Venture Capital has become a solution for many entrepreneurs for over ten years. However, not everything that corresponds to the topic has benefits. Between a business idea and an investor, some risks must be evaluated.
From a business perspective, venture capital brings benefits according to business results. Certain fundamentals should never be skipped; therefore, this article’s purpose is the definition, advantages, and disadvantages.
These are transactions in which a financial entity temporarily generates a stake in a non-financial company. This type of capital is an investment considered proper to the object of capital activity.
Like other types of economic investments, this capital has evolved. Venture capital began at least two decades ago. A venture capital fund has financed many well-known companies.
Venture capital is a cycle that begins with the creation of the fund. Then the fund is capitalized, monitoring is carried out, and it must end when the yield is obtained. Many venture capital funds come from pension funds, donations, and contributions from people with high purchasing power.
For definitional terms, risk capital is also known as Venture capital. Generally, this type of capital goes to companies that have or will have great success. The injection of investment is what makes money recover quickly.
Quite simply, venture capital has reached very high standards due to the opportunity it offers innovative businesses. Startups are more inclined to react to constant change. By taking advantage of new opportunities, they will have a greater possibility of growth.
A new company’s main obstacle is the lack of financial resources. Therefore, financing is an appropriate way to achieve what is desired. Many financial entities do not allow new ideas due to the uncertainty it generates.
The idea of venture capital is to act as a refuge for new companies in exchange for a quick capital return.
A management entity governs the characteristics, and the investment funds are usually private.
When the entrepreneur finds that he cannot go to conventional entities, he considers other strategies. It is there where the equity investment will join the risk. The risks are defined by the innovative characteristics and the lack of trajectory of the project.
The management entity is aware that it will join a project expecting 5 to 7 years for the return on investment. For the investor to do this, he is offered a significant capital gain.
Generally, the participants of a new business look for the managing entity because it is about new technologies. Companies or entities divide the money into several projects, so the risk decreases considerably. If a business dies, the others can recover the money because they will be successful.
Then the managing entity is in charge of:
In some cases, the investor assumes a large part of the management of the idea, and in others, they are limited to minimal supervision.
Venture capital funds come from 6 main types of sources. These sources are:
Natural persons generally take the lead in venture capital. It is easier for them to risk investing only on a hunch.
An entrepreneur must never forget that this activity does not consist exclusively of injecting financial resources. This is because it provides all the skills for the establishment.
Additionally, the management entity contributes a part to the organization and management of the business. To get an investment of this type, four phases must be fulfilled.
The company is not created. The entrepreneur has a novel idea, but it is not fully defined. To define it, you need to develop commercial and technical aspects.
It is a challenging phase, so the idea must seem good enough. When financing the future entrepreneur, help with the business plan and prospecting should be provided. As the project does not have a good appreciation, very few investors come to it.
In this case, it is more feasible to get an investor. Venture capital intervention is much clearer. All you have to do is start a business.
For this, an already known product must likely be produced. Success remains uncertain, but in this case, the investor can evaluate. Evaluating the business plan provides management skills for the operation’s success.
The product or service already exists in a small market. However, it lacks brand margin or competitive production. For this phase, the approval evaluation is almost immediate.
The investment of the venture capital entity is essential. It serves as a financing element and a provider of new knowledge. Thanks to both contributions, it will become a viable business.
It is made for the standard installation of the company. As the company already exists, it only merits positioning it in the market. The investment is made to increase production capacity.
It also serves to exploit distribution and make it more competitive. For this phase, the disinvestment is made with the capital gains index.
No matter what phase the entrepreneur is in, the ideal for these businesses to receive investment is to have clear ideas. They are hesitating before financial entities will never be a good idea. During all four phases, the venture capital entity has direct participation.
The decision is the effect that will make a business proposal go through each of the phases or die trying. Every entrepreneur must provide essential information in their business plan, defining:
They carry out an economic-financial analysis. The entity’s staff does this analysis. Only in specific cases do independent institutions act in the evaluation.
The evidence of the viability of an investment is made mainly by:
Whoever seeks investment must be responsible for carrying out a project. When evaluating, the quality of the people involved (entrepreneurs and associates) also intervenes.
Other aspects that are also considered are:
Computers are the most used venture capital projects. This indicates that technology makes it possible to find new economic opportunities.
Venture capital is only about temporary investments. Therefore, when the business is mature, the stake is divested. There are three divestment methods, and each one has pros and cons. The methods are:
The important thing is not divestment but the precise terms of them. Before there is an investment, the return process must be discussed.
The appreciable degree of risk means that the financial entity intelligently covers itself in case of loss. In addition to capital gains, entities make other types of precautions. The measures can be:
Forecasts should always be taken as entrepreneurs and present the margins of capital gains that are convenient. Each financial institution has its investment policies. What is clear is that no guarantee is needed in risk capital.
Every evaluation company takes into account these prevention measures:
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