Venture Capital

Start-ups with innovative ideas often cannot get bank loans, because they have little revenue, few assets and uncertain prospects. Venture capital fills this gap, providing money and often advice in exchange for equity.

Venture capital firms raise funds from institutional investors, such as pension funds, endowments and wealthy individuals. The firm's partners then invest the money in a portfolio of start-ups, typically through a series of funding rounds as each company grows.

Venture capital is high risk. Many start-ups fail, and venture capitalists rely on a small number of big successes to generate most of their returns. For example, a fund that invests in 30 start-ups might see most fail or return little, while one or two grow into very valuable companies, returning many times the fund's total investment.

Venture capitalists typically take seats on company boards, help with hiring and strategy, and introduce companies to customers and future investors. They aim to exit their investments within several years, through a sale of the company or a stock market listing. Many well-known technology companies were backed by venture capital in their early years.