Small and medium enterprises that operate on a growing market, have an idea for an innovative investment and are looking for funds for its implementation should consider the possibility of using venture capital. What is a Venture Capital firm?
Medium and long-term investments in non-public enterprises in the early stages of development carried out by specialized entities (venture capital funds) of Venture Capital. Investments of this type are burdened with a high risk of failure and usually combined with managerial support regarding optimization of business processes or increasing the quality of management.
The purpose of Venture Capital (VC) investments is to make a profit resulting from an increase in the value of an enterprise by resale of its shares after a certain period of time.
Features of financing in the form of Venture Capital
VC, i.e. Venture Capital, has such a name for a reason. The uncertainty of this form of financing is mainly due to the fact that the funds entrusted by a larger company to a smaller company are not loans. Rather, it is an investment that will bring certain benefits to both parties in the future. However – as you know – any venture is risky and in the event of failure, the investor can lose a lot.
A large enterprise buys shares in a smaller company that operates in a growing market and shows great growth potential. The funds obtained in this way are allocated by an entity from the SME sector to an enterprise that will increase the value of the company’s shares in the future. Then the investor sells more expensive shares or makes a profit from shares. Most often, the entire investment lasts from 2 to 5 years.
Who is Venture Capital for?
Venture Capital is intended for companies that have been on the market for some time, have a proven operating model and high growth potential. Investments in new technologies – IT, Internet, telecommunications, biotechnology etc. are most often preferred. It is important that the owners of the investing company see in the capital recipient great development potential.
Venture Capital investors are looking for companies that have good management, show competitive advantage in terms of product, service or technology offer. An advantage, but not a necessity, is operating in a growing market and having a significant share in it.
The idea for an investment that is to be financed with capital obtained under venture capital is also very important. A large company must feel that this idea has a chance of success and great potential.
Venture Capital also has some disadvantages
Purchase of a part of shares by an investor is tantamount to partial loss of control over the company. This involves sharing profits, sharing power, and counting on the partner’s view.
In addition, this form of financing usually means a fairly long period of investor acquisition. Usually, about 6-12 months pass from the moment of contact with venture capital to its entry into the company. Therefore, this period is definitely longer than in the case of raising capital by means of a bank loan.