Venture capital is a new form of financing that has been a boon for young entrepreneurs and plays a strategic role in financing small-scale, high-tech and risky businesses. In all developed and developing nations it has made its mark by providing equity capital, so they are more like equity partners than financiers and benefit through capital gains.
Since young and growing companies need capital at the right time, not only to float their company in the market, but also to survive in the long term. When financial institutions such as banks and other private financial organizations are hesitant to take the risk of an early stage financing, given that the credibility of the fledgling company is not established, venture capital firms enter the foray to finance the project in the form of capital that can be called “high risk capital”.
Although there is a common misconception that the interest of venture capital firms is primarily driven by cutting edge technology in the industry, this is not always the case for all venture capital firms. A venture capitalist associates high risk with huge returns. Of course after thoroughly analyzing the prospects and consequences and the feasibility of the project. The venture capitalist becomes the entrepreneur’s partner in his business. True venture capital financing doesn’t have to be limited to high-tech products, any risky idea with great potential can be funded, and venture capital is an all-powerful mechanism for promoting and institutionalizing entrepreneurship.
Venture capital is primarily focused on growth. A venture capitalist is very interested in a small business becoming a larger one. He helps establish the business, finance it, and comes all the time to see how the business grows. If it is a potential equity stake, the venture capitalist can exit the partnership once the business becomes profitable and get his money back by selling the stocks or convertible securities. If the company opts for a long-term investment of venture capital financing, the financier has to develop a long-term investment attitude, say five or ten years, to allow the company to make large profits.
Another form of financing is that the venture capitalist has in his hands the management by which he becomes an active participant in the operations of the company and his thinking is simplified as to how to multiply and make money fast, which is a win-win situation. sides. Not just finance, the venture capitalist also contributes to marketing, technology enhancement, and management skills for the benefit of the new company.
The venture capitalist’s management approach is significantly different from that of a banker whose primary concern is collateral and asset securities. He keeps his hands off the management and plays safe. The venture capitalist also cannot behave like a stock investor investing money without having in-depth knowledge of the business and management of the company. It combines the qualities of a banker, a stock investor and an entrepreneur in one.
The latest trend is for popular and giant software companies to promote their content through fledgling companies, providing the latest technology, training and expertise in addition to financing, which extends the geographic area of operations of the parent company and also expand your territory to scale greater heights. Venture capital firms should focus on fostering business growth and development and should not limit their interests solely to financing technology, infrastructure, information technology services, and the like. They need to diversify their investment in various sectors and even the reactivation of sick units can be considered one of the options if there is potential in the business.