Venture Capital - Initial Funds for Investment
Modern Private Equity Funding for Businesses
Dec 25, 2008
It is common knowledge that to start any new business enterprise, what is primarily needed is money. There are several sources to raise the money including:
- Personal savings -- one can fund the business from personal savings or by raising personal loans offering one’s personal property as collateral security.
- Bootstrapping – One can start the business venture with the limited available funds, and then use the profits to further develop the business.
- Bank loan – Banks may come forward to lend money if the account behavior is healthy.
All the above three options are meant for wealthy individuals who may not strictly need external sources for business funding. There is a fourth way to raise money to start a business and this is known as venture capital. Venture capital is particularly suited if the intending entrpreneur needs large sums of money to meet big start-up expenses and has a quick business growth plans.
How Venture Capital Functions
Venture capital is a type of private equity capital that is made available during the early-stages for a business that has high growth potential. Venture capital investments are generally offered as cash in exchange for shares in the proposed business.
Venture capital investment firms raise and pool together money from institutional investors and other high net worth individuals. These venture capital funding firms quite often provide managerial and technical expertise apart from funds for the business.
The venture capital company will then invest the pooled money in a number of business enterprises and then expect that all of the investments it has made will be paid back over a pre-determined number of years. In other words, the venture capital firm will expect each of the companies it has invested in to either enter the stock market and raise capital from the public or wait for the business to be acquired by another existing company.
Some of the businesses in which the venture capital companies invest may fail. In short, the venture capital fund relies on the law of averages, hoping that the big wins made by some companies will more than compensate for the failure of certain other companies that turn sick.
How to Avail Venture Capital Funds
Any business venture, however promising, needs start up money and funds to meet its operational costs till such time it begins to earn profits. It therefore approaches venture capital firms with a business plan that sets out what they intend to do, how rapidly the business is expected to grow and the projected profits for the coming years. The venture capital company, if convinced, will invest money in the company in four different stages.
- Seed round: This is the early start-up funding
- First round: The company is poised to develop products and sales.
- Second round: The company has made good progress on its plan, sales have started to increase, and the business is expanding.
- Final stage round: The company has done well and is ready for an initial public offering.
In return for the money it receives, the borrowing company gives the venture capital fund shares in the company as well as some control over the the company policy decisions. The company might also agree not to incur certain expenses without the venture capital fund’s prior approval.
Venture Funds - Current Scenario
Several experts at a recent symposium held at Harvard Business School on venture capital predicted a grim future for the industry as too many dollars are chasing too few deals. Presently venture capital companies are targeting industries that include biotech, medical instruments, health care, retail, computers, software, networking, and the Internet.
Venture capitalists want to direct their investments to the green tech and biotech industries and China and India now remain the most favored destinations for venture funds.
