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Companies require funds to develop their business. Financial support can take the form of loans and\/or equity capital. A company not listed on a stock exchange can obtain funds from banks or by issuing shares to private investors. Venture capital companies inject funds into the company in exchange for a proportion of its equity.<\/p>\n
Venture capital firms are prepared to assume considerably higher risk by investing at the early stages of a company\u2019s development in the hope that they can reap higher returns if the company meets or exceeds its projections.<\/p>\n
Venture capital firms realise their returns when an investee company has built a successful track record to qualify for listing on the stock exchange. Other means of exiting from investments are management buy-backs through put options based on a pre-determined formula, private placements to interested third parties or an outright or partial trade sale.[\/vc_column_text][\/vc_column_inner][\/vc_row_inner]\r\n\t\t
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Most successful companies follow a similar pattern of growth. They pass through several phases of development and each phase requires financing of a different size and structure.<\/p>\n
Seed<\/strong> Startup\/Development<\/strong> Expansion<\/strong> Mezzanine<\/strong> Buyouts<\/strong> [\/vc_column_text][\/vc_column_inner][\/vc_row_inner]\r\n\t\t The size of investments depends on the stage of development of the company and the type of deal. The seed\/start up stage requires considerably less funds than the expansion\/mezzanine stage. Startup venture capitalists usually invest between US$1m \u2013 US$5m per transaction and growth capital between US$5m \u2013 US$30m. Buyouts can range from US$20m to over US$1 billion transaction size.<\/p>\n The venture capital firm spends a similar amount of time in evaluating, monitoring and managing a small investment as they would a larger one. In fact, a small early stage investment may require more help from the venture capitalist. This does not mean that venture capital is not available to fund small early stage companies; there are firms that specialise in start up stage investments. This is particularly true for small companies involved in the high technology sector.<\/p>\n Where the investment requirement of the project is very large, several venture capital firms may join together to co-invest. In respect to buyouts, it is not uncommon for a lead investor to put together the transaction and to syndicate this down to other funds.<\/span><\/p>\n [\/vc_column_text]\r\n\t\t Each venture capital firm sets its own criteria for making investments. They differ in their investment preferences in geographical areas, specific industries, size of investment, the stage of a company\u2019s development, the expected returns, structure of the investment and the extent of involvement in the company\u2019s activities.<\/p>\n The important criteria are:<\/p>\n Industry and Product<\/strong> The Company<\/strong> Management<\/strong> Return on Investment<\/strong> Availability of Debt Financing<\/strong> [\/vc_column_text][\/vc_column_inner][\/vc_row_inner]\r\n\t\t In selecting a venture capital firm, the young company should attempt to identify a suitable match by finding out the investment preferences of particular venture capital firms in terms of the stage and size of investment, geographical location, and industry sectors.<\/p>\n In accepting venture capital, the company should understand that the venture capitalist is its his business partner and will demand a more disciplined and professional management style. As the partnership will last several years, it is important for the company to select a venture capitalist that the company believes it can work well with.<\/p>\n The young company must provide information that clearly explains its business and potential, its strategy and how management will achieve its projections. A creditable business plan is critical to \u201cselling the investment\u201d.<\/p>\n [\/vc_column_text][\/vc_column_inner][\/vc_row_inner]\r\n\t\t Willingness on the part of the company seeking funding to provide full information is generally looked upon favourably by the venture capital firms, and will greatly facilitate the evaluation.[\/vc_column_text]\r\n\t\t
\nA business idea is conceived and the initial concept of the business is formed. The project is initially funded by the entrepreneur\u2019s own resources.<\/p>\n
\nThe service or product is produced at this stage, but it has not been sold commercially. Investment in fixed assets and equipment for commercial production is now necessary. As the product has not been widely marketed or tested, its success is still in question. The risk is highest at this stage\u00a0as the funding commitment is large and rate of failure is high.<\/p>\n
\nThe company is now established. Its products or services have been successfully sold and a track record has been built. The company is ready to expand and additional funds are required. At this stage, bank loans may be available but will likely require a level of collateral, which is beyond the means of a young company. As the company is growing rapidly and is branching out to new markets, it may require a series of fund raising. Equity investment at this stage is sometimes termed \u201cexpansion or developmental capital\u201d.<\/p>\n
\nThe company has now built a track record over a few years with a trend for continuing success. In preparing for listing on the stock exchange, there may be a need to restructure and strengthen its balance sheet. At the same time, an endorsement by a reputable venture capital firm will attract greater investor interest. This is the last stage of venture capital investment where the risks are relatively lower.<\/p>\n
\nA buyout is the acquisition of control over a business either through the purchase of shares or the assets and trading liabilities of the business. There are various types of buyouts: Management Buyout (MBO), Leveraged Buyout (LBO), Management Buyin (MBI), or a combination of all three. Buyouts are usually only applicable for existing businesses with sustainable cashflows. In a buyout, the venture capitalists will own the majority of the share capital and have strategic control over the company, leaving the day-to-day operations to management.<\/p>\n\r\n\t\t\tWhat is the usual size of venture capital investments?\r\n\t\t<\/h2>\t\r\n\t\t
\r\n\t\t\tHow do venture capitalists choose their investments?\r\n\t\t<\/h2>\t\r\n\t\t
\nThe venture capital firm identifies businesses with a competitive advantage in fast growing industries. \u201cNiche\u201d businesses with good margins are important factors.<\/p>\n
\nThe venture capitalist involved in the expansion and mezzanine stages will want to see several years of consistent growth and profitability and sound management. The company should also demonstrate a leadership position in the industry. For buyouts, it is important that the business is able to generate sustainable cashflows.<\/p>\n
\nThe venture capital firm does not take an active role in the day-to-day operations of the company. It invests in the company and its management to achieve the company\u2019s strategy and objectives. The venture capital firm must be confident of the capability, the integrity and the drive of the leader and the depth of its management team.<\/p>\n
\nThe venture capital firm accepts higher risks on its investments in return for a higher return on its funds. Given the high failure rate of venture capital investments, the lack of liquidity and dividends for several years, the venture capitalist would normally expect a return in excess of 25% (depending on the stage of investment).<\/p>\n
\nIn LBO\u2019s, the extent and terms of debt financing play a major role in structuring and completion of the transaction.<\/p>\n\r\n\t\t\tHow to choose and approach a venture capital firm?\r\n\t\t<\/h2>\t\r\n\t\t
\r\n\t\t\tWhat makes a good business plan?\r\n\t\t<\/h2>\t\r\n\t\t
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\r\n\t\t\tHow do venture capitalists invest their money?\r\n\t\t<\/h2>\t\r\n\t\t