FINANCE: VENTURE CAPITAL PART I

What is Venture Capital:    Venture Capital may be defined as capital infused in ventures that are new, untested and risky, but with high potential for growth and profits.   Venture Capital 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.  

Attraction and  Scope:  Success in a venture 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 on these ventures.   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 venture capital financing.  

Venture capital is akin to private placement.   The players involved here are high networth 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 new projects or ventures are not in a position to either raise Bank loans on favorable terms, or go in for public subscriptions(IPOs). 

This vulnerability of the venture attracts the Venture Capitalist, who offers to take a stake in the company on profit and loss basis.   That is, the Venture Capitalist is prepared to bear a loss also in the event of the venture not doing well, which is not the case with traditional financiers like Banks.  For the new venture, that has a brilliant idea to work on, but not in a position to crystallise the same on account of want of funds, this offer of the Venture Capitalist is irressistible.   However, there is also a flip side to it.   The Venture Capitalist also demands a significant control on the decisioin making within the venture.   This is, of course, in addition to his control over the ownership of the venture(to the extent of his investment).   This poses a classical dilemma to the inventor, or entreprenuer who is willy nilly forced to accept the proposition of the venture capitalist.

The Venture Capitalist, who may be a individual or a firm, pools finances from interested persons or companies, and invests in new ventures as discussed above, with the objective of making a neat profit by providing crucial and much needed financial support to the new venture when it needs such assistance most.   In return for taking the trouble and the risk of associating with a venture that is struggling to find its feet, the Venture Capitalist hopes to end up with his pot of gold, when the venture is either sold off, or goes public.   Of course he is prepared to lose his investment in the process.   But for the venture capitalist, it is a fair gamble.

Apart from providing finances, the Venture Capitalist may also contribute managerial and technical expertise to the venture.   This is to ensure that there is a reasonable chance for the venture to succeed.   Often, and especially, technically brilliant people lack the managerial and financial acumen to make their venture a commercial success.   They come up with a product that perfectly fills a void in that particular area, but inablility to handle the commercial aspects of the venture, be it financing, or marketing can prevent the venture from realizing its full potential, if not end up a flop.

In the next part of the article, we shall see how the V C system works.

                                                                                    To be continued.