Invention and innovation are currently driving the Indian economy. What’s more, they have a powerful grip on the nation’s collective imagination. The popular press is filled with against-all-odds success stories of these entrepreneurs. At their side stands the venture capitalist ready to help them through all the tight spots—in exchange, of course, for a piece of the action.

What does a Venture Capitalist Do?

Venture capitalists invest other people's money in young, privately-held companies which show promise of getting very big and becoming very valuable. Because in reality, most startup companies do not succeed, early-stage investing is a very high risk, but at the same time can be very lucrative if everything works out. VCs raise a big pool of money (a "fund") typically from institutions such as university endowments, pension funds, and insurance companies, and wealthy individuals (together, the fund's "limited partners"). The fund typically has a life of ten years, with the investments being made during the first five, and then 'harvested' during the next five, when the companies in which the fund has invested (its "portfolio") have an "exit" by either being sold to other, larger, companies, or by becoming publicly traded ("going public") through an Initial Public Offering ("IPO") on the stock market.

How do Venture Capitalists make money?

Venture capitalists make money by taking a small percentage (typically 2%) of the entire fund each year (the "management fee"), and then by receiving a portion (usually 20%) of all the profits made over the life of the fund. Because of the highly risky nature of these investments, VCs are generally very picky about the companies in which they choose to invest: typically invest in only one of every 400 companies they see. Finally, almost all VCs believe (and therefore state early and often) that the value they bring to their portfolio companies is much greater than only money. Early stage investors typically take a very active role in helping the company grow, to increase the value of their investments. This takes the form of serving on a company's board of directors, mentoring the CEO, helping the company raise future rounds of financing, and using the investors' networks to help the company with recruiting, sales, business development, and, eventually, the company's exit.