Exclusive Venture Capital article
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Venture capital companies (VCCs) are usually independent companies set up by professional venture capitalists with funds obtained from private investors or other financial institutions, such as pension funds and insurance companies. The first two private venture capital firms were formed in 1946 namely, American Research and Development Corporation (ARDC) and J.H. Whitney & Company. These days some venture capital companies are subsidiaries of banks or are financed by a group of wealthy individuals with institutional support.
Many start-ups or rapidly growing small companies often find it difficult to raise finance from banks since they cannot provide sufficient asset security and are often regarded as highly risky. At the same time, they are usually either too small to seek equity finance and/or lack a sufficient trading record to meet listing requirements. These companies may offer high potential returns, but against this they usually have a high failure rate. Many of these companies need not only seed-corn capital to develop an idea, but also often require managerial expertise.
This is where VCCs come into the picture; they are prepared to invest in the company, usually for a limited period of typically 5 to 10 years, and provide some managerial expertise in return for a share (usually substantial) in the business. The vast majority of venture capitalist companies are interested in providing support for the company only for a limited period until the business is sufficiently mature that it can be floated on the stock exchange or sold off. The VCC aims to make a substantial capital gain from its investment via a floatation or sell off. This emphasis on capital gain arises from the fact that a rapidly growing company with low profitability in the initial years is unlikely to be in a position to pay dividends without constraining its growth.
VCCs are not involved exclusively with new companies; a major part of their business is concerned with management buy-outs (MBOs). MBOs occur when the owners of existing companies decide to sell off part of their business. The existing management team in the part of the business for sale might feel that it is worth buying the business but usually they have insufficient capital for this purpose. The management may approach a VCC company and arrange a financial package in which their capital is supplemented by capital from the VCC. Many MBOs combine an element of debt finance arranged through banks in conjunction with finance arranged with the VCC. In return, the VCC usually obtains a
substantial stake in the company. The control of the business remains with the existing management although they will be expected to meet performance targets set by the VCC.
Copyright BusinessEconomics.com
Copyright Business Economics.com
Venture capital companies (VCCs) are usually independent companies set up by professional venture capitalists with funds obtained from private investors or other financial institutions, such as pension funds and insurance companies. The first two private venture capital firms were formed in 1946 namely, American Research and Development Corporation (ARDC) and J.H. Whitney & Company. These days some venture capital companies are subsidiaries of banks or are financed by a group of wealthy individuals with institutional support.
Many start-ups or rapidly growing small companies often find it difficult to raise finance from banks since they cannot provide sufficient asset security and are often regarded as highly risky. At the same time, they are usually either too small to seek equity finance and/or lack a sufficient trading record to meet listing requirements. These companies may offer high potential returns, but against this they usually have a high failure rate. Many of these companies need not only seed-corn capital to develop an idea, but also often require managerial expertise.
This is where VCCs come into the picture; they are prepared to invest in the company, usually for a limited period of typically 5 to 10 years, and provide some managerial expertise in return for a share (usually substantial) in the business. The vast majority of venture capitalist companies are interested in providing support for the company only for a limited period until the business is sufficiently mature that it can be floated on the stock exchange or sold off. The VCC aims to make a substantial capital gain from its investment via a floatation or sell off. This emphasis on capital gain arises from the fact that a rapidly growing company with low profitability in the initial years is unlikely to be in a position to pay dividends without constraining its growth.
VCCs are not involved exclusively with new companies; a major part of their business is concerned with management buy-outs (MBOs). MBOs occur when the owners of existing companies decide to sell off part of their business. The existing management team in the part of the business for sale might feel that it is worth buying the business but usually they have insufficient capital for this purpose. The management may approach a VCC company and arrange a financial package in which their capital is supplemented by capital from the VCC. Many MBOs combine an element of debt finance arranged through banks in conjunction with finance arranged with the VCC. In return, the VCC usually obtains a
substantial stake in the company. The control of the business remains with the existing management although they will be expected to meet performance targets set by the VCC.
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