Set sail for exotic locales with emerging industries and companies, adrenaline-pumping opportunities involving tense negotiations, and white-knuckled investment! OK, admittedly, that’s ad-venture capital (and a really bad joke). Still, in – and especially outside of – the world of capital investment, very few areas have the allure and mystique of venture capital, which, unfortunately, won’t seem quite so alluring or mysterious when we’re done explaining it.
Essentially, venture capital is a type of financing that investors, either individual or corporate, provide to start-up companies and small businesses with long-term growth potential. In many ways, it’s the same as general private equity investment, with the main distinction being that venture capital focuses on emerging companies which are typically seeking substantial funding for the first time, instead of larger and more established companies.
Where does the word venture capital originate from?
Though the genesis of venture capital itself can be traced back to Harvard Business School’s Georges Doriot, who started a corporation (the American Research and Development Corporation) in 1946 specifically to invest in businesses utilising technologies developed during the Second World War. The term itself can be traced back to a 1943 address given by M.A. Shattuck to the National Association of Investment Companies, where, recorded in Addresses at Membership Forum, he stated: “Industry during the last decade has not only lacked venture capital for new enterprises; it has also lacked venture capital for established concerns.”
On the other hand, by breaking the term down into its components, we can literally see the risk in venture capital. For starters, venture, meaning ‘chance, fortune, or risk of loss’, comes to us from the Old French aventure and the Latin advenire, meaning ‘to come to, reach, or arrive at’, and was first used in the prose work of playwright and writer Robert Greene, who wrote in Gwydonius (1584): “Your venture was much, but your gains are such, as you are like to live by the loss.”
Second, capital, in the sense of the monetary value of assets, can be traced back to the Medieval Latin capitale, meaning “stock or property”, and was first used in Jan Ympyn Christoffels’ 1547 work, the Notable Woorke Book Accomptes, which, ironically, was the first English book on double-entry bookkeeping, where he writes,: “The other word, the Italians call it Capital, that is to say, the Stock or principal that the merchant began with all […] and it is at your pleasure whether you will use this word Stock in English, or Capital.”
Due diligence and risk mitigation
As stated before, it should come as no surprise that investing in small, mostly unproven businesses is quite risky. However, there is a process involved to reduce risk to more manageable levels. The bedrock is, of course, due diligence: financial experts and industry veterans thoroughly vet a company, checking its business model, products, management, etc. Further lessening risk, venture capital companies, in addition to holding a stake in the company, typically take an active role in advising the company, and, to lessen exposure to a loss, break up their total investment into several rounds (as opposed to a lump-sum investment) often based on specified goals and criteria.
Is venture capital risky? Of course it is. Additionally, after reading this, it probably doesn’t seem quite as mystifying and captivating as before; nevertheless, with enough due diligence, the risk can be well worth the reward.
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