What is Venture Capital
Any kind of capital that is invested with certain amount of risk for obtaining profits is called Venture Capital. Such kind of capital is always invested in shares rather than loans, so that they get higher returns. It provides long term returns to companies that are not cited in the stock exchange. If a business is considering expanding or buying a new company its only venture capital that comes into picture.
Acquiring Venture capital is totally different from getting a loan or floating a debt. This capital is invested in shares in form of equity stake. The shareholders venture capitalist returns depends on how well the company runs on profitability. This return is usually calculated when the company winds up or sold to another company.
Venture capitalists or stake holders usually prefer to invest in risk-taking business, it could be small or new venture. Since these investors are interested in company that give them high returns and this is possible only if they are ready to take risks in business. It is for this reason the venture capitalists look to lock the investment period between three to seven years. They also try to look for business that have done really good in the past and companies that have run their business in a more mature manner.
How can companies acquire Venture capital? To do so the venture capital firms must have a good financial record. They can also do so from external sources, which can include even insurance companies and pension funds. The capital acquired from external sources always has a lock in period of ten years fixed. In such cases once the lock period expires the they will have return the original amount taken plus additional returns if any.
It is wise to understand the key stages of investment process:
- Preliminary assessment of business plans.
- Check the sustainability of company for risks.
- Services provided by the company are practical
- Check if the company has the prospective for continuous growth.
- Will the ROI (return on investment) meet the initial investment?
- Check for reward versus risk
The venture capitalist may use any of the ensuing types of share as investment:
- Ordinary shares: these are the shares that are usually held by the management and their relatives instead of the venture capital firms.
- Preferred ordinary shares: these are also equity shares but they have right towards fixed returns from profits called dividends.
- Preference shares: these are the most sought after amongst the others, because they right for income in well defined. They usually charge a fixed rate of 10%.