How Venture Capital Is Different From Traditional Financing?
Venture capital is often a new kind of financing that has come as a boon for young entrepreneurs and it plays a strategic function in financing compact scale enterprises and high technologies and risky ventures. In all of the developed and establishing nations it has made its mark by giving equity capital, so, they may be extra like equity partners as an alternative to financiers and they’re benefited via capital gains.
As young and growing organizations have to have capital in the appropriate time, not only to float their enterprise inside the market place, but also to survive in the lengthy run. When financial institutions like banks and also other private financial organizations hesitate to take the risk of early stage financing, since the credibility with the budding firm is just not established, venture capital firms comes in to the foray to fund the project within the kind of equity which can be termed as “high threat capital”.
Although there is a misconception that the interest of venture capital firms are mainly driven by cutting edge technology in the industry, it is not always the case with all venture capital firms. A venture capitalist associates high risk with huge profits. Of course after thoroughly analyzing the prospects and consequences and the viability of the project. The venture capitalist becomes a partner with the entrepreneur in his business. True venture capital financing need not confine itself to high end technology products, any risky idea with great potential can be financed and venture capital is an all powerful mechanism to promote and institutionalize entrepreneurship.
Mainly venture capital focuses on growth. A venture capitalist is very much interested to see a small business growing into a larger one. He assists in setting up the business, funding it and comes all along to seethe firm grow. If it is a potential equity participation, the venture capitalist can come out of the partnership once the company becomes profitable and take back his money by selling the shares or convertible securities. If the firm opts for a long term investment from the venture capital finance, the financier has to develop an investment attitude for a long term, say five or ten years to allow the company to make large profits.
Another form of financing is that the venture capitalist has his hands on management by which he becomes an active participant in the operations of the firm and his thinking is streamlined as to how to multiply and make quick money which is a win-win situation for both sides. Not only finance, the venture capitalist also contributes to marketing, technology upgradation and management skills to the benefit of the new firm.
The venture capitalist’s management strategy is substantially distinctive from that of a banker whose prime concern is collaterals and securities in the kind of assets. He keeps his hands off the management and plays protected. The venture capitalist also can not behave like a stock market place investor who invests money devoid of getting thorough understanding regarding the company’s business enterprise and management. He combines the qualities of a banker, stock industry investor and an entrepreneur in one particular.
Most recent trend is that preferred and giant application firms market their content through the budding enterprises, by providing with all the newest technology, education and knowledge apart from finacing, which spreads the geographical region of operations of your parent firm as well as expand their territory to scale higher heights. Venture capital firms need to concentrate on fostering growth and development from the enterprise and need not confine their interests only to finance technology, infrastructure, information technology services plus the like. They require to diversify their investment in a variety of sectors and in some cases revival of sick units is often thought of as one of several options if there’s potential within the small business.