Venture Capital Investment

Venture capital investment refers to the investment of funds or partnerships in emerging companies and promising start ups. Venture capitalist who makes the venture capital investment in the company gets an ownership interest in return for the money invested. Some of today’s famous companies like Intel, Apple, Compaq etc. have many venture capital investments in them made by various venture capitalists.

Venture capital investments in companies allows the investors or venture capitalists to be closely associated with the working of the business. They can provide expertise and assistance with planning as well as take calls during meetings. Thus apart from the monetary part of venture capital investment, there is an investment of time and skills as well by investors in such ventures. Nevertheless, the sole aims of all venture capital investments are making more money and profit through the investment and hence most investors look for businesses and companies that can grow to become large.

Venture Capital Investments or Risk Capitals

Venture capital investments are capital that is invested in companies and businesses which have high element of risk associated with them. These risks could be related to profits, cash flows etc. usually, venture capital investment is invested in shares or equity which are compensated with relatively higher rate of return for the higher degree of risk involved. Business angels or venture capital firms are the main sources of venture capital investments.

Businesses Ideal for Venture Capital Investment

Businesses that have high growth potential are attractive for venture capital investment. Current size of business is not a matter of relevance where venture capital investment is concerned. Most venture capital firms opt for companies that can offer a significant turnover in five years. Thus some of the common factors that venture capital investment looks for include:

  • High growth prospects
  • Ambitious teams
  • Experienced management
  • Ability to convert plans into reality.

The time period of venture capital investment in a project usually falls between three to seven years. Venture capital investments in mature businesses where improved performance occurs quicker and sooner would lead to quicker selling off of investments. In businesses where development of business model takes time, venture capital investments stay put for longer periods until profits are realized.

Venture Capital Investment Process

Most venture capital investment deals can take from about a month to a year to materialize. A typical period of three to six months is the normal time frame. Quick deals also occur, but these are exceptions and are largely dependant on the type of information that is made available or provided to venture capitalists.

The process to procure venture capital investment begins with evaluation of business plan. The principal aspects that are considered by venture capitalists while looking for appropriate ventures to invest in include:

  • Viability of product or service
  • Potential for sustained growth of company
  • Efficient management team for efficient control and working of company
  • balance of risk and expected profits
  • justification of venture capital investment and investment criteria
  • Potential for sustained growth of company

The selection of business is followed by structuring of venture capital investment. The share capital that would be used in the venture capital investment are of many types:

  • Ordinary shares – ordinary shares or equity shares are held by all shareholders like members of family, members of management and usually not given to venture capital firm. Shareholders of ordinary shares have right to vote.
  • Loans – venture capital loans are entitled to interest. These loans can be converted into equity shares.
  • Preference shares – these non-equity shares are entitled to fixed dividends and are redeemable on fixed dates.
  • Preferred ordinary shares – these usually refer to equity shares but come with special rights. The special rights might be a fixed dividend or a share in the profits. Preferred ordinary shareholders have votes.

Venture capital investment in a mature business is accompanied by additional financing through merchant banks, finance houses etc. This is known as the syndication process.

Due Diligence Prior to Making Venture Capital Investment

Due diligence is a must to ensure that assessment of chosen business proposition for venture capital investment is correct. It is mandatory to assess the financial and technical feasibility of the business in question. Detailed research and background check can be conducted using external consultants. Sometimes the venture capital firm has qualified in-house experts to asses a business proposition. Financial aspects of the venture capital investment project is usually assessed by chartered accountants who would then go on to report about the financial projections of the business model. Once the background work is completed, the prospective venture capital investment is reviewed along the lines of:

  • Bank facilities
  • Leasing agreements
  • Management and information systems
  • Accuracy of previous forecasts
  • Financial assumptions and projections
  • Available management accounts
  • Pensions funds
  • Contracts of employees etc.

The completion of due diligence concludes venture capital investment process. Deals are drawn and plans materialized.

Venture Capital Investment Cycle

A typical cycle of venture capital investment involves raising of capital, monitoring of cash flows and finally the exit. All businesses need money for growth and their business models are not always in accordance with traditional banking rules. Thus the the high risk involved in these kind of businesses find asylum in venture capitalists.

Venture capitalists are on the look out for new businesses and start ups that have tremendous growth potential. The high element of risk involved with this kind of investment is balanced by the high expected returns.

Venture capital that is invested is not a loan. The businesses that need much required money can get money for growth from venture capital firms and realize their dream projects. Venture capital investment benefits both parties involved.

The venture capitalist team is involved closely with the working of the business they invest in. They monitor progress and take part in important decision making about company. Venture capital investment is ideal to catapult businesses into a different dimension and it is never too late.