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1 Introduction
Venture capital may be regarded as one of the greatest mysteries in entrepreneurship. There are so many misinterpretations and misunderstandings about venture capital and joint venture partnerships that this dynamic division of entrepreneurship does not receive its equitable credit and the bad stigma to it is not justified. ... However, in most cases entrepreneurs with good business ideas do not poses the necessary capital to realise their dreams. ... These arteries are the question regarding the equity basis of an enterprise, venture capital, and joint venture partnerships. Disciplines such as where to find venture capital, how to talk to a venture capital company, how to obtain equity capital without loosing majority shares and so on, are never dealt with in detail. This results that the topic “Venture Capital” remains a mystery and a vague concept in entrepreneurship. ... So variously as the opinions in individual cases, and depending on branch, are about the adequate amount of the required equity capital, so undisputed are the fundamental meaning of equity capital for the dynamics and the growth of an enterprise. However, venture capital shouldn’t be looked at only as a safeguard within difficult times of the enterprise. Except for going public with the enterprise, which only can be seen as a long-term objective, the raising of equity capital through venture capital companies is the obvious, and often the only, way to generate an equity basis for an enterprise without selling the majority shares to a financial partner.
This document will supply the reader with the basic fundamental principals on venture capital and joint venture partnership. It will answer the questions asked by entrepreneurs about venture capital and provide the basic guidelines to evaluate their enterprises for a joint venture partnership.
2 What is Venture Capital?
Venture capital is one of the least understood areas in entrepreneurship. Some think that venture capitalists do the early-stage financing of relatively small, rapidly growing technology companies. While true, this is a narrow definition and it is better to view venture capital more broadly as a professionally managed pool of equity capital.
Definition: Venture capital may be defined as a professionally managed pool of equity capital (McGraw et al 1996)
Frequently, the equity pool is formed from the resources of wealthy limited partners. Other principal investors in venture-capital limited partnerships are pension funds, endowment funds, and other institutions, including foreign investors. The pool is managed by a general partner, the venture-capital company in exchange for a percentage of the gain realised on the investment and a fee. ... In fact, venture capital can best be characterised as a long-term investment discipline, usually over a five-year period, in the creation of early stage companies, the expansion and revitalisation of existing businesses, and the financing of leveraged buyouts of existing divisions of major corporations or privately owned business. In each investment, the venture capitalist takes an equity participation through stock, warrants, and/or convertible securities and has an active involvement in the monitoring of each portfolio company bringing investment, financing planning, and business skills to the company. ... , 1996)
The conclusion is that venture capital is equity capital and not risk capital and that this equity pool of money is professionally managed.
3 What Venture Capital is Not! (Bundesverband Deutscher
Kapitalbeteiligungsgesellschaften, 1996)
In order to clear all misunderstandings it is important also to state what venture capital isn’t. Venture capital isn’t
a) money for speculation;
b) risk capital;
c) a loan or any form of personal credit (it is equity capital); and
d) the anchor in crisis management. ...
4 Stages of Venture Capital
In evaluating the appropriateness of venture capital financing, an entrepreneur must determine the amount and the timing of the funds required, as well as the projected company sales and growth rates. Conventional small business and privately held middle-market companies tend to have a more difficult time obtaining external equity capital, especially from the venture-capital industry. Venture-capital firms like to invest in high-potential ventures. ... 1 Early Stage Financing
Definition: Early stage financing consist of two types of financing which occurs during this difficult stage for rising capital; seed capital and start-up capital (McGraw et. ... , 1996)
• Seed capital
Relatively small amounts to prove concepts and finance feasibility studies. ... , 1996)
• Second stage
Working Capital for initial growth phase, but no clear profitability or cash flow yet. ...
5 Description of the Stages of Venture Capital
5. ... Two types of financing occur during this stage: seed capital and start-up. Seed capital, the most difficult financing to obtain through outside funds, is usually a relatively small amount of funds needed to prove concepts and finance feasibility studies.
Since venture capitalists usually have a minimum funding level of US$400,000.00 and higher, they are rarely involved in this type of funding except in the case of a high-technology venture proposed by an entrepreneur with a successful track record needing a significant amount of capital. ... Venture capitalists play an active role in providing funds here. ... Generally, funds in the second stage are used as working capital to support initial growth. ...
6 Venture Capital Markets
Definition: The venture capital market is the market where financing can be obtained for new and growing companies (McGraw et. ... , 1996)
There are three venture capital markets involved in financing stages of a firm’s growth. These are the informal risk-capital market, the venture-capital market, and the public-equity market. ... While all three capital markets can be a source of funds for stage one financing, the public equity market is available only for high-potential ventures, particularly when high technology and large amounts of capital are involved.
Definition: Informal risk-capital market; One type of risk capital that is composed of a virtually invisible group of investors who are looking for equity-type investment opportunities in a wide variety of entrepreneurial ventures (McGraw et. ... , 1996)
Definition: Venture-capital market; One of the three types of venture capital that has formal companies making investment decisions in a variety of business areas (McGraw et. ... , 1996)
Definition: Public stock market; One type of venture capital that is the official listing of a company on the stock exchange, giving the general public the opportunity to invest in the company (McGraw et. ... ” Venture-capital firms also provide some first-stage funding. However, the venture must require a minimum level of capital set by the firm $400,000.
Approximate Word count = 5311
Approximate Pages = 21.2
(250 words per page double spaced)
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