Venture Capital

By: Lucy Yan

Definition

Venture Capital is a capital raising process, which helps entrepreneurs gather essential resources to jump-start their business. It also serves as a channel to provide focused and quality deals to its network of investors. In addition, venture capital organizations educate the investing community and provide the necessary tools for investors to make sound investment decisions or facilitate their business development processes. Among these tools are a clearinghouse that provides valuable, direct industry connections and a supportive community based on common experiences. Venture capitalists structure their deals in a particular way to minimize their risk and maximize their returns.

Operation Process

Venture capital professionals have an in-depth understanding about the preferences of individual investor networks. Depending on their nature, these investor networks may be interested in deals spanning a wide variety of industries and investment categories. By maintaining a close relationship with these networks, VC professionals gain first hand information on the amount and availability of financial resources.

Entrepreneurs and business owners who qualify for the venture capital network gain access to high-quality investors. Venture capitalists are responsible for filtering and pre-qualifying deals based on the business' potential or its strength within the industry. Furthermore, venture capitalists collect detailed information about the business, such as the company's ownership structure, historical and projected revenues, and financial data of its competitors, etc. After analyzing all these information, they help entrepreneurs or business owners customize a capital raising strategy to meet their specific needs. Then, with a definite strategy, venture capitalists put together an entrepreneur-approved list of targeted investors. Thus, venture capitalists function as the bridge between the investor and business opportunity.

Venture capital professionals also provide valuable assistance with business planning by contributing their industry knowledge, experience in expending businesses and expertise in taking the company public. Venture capitalists often offer their insights to the firms in which they invest, such as how to operate more efficiently, how to make better use of financial resources, how to enhance business image, etc.

Today's VC

Today, venture capitalists function more like conservative bankers than the risk takers in prior days. However, the venture capital revolution is far from over. They will continue to dramatically alter the economic landscape. With the help of technology, venture capitalists can now work across the globe seamlessly. Investors can also easily tap into a high-quality network of professional service providers anytime, anywhere.

Although many entrepreneurs expect venture capitalists to provide them with sage guidance as well as capital, they should have a more realistic expectation.

Venture capitalists have carved out a specialized niche in the capital markets, filling a void that other institutions cannot serve. They are the linchpins in an efficient system for meeting the needs of institutional investors looking for high returns, of entrepreneurs seeking funding, and of investment bankers looking for companies to sell. Venture capitalists must earn a consistently superior return on investments in inherently risky businesses.

Recently, informal venture capital market has become more organized and eminent as many of the professionally managed venture pools grow increasingly less interested in the seed round. It is comprised of private individuals, commonly referred to as "business angels," who provide risk capital to new and growing businesses in which they have no prior connection.

Conclusion

Venture Capital significantly reduces time needed to raise capital comparing with traditional capital-raising procedures. Venture capital offers an inexpensive, yet effective service. For example: data transmission is secure and the release of information is based on permission; therefore, entrepreneurs and business owners in the venture capital network are always in control of which parties may view their data.

Venture capitalists have three sources of power over management--money, personal relationships, and formal power. They attempt to influence managers to follow their "dominant logic," which generally stresses on formal planning, a profit orientation approach, organizational development, and strategic focus.