| Most small or growth-stage businesses use equity
financing in a limited way. As with debt financing,
most of the time additional equity comes from
non-professional investors such as friends, relatives,
employees, customers or industry colleagues. However,
the most common source of professional equity funding is
that group of investors known as venture
capitalists. Venture capitalists are institutional
risk takers and may be groups of wealthy individuals,
government-assisted sources or major financial
institutions. Most specialize in one or a few
closely related industries. The high tech industry
of California's Silicon Valley offers many shining
examples of capitalist investing.
While public perception of venture capitalists may be
of deep-pocketed financial gurus looking for "that
hot new business" in which to invest their money, in
reality they most often prefer three-to-five-year old
companies that offer the potential to become major
regional or national concerns and return
higher-than-average profits to their shareholders.
Venture capitalists may scrutinize thousands of
potential investments annually, while investing
ultimately in only a handful.
The possibility of a public stock offering is critical
to venture capitalists. Quality management, a
competitive or innovative advantage, and growth of the
industry are also major concerns.
Venture capitalists differ in their approach to
management of the business in which they invest.
They generally prefer to passively influence a business,
but will react when a business does not perform as
expected and may insist on changes in management or
strategies. Relinquishing some of the decision
making and some of the potential for profits comprise the
major downside to equity financing.
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