Entrepreneurs who need help with either startup capital or a cash infusion have several options when it comes to seeking various sources of income. Some of these potential backers might include friends and family, bank loans, crowdsourcing, or investors, to name a few. The two main types of investors are called angel and venture capitalists (VCs). These are both very common options for startup businesses in the technology and science sectors, and they not only provide capital but also act as mentors and advisors to help a business grow its brand.
The two common types of venture capital are equity and convertible debt. Equity means the investor will own stock in a company, and convertible debt means they will be repaid at a later date.
Venture capitalists either work in large firms or start their own, smaller companies. Some are even independent, wealthy individuals. If you are interested in starting your own fund, it’s important to earn a reputation by working as a fund manager in an existing firm. At first, you might be given a few million to invest in a small handful of startups, generally 20-30.
Once you’re gotten some experience working in a firm, it might be time to branch out on your own. Start as an angel investor and gain a good reputation and experience that way. Some people find other individuals who want to partner up to start a firm.
Part of the thrill of being a venture capitalist is the enticement of a big payoff. The downside to this is the higher chance of risk. The rate of return is pretty low, so the more knowledgeable a VC is about business and finance, the better off they’ll be with their VC investment portfolio. It’s important to research the niche you’re interested in and the potential for the growth of each candidate. Companies with a potential for growth that also have passionate entrepreneurs are the ones to keep an eye on, especially when they are knowledgeable about business numbers like profit margins, the cost for production, and revenue.
While diversification is important, as a venture capitalist, you are at an advantage over your competition if you are knowledgeable about a certain industry. For this reason, it’s important not to be too diversified or spread yourself too thin.