Owing to their participation in different industry networks, venture capitalists are well positioned to spot and create nascent investment opportunities in different sectors of the economy. By participating in scientific breakthroughs and the formation of new companies, venture capitalists catalyze and accelerate technological change. A good venture capitalist can therefore create substantial wealth not only for themselves and other investors, but also for the economy.
Venture capital firms can take a variety of organizational forms that range from specialist firms with only a small fund of about U.S. $10 million to firms with more than U.S. $10 billion under management. The institutional investors in venture capital firms include private and public pension funds, endowment funds, banks, corporations, insurance companies, and wealthy individuals.
There are numerous kinds of venture capital companies, but a vast majority of them invest their capital through funds set up as limited partnerships in which the venture capital firm acts as the general partner. The most frequent type of a venture capital firm is an independent venture i rm having no relationship with any other financial institution. Besides stand-alone venture capital firms, many corporations also set aside a pool of funds for venture capital investments.
This is commonly referred to as "corporate venturing"; besides financial return targets, corporate venturing seeks to advance the corporation’s strategic objectives, either to identifying new technologies that may be incorporated into existing products or to acquiring an emerging business to add to the corporation’s business strategy.
The venture capital firm typically organizes its partnership as a pooled fund— with a life span of 10–15 years—comprising the general partner and the investors as the limited partners. A venture capital i rm may manage more than one fund at any point in time.
Typically, a venture capital firm raises another fund a few years at er closing the first fund; this is in order to continue investing in firms and providing more opportunities for existing and new investors. These different funds may possess similar investment mandates or they may be tailored to suit different investor preferences for the sectors or stage of the development of the start-up company.
The compensation structure for venture capital firms is performance-based. As an investment manager, the venture capital firm will typically charge a management fee to cover the costs of managing the committed capital, as well as a carried interest, which refers to the division of the profit proceeds to the general partner.
Depending on their investment focus and mandate, venture capitalists may be generalists, investing in numerous industry sectors, or different geographic locations, or in a variety of stages of a firm’s life. However, they can also be specialists in one or two industry sectors, or can even attempt to look for investments in only a localized geographic area.