Introduction to Venture Capital for Kids and Teens
This video explains the concept of Venture Capital in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about venture capitalists, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- What is venture capital
- Pros / advantages of venture capital
- Cons / disadvantages of venture capital
- Amount and duration of investment by venture capitalists
What is venture capital?
Venture capital (or VC) is a type of investing where money is provided to private companies or ventures in exchange for equity.
These investors, called Venture capitalists, invest in companies that have grown beyond the startup phase, and want to go to the next level. These businesses are usually high risk, but also demonstrate potential for exponential growth, which is the main incentive for the VC investment.
Venture capital funding usually comes from investment banks or Venture Capital firms that pool money from wealthy individuals, insurance companies, pension funds, etc.
While venture capital generally refers to monetary investment, it sometimes can be in the form of managerial or technical expertise.
Why would a company use venture capital? What are the advantages?
Conventional investments in companies are done through the stock market or by borrowing from banks. But both of these options require the companies to have significant operating history.
Startups and small businesses that lack a proven track record do not have access to these sources. So venture capital becomes an essential source of financing for young companies.
Venture capitalists have a lot of expertise in running businesses, which can be a source of invaluable guidance. VCs also have ready access to resources in key areas like legal and taxation, and are very well connected in the industry – all of which are incredibly crucial to a company’s rapid growth.
One very attractive benefit is that there is no obligation to repay the VC if the business fails – this is unlike borrowing from a bank, where the business has to pay back the loan even if it fails.
Another huge advantage of venture capital financing is that it encourages entrepreneurs by giving them an opportunity to bring their ideas to fruition. This promotes invention and innovation, creates jobs, and provides consumers with newer and better products and services.
Are there any disadvantages of venture capital investment?
Venture capital financing is a high cost capital for companies – VCs expect a higher equity stake to compensate for the higher risk of investing in a new company.
So depending on the amount of capital, the ownership stake could be considerably reduced for the company founders. This could also translate into loss of control in decision making.
Approaching a venture capitalist is not easy and can be a tedious undertaking for the company founders.
Often the VCs don’t release all the promised funding at once. They do it in stages based on the company reaching pre-defined milestones, leading to a lot of pressure on the company’s management.
Since VCs are looking for very high returns, they are heavily involved in the running of the business. Often they are on the company’s board and impact key decisions.
Sometimes VCs lose patience and look to recoup their investment quickly, either by selling their stake or forcing a premature listing of the company, leaving the founders at a huge disadvantage.
How much money do venture capitalists contribute? And how long do they invest for?
On average, venture capitalists invest between 3 and 5 million dollars.
They usually have a long term investment horizon. It is not unusual for them to stay invested for over a decade before cashing out by initiating a merger, acquisition, or initial public offering (IPO).