Because of the numerous stories in the press about venture capital firms that have turned countless young entrepreneurs into millionaires ‘” even billionaires ‘” inexperienced observers may erroneously conclude that a well-managed venture capital portfolio concentrates on one investment that will return 200 or 300 times the initial layout of cash, usually to justify a drab performance by the rest of the portfolio.
This often fosters the notion that an ultrahigh-risk strategy is characteristic of venture capital investing, the managers plunging exclusively into new and untried schemes, hoping to win big every now and then. But in fact, most venture capital strategies are diversified and, more important, disciplined in their investment selection process, carefully evaluating each potential deal one by one.
Not all (not even most) venture funds focus on early stage companies. Venture funds come in all shapes and sizes, and each has its own area of specialty:
• Some venture capital pools focus on late-round investments ‘” infusions of cash made to companies on the verge of going public.
• Buyouts of mature firms are another popular venture capital strategy, as are so-called turnarounds, or investments in troubled companies.
• Some venture funds are hybrids, pursuing more than one strategy and even investing a portion of their assets in public securities.
The point is that a venture capital manager balances risk against reward: A preseed investment needs to forecast sensational returns to balance the risk, while a late-round purchase of convertible debt promises a more modest payoff but is safer.
Dealing with venture capital is an intense business. The relationship between venture capitalists and the companies they invest in is such that each VC professional can carry a portfolio of no more than a handful of companies.
If you hope to raise the capital you need by taking the venture capital route, you need to have a firm understanding of what makes venture capitalists tick and what gets their attention in a crowded financial marketplace.