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Venture capital, explained

Ask the Fool

Published: May 24, 2022

Q: What are venture capitalists? -- M.B., Whitefish, Montana
A: They're investors who often take stakes in young and small companies that need infusions of cash to help them grow.
Venture capital ("VC") investors will hear many pitches for their money, such as from entrepreneurs with startup businesses. When they decide to invest, buying a partial stake in a company, they'll frequently offer guidance to its management as well, to help the company grow.
A VC investment is generally not long-term. Ideally, the small company will grow well, and after a few years will either be bought out by another company or will debut on the open market via an initial public offering (IPO). At either point, the VC investors can cash out, netting a nice profit.
For example, Sequoia Capital invested $60 million in WhatsApp early on, and exited with $3 billion when it was bought by Facebook. Meanwhile, Greylock Partners plowed $4.9 million into Airbnb -- a stake worth roughly $1.4 billion at Airbnb's 2020 IPO.
Q: Is this a decent time to start contributing to a 401(k) account? -- P.W., Forest Acres, South Carolina
A: It's just about always a good time. Sure, the market has been especially rocky lately, but when share prices are down, you'll be getting more of them for your dollars. And over the long term, the market has always gone up.
Be sure to contribute at least enough to qualify for all available matching funds from your employer, as that's free money. Also consider saving and investing much more than that in your 401(k) or elsewhere -- you might aim for 20% or more of your income -- to build a hefty nest egg for your future.
Fool's School
Six Smart Quotes About Investing
A great way to get smarter about investing -- and ideally, to enjoy better investing results -- is to learn from successful and savvy investors. Here are a few insightful quotations attributed to some of them:
-- Burton G. Malkiel: "... put time on your side. Start saving early and save regularly. Live modestly and don't touch the money that's been set aside." This reminds us how simple successful investing can be. It does take discipline, though.
-- Warren Buffett: "The stock market is a device which transfers money from the impatient to the patient." Successful investing doesn't require a lot of buying and selling. For best results, expect to wait for many years while your investments grow.
-- Christopher Davis: "A 10% decline in the market is fairly common -- it happens about once a year. Investors who realize this are less likely to sell in a panic, and more likely to remain invested, benefitting from the wealthbuilding power of stocks." Don't panic, and expect volatility. Stay the course.
-- Peter Lynch: "Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed's policy on money supply, foreign investment ... and they can't predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack." If you invest in simple, low-fee S&P 500 or other index funds, you're likely to outperform many Wall Street pros over long periods.
-- Benjamin Franklin: "An investment in knowledge pays the best interest." The more you learn, the better you can do. Aim to read widely about investing and personal finance topics. You'll find a lot of wisdom in newspapers, magazines, books and online articles. Invest in yourself.
-- Benjamin Graham: "The best way to measure your investing success is not by whether you're beating the market but by whether you've put in place a financial plan and a behavioral discipline that are likely to get you where you want to go." Amen.
My Dumbest Investment
Beware of Hot Stock Tips
I've made a bunch of dumb investments. When it comes to stocks, my dumbest would have to be buying some shares on a tip from an acquaintance at a party. Never a smart move. I spent $850 on shares that I bought for a bit over $21 each. They went up to $24, but now sit around $2 per share on a good day. -- E., online
The Fool responds: This is a classic blunder. We all want to stumble upon and invest in the next Apple or Amazon in order to get much wealthier.
If someone tells you about a company and suggests that it's likely to perform amazingly well, it's naturally tempting to buy some shares. But hold on -- you should research the company first. For starters, is it profitable? If not, why not? Are investors excited about what it might do, or what it's actually doing? Look into how financially healthy it is -- how much cash and how much debt does it have? Is its revenue growing?
Also, think about the source of any hot stock tip. How well do you know the person, and what do you really know about their investing skills and track record? For all you know, they know little about the company, but have blindly invested in it themselves, hoping to get wealthier. Even talking heads on financial TV programs can pitch investing ideas that turn out badly.
Foolish Trivia
Name That Company
I trace my roots back to 1949, when two fellows launched me to repair medical electronic items. Within a decade, I introduced the world's first implantable pacemaker, and in 1977, an innovative mechanical heart valve, followed by implantable cardioverter-defibrillators in 1996. Today, based in Dublin and with a recent market value near $140 billion, I'm a leading medical device maker. I own more than 49,000 patents, and employ more than 90,000 people in some 150 nations. My products address more than 70 health conditions, from Parkinson's to diabetes, and treat 72 million patients. Who am I?
Last Week's Trivia Answer
I trace my roots back to my 1967 founding, when two siblings built two homes in Pennsylvania. I tackled my first large master planned community in 1975. I sold my 100,000th home in 2014. Today, with a recent market value of around $5.5 billion, I'm a premier builder of luxury homes -- in 24 states and the District of Columbia. I'm vertically integrated, with my own architectural, engineering, mortgage, title, land development, golf course development, smart home technology and landscape businesses. I do my own lumber distribution, house component assembly and manufacturing. I'm in the Fortune 500. Who am I? (Answer: Toll Brothers)
The Motley Fool Take
A Low Price for Lowe's
Looking for a fairly dependable stock? Consider Lowe's (NYSE: LOW). Home improvement is a retail niche likely to enjoy continued demand across the country. And with over 2,200 locations, Lowe's has a store close to most customers in the United States and Canada.
Home improvement spending in 2021 was $538 billion, according to Statista, and by 2025, it's expected to surpass $620 billion. So Lowe's business opportunity is robust and expected to grow.
Some might worry about the possibility of an economic recession. And that could happen. But the U.S. economy has gone into recession before, and Lowe's business barely skipped a beat.
While Lowe's products might not be flashy, its shareholder returns are. Lowe's stock has grown by an average annual rate of more than 20% over the past decade. In fiscal 2021 (which ended Jan. 28, 2022), the company paid out $2 billion in dividends. The dividend has been paid every quarter for nearly 60 years. Meanwhile, Lowe's stock's price-to-earnings (P/E) ratio was recently in the mid-teens, well below its five-year average of 24, suggesting that it's priced attractively.
The stock market is a turbulent place. So consider having a position in a company with growing consumer demand and consistent financial results like Lowe's in your long-term portfolio. (The Motley Fool has recommended Lowe's.)