Venture Capital and Profitable Investment - Essay Example

?Abstarct: It is frequently assert that undertaking capital (VC) finances concentrate by manufacturing, phase, and characteristics. Miniature investigation in money, however, has empirically scrutinized how particular VC finances actually are, and how they make their specialty choices. Using a principal-agent model. The main analyzing done here is on why VC finances exhibit a variety of degree of interest from a hypothetical perception. In totaling, the experiment the forecast of my replica by means of an illustration of 1586 funds with 64168 venture reserves. The learning shows that near exists immense heterogeneity in finance specialism. Finance size, proxy for VCs' threat hatred, and proxies for the risk connected with the excess returns of the fund all have unenthusiastic effects on specialization. It mainly constitutes two events differentiating VCs’ focused aptitude from their universal talent. I locate that it is VCs’ particular talent that actually matters in shaping interest. There is also verification demonstrating a constructive connection connecting specialty and fund presentation. Additionally, particular ability and common ability are both absolutely interrelated to concert. The many of the researches do not advance inspect how particular VC finances are. Certainly, little study in business has tried to calculate the specialty patterns of VC funds by means of real asset data or to expand a prescribed replica elucidating the occupation choice of scheme capitalists. In this learning, it is demonstrated that a huge number of US project resources are not specific. There survive immense heterogeneity in finance area. Some are barely paying awareness, some are more comprehensive, and others are well expanding over dissimilar industries, phase, or geographic regions. Additionally, significant the area preferences of business enterprise capitalist can assist entrepreneurs aim the accurate finance while looking for VC funding. Introduction: “Venture capital is a huge amount of money provided by the investors to a company in exchange of equities or shares” (Venture Capital, 2011). Venture Capital is a form of "risk capital". Venture capital raises their funds from several sources. Most UK venture capital firms raise their funds for investment from external sources, mainly institutional investors, such as pension funds and insurance companies. The major factors that are considered by a venture capitalist before investment are: 1. Quality of management team 2. Size of the company’s market 3. Proprietary, uniqueness or brand strength of the company’s product 4. Return on investment and companies’ potential for growth. Aims of the study: The main aim of this research is to examine the scope, working and limitations of ‘venture capital’. Objectives: The main objectives of the study are: 1. To assess the fund allotment of venture capital 2. To evaluate the viability of the long term relationship 3. To examine the degree of risk involved in investment 4. To evaluate the possibility of active participation of venture capital in management 5. To evaluate the problems faced by the venture capitalist Methodology: The purpose of research methodology is to describe the method of conduction of the study. Redman and Mory define research as a “systematized effort to gain new knowledge” (Research Methodology: an Introduction, 2011). The primary and secondary research helps in its way to analyse the working and success of venture capital. “Secondary research occurs when a project requires a summary or collection of existing data” (Secondary Research, n.d). “Primary research involves getting original data directly about the product and the market. Primary research data is data that did not exist before” (Market research - primary research, 2010). To analyze the working and to assess the limitations of venture capital, a strict analysis of primary and secondary data are necessary. The methods like surveys, questionnaires and interviews are the part of primary research. “Secondary research lays the groundwork and primary research helps fill in the gaps. By using both types of market research, business owners get a well-rounded view of their market and have the information they need to make important business decisions” (Secondary vs. Primary Market Research, 2011). The working of venture capital is analysed using both primary and secondary data. Secondary sources are mainly journals, books and authenticated websites. For the primary source survey method is being used. The sampling method is being employed for the purpose of survey. Scope of the study: The working of a venture capital has greater importance in today’s world. It has a greater scope as well as risk. Greater the risk greater is the return from investment. Chances of failure are high in the case of venture capital as it provides long term start-up capital to new emerging companies. The major risk faced by venture capital is management risk, market risk, product risk and operation risk. Evidences show that out of ten units financed by venture capital only three succeed. Venture capital investments are not subject to repayment on demand and hence they are illiquid. Since the venture capital investments are of long term nature it is not possible to predict the future returns. Findings: The multinational enterprise of nowadays has got the options to expand even more in the worldwide marketplace as a result of increasing globalization. These business establishments which are operating in different countries are capable to generate profit in the course of their unique policies and strategies and sometimes their earnings margins overcome the nation state. They are capable to find new company destination and succeeding to maintain in the particular marketplace. But, in and environment where capital, labor, commodity, information and technology flows freely, the multinational entities have to face more challenge rather than operating in one state. “Money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns” (Venture Capital, 2011). The criteria which Venture Capital Fund Managements reported that they take into account when examining an innovative venture scheme are the characteristics of the marketplace or business, ecological threats to the company, the level of rivalry and the amount of product discrimination. In nowadays worldwide business surroundings, multinationals have various alternative of the method of entry into worldwide markets. They consist of mergers and acquisitions (M&A), configuration of joint ventures, and Greenfield investments.” Getting access to a loan to invest in a start-up venture can sometimes be daunting. This is because many lending institutions, especially commercial banks, are leery of lending to start-up ventures, terming them as mere conceptual business ideas yet to be proved feasible and therefore full of potential risks” (Head Fund Monthly, 2011). Venture capital teams are those that concentrate in financial support company thoughts drawn in suggestions where they perceive an investment chance by way of practicable development prospects. To summarize, a start-up which has strong administration capability and its merchandise has high level of rivalry and high amount of merchandise differentiation will attract Venture Capitals. Also, the start-up should either arrange to go IPO in fast finance enlarged state or sign a agreement with Venture Capitals to provide them a safe method of exit. “Many budding entrepreneurs lack a regular source of income to accumulate significant savings for a start-up capital and subsequently are devoid of tangible assets to present as collateral to borrow against. Consequently, their only resort lies in seeking venture capitalists as a potential source of start up capital” (Start-ups can raise funds from venture capital market, n.d). In reality, venture capital Organizations often offer the industrialist by way of more than just cash; because they frequently turn out to be fraction owners in the company, they regularly take an energetic position in shaping the Organizations policy and its management consisting of probably installing one or more knowledgeable managers from the outside. “While the venture capital firm may be affiliated with banks or other lending institutions, most are independent and privately managed. Their efforts are focused; business activity is limited to working with start-ups or young organizations” (Venture capital, 2011). Venture capital companies offer their consumers by way of capital in the course of straight equity funds, loans, or other fiscal arrangements. Because of the extremely speculative character of their funds, venture capitalists obtain large risks by functioning by way of new ventures. The aim of study consists of, to identify various Contemporary Management Issues faced by venture capitalist, to maintain long-term relationship etc. “Venture Capital is not broken. The demand by entrepreneurs for capital to form and fund companies are at an all time high. The trick is in the strategy of supply. We VCs are the suppliers of money. But if we are all giving money to the same types of companies, we’ll get crushed. The process of re-equilibration is playing out in this business, as it does in all businesses. Sequoia Capital, for example, is making a fortune” (Venture Capital 2.0 – the evidence accumulates, 2006). By way of venture capital funding, capitalist obtains an agreed amount of the equity of the business in return for the financial support. New company faces various troubles for funding at the starting its business establishment. In this circumstances company adopt Venture capital for funding. Equity finance offers the significant advantage of having no interest charges. It is "patient" capital that seeks a return through long-term capital gain rather than immediate and regular interest payments, as in the case of debt financing. Given the nature of equity financing, venture capital investors are therefore exposed to the risk of the company failing. As a result the venture capitalist must look to invest in companies which have the ability to grow very successfully and provide higher than average returns to compensate for the risk” (About Venture Capital (VC), 2010). Venture capital faces various issues like management risk, product risk, and market risk ad operation risk. All these risk affected by the Venture capital in a negative way so that study helps to identify all these risks. So that appropriate alternative can adopt to overcome all these risks associated with the venture capital. VC can also have various advantages and disadvantageous too. “Venture Capital is a capital funding provided to early-stage, high-potential and growth companies. Most of the times, a venture capital fund is invested in a new Start Up company or business. Financial investments made in such companies can range between hundreds of thousands of dollars to millions of dollars” (Advantages of Venture Capital, n.d).Various advantageous of venture capital consists of, it act as a business consultation for the company openings, it is kind of human resource, act a role of management consultation of the company, finally it play a role of additional resource as well. “In addition to being a source of funding, an advantage of venture capital is that a number of value-added services are provided to companies: like Mentoring, Alliances and Facilitate exit” (What are the advantages and disadvantages of venture capital?, 2011). Practical of venture capital: The virtual capital has been much developed in comparison to the past years, they have been today a professional one and they have been practiced all over the country. The countries like the Europe and Asia, there are significant attentiveness of venture resources in London, Israel, Hong Kong, Taiwan, and Tokyo. In the U.S., the administration has participated a mission in the expansion of venture capital, although, for the majority part, it was not direct. “Venture capital funds are used primarily for companies who may not have sufficient operating history to qualify for traditional loans through a bank. Most start-up high technology companies have used venture capital funds in order to get started. In most cases, these companies are required to provide the venture capital company with a form of profit sharing by providing the venture capital firm equity in the company” (Martel, 2011). The circumlocutory role, i.e., the common strategy that also advantages the progress of the attempt capital industry, was approximately certainly the most noteworthy. Some of the majority significant of these was: The static financial environment and the background Much gains in the finance The much strategy of choice of the venture stocklists. “Another important policy has been a willingness to invest heavily and continuously in university research. This investment funded generations of graduate students in the sciences and engineering. From this research has come trained personnel and innovations; some of who formed firms that have been funded by venture capitalists. U.S. universities particularly, MIT, Stanford, and UC Berkeley played a particularly salient role” (Kenney, et al, 2002, P.3). The sequential evidence also designate that government act can injure venture capital. The mainstream exceptional occurrence inwards when the U.S. Congress, in reply to widespread corruption in retirement fund, indistinct Federal pension funds system. In their swiftness to exclude pension fund abuses, Congress approved the service Retirement Income Security Act structure pension fund manager criminally accountable for fatalities incur in high-risk investments. “Despite the many shortcomings of VC funding of about many business owners are the only source of funding. Venture capitalists are often up to several billion dollars in VC funding. For some companies, VC funding is the only means by which the operator can realize his dream” (Disadvantages of Venture Financing, 2011). Limitations of venture capital: There are many limitations for using the venture capital, the venture capital is much risky in the various applications and the applications of the same include the different kind of the risk like the management risk, market risk, operation risk and the product risk, the various risk associated with them gives a negative impact on the study of the same. Venture Capitalists hoist assets for a commerce and offer optional services throughout the term of their speculation. The resources raise may be in the shape of arrears or fairness in the business. A characteristic business enterprise resources speculation is prearranged so that the undertaking capitalist gets adaptable favored supply in your company. This supply gives the venture entrepreneur a first option over the ordinary shareholders in the occasion of a insolvency or amalgamation. It also give the VC a speak in what course the corporation should go. If an entrepreneur’s business plan contemplate a longer time. Entrepreneurs ought to consider: ”pricing - Venture capitalists are typically more sophisticated and may drive a harder bargain. Intrusion - Venture capitalists are more likely to want to influence the strategic direction of the company. Control - Venture capitalists are more likely to be interested in taking control of the company if the management is unable to drive the business” (What are the advantages and disadvantages of venture capital?, 2011). You require weighing what's significant to you in stipulations of your business affecting forward. If power is a big factor, then a venture capital venture may not be apposite, and possibly you need to follow other venture opportunities. If producing a much important value, though, is the majority important — the hypothesis that it is enhanced to possess a slighter piece of a superior pie than a complete pie that is not significant one which is much higher than the existing venture capital outlay by the accurate dense can create a assortment of intellect. The other disadvantages of them that are to be considered in general are the, “At first you will have a smaller share in the business - both as a percentage and in absolute monetary terms. However, your reduced share may become worth a lot more in absolute monetary terms if the investment leads to your business becoming more successful. There can be legal and regulatory issues to comply with when raising finance, eg when promoting investments” (Equity finance: Advantages and disadvantages of equity finance, n.d). Social implications: Venture capital means money provided by investors to startup firms and small business with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above average returns. 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, which cannot raise funds by issuing debt” (Herrmann, et al, n.d). The downloads for entrepreneurs is that venture capitalists usually get a say in company decisions, in addition to a portion of the equity. The focus of angel investors is typically earlier stage businesses. Different venture capital firms focus on different stages of business development, but the unifying criteria is that they seek high growth companies capable of achieving exit strategies that meet the fund’s return criteria within a specified time frame. There is no set of industry or geographic markets that dominate in terms of attracting funding. “However, venture capital providers frequently concentrate on high-growth sectors often associated with technology or innovation. Angel investors may allocate funds to a range of ventures, frequently tied with their areas of expertise. In both cases they often prefer to invest within the vicinity of their offices to add management value and monitor portfolio companies” (Venture capital entreprenuer point of view, 2011). Venture capital is not suitable for al businesses, as a venture capitalist typically seeks; Companies with superior products or services targeted at large, fast growing or untapped markets with a defensible strategic position such as intellectual property or patents. A business proposition with good potential for significant profitability, such as a product or technology capable of generating a defensible and sustainable competitive advantage in the market. Being the first one in the market is not enough. A big idea a market opportunity with enough profit potential to create a company with sales in the multi-millions per year within five or so. Tangible evidence of market demand for products of the company Venture capitals are influencing public attitudes also. Venture capital is also associated with the job creation, the knowledge economy, and used as a proxy measure of innovation within an economic sector or geography. Every year there is nearly 2 million businesses created in the USA, and only 600-800 get venture capital funding. According to the national venture capital association 11% of private sector jobs come from venture backed companies and venture backed revenue accounts for 21% of US GDP. The impact of venture capital on team building: As companies develop from being a start-up to large complex organizations, attracting highly talented employees becomes a key challenge. The development of human resource functions, broadly defined, thus becomes an important an important aspect of professionalization, especially in high technology sectors where human capital is critical. “In traditional arrangements investors concern themselves mostly to the entrepreneurs. The notion of venture capitalists being closely involved investors suggests that they may even go as far as helping companies with their internal organization, including their human resource management” (Puri, 2008). The impact of venture capital on CEO turnover: The evidence of the previous section shows that venture capitalists play a role in the building of the internal organization- and specifically the building of human resources of the companies they finance. An important question is whether venture capital affects of the companies the leadership at the very top of the organization. Presumably one of the most important positions in any company is the position of chief executive officer (CEO). This person has a particularly large in role in building up all aspects of the company. To begin with the founders naturally take the leadership position in their own company. To begin with the founders naturally take the leadership position in their own company. While founders may be very suited for the initial phases, not all founders can make the transition from entrepreneur to manager. It could be that as companies develop, they could benefit from bringing in an outsider into the position of a CEO. Bringing In an outside CEO thus constitutes a significant step in the professionalization of a start up company. “The transition from founder to outside CEO however is not always simple. Some founders may be glad to have an experienced outsider take the leadership position in their new firm, so that they can focus on other aspects of their start-up” (Hellmann & Puri, 2000). For other founders, however, there may be an issue with relinquishing control to an outsider. While the entrepreneurs may be interested in the maximization of their own benefits, the investors will be solely concerned with the maximization of shareholder value. “The corporate social responsibility of the venture capital has many examples. Venture capital has been providing many job opportunities to the public. It is a best example for CSR. Because every organizations would have some social responsibilities, because they are operating in the society and they are transacting with the society. So they would have to show some social commitment to the society” (Corporate Social Responsibility, 2010). Originality/ value: This research deals with the structure of venture capital. In this paper we could see the structure of the venture capital is defined elaborately. Venture capital firms are typically structured as partnerships, the great partners of which serve as the managers of the firm and will serve as investment advisors to the venture capital funds raised. Venture capital firms in the United States may also be structured as limited liability companies, in which case the firm’s managers are known as managing members. Investors in venture capital funds are known as limited partners. This constituency comprises both the high net worth individuals and institutions with large amounts of available capital, such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled investment vehicles, called fund of fund. The many of the researches do not advancely inspect how particular Virtual capital finances are. Certainly, little study in business has tried to calculate the specialty patterns of Virtual Capital funds by means of real asset data or to expand a prescribed imitation elucidating the occupation choice of scheme capitalists. In this learning, it is demonstrated that a huge number of US project resources are not specific. “Also features of venture capital has been included in this paper (which is new), features of venture capital includes” Equity participation Long-term investment Participation in management (vENTURE cAPITAL, 2010). These all are the special information about the venture capital included in this research paper. These data’s are all based on the accurate research, which is very helpful to everyone. The technical paper includes the practical view points like, the virtual capital has been much developed in comparison to the past years, they have been today a professional one and they have been practiced all over the country. EXIT: Exit includes IPO, Equity transfer, write offs: IPO stands for initial public offerings; it means the first sale of stock by private company to the public. IPO’s are often issued by smaller, younger companies seeking the capital to expand, but can also be one by large privately owned companies looking to becoming publicly traded. “In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market” (Initial Public Offering – IPO, 2011). Equity transfer is done when a person sells his automobile to another person before the mortgage is recorded on his title has been fulfilled. “There is no requirement for a separate bill, presenting the act of sale is not essential, keeping in mind the act of sale and statement or transfer of equity particularly states what amount the buyer paid the seller for his equity” (What Is "Transfer Of Equity?, n.d). Write-off means a reduction in the value of an asset or earnings by the amount of an expense or loss. Companies are able to write off certain expenses that are required to run the business, or have been incurred in the operation of the business and detract from retained revenues. Reference List About Venture Capital (VC), 2010. [Online] IVCA. Available at: http://www.indiavca.org/ven_about.aspx [Accessed 14 May 2011]. Advantages of Venture Capital, n.d. [Online] VentureCapitalReporter. 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