This Site Requires Javascript
Burger Menu

Venture Capital

Additional Resources

  1. Beginners Guide To Venture Capital [nutsandbolts.mit.edu]
  2. The Quantitative Economics Of Venture Capital [web.stanford.edu]
  3. How Much Does Venture Capital Drive The U.s. Economy? [gsb.stanford.edu]
  4. How Well Do Venture Capital Databases Reflect Actual Investments? [faculty.chicagobooth.edu]
  5. The Risk And Return Of Venture Capital [faculty.chicagobooth.edu]
  6. How Venture Capital Changes The Laws Of Economics Working Paper ... [citeseerx.ist.psu.edu]

Definition

Venture capital is a type of private equity, a form of financing that is provided to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth. Venture capital funds invest in these early-stage companies in exchange for equity–an ownership stake–in the companies they invest in. The start-ups are usually based on an innovative technology or business model and they are usually from the high technology industries, such as Information technology, social media or biotechnology. The typical venture capital investment occurs after an initial "seed funding" round. The first round of institutional venture capital to fund growth is called the Series A round. Venture capitalists provide this financing in the interest of generating a return through an eventual "exit" event, such as the company selling shares to the public for the first time in an Initial public offering or doing a merger and acquisition of the company.

Venture Capital

Venture capital is financial support provided by moneyed investors to small business that requires initial help when they are starting up.

Provision of Venture Capital

Venture capital is typically provided to those new businesses that have solid ideas and plans as well as high potential for long term growth. By large, Venture Capital is one of the most important sources of funds for fresh startups since they do not have the financial assets to be able to approach the capital markets.

While the risk for the investor is certainly higher, such risks are offset by the higher-than average returns they might be able to accrue. This holds true especially if it’s a revolutionary idea that has not been implemented before.

Advantages

For such firms, if the idea ‘clicks’, then being the market pioneers, they would be able to create their own value and charge as per their own demands. Even when newer entrants muscle into their field, they would still be able to keep a dominant position by virtue of their pioneering status and in this way the Venture Capital financer’s investment would be assured. Conversely, if the idea was to flop and the firm may become insolvent the financer would lose his investment.

Disadvantages

However from the startup’s point of view, since the firm is heavily beholden to its financer, it has no choice but to give him a say in all decision making activities. And this opportunity is usually availed by the financer who would try his level best to minimize the risk of losing his investment.

Potentially it could make or break the startup, since without full control of its idea and revenue generation capabilities it would be forced to listen to the ‘advice’ of the financer and might not be able to implement ideas as fast and as aggressively as it may want to do so.

Other more fell funded players may step into the field and the ‘pioneering edge’ would be lost for the startup. In the long run this would have negative consequences for both the business as well as the financer who, even if he does not lose his investment would not be able to reap the windfall that he had envisaged.