What is Venture Capital (VC): It may be defined as capital infused in businesses that are new, untested and risky, but with high potential for growth and profits. It is financing of untested technologies, processes, systems, or products that have no guarantee of success, but tip the scales in favor of investing in them, on account of their high potential for growth and profits.

Success in a project of this kind holds the promise of capturing the whole, or at least a good part of the market, for that particular product or service. It is this tantalizing prospect of cornering the market, and consequently driving away the gravy car home, that persuades a Venture Capitalist to risk his money. Of course, the prospect of such high growth and profits naturally begets with it, the risk of losing it all.

All or Nothing is a common feature of this type of financing.  It may also be compared to private placement. The players involved here are high net worth individuals, or institutions, who contribute or pool together their resources for investment through the medium of specialist investment firms. These investment firms look out for opportunities of high returns against high risk, and identify projects that are relatively new and yet to establish themselves. And because they are not established players, these newbies are not in a position to either raise Bank loans on favorable terms, or go in for public subscriptions (IPO’s).   This vulnerability of the entreprenuer attracts the Venture Capitalist, who offers to take a stake in the company on profit and loss basis. That is, the financier is prepared to bear a loss also, in the event of the new business not doing well, which is not the case with traditional financiers like Banks.

For the new business, that has a brilliant idea to work on, but not in a position to crystallize the same on account of want of funds, this offer of the financier is irresistible.   However, there is also a flip side to it. The financier or the financing firm also demands a say in decision making on important issues. This is, of course, in addition to his control over the ownership of the business (to the extent of his investment). This poses a classical dilemma to the inventor, or entrepreneur, who is willy nilly forced to accept the proposition of the “angel” financier.

The Venture Capitalist, who may be a individual or a firm, pools finances from interested persons or companies, and invests in new businesses as discussed above, with the objective of making a neat profit by providing crucial and much needed financial support, to the new business, when it needs it most. In return for taking the trouble and the risk of associating with such a new and risky business that is struggling to find its feet, the “angel” financier hopes to end up with his pot of gold, when the business is either sold off, or goes public.

Of course, he is prepared to lose his investment in the process. It is a gamble he is prepared to invest in.   Apart from providing finances, he may also contribute managerial and technical expertise to the business. This is to ensure that there is a reasonable chance for the business to succeed. Often, technically brilliant people lack the managerial and financial acumen to make their initial efforts at running a business, a commercial success. For such people, venture capital may provide the perfect match to realize their potential.

Article Source: http://ezineseeker.com/?expert=Muhammad_Haidar

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