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OVERVIEW OF VENTURE CAPITALISM
Venture capital refers to the funding of a business enterprise. What distinguishes it from
traditional business capital is that venture capital financing is often given to unproven,
potentially profitable business models that present significantly more risk than funding well-
established business enterprises. Although venture capital is not limited to the technological
field, technology companies usually benefit from venture capital funding. This is because
technology companies generally involve new and unproven technologies that traditional business
financing sources are reluctant to fund. The possibility of high returns compensates for the high
risk of funding startups and new technologies. The gain is usually through capital gains brought
about by the success of the new technology or business model. Profit through capital gains is
contrasted with profit through income or dividend yield.
Venture capitalists usually build a long-term relationship with the businesses they are funding
because, beyond money, venture capitalists also serve as mentors for other areas of the business
such as marketing, human resources, and management. Venture capitalists usually come in as co-
partners of the company founders. Venture capital initiatives have several common features.
One of these features is risk. Venture capital risks are of four kinds. The first is management risk.
This is the risk that the enterprise's management team being funded fails to work as a team. This
is especially true if the venture capitalist partners add new people to the existing company
management as part of the funding deal and the new people have conflicting ideas with the
founders. Even if management works like a well-oiled machine, company operations might be
too expensive to turn a profit, or operational processes may prove faulty. This is known as
operational risk, which is the second kind of risk.
When the product or service from the new enterprise finally hits the market, there are still two
kinds of possible risks: market risk and product risk. Market risk is risk of the product or service
failing because the target market rejects it. Product risk refers to introducing products or services
that might not be commercially viable. Another feature of venture capitalist initiatives is the
involvement of high technology. All venture capitalist enterprises do not share this feature, but
high technology is common to most of them. The reason is that the involvement of high
technology, contrasted with low technology, presents the possibility of the higher returns that
venture capitalists are looking for to balance the risks.
All venture capitalist partnerships result in equity participation, leading to capital gains.
Founders of businesses that look for injections of venture capital funds must be ready to share
ownership of the business they founded with venture capitalists. When a venture capitalist
chooses to back a business, it is called an equity purchase or a stock-convertible loan known as a
convertible debenture. This new funding in the form of equity gives new enterprises a greater
chance of getting needed business capital. With the invested funds comes the insistence from
venture capitalists for involvement with the management of the enterprise. Although venture
capitalists will not interfere in the day-to-day running of the business, they will most likely insist
on a seat on the board and would like to be consulted on major business decisions.
In addition to those already mentioned, some of the business areas venture capitalists might get
involved in as mentors or advisors would be project management, financial management, and
how to go about listing the business in the equity market. Another feature of venture capitalist
partnerships is the length of the investment. Eventually, all venture capitalists will want to exit
the enterprise, preferably with a solid profit. The time they have to wait before doing so can be
numbered in years. This will partly depend on whether the funding given is early or late-stage
funding. Venture capitalists who provide late-stage funding can exit sooner than those who come
in during the early stages. Those venture capitalists who come in during the beginning of an
enterprise may have to wait seven to ten years for their investments to mature.

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VC.docx

  • 1. OVERVIEW OF VENTURE CAPITALISM Venture capital refers to the funding of a business enterprise. What distinguishes it from traditional business capital is that venture capital financing is often given to unproven, potentially profitable business models that present significantly more risk than funding well- established business enterprises. Although venture capital is not limited to the technological field, technology companies usually benefit from venture capital funding. This is because technology companies generally involve new and unproven technologies that traditional business financing sources are reluctant to fund. The possibility of high returns compensates for the high risk of funding startups and new technologies. The gain is usually through capital gains brought about by the success of the new technology or business model. Profit through capital gains is contrasted with profit through income or dividend yield. Venture capitalists usually build a long-term relationship with the businesses they are funding because, beyond money, venture capitalists also serve as mentors for other areas of the business such as marketing, human resources, and management. Venture capitalists usually come in as co- partners of the company founders. Venture capital initiatives have several common features. One of these features is risk. Venture capital risks are of four kinds. The first is management risk. This is the risk that the enterprise's management team being funded fails to work as a team. This is especially true if the venture capitalist partners add new people to the existing company management as part of the funding deal and the new people have conflicting ideas with the founders. Even if management works like a well-oiled machine, company operations might be too expensive to turn a profit, or operational processes may prove faulty. This is known as operational risk, which is the second kind of risk. When the product or service from the new enterprise finally hits the market, there are still two kinds of possible risks: market risk and product risk. Market risk is risk of the product or service failing because the target market rejects it. Product risk refers to introducing products or services that might not be commercially viable. Another feature of venture capitalist initiatives is the involvement of high technology. All venture capitalist enterprises do not share this feature, but high technology is common to most of them. The reason is that the involvement of high technology, contrasted with low technology, presents the possibility of the higher returns that venture capitalists are looking for to balance the risks. All venture capitalist partnerships result in equity participation, leading to capital gains. Founders of businesses that look for injections of venture capital funds must be ready to share ownership of the business they founded with venture capitalists. When a venture capitalist chooses to back a business, it is called an equity purchase or a stock-convertible loan known as a
  • 2. convertible debenture. This new funding in the form of equity gives new enterprises a greater chance of getting needed business capital. With the invested funds comes the insistence from venture capitalists for involvement with the management of the enterprise. Although venture capitalists will not interfere in the day-to-day running of the business, they will most likely insist on a seat on the board and would like to be consulted on major business decisions. In addition to those already mentioned, some of the business areas venture capitalists might get involved in as mentors or advisors would be project management, financial management, and how to go about listing the business in the equity market. Another feature of venture capitalist partnerships is the length of the investment. Eventually, all venture capitalists will want to exit the enterprise, preferably with a solid profit. The time they have to wait before doing so can be numbered in years. This will partly depend on whether the funding given is early or late-stage funding. Venture capitalists who provide late-stage funding can exit sooner than those who come in during the early stages. Those venture capitalists who come in during the beginning of an enterprise may have to wait seven to ten years for their investments to mature.