In entrepreneurship there are two things that shape the creation of a new venture; an idea and the intent to put risk into that idea. Not always does it succeed, but neither does it fail always, and with a beginning there's always a new opportunity ahead. All that is required is the determination to stick out the neck.
Mostly it revolves around financing and investment. And the most crucial part is the capital. That's where venture capital comes into play. It holds immense importance in deciding the growth and success of companies.
Venture capital- a form of private equity
Any emerging firm, small and medium enterprises, or any early stage venture requires financing to grow and expand into a bigger network, so venture capital aids by providing them with substantial capital either in exchange for equity or a shareholder stake in the companies. It is a kind of private equity, a private capital which invests as an outsider rather than public equity markets.
It is a risky module, but acts as a great catalytic agent in reforming the structure of a young business. Though it does take into consideration various factors before investing in the company and based on its evaluation the further process of investing begins.
The reformation of venture capital began in the late 20th century or early 21st century and it emerged as a separate function. Before that it used to be the ambit of a few wealthy families such as Rockefellers, Warburg, ford, Carnegie etc. In 1945 the first venture capital firms opened in the true distinct form; American research and development corporation and J H Whitney and company. Then slowly with a lot of successes, it expanded with the Silicon Valley and then the introduction of jobs, gates etc. it took a completely new look in the form of digitalized version.
Formal and Informal venture capital (Business Angels)
The potential of the firm matters most in getting the most out of venture capitalists. Mostly venture capital deals in equity related investments, so the companies have to have some girth, that it can really leave some imprints in the public domain in a few years. The formal can be said to be the way of playing safe in a risky environment. They look for a competitive environment and management that can give them an outlook of the company's success in the market.
While on the other informal venture capital gives a new kind of vision and hope to the young start-ups and companies. These are usually very rich holders who are willing to give the new fresh blood a good competitive chance in the market by taking responsibility and giving them full assurance of their financial net and backup. These are also known as business angels. Their investments come out of their own wealth. The creators of the company or the presenters of idea need to give their vision and objectives to their angel investors and in return they provide them with various packages to choose from as per their convenience.
Trust and empathy play a huge role in this relationship. The investors are more open and provides a very warm environment.
Decision making and investment behavior
Net Present Value (NPV) is a major factor in deciding the investment process. It involves a lot of screening steps and carefully judging the upcoming few years of investment based on company's profile. And the investment behavior is not a rigid thing, it's a dynamic process whereby the investors can alter and make new adjustments if it helps in the betterment of the firm.
According to Paul Gompers and Josh Lerner, who are considered to be venture capital revolutionaries, this venture capital cycle goes like;
Stages of venture capital investment
The job of venture capitalists is not just to give funds to the company but also to nurture and protect it. It helps the firm in following stages
An idea cannot just be a docile idea, it needs to sell. It has to be centered around a product or a service that has the capacity to generate enough income to sustain and then later on becoming the stronghold unit.
When it fulfills the criterion then the company needs to take risks and start building the structure of its business. It requires a great support as the risk is bigger and carries a lot of uncertainty.
With the maximum capacity utilization, when the company starts to produce decent amounts of money and the product range also increases, it's called a ramp up in business. The investors need to keep in touch with continuous evaluation of the future market.
And they have an exit strategy in place too. If something goes downhill, then overcoming that so that the loss can be tackled with ease
Funding stages
SEED FUNDING - whenever a company is at its initial stages of functioning, it requires an immediate funding so it can start to generate some cash on its own. That early investment is the seed funding.
Structure
Venture capital firms are typically structured partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisors to the venture capital fund raised. Investors in venture capital fund are known assimilated partners. This constituency comprises both high-net-worth individuals and institutions with large amounts of available capital, such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled investment vehicles, called funds of funds. Venture capital firms are typically structured s partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisors to the venture capital fund raised.
Role
There was a time when capitalism was centered around credit, as it was the way it was dealt. Then slowly shares, equity entered the frame and the scope got widened by a huge margin. In the late 20th century Goldman Sachs found a new way to underwrite securities. And slowly over a period of time this business flourished.
But it requires a very free atmosphere to flourish, and that's why US has the most amazing industrial arena. India being a developing nation is yet to develop a safety net where risks can be taken, experiments can be made.
And in that sphere venture capital plays a huge role in deciding the success of a company and businesses.
