The currently on-going Korean drama, “Start Up”, has become a hot topic. Not only the actors make it worth to watch, but the drama itself is also pretty realistic and give a lot of lessons, especially related to investments. In the earlier episodes, the drama revealed that one of the main characters, Han Ji Pyeong, works as the team leader of a venture capital firm. What is venture capital?
Venture capital: fundings for entrepreneurs
Venture capital, derived from Investopedia, is a type of financing given from investors to businesses that are in dire need of support, such as startups, or other small businesses. However, not all businesses may receive aids. Just as other types of investments, the firms will choose companies that have a promising future prospect.
Venture capital firms usually invest in more than one companies at a time. To narrow down the risk of failure, they try to limit the choices and tend to invest in certain industries. Some firms opt for industries that give them a higher level of success, while others also choose industry expertise to provide non-financial aids to startups.
Aids provided by venture capital firms
Investments that come from these firms are not always in the form of money. Sometimes, it could be in the form of technical or managerial expertise. That’s why in “Start Up,” Han Ji Pyeong became one of the mentors in the hackathon hosted by Sandbox.
Venture capital can also become the bridge for new companies in accessing capital markets, bank loans, or other debt instruments. Usually, this option is open for new companies or ventures with commonly under two years of operating history. One thing to note is that firms that provide such help will also own parts of the company’s equity. Thus, investors will get to voice their opinion on the company’s decisions.
Big risk, big return
Just like what Han Ji Pyeong said, not every startup returns with fortune. Hence, venture capital firms usually involve already well-off investors, investment banks, or other stable financial institutions. Despite all the risk, the returns that investors can receive is more than enough as a payoff.
WhatsApp is a perfect example of successful venture capital. According to Investor Junkie, Sequoia Capital invested $8 million for a 15% WhatsApp’s share back in 2011. The company later added $50 million in 2013, when WhatsApp’s value was at $1.5 billion. Right the next year, Facebook took over WhatsApp for over $19 billion. Accordingly, Sequoia Capital’s equity stake’s worth skyrocketed to nearly $3 billion. With that, the $58 million venture capital investment resulted in 50-to-1 return. Very promising, right?