These small businesses and potential entrepreneurs usually have excellent growth potential but lack the funds to proceed.
Because there's a chance that the business may not do well at all, venture capital is also known as risk capital.
So how does venture capital work?It's not as difficult as it sounds.
A start up business will solicit funds from a venture capital firm.
If everything goes well, the venture capital firm will invest a certain amount of money into the start up, drawing on it's capital over several years.
When the fledgling firm "exits," (meaning the business is purchased or goes public), the investment is returned to the venture capital firm's investors, with a percentage of the profits thrown in for good measure.
How does one find a venture capital firm? One way is through a trusted financial expert such as an attorney, financial advisor, stockbroker or accountant.
With luck, one of these professionals will recommend you and your business to a venture capital firm.
Be sure to do your research first.
The library and Internet host a wealth of information and there are many books available on the subject.
You'll need to know what steps are necessary to put in place before seeking out venture capital.
For instance, a business plan and executive summary are necessary in order to convince any venture capitalist to invest in your idea.
A typical venture capital firm may invest in perhaps one out of four hundred businesses that are seeking their assistance.
After losing money in the dot com boom of the nineties, many firms have become quite selective.
If you wish for one of these firms to make an investment in you, you must be convincing and have great negotiation skills.
Your business or product may be fabulous, but if you don't have the ability to sell it, it's not going to bring in any investors.