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Venture capital is a type of equity investment suits for start-up companies that require a lot of capital. In general, venture capital investments are higher risk investments with above average returns. Venture capitalists will receive suitable shares of the company in return for their investments. The funds getting mobilized through venture capital would be from a group of wealthy investors, investment banks and other financial institutions. This type of funding is popular in new companies, emerging industries and joint ventures also.
Research study estimates
- The private equity and venture capital funded companies are growing faster than non-private equity and venture capital funded companies in the market place
- These firms are adding more jobs to the economy and growing at the rate of 32% as compared to 6% non -private equity firms
- Most of the top executives in the companies feel that without venture capital funding these companies would have not existed
History of venture capital funding
- 1959 - Fairchild Semiconductor was funded by Venrock Associates
- 1970 - Venture capital firms focused on startup and expanding companies
- 1974 - Temporary downturn due to stock market crash and non-acceptance on this type of funds
- 1978 - Venture capital raised on an average $750 thousands and the first great year for Venture capitalists
- 1980 - Venture capital investment returns were very low due to inexperienced venture capital managers
- 1990 - It was a boom year for the global venture capital firms due to large number of initial public offerings happened in US history
- 2000 - Due to NASDAQ crash and technology slump resulted in losses from high valued and non -performing new companies as per the expectations
- 2003 - Venture capital funds withered about half of its capacity from the year 2000
Types of venture capitalists
- Public and private international venture capital firms
- Small Business Investment Companies(SBIC)
- Corporate venture capital units
Features of venture capital firms
Board representation
Venture capitalists play a pivotal role in strategic functions of the companies apart from mobilizing capital for its ventures. In order to protect their investments, they would like to represent in company's board activities.
High risk and high returns investments
venture capitalists appreciates innovative ideas but they look for higher returns in the range of 25 percent to 40 percent.
Business exit
Vventure capitalists would like to move out of the business after specified period of time usually between 3-7 years after investments in the business.
Industry expertise
venture capitalists prefer to invest capital in specific industries or businesses due to their good knowledge base.
Project evaluation process - Venture capitalists
Before investing in any projects, venture capitalists will follow the various steps to evaluate the project:
- Preliminary screening
- Detailed Business plan and
- Due diligence - Business and legal
Venture capital advantages
- Venture capital can be used as a financial tool for start-up and small and medium companies
- Venture capital acts as a source of job creation
- Venture capital acts as source of sanctioning capital for growing companies who don't qualify for bank loans approval
- Venture capital plays a vital role in improving the corporate governance and accounting standards of those companies
- Venture capital is used as an economic tool in developing economies
Geographical spread - Venture capital funding
- United States - During 2006, VC's invested about $6.6 billion in 797 deals and research survey predicts that Venture capital investments will be around $20-29 billion in 2007
- Europe - In the year 2006, the top three countries in venture capital investments were the United Kingdom (515 deals worth of €1.78bn, France(195 deals worth of €875m) and Germany(207 deals worth of €428m)
- In China, venture capital investments doubled from $420 thousand in 2002 to almost $1 million in 2003
- In India, the venture capital investments during 2006 is $3 billion and expected to reach $6.5 billion
Thus, venture capital ahs become an important source of mobilizing funds for start up companies and small - medium companies which comes out with innovative ideas in the market place. Meanwhile, VC investments are risky but having the potential for getting higher returns over a long period of time. The venture capitalists have been the source of creation of world best companies such a s apple, Compaq, Intel, Sun Microsystems etc. Without VC investments, we wont be seeing these companies today physically.
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