June 12, 2022

Venture Capital: Bringing Innovation to Market

Venture capital is a strategy that makes investments in early-stage businesses to finance innovative ideas and validate their commercial potential. The manager’s ability to differentiate the company’s potential from an array of competing entrepreneurs seeking capital to address similar market solutions is a prime driver to create value.

Venture capital funds typically exit their investments after providing the capital needed to get their initial products to market. By investing in companies when their long-term success is uncertain, venture capital firms have the potential for outsized returns from winning investments that far exceed public market expectations.

Structuring Venture Capital Funds

Bringing innovation to market often has significant capital needs, providing investors an opportunity to bridge the funding gap between traditional sources, such as banks and public equity markets, and to earn potentially high returns given the risk taken. Venture capital managers typically raise pools of funds from institutional investors and high net worth individuals. Funds are often structured as private partnerships, with the management firm as the general partner who identifies investments, and limited partners who invest capital.

Once a fund has been raised, a manager’s investment knowledge and operational expertise can then assess a company’s industry positioning, management capability, and business plan. While most venture capital investments are made in private start-ups, some are made in businesses commercializing academic and government investments in research.

Managers are able to diversify their portfolios by investing in several businesses, which improves the likelihood of outsized financial returns from a successful investment that could offset losses elsewhere in the fund. To navigate the risks of bringing a company’s innovative products to market, venture capital managers may structure investments as preferred stock that provides some downside protection without limiting potential upside gains.

While investors usually have limited rights regarding a fund’s investments, funds deploying scarce capital in small amounts across a diverse set of business models may mitigate risk.

The Venture Capital Ecosystem Drives Value

The track record of a venture capital firm’s partners are often more important given capital deployments across a range of business models and the need for just a few to succeed. The access that venture capital managers have to investment candidates through their professional networks helps filter quality opportunities.

Venture capital investments are typically funded through a series of capital raising rounds as companies reach milestones in their corporate development and product roadmap. This provides the potential to generate attractive returns for new investors over the cycle of a company’s future stages of development.

‘Early-stage’ venture capital firms may focus on providing seed financing to companies in early funding rounds. These investments have significant business model risk and need to build out a corporate infrastructure that includes product development, sales, and marketing. But by making small investments upfront, successful execution by company management teams can lead to asymmetrically positive returns for investors.

‘Late-stage’ venture capital firms focus on companies that have achieved certain milestones like strong domestic market penetration and need additional capital to further their development with new products or channels. Series C and later funding rounds typically include larger investments made at higher valuations, offering a lower return potential for less risk taken.

Venture capital accelerates companies that are just getting to market and creates a first mover advantage ahead of the competition. However, portfolio companies often release products that are just good enough. Disruptive innovations usually don’t acquire mainstream acceptance until the product’s quality catches up to customers’ standards.

After nurturing an innovation to market, venture capital firms often exit their investments when there’s visibility into a company’s potential growth but before its long-term value can be fully assessed. Taking a company public through an IPO provides additional capital for transitioning to a mature business with a robust set of product offerings.

Recently, though, fast-growing companies are staying private longer. Venture capital firms may sell their portfolio companies to private equity firms that can also provide additional operational support to accelerate revenue growth, margin expansion and positive cash flows. Corporations could also be strategic buyers of portfolio companies to acquire new capabilities and enhance their own growth potential.

Poolit Provides Unique Venture Capital Access to Individual investors

Historically, venture capital was only accessible by institutional investors such as university endowments and pension plans, or high net worth individuals considered to be qualified purchasers having net worth of over five million dollars excluding home equity. Most individuals also lacked access to highly selective fund manager distribution channels in order to make investments.

Poolit is seeking to offer accredited individuals the opportunity to invest in the same strong risk-adjusted returns generated by venture capital, previously accessible only to institutions and high net worth investors.

Partnering with professional venture capital managers who employ multiple strategies across early- and late-stage markets, Poolit’s offering will provide broad exposure to venture capital in a single investment. To further democratize alternatives, the fund will also have no minimum investment.

To begin building your wealth and realizing your potential, get early access and be the first to know about new venture capital investments on Poolit by providing your email at https://www.thepoolit.com.