Venture Capital Firm

By their very nature, venture capital investments are high risk. The two most common times that a company seeks funding from a venture capital firm is when they are a start-up or when they are in trouble and seeking a turnaround. A venture capital project normally has a fixed length of time, usually from three to seven years. If the venture capital firm does not make a profit at the end of this time, their money is gone.

To minimize the risk in such a volatile situation, most venture capital firms do one of two things. The first way to minimize risk is to diversify the projects that a firm finances. While each individual project will be considered high risk, by investing in a variety of companies, they mitigate some of their risk. By spreading their investments over a variety of companies--or even countries--they reduce the risk that a stagnant economy or piece of bad news will send the entire investment crumbling.
Another method many venture capital firms use to reduce their risks is to concentrate on one sector. The key to success using this method is to have leading partners in the venture capital firm who are extremely knowledgeable about that particular industry. Many venture capital partners have previously worked in the highest levels of their chosen industry, so if anyone can pick a winner, it will probably be them.

Even by attempting to mitigate the risks to the venture capital investors, it is important to realize that venture capital investments are high risk. One rule of thumb commonly used by venture capitalists is that for every ten investments, two will succeed, two will fail, and eight will be mildly successful. The key is that the two that succeed must be profitable enough to pay for the investments that are mildly successful or complete failures.