One thing almost all start-up businesses have in common is the need for cash to get the company going. Finding investors for an idea is often critical to ensuring its success. Start-up firms seek capital from a variety of sources, including professional venture capitalists and major investment banks. Investors looking to lend capital to new businesses should understand some of the key differences between venture capital and investment banking.
Venture capital firms are businesses that manage a portfolio of investments that emphasize start-ups and major expansions. According to the Small Business Administration, venture capitalists offer financing that "addresses the funding needs of entrepreneurial companies that ... cannot seek capital from more traditional sources, such as public markets and banks." In addition, venture capital companies also lend technical assistance and networking resources to new businesses, and help introduce these firms to the larger investment market.
Like venture capitalists, investment bankers provide capital to other businesses with the goal of earning a return on their investment. An investment bank capitalizes many different kinds of businesses, and invests money in other options besides new ventures, such as commodities and bonds. Investment banks provide advice and brokerage services to investors, although the exact extent of these services varies considerably.
Although venture capital and investment banking firms are often interrelated in the marketplace, the two types of business have some key differences. For instance, venture capital firms tend to focus on providing capital to new and emerging businesses, while investment banks are more likely to look for established performers. In this way, investment banks tend to be more conservative when evaluating opportunities. Venture capitalist Jason Mendelson says hat venture capital firms "will normally bring one to three shareholders to your company, whereas investment banks tend to bring many different individuals," as the investment banks tend to serve a more diverse population of clients. In most cases, venture capital firms often specialize in a small group of industries, while investment banks' holdings are more diverse.
The landscape of the investment market changed dramatically in the 1980s and 1990s to accommodate the emergence of many more venture capital firms. This is due in part to changes in regulation during the late 1970s. Venture capital firms also were able to offer new businesses more technical expertise resulting from their increased specialization. But their financing sometimes comes with the risk of expropriation, or the original entrepreneurs' loss of control over their business.
- Small Business Administration: Venture Capital
- "Venture Impact"; Venture Capital 101: What is Venture Capital?; 2004
- Massachusetts Institute of Technology; Investment Banking; July 2008
- AskTheVC; Raising Money From Venture Capitalists Versus Investment Banks; Jason Mendelson; July 30, 2007
- Universitat Pompeu Fabra; Bank Versus Venture Capital; Masako Ueda; Nov. 2000
Matt Petryni has been writing since 2007. He was the environmental issues columnist at the "Oregon Daily Emerald" and has experience in environmental and land-use planning. Petryni holds a Bachelor of Science of planning, public policy and management from the University of Oregon.