A venture capital investment bank is a lending institution that specializes in helping fund start-up businesses with the potential to earn a great deal of money. These banks are one of the few options for risky ventures because traditional banks rarely provide start-up firms with loans. The banks have in-house departments dedicated to evaluating an entrepreneur's prospects and determining the potential return on investment. These banks work with individual start-ups and with venture capital firms that are in need of additional funding. Investment banks not only deal with venture capital, but subsidize these risky investments with more traditional offerings.
In many cases, a traditional bank will deny an entrepreneur the necessary cash to get a business properly funded. This may stem from the new business founder's lack of prior business experience or, in many cases, the fact that the product or service is only in the prototype stage. A venture capital investment bank is educated in the risk of new businesses and specializes in providing loans to these less-predictable prospects.
Evaluating the risk of potential clients is a major part of what a venture capital investment bank does. These organizations decide how to give out venture capital funds by reviewing proposals and comparing the risk and reward based on similar new companies. These banks understand the elevated risk associated with venture capital, but may not provide a loan if the project is believed to be too risky and unlikely to turn a profit. Start-up projects deemed worthy are given the funding and expected to repay the loan with interest in a specified amount of time.
Individual inventors and start-up businesses often come directly to a venture capital investment bank to seek funding. This is a straightforward way to pay for a project instead of seeking out individual investors that may demand partial control of the business. Venture capital firms often solicit these banks, however, if additional funds are needed beyond what the firm already has reserved for start-up projects.
Since providing money to new businesses is such a risk, a venture capital investment bank will often subsidize these loans with safer offerings. Investing in real estate, private equity, and financial advising are three ways these banks ensure a steady flow of income in order to fund venture capital opportunities. These alternative revenue streams are not necessary for all banks, but it is rare to find a lending institution that focuses solely on venture capital.