What Do Venture Capital Firms Know That The General Public Does Not?

What Do Venture Capital Firms Know That The General Public Does Not?

The answer is probably, a lot.  That being said, the Wall Street Journal released the top 50 Venture-Backed Companies while you can read more about the methodology the list basically,

seeks to pinpoint the 50 U.S. venture-backed companies with the greatest promise to succeed. To be eligible, companies must have received an equity round of financing in the past three years and be valued at less than $1 billion, as the aim is to identify lesser-known contenders.

What is a Venture Capital Firm/Fund?

For those who don’t regularly read boring financial news a Venture Capital Firm is a company

that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. A venture capital fund refers to a pooled investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. Venture capital firms typically comprise small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience.

A core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital (thereby differentiating VC from buy-out private equity, which typically invest in companies with proven revenue), and thereby potentially realizing much higher rates of returns. Inherent in realizing abnormally high rates of returns is the risk of losing all of one’s investment in a given startup company. As a consequence, most venture capital investments are done in a pool format, where several investors combine their investments into one large fund that invests in many different startup companies. By investing in the pool format, the investors are spreading out their risk to many different investments versus taking the chance of putting all of their money in one start up firm.

Statistics of the Top 50 Ventured Backed Companies

As I read the article I kept thinking what does it say when venture capital is being infused into certain companies and to a lesser extent certain industries.

  • 13 of the top 50 are in the Business and Financial Services Industry
  • 5 of the top 50 are in Consumer Services Industry
  • 1 of the top 50 is in Energy
  • 8 of the top 50 are in Healthcare
  • 23 of the top 50 are in the Informational Technology Industry

What I also find interesting is that even those companies found in other industries are often focused on technology in some extent.  For example, the number 3rd company, Xactly Corp. (industry: business and financial services) has a description under product/service of,

Web-based software for managing sales compensation.

I know it shouldn’t be shocking since it is probably easier to understand a web-based software for sales compensation rather than “Therapies that target tumor-causing cancer stem cells.” (Number 41: OncoMed).

It makes me wonder if there is an investment strategy where you can purchase a company that will eventually buy one of these companies out and then reap the benefit?

7 Responses to What Do Venture Capital Firms Know That The General Public Does Not?

  1. Interesting question! How will you know who will purchase one of these companies? More importantly, when? For example, many of the biotech companies will not remain on their own unless they become very big. When will they be bought?

    • I have no clue about anything…but maybe you could purchase a biotech etf so you get the benefit of the sector rising.

  2. Interesting information! Apparently, I didn’t quite have the fact straight as to what a venture capital firms was, so thanks.

    Just curious, are you thinking of becoming a partners in such a firm (based on your background, you would seem to be a likely candidate)…

    • Partner in a private capital firm? Noooooooooo I am not even in that field although how cool of a job would that freaking be?

      I get to invest other people’s money (and some of my own if I were a partner) in businesses that I believe in!

      If I win the lottery I will start one and bring you on lol

    • I know nothing that you don’t know! But I wish I did, although why would I share it? It is like those ads you see for cheesy penny stock guides…if you are making 235% a trade why do you care if I buy your $29.95 guide

  3. Sounds like a recipe for disaster. I read something about VCs being the contributors to the next bubble. I guess only time will tell.

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