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risk capital

Contributor(s): Ivy Wigmore

Risk capital is funds invested speculatively in a business, typically a startup.

Risk capital comes from private equity:  Funds belonging to high net-worth individuals and institutions that are amassed for the purpose of making investments and acquiring equity in companies. Venture capital (VC) is a common type of private equity.

In such investments, risk and reward are usually positively correlated: Higher risks are associated with greater potentials for reward. An emerging technology, for example, may take off and provide investors with many times their initial investment. On the other hand, unforeseen issues and market conditions may mean that the technology fails to be adopted and the investments are lost.

 One of the key strategies for successfully investing risk capital is diversification. In other words, don’t put all your eggs in one basket.

This was last updated in April 2016

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