Venture capital is a new form of financing that has come as a boon for young entrepreneurs and plays a strategic role in financing small-scale companies and high-tech and venture companies. In all developed and developing nations it has made its mark by providing equity capital, so they are more like equity partners rather than financiers and benefit through capital gains.
Since young and growing companies need capital at the right time, not only to float their company in the market, but also to survive in the long term. When financial institutions, such as banks and other private financial organizations, are hesitant to take the risk of seed funding, as the credibility of the fledgling company has not been established, venture capital firms jump in to fund the project in the form of capital that can be termed as “high risk capital”.
Although there is a misconception that the interest of venture capital firms is primarily due to the latest technology in the industry, this is not always the case with all venture capital firms. A venture capitalist associates high risk with huge profits. Of course after thoroughly analyzing the prospects and consequences and the viability of the project. The venture capitalist becomes the entrepreneur’s partner in his business. True venture capital financing need not be limited to high-tech products, any risky idea with great potential can be financed, and venture capital is an all-powerful mechanism for promoting and institutionalizing entrepreneurship.
Mainly venture capital focuses on growth. A venture capitalist is very interested in seeing a small business grow into a larger one. He helps set up the business, finances it, and comes all the time to see the company grow. If it’s a potential equity stake, the venture capitalist can exit the partnership once the company is profitable and get his money back by selling stock or convertible securities. If the company opts for a long-term investment of venture capital financing, the financier has to develop a long-term investment mindset, say five or ten years to allow the company to make large profits.
Another form of financing is that the venture capitalist has his hands in the management so he becomes an active participant in the operations of the company and his thinking becomes quicker as to how to multiply and make money fast which is a win-win situation. for both. Not just finances, the venture capitalist also contributes marketing, technology upgrading, and management skills for the benefit of the new company.
The venture capitalist’s management approach is significantly different from that of a banker whose main concern is collateral and securities in the form of assets. He keeps his hands off management and plays it safe. The venture capitalist also cannot behave like a stock investor who invests money without having in-depth knowledge about the business and the management of the company. He combines the qualities of a banker, a stock investor and an entrepreneur in one.
The latest trend is for popular and giant software companies to promote their content through start-ups, providing the latest technology, training and expertise in addition to funding, thus expanding the geographic area of operations of the parent company and also expands its territory to scale greater heights. Venture capital firms should focus on fostering the growth and development of the business and need not limit their interests solely to financing technology, infrastructure, information technology services and the like. They need to diversify their investment in various sectors and the reactivation of sick units can even be considered as one of the options if there is potential in the business.