Definition of 'Venture Capital'

Money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.

Characteristics of Venture Capital

Object of Investment : Medium or small-sized enterprises in stage of business creation, and mostly being high and new-technology enterprises Term of Investment : 3-5 years or over, generally by means of equity investment, which usually accounts for 15-30% equity interests in the invested enterprise, without requirement for control power Decision of Investment : On the basis of expert assessment and evaluation Relation of Investment : Investment company will proactively take part in the operation and management of the invested enterprise, and provide value-added service Strategy of Investment : To determine the manner, scale and other aspects of investment according to different development stages of the invested enterprise (i.e. seedling stage, creation stage, growth stage, expansion stage, maturation stage), for the purpose of reducing investment risk Return on Investment : It's not aimed to procure investment bonus, but to withdraw investment by means of listing, acquisition, merger invested enterprise or other equity transfer

Manners of Venture Capital

Investment directly in the invested enterprise by installments Procurement of bank loans through Venture Capital Company security Partly loans on security and partly direct investment

Standards of Venture Capital

It has potential market Science and technology is specific to market demand It can set up market advantage It can become market leader Its management has talents and foresights It has significant return

Steps to draw Venture Capital

To familiar with corporate finance process To show corporate value To prepare business prospectus To promote enterprise Evaluation and due diligence Transaction negotiation To sign agreement

Venture Capital Investment Process

Venture capital is regarded as risk capital. This can be termed as the capital that is being invested in a project where in there is a fair bit of risk involved when investing. This risk is basically involved either in case of future profit or a regular and consistent cash flow for the investment. The best example for venture capital investment process is the investment in shares or equity. In venture capital investment process, there are ample chances of high return; however, there is a huge risk when you are investing in stocks. But there is a saying No Risk No Gain. Thus, to earn well, you will have to take some amount of risk. Everyone, rather to say the investors, says that when you are investing somewhere its always better to know more and do quite a bit of research before making any decision and initiate the investment. There is no harm in researching than to repent after losing in a blind fold investment. After all its your hard earned money and its your responsibility. There are few questions that can arise when comes to venture capital investment process and its related processes. Letstake a closer look at them through the course of this article. It is essential that you know and understand a few important points before making your choice for a venture capital investment process. These points can be summarised as follows: Venture capital investment process is very different from traditional banking and venture capital investment process is also nowhere related to the traditional banking and investment process.

Venture capital investment process ideally meets the modern socioeconomic needs and also brings a significant positive impact over the economy of the place. The venture capital investment process drives new industries. Venture capital investment process involves high risk, but at the same time it creates and brings in more wealth than any other traditional investment processes. Venture capital investment process is mainly focused towards or rather it is regarded as people and pedestrian oriented business. Venture capital investment process at the same time is a growth and exit oriented process. It is also an internationally oriented process too. Venture capital investment process first started in the US and today it has matured in the Continental Europe. Even Asia and South America too are not far behind and readily following the venture capital investment process. Venture capital investment process is a sought after business choice in which the venture capitalists invest in the entrepreneurial business, which may be small or new in nature. However, it is imperative to discern whether these businesses have the potential to grow in the near future. In case yes, venture capital investment processcan actually be a long term goal and investment. Theventure capital investment processpatterns show that the venture capitalists generally prefer or mostly invest their money in the market for anywhere between 3 and 7 years. Sometimes this number also increases, if the investment is not a dead investment for the investor. Theventure capital investment processfirms squeeze money for the investment from various sources. Most of the UK firms, especially the institutional investors, try extracting the fund from external sources such as the pension funds and insurance companies.

Investment Patterns and Other Features:

There is no such universally or ideally mentioned process or documentation for the venture capital investment processor pattern for the venture capitalists. The venture capital investment process varies from investor to investor and from place to place. Likely to say, if an investor is from UK or from any other continental European country, his investment pattern will be different from the investor who is prevailing in the Asia-Pacific region or in the US. So it is difficult and practically impossible to plot an ideal and scientific investment pattern for venture capital investment process. However, if you still wish to know the pattern or the process in detail, it is suggested to reach out to various investors from diverse backgrounds to get a first-hand picture. It will surely help you get an idea of venture capital investment process and plot your own graph for the same. When an investor is investing in venture capital for the first time, or at the key stage, it is vital to make an initial evaluation of the business plan where the money is to be invested. This is the stage of venture capital investment process wherein most of the approaches to the venture capitalists are rejected. There are few aspects that the venture capitalists should look into before making a decision to invest. Those principal aspects of venture capital investment process are as follows:

The commercial viability of the product or the service Companys potentiality for sustained growth The capability of the management to exploit this growth potential to take the company to a greater height Does the management have the ability to control the growth? The risk taken for the investment should be justifiable in terms of the possible risk taken. It is very important that the potential financial return should meet the investment criteria If an investor can look into the above aspect with greater and utmost importance then the high risk venture capital investment processwould

a healthy and joyful investment with good return for a decent period of time. When an investor, rather a venture capitalist, is investing in the venture capital, one or more of the following share capital options can be of good choice: Ordinary share: Thisis the equity share that is entitled to all income and capital Preferred ordinary share: This is the equity share that has some special rights such as, they may be entitled to fixed dividend or profit share Preference share: This is the non-equity share which is ranked ahead of all other classes of ordinary shares in terms of both income and capital Loan capital: This is the most risky but high return investment. Thisventure capital investment process investment is typically entitled to interest and is categorised as both secured and unsecured

Other forms of finance provided in addition to venture capitalist equity include: Clearing banks - principally provide overdrafts and short to mediumterm loans at fixed or, more usually, variable rates of interest. Merchant banks - organise the provision of medium to longer-term loans, usually for larger amounts than clearing banks. Later they can play an important role in the process of "going public" by advising on the terms and price of public issues and by arranging underwriting when necessary. Finance houses - provide various forms of installment credit, ranging from hire purchase to leasing, often asset based and usually for a fixed term and at fixed interest rates. Factoring companies - provide finance by buying trade debts at a discount, either on a recourse basis (you retain the credit risk on the debts) or on a non-recourse basis (the factoring company takes over the credit risk). Government and European Commission sources - provide financial aid to UK companies, ranging from project grants (related to

jobs created and safeguarded) to enterprise loans in selective areas. Mezzanine firms - provide loan finance that is halfway between equity and secured debt. These facilities require either a second charge on the company's assets or are unsecured. Because the risk is consequently higher than senior debt, the interest charged by the mezzanine debt provider will be higher than that from the principal lenders and sometimes a modest equity "up-side" will be required through options or warrants. It is generally most appropriate for larger transactions

The Pros of Venture Capital

There are some benefits to venture capital funding. In many cases, the company able to secure venture capital funds can receive services that may include: Business Consultations - Many venture capital firms have consultants on their staff that are well versed in specific markets. This can help a start up firm avoid many of the pitfalls that are often associated with start-up business ventures. Management Consultations - Unfortunately, not all entrepreneurs are good business managers. Since venture capital firms almost always require a percentage of equity in the start-up firm, they likely will have a say in how the firm is managed. For the nonmanagement expert, this can be a significant benefit. Human Resources - In terms of finding the best talent for start up firms, venture capital firms often provide consultants who are specialists in hiring. This can help a start up firm avoid the pitfalls of hiring the wrong people for their company. Additional Resources - Starting a new business is fraught with concerns about legal matters, payroll matters, and tax issues. It is not unusual for a venture capital firm to take an interest in providing these resources since they have a vested interest in the success of the company.

In general, business resources that are provided by venture capital firms who have taken an equity position in a start up company can be invaluable to the success of the company. Many start up firms securing venture capital are able to thrive and become giants in their industries.

Cons of Venture Capital

Venture Capital Fund Diagram Securing venture capital typically means that you have to give up something in exchange for the funding. Most venture capital firms are not interested in merely receiving the capital that they have invested along with a standard interest rate. In fact, there are some things that venture capital firms may ask for that may surprise you. These include:

Management Position - In many cases, a venture capital firm will want to add a member of their team to the start up company's management team. This is generally to ensure that the company

can be successful, though this can also create internal problems. Equity Position - Most venture capital firms require that the company give up an equity position to them in return for their funding. This amount is not small, in many cases it can be as much as 60 percent of the equity in the company. In effect, this means that the entrepreneur is not controlling their business; it is being controlled by the venture capital firm. Decision Making - One of the biggest problems that many entrepreneurs face when they agree to accept venture capital is they often are giving up many key decisions in how their company will operate. Venture capital firms that have taken an equity position want a "seat at the table" when any major decision is made and they often have the power to override decisions. Business Plans - When a business plan is written and submitted for financing considerations, most finance companies will agree to sign a non-disclosure agreement. This is not the case in most venture capital firms. Venture capital firms will nearly always refuse to sign a non-disclosure agreement due to the legal ramifications of doing so. This can put ideas from an entrepreneur at risk. Funding Plan - If an entrepreneur writes their business plan and determines they need $500,000 to get the business launched, they may be lulled into thinking that these funds will come up front. This is simply not the case. Venture capital firms almost always set goals and milestones for releasing funds. Funding from venture capital firms is typically done in stages with an eye on the expansion of the business.

These are only a few of the possible problems an entrepreneur could face when they secure venture capital funding. It is important that they carefully review all agreements and have them reviewed by an attorney as well.