Venture Capital Investment Characteristics
Venture capital investments almost always involve investments in assets which cannot be liquidated immediately and the return on which is highly uncertain. Venture capital investments also have several significant characteristics.
Venture Capital Funds and Their Investors
Venture capital funds are intermediaries between investors and companies. On the one hand, funds provide professional screening services and scrutinize promising investments as well as provide a means to invest in portfolios of ventures, and on the other hand, funds amass capital and attract a large number of investors to invest in companies. Funds also provide investors with management, reporting, and monitoring services with respect to the portfolio companies and provide portfolio companies with added value (see the section on the added value of venture capital funds). From these respects, venture capital funds improve the investment process and reduce its cost and the investors' exposure to risk, in consideration for which they are compensated by the investors in the fund with annual management fees and a portion of the future profits.
Private equity funds in general, and venture capital funds in particular, give investors an alternative to investing in traded securities and debentures. They offer investors a diversified portfolio with the chance of increasing the risk adjusted return on their investment (see the discussion on investment theory in the section on the venture capital method). Venture capital funds are an efficient platform for these alternative investments, and they remove the need for establishing an in-house department for this purpose. However, many large technology companies have in recent years established investment arms which focus on identifying investment opportunities which are close to their fields of activity. For instance, Nokia, Intel, Time Warner-AOL, and many others also make considerable direct investments in startups, besides their investments in venture capital funds.
Venture capital funds use various control tools to provide their investors with monitoring and supervision services. These services are founded on the experience of the fund managers, as well as their ability to supervise portfolio companies by determining procedures and targets for them. Naturally, the larger the information gaps between the investors and the managers of the company, the more valuable are the controlling entities. Since venture capital funds provide investors with the means of control, they understandably focus on areas in which there are large information gaps, such as in many areas in technology which require a high level of expertise, and in companies in the early stages of development (see the section on the means by which venture capital funds oversee their investments for a discussion of funds' control tools).