What is venture capital?
Venture capital (VC) is a form of private equity financing that supports startups and with high growth potential. Venture capital funding is typically used to fund product development and market expansion for an overall growth in company valuation.
In return for financial backing, venture capitalists secure an ownership stake in the companies in which they invest. In addition to financial support, venture capitalists also tend to offer these companies mentorship and networking opportunities to support their growth. After all, if the company succeeds—with an exit (usually through a merger or acquisition) or an initial public offering (IPO)—the VCs who invested prior to that event can yield significant returns.
Venture capital funds are typically managed by their General Partners, or GPs, who are usually experts in select fields of entrepreneurship. These leaders fundraise from Limited Partners, or LPs; financiers who hold large amounts of wealth that they want allocated to the growth potential of startups. LPs thus invest in venture capital funds, and GPs allocate this capital to startups in their focus areas of expertise. LPs are paid by the growth outcomes of the portfolio of companies that the VC fund invests in, while GPs are typically paid management fees with ties to the performance of their portfolio.
