By Jannet Smith 
Introduction
Venture Capital is a type of pure private equity financing that is offered by Venture Capital firms or funds of Venture Capital that is available to startups early stage and emerging companies which characteristically have high growth characteristics or have been rated as having high growth. These are often made on the basis of an equity stake or a share in the business of the firm. VCs invest the amounts that a firm requires for the expansion of its business and are rewarded handsomely in case of the firm’s success.
Venture capital is a very important factor in the entire system of innovation. It fosters the expansion of organisations within different sectors namely information technology health and biotechnology. Although venture capital is a way of funding it also comes with the consulting guidance and connection to other investors and experienced personnel.
Historical Perspective
The early origin of venture capital has been dated back to the period shortly after the Second World War in the United States. The modern forms of VC started in the end of the 1940s when Georges Doriot an academician and businessman of French origin established American Research and Development Corporation (ARDC). ARDC was amongst the earliest venture capital firms and it had a great part to play in the formation of the venture capital industry.
Some of the most prominent investments made by the ARDC can be described as follows the largest was made in 1957 with the DEC company that later became one of the largest producers of computers in the world. The success of DEC proves the effectiveness of VC and made people form more such companies.
A number of now famous VC firms date back to the 1970s including Kleiner Perkins and Sequoia Capital. This growth was driven by the growth of Technology and specifically after the emergence of the technology firms in what is known today as Silicon Valley.
Importance in the Economy
New business funding is a valuable part of the economy particularly in promoting innovation and business startups. New entrants in the market may experience a classic financing dilemma because most of the conventional means of financing such as bank loans are usually very costly because they are associated with high risk. Venture capital helps to satisfy this need as it is the money that is required to expand the scale of operations to penetrate new markets and develop new products.
Furthermore venture capital has a significant function in job generation and economic development. The employment outcomes of VC funded firms are better compared to those that are not funded by VC firms because the former expands at a faster rate. Also venture capital plays an important role in the boosting of technology and changing industries such as software hardware health and even energy.
How Venture Capital Works?
Venture capital is a many sided phenomenon which encapsulates a great number of elements starting with the venture capital firms and ending with the angel investors entrepreneurs as well as supplementary participants as the lawyers accountants and consultants. It is high risk capital with venture capitalists looking for those businesses that can deliver high returns on invested capital.
Key Venture Capital Players
Venture Capital Firms
These are the primary entities which are involved in the management of venture capital funds. These collect money from limited partners (LPs) such as pension funds endowments and wealthy individuals and then invest this money in startups and other young growing companies.
Limited Partners (LPs)
LPs are the buyers of the capital which the venture capital firms in turn invest in the business. They are mostly players such as institution investors or persons of substantial worth who contribute funds to a venture capital fund in anticipation of receiving worth back on their invested capital.
General Partners (GPs)
GPs are the tender of the venture capital fund. They are accountable for making investment decisions and the management of the portfolio and for producing the results in returns to the LPs. Many GPs are also experienced investors or are former entrepreneurs while many possess extensive industry knowledge of the sectors in which they invest.
Entrepreneurs Startups refer to new firms which are managed and owned by entrepreneurs. They require venture capital in an effort to get funding for their organisations advancement and functions. And in return they surrender a percentage of their company’s stock to the venture capitalists for the invested capital.
Venture Capital Process
The venture capital process typically involves several key stages
Fundraising
Venture capital firms go out to the investors to solicit for funds to form a Venture Capital Fund. This is the method of marketing the investment strategy and performance of the firm to the prospective investors. After the capital has been sourced the firm has to start searching for the investments to be made.
Sourcing Deals
Venture capitalists find their deals through cold calls using relationships and other social activities and networking events. They look for the startups that are growing fast and ones that fit into their theme of investment.
Due Diligence
Thereafter after a certain investment opportunity is sighted the venture capital firm goes through research. This process entails the assessment of the business that the company operates in the company’s opportunity the competition financials and the managerial team that will be behind the company.
Investment
If the due diligence is beneficial for the concerned venture capital firm the particular firm will discuss the terms and conditions of the investment and then possibly invest through the purchase of stock in the company.
Post Investment Support
Venture capitalists once an investment is made they do not just sit back and watch how the company is being operated there is usually an intervention. This can involve offering consultancy in terms of business and HR employment assistance and getting the company into contact with customers or suppliers for instance.
Exit
The main objective of venture capital is to be exited out of the investment and get its return. This may occur in several ways through floating in the market through an IPO sale of stakes to another company or sale of shares without belonging to the initial IPO. The chief stages of Venture Capital Funding are as follows
Venture capital funding is ordinarily presented in phases which are grouped in stages each of which reflects the distinct life cycle of a given firm.
Seed Stage
The seed stage comes first to venture capital financing models. At this stage the startups are often involved in the creation of the product or service research work and creation of a model. The money that is obtained during the seed stage is employed to meet first costs like the creation of products market analysis and recruitment.
Early Stage (Series A)
The first round otherwise known as Series. A funding is a stage when the company has a minimum viable product (MVP). The capital that is obtained in this stage is usually applied in such areas as expanding the business enhancing the product and hiring more people.
Series A
Financing is important to allow startups to move from a development stage to a growth stage. At this stage the investors tend to identify with startups that have the potential and strategies for making profits.
Series B C D
The growth stage includes series B C D rounds of funding and or more rounds. At this stage the main goals of the company are growth expansion and high profitability. The capital which is garnered during the growth stage is spent primarily in the areas of marketing plus sales expansion and at times acquisitions.
Investment at this stage is normally high and incurs less risk as compared to other earlier stages this is because the company is already established and has a test market. But the risks are still significantly present since the company has to expand and become profitable.
The last concepts discussed are Late Stage and Exit Strategies. In many companies the last stage of venture capital funding happens when the organisation is nearly reaching its growth plan and is ready for exit. The arrangement can also be applied to the last sprees of expansion initiatives before an actual IPO or before the company is ready to be picked up. One cannot discuss venture capital without having to talk about exit strategies. The most common exit strategies include
Initial Public Offering (IPO)
The company floats its equities on the stock market as a way of carrying out its sale of securities. This makes it possible for venture capitalists to dispose of their stakes and hence get their money back.
Acquisition
The company is sold to another company most of the time the buyer company has a large stake in the industry. This can afford a quick income to the venture capitalists.
Secondary Sale
VCs can also sell their equity to other investors directly or buy and sell the shares at the secondary market.
Role of Venture Capitalists
Identifying Investment Opportunities
The venture capitalists are always keen on seeking for their investment stakes in any growing sectors. They primarily target industries like technology healthcare and biotechnology that propound highly sleeper antipathy for creativity and break. To know which startups to look for it is necessary to grasp the ongoing tendencies of competitors and the scale of a startup’s further development.
Due Diligence Process
Once a good investment opportunity is found the venture capitalist undertakes proper diligence to establish the prospect of the startup. This process comprises identification of the business model the size of the value creation opportunity competitors financial projections and management of the team. It is however important to stress that analytics have to be made to the lowest degree possible so that risk can be controlled so that the firm has the capability to succeed.
Post Investment Involvement
The sources also showed that VCs are usually very much involved in the businesses they finance. This may involve sitting on the company’s board of directors advising the company and or partaking in recruitment procedures as well as introduction of the company to prospective customers or dealers. The idea behind this approach is simple it makes it easier for the company to realise its growth plans and it maximises the chances of exit.
Venture capital can be defined as the provision of equity financing to an organisation with the intention of having some influence over the management of the organisation. Venture capitalists have an essential function in managing companies corporate governance after they invest in the corporations.
This way sitting on the board of directors enables them to be involved in all the major decisions concerning the strategy of the company employment of staff and the management of the financial resources of the company. It is due to this involvement that they are able to note that the management of the company is proper to enable it actualization of the growth and profitability objectives that are in place.
Risk and Return of Venture Capital
Risks for Entrepreneurs
As we shall see there are a number of risks associated with venture capital to the entrepreneur. First they must be willing to surrender a part of their ownership of the company thus having a weaker controlling interest in the business. Besides focusing on quick growth and the exit strategy creates considerable pressure and might result in a number of unpleasantries.
However to everyone’s surprise not every startup comes to life and if it fails the consequences are dire on the side of the owners. In the event the company does not succeed the founders stand to lose the equity they own in the company besides their standing in the startup ecosystem may be jeopardised.
Risks for Venture Capitalists
Similarly there are risks to venture capitalists. This is a high risk area of investment perhaps because many companies which receive startup capital do not attain their growth goals. One of the main characteristics of venture capital is that the investor is equipped to sustain losses on these kinds of investments.
Potential Rewards and ROI
Nonetheless venture capital can be very profitable for both the entrepreneurs and the venture capitalists. Startups when successful have the ability of earning high revenue returns and some may even pay high multiples of the money invested. Hence for the entrepreneurs venture capital offers the means of realising their ideas for a new business and making good money.
One crucial consideration for venture capitalists is the high anticipated returns that characterise investments in startups. It is unlikely that all the investment made will generate a positive outcome but those that are successful can generate higher ROI than the amount that was lost in the unsuccessful investment. Some of the successes and failures of cloud computing that will be discussed in this paper include
Success Story
Google is possibly one of the most successful venture funded companies in the world today. Venture capital firms Sequoia Capital and Kleiner Perkins Caufield & Byers invested in Google with the firm’s capital which enabled expansion of the firm. It was listed in the stock market in 2004 the venture capital firms that had invested in Google got impressive gains on their investment.
Webvan
Webvan which was an online grocery delivery service is an example of companies which received funding from venture capital companies but did not succeed. Webvan even with hundreds of millions of venture capital dollars failed to execute strategies and shut its operations in 2001. Webvan generates a lot of attention and its failure should be seen as a sign that corporate America should stop investing in capital intensive low margin businesses.
Impact of Venture Capital
Some of the companies that have power from venture capital are today having a lot of impacts on the economy and the society. These innovative Internet enterprises such as Google Amazon and Facebook have revolutionised industries and have directly created millions of new employment opportunities. The influence of such companies is not only financial they have contributed to advancing technology they have changed peoples lives and ways of earning a living.
Function of Venture Capital
Technological advances have been particularly catalysed by venture capital. Venture capitalists have been instrumental in fueling the growth of the technology industry as they supply the capital for launch of new technologies and the growth of those technologies to marketable opportunities.
It has advanced the offerings that have dominated markets and caused the alteration of industries and companies as well as provided consumers with new products and services that have changed their lives. Venture capital refers to the finance in the form of equity funds that is provided to startup companies with the aim of their expansion in the economy.
Impact on Job Creation
Businesses funded by venture capital have been found to be a net creator of employment. Such businesses often experience significant growth and as they enlarge themselves more employment opportunities are established in the different fields including engineering product development sales and marketing.
The role of venture capital in job creation cannot be looked at only from the perspective of the companies that receive the funding as growth of such companies is likely to give rise to an entire supply chain of suppliers partners and service providers. Venture capital has been the driving force in increasing innovation and use of technologies. Venture capitalists have supported funding of research and development to aid startups in inventing new technologies that change industries.
This has subsequently led to market creation and destruction leading to market development and improvement of the living standards of people all over the world.
Entrepreneurial Finance and Economic Development
Venture capital being one of the most influential factors has incredible effects on economic growth. The evidence also suggests that the venture capital backed firms both create employment faster and generate gross domestic product or GDP more than nonVCT firms. The success of these companies can cause formation of new industries raise productivity and bring into existence new markets. It in turn fosters growth of the economy and enhances the wealth of the economy call it economic development.
Conclusion
VC is incredibly important in the innovation realm because it supplies the required capital to grow and evolve early stage companies. Venture capital comprises many stages and includes seed capital early stage mid stage investments and exit strategy. It would be unrealistic to overestimate the importance of venture capitalists in regard to the search for the investment opportunities evaluation and further development of the invested companies.
Venture capital comes with certain risks but the returns are well sized and probable for both the entrepreneurs and the venture capitalists. The stories of firms that have received venture capital funds are glowing and their continuation has been influential in generating employment and boosting the economy and innovation.