Venture Capital. Alternative Assets. Convertible Debt. Angel Investor. Can you define all these terms without googling them? We hear a lot of startup buzzwords being thrown around at Startup Grinds, Tech Cocktails, in incubator and co-working space and in the media. Our team wanted to get back to the basics and offer up some simple definitions via a new blog post series called Startup Speak so you can use the lingo with confidence.
First up? Venture Capital. Venture capital is money committed to a company by a venture capital firm; usually the company is in the startup phase or the early stage of existence.
A venture capitalist (VC) firm is usually comprised of two legal entities. The first entity is a general partnership or the managers of the money (the venture capitalists) and the second entity is a limited partnership. The limited partnership is where the investors (the limited partners) invest their money to form a “fund.” Limited partners, otherwise called “LPs,” can be individuals, companies, investment banks, insurance companies, pension funds, etc.
Entrepreneurs should take note that venture capital money can be some of the most expensive money out there. Why? Because a venture capitalist has an obligation to its limited partners to be good stewards of their money and provide returns that compensate for the risk of their investments. Venture capitalists usually target the biotech and medtech industries, closely followed by the software industry. Although many entrepreneurs think their deal is appropriate for venture capital funding, the reality is only 1/6 of 1% of startups receive VC investment.