A venture capitalist invests in early to mid-stage companies and startups with the goal of scaling that business and producing a high return on the investment. The biggest risk for venture capital investors is that an investment will flop or even fall into bankruptcy.

Many small and emerging businesses fail for various reasons and venture capitalists tend to accept failure as a cost of doing business and look to notch huge returns on the few investments that do succeed. The old cliché in venture capital is that for every home run, a venture capitalist will strike out ten times. A venture capitalist hits a home run by investing early in a company’s life and riding the subsequent business growth.

Many entrepreneurs and small businesses look to venture capitalists to finance the company’s expansion into new markets, new products, and new customers. Often times, that expansion does not go as planned and the venture capitalist takes a loss on the investment. But occasionally, a venture capitalist invests early in a company like Apple, Facebook, or Twitter and that stake in the corporation becomes incredibly valuable as the company grows. Importantly, a venture capital firm will often secure preferred terms on its investment so that a successful investment becomes even more valuable with the option to buy more shares, earn dividends, and other rewarding components of the investment deal.

At the later stages of private equity, a venture capital investor is often a passive investor with maybe some influence via a board seat or connection with the CEO. By investing early on in a company’s life, an early investor can exercise substantially more control over the growth and direction of the company. Almost every family office that we have met is either open to or actively seeking venture capital-type deals. It seems that the biggest challenge for investors executing venture deals is sourcing high-quality deals and performing due diligence on the companies. But more and more, through peer-to-peer networks, conferences, and active development of deal-sourcing channels, investors that would otherwise be passive LPs are locating better deals and developing strong venture capital platforms internally.

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