Venture Capital: What Is It?

Venture capital is the funding investors provide to promising small companies with a potential for long-term growth. Currently, venture capital is a primary way for companies without access to capital markets to fund innovation.

Why Is Venture Capital Important?

  • For companies that can't access capital markets, venture capital can be a main source of funding.

  • Venture capital is used to support companies that have a high potential for long-term growth.

  • Venture capital can fill the gap between innovation funds and traditional capital.

Venture Capital vs. Angel Investors

Venture capital funding is typically offered by investors or banks. While most people associate venture capital with money, it can also come in the form of guidance, mentorship, or technical advice.

Angel investors, on the other hand, are high net worth individuals (HNWIs) or a series of investors at a venture capital firm (often a part of the National Venture Capital Association) who co-invest in new companies.

What Is a Typical Venture Capital Amount?

On average, venture capital firms invest about $7 million in a company. This number may be higher or lower depending on the startup.

Do Not Use Venture Capital If

  • You've not yet invested your own money in the company.

  • You haven't explored sources of innovation funding. Common sources are friends, family and connections.

  • You don't want investors involved in company decisions.

Use Venture Capital If

  • You have invested your own funds in the company but still need more financial backing.

  • You've hit your maximum in innovation funding.

Commonly Asked Questions About Venture Capital

  • What is the benefit of venture capital?

    Taking venture capital provides guidance and expertise from experienced investors.

  • Do investors have a say in the companies they invest in?

    Yes. Typically, raising venture capital allows investors to step in and make important decisions for a company.

Common Mistakes of Raising Venture Capital

While there are many mistakes small businesses make with venture capital, Entrepreneur names the following six as the most common:

  • Reaching out to all the venture capitalists in a given area. Instead, reach out only to those with whom you have a connection.

  • Failing to answer a VC's questions completely.

  • Exaggerating the success, background or experience of the company.

  • Taking a short-term outlook on venture capital.

  • Disclosing a company's worth too quickly.

How to Raise Venture Capital

  • Contact the VCs in your network first. Whether you know them directly or indirectly, these are valuable connections.

  • Research all the VCs you're interested in. Finding the right fit is important.

  • Be yourself. VCs want a taste of your company's personality.

The Best Venture Capital Company

CBInsights currently ranks Sequoia Capital as the best venture capital firm.  It should be no surprise that the best firms are located in the hottest places for starting companies - Silicon Valley, Boston, NYC, and even my favorite place Boulder, Colorado.