One problem many new businesses face is raising sufficient capital. A business in it's primary phase will also face a difficult challenge getting a bank loan. One alternative is venture capital. Venture capital firms offer capital in exchange for equity in a company. This type of financing is ideal for new businesses since venture capital firms focus mainly on the future prospects of a company when banks use past performance as a primary criteria.
venture capital investor
Venture capital (VC) is the process of investing private equity in companies, typically in early stages of development, that are believed to offer significant potential to grow substantially and reward investors accordingly. The objective of VC is to generate high rates of return over long periods of time. VC offers institutional investors and high-net-worth individuals high returns (historically better than stocks) and strong diversification benefits from very low correlations with other asset classes. The major negatives of investing in VC are long time frames, lack of liquidity, and high management fees.
"Venture capital investments are like inefficiently priced stocks, with two differences. First because there are no short-selling mechanisms, a venture capitalist, like a commodity investor, faces potential overpricing. Second, unlike stocks, which represent existing assets, an early-stage venture capital project may be an idea."