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The high-stakes world of venture capital

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Try to imagine the landscape of American businesses without venture capital: there would be no Starbucks, Apple, eBay, Google or JetBlue. Those are just a few of the companies that launched thanks to venture capital funding (and also went on to make big money for their investors).

Venture capital firms provide financial backing for new companies. These fledgling businesses typically aren't eligible for traditional financing through banks, and corporations view them as too risky (or, in some cases, as dangerous competition). Venture capital firms step into the breach with financial backing for businesses of many varieties.

Some of these startups aren't much more than a few people and a business plan, but increasingly venture capital firms are funding slightly more established companies that present less risk. According to the 2011 Yearbook of the National Venture Capital Association, a nonprofit membership organization, venture capital firms funded more than a thousand companies in 2010. That same year, venture-backed companies were responsible for almost 12 million jobs and $3.1 trillion in revenues, according to a 2011 study from Global Insight, a firm specializing in financial forecasting and analysis.

Working in venture capital requires a keen understanding of what it takes to make a business successful. According to the NCVA, only about one in every hundred business plans seeking funding actually gets it. The key decision-makers are the partners (and sometimes the junior partners). They decide which startups are worth funding, when new companies should go public, or when to accept the terms of a sale, for example. Some firms also have analysts or associates who research proposals and provide other kinds of support. These entry-level positions require industry savvy and in some cases advanced degrees in business or finance.

Though the partners sometimes invest some of their own money, venture capital firms for the most part act as brokers for other institutional investors (like pension funds, life insurance companies or extremely wealthy individuals -- non-bank entities that can trade at such high volumes that they're entitled to preferential treatment and lower commissions).

After fronting the money for a new venture, the partners tend to stay closely involved with it. They typically sit on the boards of new companies and provide guidance as they get off the ground. And the amount of time partners put in can be significant. Venture capital firms usually don't see a return on their investment for five to eight years, according to the NVCA. The payout comes when the company successfully goes public or is sold at a hefty profit.

It's a challenging business, and it's been especially challenging during the most recent recession and its aftermath. The NCVA's 2011 Yearbook reports that venture capital investors saw lower returns during the slowdown, and as a result they had less capital to funnel into new business ideas.

That meant venture capital firms had a hard time raising money in 2010, though some new companies still managed to get funding. Many new businesses were acquired -- a "record number," in fact -- but the proceeds from those sales were disproportionately low. And initial public offerings picked up dramatically, but, the report's authors add, "totals have to increase far beyond 2010 levels for a sustainable industry."

Last Updated: 20/06/2012 - 11:47 AM

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