How Do Venture Capital Firms Make Their Money?

Venture capital is not a business loan or debt capital.

Investors look for new opportunities to invest their client’s money. In most cases, if an entrepreneur has a new product or service that shows to be of great promise, he will make on investment in that company.

Investors usually do not continue to invest in the company for the duration of a company’s life. Usually, the typical venture capitalist will invest in a company for a period of time, between three to five years.

During this time period, venture capitalists often do not leave after just supplying funding, but they continue to supply other valuable resources as well. It is in the interest of the venture capitalist for the fledgling company to do well.

This means that not only does the company need financial backing, but also resources that can give it new market leads and other industry related help that can benefit the company in the long run. Most venture capitalists will invest only in sectors and industries that they have experience in.

Venture capitalists will also have connections related to that sector and will have their experts in that industry who can help the new entrepreneur along the path to success.

Much of this expertise can come from portfolio companies, which are other companies that the investor has invested in.

Now, how do investors make money? Well, this is done when they make their exit.

An exit occurs when the investors leave the company after the company has been established and is starting to make profits.

Most often, exit strategies can be anything from liquidation to IPO. The point is that if your company is doing well, there would probably be no need for liquidation.

So, then how does the investor get his or her profits? Simple. Investors usually make their money by selling their shares to other companies, investors or potentially on the stock market.