Venture capital firms are investment companies that operate only to handle investments in business ventures that may be considered high risk. This type of firm may specialize in working with startup companies that are seeking funds to cover operational expenses until profitability is achieved, or it may focus on rescuing established firms that are in financial trouble but demonstrate some potential for becoming profitable again after some retooling. Some venture capital investment firms will provide funding for both situations, as well as short term projects that fall anywhere along the spectrum.
The size of a venture capital firm may vary from a small operation that works with a limited amount of seed money supplied by a few investors to a company that includes hundreds of investors and has billions of dollars at its command. However, the size of the firm is not always indicative of the type of venture capital deals that the company will take on. A large firm may choose to devote a portion of its attention to startups along with funding major deals involving the restructuring and renewal of well established international business entities.
What sets this type of company apart from other funding sources is that venture capitalists do not tend to be passive in their approach to the task. While many funding agencies will simply loan the money and expect nothing more than repayment according to terms, the venture capital firm will often take an active interest in the setup, operation, marketing, distribution, and sales efforts of the funded company. Generally, the contract between the firm and the client receiving funding will specify the rights and privileges of the firm in regard to involvement in the day-to-day functions of the client.
One additional benefit that a venture capital firm often brings to the table is the ability to create new vendor relationships between its clients. For example, Client A may manufacture an outstanding product, but does not have adequate distribution facilities. Client B possesses excellent distribution technology and facilities and can take over that function at a price that will cut expenses for Client A. The venture capitalist introduces the two clients, who are then able to strike a deal. As a result, both clients experience a healthier bottom line and, at the same time, the firm benefits from the healthier financial outlook of the clients.