Venture Capital

Peter Thiel’s Facebook shares of $1 billion – a dream investment return

Venture capital (VC) is money provided to seed early-stage and emerging growth companies. Venture capital funds invest in companies in exchange for equity in the companies they invest in, which usually have a novel technology or business model in high technology industries, such as biotechnology and IT.

In 2004, venture capitalist Peter Thiel made a $500,000 angel investment in the social network Facebook for 10.2% of the company and joined Facebook’s board. This was the first outside investment in Facebook and when he sold his shares in 2012 realised over $1 billion. This is the dream investment return venture capitalists chase.

Venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan. Investments in smaller and less mature companies are exceptionally risky investments. As a result, venture capitalists usually get significant control over company decisions and a significant portion of the company’s equity.

Venture capitalists typically only invest in companies with innovative technology, potential for rapid growth, a well-developed business model, and an impressive management team. In addition, they are only interested in companies with exceptionally high growth potential and where the investment can be realised within three to seven years. Venture capitalists target minimum returns of 40% pa.

A core skill within VC is the ability to identify novel or disruptive technologies that have the potential to generate high commercial returns at an early stage. VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital.