Welcome to professrsavings.com, we teach finance basics.
Today we will teach what venture capital is even a college kid would understand.
Hi I’m Rayfil Wong. We hope these investment concepts will help you be a better investor.
Venture capital is a word often heard especially in the tech entrepreneur community especially stories of a young whiz kids who started a social network
It is simple is money invested in early-stage firms and small businesses with growth potential.
The reason why venture capital is so valuable for startups is because they often don’t have an operating history so going to a bank for a big loan is nearly impossible.
Venture capital investments are risky since there is a high rate of failure in startup for many reasons but venture capitalist can earn impressive returns with a major big hit such as Google or Facebook.
Venture capitalist exchange capital or cash to entrepreneurs and their company in exchange for a portion of the equity or ownership of their company.
Venture capitalist may also have the ability to influence the direction of the company if they have a board seat.
Let’s say that Professor Savings wants to create the next lending mobile application and is seeking $1million dollars and get that amount for a venture capitalist.
In exchange, Professor Savings would need to give up 20% of his company to the venture capitalist.
Let’s say that the lending application is a massive success and seven years later sells to a major bank for $50 million dollars. The venture capitalist with 20% of ownership will receive $10 million dollars. So in seven years time, the venture capitalist investment of $1 million dollars has a $10 million dollar return or 10x.