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Know your Venture Capitalist Bookmark and Share  
 
  Author Name : Venkatesh Raman Posted on : September-2-2009 Total Hits: 1382
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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.

The National Venture Capital Association defines venture capital as: "Money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors."

The research study also estimates that

 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  - VC raised on an average $750 thousands and the first great year for
                         Venture capitalists
1980   -  VC 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

Three types of venture capitalists
There are three types of venture capitalists namely

 Public and private international venture capital firms
 Small Business Investment Companies(SBIC)
 Corporate venture capital units

Features of a VC firms

The important features of venture capital firms are:
 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
VC appreciates innovative ideas but they look for higher returns in the range of 25 percent to 40 percent.
 Business exit
VC’s 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
VC’s 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
 VC can be used as a financial tool for start-up and small and medium companies
 VC acts as a source of job creation
 VC acts as  source of sanctioning capital for growing companies who don’t qualify for bank loans approval
 VC 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 VC 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

Conclusion

Thus, venture capital has 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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