Venture capital and venture capitalists: how it works

In this article, we tell you everything you need to know about what venture capital is and how to become a venture capitalist. 

What is venture capital?

Venture capital is a form of financing where investors put money into companies with high growth potential, often young companies such as start-ups. These companies often have an innovative vision but need capital to develop their products, expand and grow.

In return for their investment, venture capitalists receive an ownership stake in the company, usually in the form of shares. Venture capital does not work like a bank loan to be repaid with interest, but is a long-term investment where the investors become part of the ownership structure of the company.

If the company becomes successful and is either sold or listed on the stock exchange, the venture capitalists can make a significant profit on their investment. However, it is important to understand that venture capital also carries a high level of risk, where investors can lose their capital if the company fails.

What venture capital investments are available?

Venture capitalists typically invest in private equity, that is, investments in unlisted companies, where capital is provided to help companies grow, restructure or develop their businesses. Examples of private equity investments include the purchase of unlisted shares. Private equity is often divided into different categories, the most common being venture capital and buyout capital.

• Venture capital (VC)Venture capital is investment in early-stage companies, often start-ups, that need capital to develop their products and expand. These investments are higher risk but also offer high potential for returns.

• Buyout capitalBuyout capital focuses on buying mature companies with stable cash flows and proven business models. These investments often involve the investor taking a majority or full ownership of the company to create value through efficiency improvements or strategic changes.

Private equity also includes other forms of investment, such as growth capital and investments in companies in financial difficulty, depending on the investor's strategy and objectives.

What is a venture capitalist?

A venture capitalist is a person who works at a venture capital firm and invests money in companies with high growth potential. Venture capital firms often manage capital from funds, institutional investors and other large players, and focus on financing companies that have the potential to generate high returns.

Difference between business angels and private equity firms
Individuals who invest their own money in companies are normally called business angels, while companies that invest capital, such as venture capital firms, do so with funds from external investors. Business angels tend to invest at earlier stages of a company's development, while venture capital firms often come in when the company has shown some growth and needs more capital to scale up its operations.

The role of the venture capitalist
Venture capitalists often take an active role in the companies they invest in. In addition to providing capital, they offer strategic advice, operational experience and access to industry networks. Their aim is to help the company grow and increase its value ahead of a future exit, such as a sale or IPO.

What is the difference between venture capitalists and private equity firms?

Venture capitalists are investors who often work in venture capital firms and are responsible for managing and investing capital in companies with high growth potential, such as startups. They work to find companies where investments can generate high returns, usually through a future exit such as a sale or IPO.

Venture capital firms raise capital from institutional investors, such as pension funds, insurance companies and wealthy individuals, and use this capital to invest in growth companies. In some cases, venture capital firms also invest their own capital, which may come from the founders or the profits of previous investments.

Advantages of investing through venture capital firms
Investing through a venture capital firm means that the investor has access to professional management and a diversified portfolio, which can reduce the overall risk. Venture capital firms often have industry expertise and strong networks to support the companies they invest in.

Advantages of investing directly
Investing directly in companies without using a venture capital firm gives the investor greater control over their ownership and the ability to influence how the capital is used. However, direct investment carries a higher risk, as the investment is not spread across several companies.

How to become a venture capitalist?

A venture capitalist invests in companies with high growth potential, usually within a professional framework such as a venture capital firm. Becoming a successful venture capitalist requires both capital to invest and deep knowledge of business operations and market trends. Some key steps in the process are described below:

1. Build relevant experience and knowledge
   To be a good venture capitalist, it is important to have experience in running or investing in businesses. Many venture capitalists have previously been entrepreneurs, leaders of high-growth companies, or worked in finance. Industry knowledge and a strong network are also crucial.

2. Find companies to invest in
   To find promising investment opportunities, you can network with entrepreneurs, business angels or use platforms that connect investors and startups. Analyze the companies carefully by reviewing the business idea, market potential, competitive situation, management skills and possible risks.

3. Investing in the company
   When you choose to invest, you provide capital in exchange for an ownership stake in the company. Larger investments may give you a seat on the board of directors, where you can contribute to the strategic development of the company. For smaller investments, the influence is often through advisory and networking.

4. Contribute to the success of the company
   A venture capitalist plays an active role in the company's development by offering strategic advice, access to contacts and resources, and helping with financing issues. This support is often crucial for the company to grow and achieve its goals.

5. Make an exit
   The goal of a venture capitalist is to make money by making an exit. This means selling your ownership stake, usually when the company listed on the stock exchange, sold to a larger company, or through a secondary sale to other investors.

Frequently asked questions

What does a venture capitalist do?

A venture capitalist invests money in start-ups and growth companies and, in return, the investor receives ownership shares in the companies. The ultimate goal of a venture capitalist is to get a return on their investment when the company is sold or goes public. 

Which companies are seeking venture capital?

Companies seeking venture capital are typically technology and medical companies that have innovative ideas but need more capital to grow. More often than not, their ideas are so innovative and high-risk that a bank loan is difficult to obtain. 

What is the biggest risk for venture capitalists?

For a venture capitalist, the biggest risk is losing all the money invested, which sometimes happens as this type of investment is a high-risk investment.