What exactly do venture capitalists do?

They usually fund new businesses or help existing businesses to expand. They take a stake in the ownership of the business they are funding.

Nothing.

They have money, that is their “skill.”

VCs are looking to find the next Google, Facebook, etc. when it’s just a small company, desperate for cash, lean on people with experience of playing in the “big leagues,” and willing to sell large percents of the company’s stock fairly cheaply. They are looking to get many times their initial investment within a couple of years, so they push the companies they invest in to make decisions that benefit short term liklihood that it will be bought out vs. the long term health of the business. Often they will supply contacts and talent that can help take a company from a garage-run operation to an IPO on the NYSE.

VC’s know that most of their investments will fail, but good VCs will pick big winners frequently enough that the gains from those projects far ought weigh the losses from other failed companies.

Nice explanation, @gorillapaws! They gamble with money that they already have to make more.

Venture capitalists make available money for a short term. Usually their time frame is 1–3 years – they don’t like taking long term positions. THey do short term high stakes gambles on new technologies hoping that one of 5 will actually pan out. They realize that a lot of new startups will fail, but some percentage will succeed, and that’s the place where they make their money.

No matter how successful, venture capital usually moves on (by doing an IPO or selling the company or whatever) after 2–3 years. They move onto the next promising idea.

They supply startup money for promosing businesses. However, in exchange, they usually want the lions share of the profit in return, thus turning the creative mind behind the venture into little more than an underpaid employee.

@gorillapaws gives a reasonable thumbnail sketch of venture capital. Start up companies may not have any tangible assets and are not really good risks for normal financing. To make it worse they may not create any return on investment for several years making it difficult to make payments on any borrowed money. Venture capital takes all that into consideration. But in return for the high risk and long return cycle, they take a fairly heavy slice of the business.

I recently read an article (can’t find it right now) that places about 50% of public companies were started with venture capital. While they may be painted as vultures by some (not unreasonably) they provide an essential service for new ideas and inject over $20 billion annually into starting new business.

@Jaxk and @gorillapaws have explained it pretty well. My dad is a venture capitalist and those explanations are how I understand it from him (though to be honest, I don’t know as much about it as I probably should—it’s not anything I’m interested in doing, but I find myself defending it when people attack venture capitalists in general; I guess that’s kind of instinctual. Not that I have to love my dad’s job, but I certainly don’t see it or him in a negative light).

One other aspect that’s germane to this discussion: Many VCs have made their money through their own rags-to-riches enterprises. That means that they do know something about nurturing, growing, administering and then selling a business as a going concern.

It’s one thing to invent the next must-have widget (or Facebook or Google) and start a company that produces it. But when the inventor attempts to become a business administrator, he or she often fails, because “running a business” wasn’t what they wanted to do in the first place. So sometimes the VC will supply that expertise as well, or help to identify the people who can, in a way that’s acceptable to the VC with the money and the inventor with the idea.