Venture capital
Definition of venture capital: "venture capital is defined as long term Funds in equity or semi equity
forms to finance high-tech projects involving high risk and having strong potential of high
profitability".
Features of Venture capital financing:-
(1) Investment in equity:-
Investments are generally in equity instruments where return is taxable as capital gain rather than
ordinary income.
(2) Participate in management:-
Inverters are directly involved in management of the enterprise, the reason is that these kinds of
investments are having high risk associated with them. so if the investors are in mgt, they can watch
on mgt.
(3) Investments in new technology and new product:-
Investment is done in new enterprises using new technology to produce new products in
expectation of higher gain.
(4) Investment are not liquid (flexibility):-
Venture capital investments are not liquid i.e. not subject to repayment on demand as in the case
with in overdraft is realised only on investment of security or it is lost if organisation is in liquidates
for an successful working.
(5)High risk and high growth potential:-
Investment is made only in high risk but high growth potential projects, all types of risk like
technological, managerial, financial are studying sensitivity analysis is also used to study the impact
on return under different situations.
(6) Investment in small and medium size organization:-
Investments are usually made in medium and small size firms. This helps a venture capital company
to pick up equity at par. Besides, large units generally do not need venturs capital investment
assistance.
(7)No venture capital financing to trading financial service sector:-
Venture capital companies do not finance enterprises which are engaged in trading, investment,
brokerage, financial service and agency business.
Venture capital
Advantages of Venture capital Financing
Here are the advantages of venture capital financing.
1) No collateral required If you have a business plan along with the business model and profitability
then angel investors or venture capitalists invest in your project
without any collateral.
2) No repayment period Unlike debt financing, you need not pay any fixed monthly or yearly
payments to make it happen. This enables a company to manage funds efficiently for expansion of
business or purchase of machinery to boost production.
3) More cash on hand - You have more cash on hand and no loan burden. So, you as the company
can declare a dividend to the shareholders in accordance with the profitability of the company.
4) Long term planning Since the investors do not expect the immediate retum on their investment,
you can manage the funds efficiently which will yield better returns in the near future.
Disadvantages of Venture Capital Financing
Here are the disadvantages of venture capital financing.
1) Complex Process - In order to raise funds you need to approach venture capitalists or angel
investors by submitting a robust business model, future revenue projection, whether your venture
will succeed in the future, profitability, etc.
2) Share of Profit of the company - Since equity gives an ownership right and voting right to the
shareholders, the dividend paid to the shareholders is more than the interest payable in the case of
debt financing.
3) Loss of control - Since the shareholders are the owners of the company, you need to consent or
consult with the shareholders in the case of differences of opinions among the shareholders.
Stages of Venture Capital
1. Seed Capital
Purpose: The first round of funding to validate an idea or concept.
Use of Funds: Developing a prototype, conducting market research, or assembling a founding team.
Investors: Often angel investors or specialized seed funds.
Example: Funding to create the first version of an app or test the feasibility of a product idea.
2. Startup Capital
Purpose: To help companies with a developed product/service enter the market.
Venture capital
Use of Funds: Hiring key team members, refining the product, and beginning initial marketing
efforts.
Investors: Early-stage venture capital funds or angel investors.
Example: A startup launching its beta product and seeking funds for customer acquisition.
3. Early-Stage Capital
Purpose: To help companies scale operations and grow after initial market validation.
Use of Funds: Expanding production, building a user base, or enhancing marketing.
Investors: Venture capital firms specializing in Series A or Series B funding rounds.
Example: A tech company scaling its cloud services after gaining traction with early adopters.
4. Expansion Capital
Purpose: To fund established companies looking to expand further.
Use of Funds: Launching new products, entering new markets, or increasing production capacity.
Investors: Larger venture capital firms or growth-stage funds.
Example: An e-commerce company entering international markets or acquiring smaller competitors.
5. Late-Stage Capital
Purpose: For mature companies preparing for an exit strategy, like an IPO or acquisition.
Use of Funds: Optimizing operations, increasing market share, or stabilizing finances.
Investors: Venture capital firms, private equity investors, or strategic corporate investors.
Example: A SaaS company solidifying its leadership position in preparation for a public offering.
6. Bridge Financing
Purpose: Short-term funding to "bridge" the gap between stages or an exit event (like an IPO).
Use of Funds: Meeting immediate financial needs or preparing for a liquidity event.
Investors: Often existing investors or specialized bridge loan providers.
Example: A startup needing cash flow while finalizing an acquisition deal.
