Venture Capitalism

[redcannon]

What is Venture Capitalism? I'm very confused as to the whole concept of venture capital and who venture capitalists are.

[Die Neue Zeit]

http://en.wikipedia.org/wiki/Venture_capital


Venture capital is a type of private equity capital typically provided by professional, outside investors to new, growth businesses. Generally made as cash in exchange for shares in the investee company, venture capital investments are usually high risk, but offer the potential for above-average returns. A venture capitalist (VC) is a person who makes such investments. A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. Venture capital can also include managerial and technical expertise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. This form of raising capital is popular among new companies, or ventures, with limited operating history, who cannot raise funds through a debt issue. The downside for entrepreneurs is that venture capitalists usually get a say in company decisions, in addition to a portion of the equity.

[Janus]

It other words, they provide the funds and capital which entrepeneurs need.

[BlessedBesse]

Yes, in exchange for a degree of control over the company.

generally, it's either a win/win or a lose/lose situation.

[gilhyle]

Venture Capital usually comes from collective investment funds with a five year (no more) investment horizon. That means they pick businesses that they think should see substantial capital appreciation in that time frame. (Sometimes individuals act as venture capitalists using their own money, but more often they leverage off their own funds by taking up funds from others who trust them on the basis of their reputation) THe dragons den programme in the UK on BBC 2 shows four venture capitalists who use their own money interviewing potential entrepeneurs.

WHy does venture capital exist ? THe classic model is of an entrepeneur who goes to the bank for funds to invest. If he can get that funding, he/she retains all the equity, therefore all the upside. If he cant get that he needs to get his funds elsewhere. THe classic alternative is a business partner. Both people go into business together, mortgage their house etc etc, yawn.

In practice the way it works is that banks use venture capitalists as a test. If the entrepeneur can get a venture capitalist on board the bank will come on board as well. So lets say you got a business that needs one million to get going. You - the entrepreneur puts up your skill and 50K, you get a venture capitalist to put up 150k, he takes 60% of the shares you get 40%. THe bank then lends you 800k.

In five years time the business has quadrupled in value. THe shares are worth 800K. The venture captialist now insists on leaving. He wants 480k for his 60% (thus tripling his money in five years). Your shares are now worth 320K and you should have a managers income of about 100k from the business. With that security and income you should - just about - be able to borrow what you need to buy out the venture capitalist. If the figures add up you end up where you wanted to be in the first place - 100% shareholder with bank loans (all the upside is now yours). If the figures dont add up.....you got a problem.

[Die Neue Zeit]

^^^ Here in Canada, we also have Dragon's Den (and I watched a couple of eps and saw how the poor innovators had to humilitate themselves before the CAPITALISTS proper - one of them being a famous company exec).



Simply put, venture capitalists are the business world's equivalent of payday loans and other loan sharks, but with the added risk of legitimate losses (since ordinary workers' can't legally default repayment to loan sharks).

[Kropotkin Has a Posse]

Venture capitalists see like leeches to me. Making money off of something they never worked for.

I'd like to be a venture communist, actually. I'd go on adventures and struggle alongside struggling people. It would be worth it for the business cards.

[Janus]

Venture capitalists see like leeches to me. Making money off of something they never worked for.
Sometimes they make a profit and sometimes they don't, it all depends on the venture. Either way, they're sometimes the only source of funding for entrepeneurs and thus a critical part of commerical enterprising and expansion.