Venture Capitalists operate funds, which are pools of money generated from other companies or wealthy individuals. The fund is usually of fixed size, say R10 million rand, and the idea is to take that money and diversify it by investing in a lot of other companies.

Funds usually have a specific focus or areas where they will invest eg there can be a Green Fund that invests only in eco-friendly companies, a Biotech Fund that invest in biotechnology companies, or a fund that focuses on dot coms.

Funds can also focus on a specific stage of financing, such as start-up only, or second round of financing.

Whatever the chosen profile of investments, the funds founders are aware of the risk and potential returns of the sector.

Often, the VC firm will invest all the money, and “close the fund”. The idea is to liquidate the investments within a specific period of time, usually less than 10 years. Investments are liquidated when companies are bought by another company, or when companies go public. All the proceeds are then redistributed back to the original fund investors.

It is an accepted fact by VCs that not all the companies they invest in will be successful. In fact, the VC firm plays the law of averages, hoping that one or two out of every ten investments made will generate enough profit for the firm to offset the eight investments that lose money and provide a good rate of return for he fund founders.

Funds are looking for about a 20% per year return on the fund, and the success of the firm is tied to its ability to invest in the right companies at the right time.

In return for investing in the company, the VC firm takes stock in the company, and also has some say in the strategic decisions the company may make, such as expenditure, hirees, loans taken etc. The VC can also contribute its contact base as well as business acumen