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How Venture Capital Firms Work

If you are an entrepreneur looking to grow your new business, you need to find companies or individuals willing to give you the money to start your business. Perhaps you have applied for a bank loan and have been denied. You were likely told that your business is not a "good risk" or a "solid investment." What you need to do is find someone who is willing to take on a risky investment, based on the way you have proven through your business plan that you will succeed. What you need is a venture capital firm.

A venture capital firm is a group of investors who gain income from wealthy people who want to grow their wealth. They take this money and use it to invest in more risky businesses than a traditional bank is willing to take on. Because the investments are risky, the venture capital firm typically charges a higher interest rate to the businesses it is investing in than other types of lenders would. The interest rate is worth it to the business, however, because the business would otherwise not receive the financing needed.

Venture capital firms work under a specific investment profile. The investment profile is a document that outlines the types of businesses the firm is willing to invest in. by targeting their investments to certain types of businesses only, the venture capital firm can learn the ropes of a particular industry, and thus be better prepared to decide which new or expanding businesses are the best investments. And venture capital firms do not just provide start up financing. They can also provide expansion financing for promising businesses. This is less common, however, since the growing, successful business is more able to get a bank loan.

When individual investors entrust their money to a venture capital firm, the firm puts the money in a fund. This fund is then invested in several companies, with the expectation that the companies will be able to repay the money in around three to seven years. This money is repaid either when the company takes their business public and starts selling stocks and bonds, or when the company is acquired by another company. The money is then paid back to the venture capital firm, with interest. Sometimes, the money is repaid through shares of stock in the company. Once all of the money in a particular fund is returned, the money, with the interest earned, is then sent back to the investors. Of course, the firm takes a portion of the money as their fee.

Venture capital firms are excellent places for start up businesses who are not able to get funding for their growth through another source. They key is finding a venture capital firm that chooses to invest in your type of business. If you do, and they like what they see in your business plan, you likely have found the money that you need.

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  • "I know that I've invested in at least one deal associated with FundingPost events, and it's a great networking opportunity with the founders and the VCs that are there. I'm looking forward to this one!" - John Filla, Angel Investor, Houston Angel Network
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  • "FundingPost has provided Investors a great way to read company summaries from across the country, and entrepreneurs the opportunity to get in front of a lot of Venture Funds they wouldn't normally have access to." - Richard Irving, Pond Venture Partners
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