Venture capital is the capital funding that companies seek for expansion and development. Companies seeking capital can be existing companies with financial requirement or start up firms. VC firms invest in companies with a strong potential for development and income generation. They take a high risk with expectations of a high return on their investment.
Where Does Venture Capital Come From?
In fact, the principle behind capital investment is that greater is the risk, greater is the possibility of high rates of return rates. Capital is not available through normal financing channels such as banks and finance institutions. It is equity in cash form available to companies with innovative and powerful ideas and technology without sufficient capital to launch their initiatives. Most often, capital investment is made by firms in return for stock ownership in the company.
While the advantages of raising capital through VC firms are many, one major disadvantage is the high cost or repayment and relinquishing part of ownership rights. This method of raising capital is more popular among companies that are launched based on unique ideas rather than on physical stock. Innovation and emerging technology therefore have immense potential which attract VC firms and private investors.
Venture capital funds are also created in a joint manner by groups of individuals with the same basic idea of obtaining huge returns on high risk investments. There are various advantages as well as disadvantages for companies seeking capital through venture firms.
What is a Venture Capital Firm?
Apart from funding, a VC firm provides a variety of value added services to companies they invest in.
Companies are provided with strategic mentoring services such as financial and operational advice. Nominee directors are appointed by these firms in the company’s board and are usually involved deeply in the day to day strategic development and direction of the company.
VC firms help company identify strategic acquisition and network extension opportunities both locally and globally. They also facilitate acquisition after identifying lucrative partners. These firms help companies with trade sale as well as prepare them for IPO or Initial Public Offering.
A Few Negatives of Venture Capital
While these services provide great benefits especially for new or inexperienced start up companies, there are certain disadvantages too. Most of the VC firms seek to recover their investments from companies in a maximum of five years time. If your business is likely to take more time to liquidate, then it is in the interest of your business to seek other finance options.
Being highly sophisticated, these firms usually strike a hard bargain. Another disadvantage is that most of the VC firms have their eyesight set on eventual acquisition of the company they invest in. There are possibilities of the VC firms interfering in strategic company operations, directions and decisions. If they find the management not effective enough to drive enough business, they tend to take control of operations.