Learn the Ins and Outs of VC Investments.doc

8/10/2019 Learn the Ins and Outs of VC Investments.doc

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Learn the Ins and Outs of VC Investmentswritten by:Doreen Marteledited by:Jean Scheidupdated: 5/23/2011

New business owners often face diculties in obtaining capital. Some turn to venture

capital (VC options to help them get started. !efore "ou use this t"pe of investment

to fund "our business# ma$e sure "ou understand the advantages and disadvantages.

Understanding Venture Capital

%f "ou are loo$ing for wa"s to fund "our business# do "ou understand venture capital#

its advantages and disadvantages& %f not# here "ou will 'nd all "ou need to $now as

well as the pros and cons of this t"pe of funding.

Venture capital is also $nown as seed capital or private capital. %t is mostl" used to

help businesses that have high potential for growth. ne compan" that is no stranger

to most people is Digital )*uipment Corporation (D)C which was founded in +,-

using venture capital funds obtained from /eorge Doriot who owned the venture

capital 'rm 0merican 1esearch and Development Corporation (01DC.

Venture capital funds are used primaril" for companies who ma" not have sucient

operating histor" to *ualif" for traditional loans through a ban$. Most start2up high

technolog" companies have used venture capital funds in order to get started. %n

most cases# these companies are re*uired to provide the venture capital compan"

with a form of pro't sharing b" providing the venture capital 'rm e*uit" in the

compan".

Venture capital funds are not eas" to obtain. %n fact# most business owners who appl"

for venture capital funds will be turned down. 3nless a business plan can easil"demonstrate high rates of return within a 've "ear period# chances are ver" good

that the re*uest for venture capital funds will be turned down.

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2/11

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&he Pros of VC

7here are some bene'ts to venture capital funding. %n man" cases# the compan" able

to secure venture capital funds can receive services that ma" include8

Business Consultations2 Man" venture capital 'rms have consultants on their sta9

that are well versed in speci'c mar$ets. 7his can help a start up 'rm avoid man" of

the pitfalls that are often associated with start2up business ventures.

See the complete Bright Hub Guide to Intellectual Property Rights

'anagement Consultations 2 3nfortunatel"# not all entrepreneurs are good

business managers. Since venture capital 'rms almost alwa"s re*uire a percentage

of e*uit" in the start2up 'rm# the" li$el" will have a sa" in how the 'rm is managed.

:or the non2management e;pert# this can be a signi'cant bene't.

!uman (esour)es2 %n terms of 'nding the best talent for start up 'rms# venture

capital 'rms often provide consultants who are specialists in hiring. 7his can help a

start up 'rm avoid the pitfalls of hiring the wrong people for their compan".

Additional (esour)es2 Starting a new business is fraught with concerns about

legal matters# pa"roll matters# and ta; issues. %t is not unusual for a venture capital

'rm to ta$e an interest in providing these resources since the" have a vested interest

in the success of the compan".

%n general# businessresources that are provided b" venture capital 'rmswho have

ta$en an e*uit" position in a start up compan" can be invaluable to the success of

the compan". Man" start up 'rms securing venture capital are able to thrive and

become giants in their industries.

Cons of Venture Capital
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3/11

Securing venture capital t"picall" means that "ou have to give

up something in e;change for the funding. Most venture capital 'rms are not

interested in merel" receiving the capital that the" have invested along with a

standard interest rate. %n fact# there are some things that venture capital 'rms ma"

as$ for that ma" surprise "ou. 7hese include8

'anagement Position2 %n man" cases# a venture capital 'rm will want to add a

member of their team to the start up compan"


4/11

7hese are onl" a few of the possible problems an entrepreneur could face when the"

secure venture capital funding. %t is important that the" carefull" review all

agreements and have them reviewed b" an attorne" as well.

Con)lusion

%f considering venture capital# the advantages and disadvantages are man". 7his t"pe

of funding is not right for ever"one. 7hose companies who have high growth potential

such as electronics manufacturers# green technologies# and other high tech ventures

are usuall" the ones who fare best with venture capital funding. !efore "ou decide

that venture capital is right for "ou# ma$e sure that "ou $now all of the pros and cons

and do "our research.

(esour)es

Sources:

Investopedia

+. De'nition of Venture Capital8

http855www.investopedia.com5terms5v5venturecapital.asp

. Eochane$# David? 7op , Venture Capital %nterview Fuestions

http855www.investopedia.com5articles5'nancial2careers5>G5venture2capital2interview2

*uestions.asp

H. !eattie# 0ndrew? /eorges Doriot 0nd 7he !irth f Venture Capital

http855www.investopedia.com5articles5'nancialcareers5+>5georges2doriot2venture2

capital.asp

I. 6oiscono# C0# Stephanie? rivate )*uit" 0 7rendsetter :orStoc$shttp855www.investopedia.com5articles5>5private2e*uit".asp

%mage Credits8

Cash8 urchased %mage via iStoc$hoto5bobainsworth

Venture Capital :und Diagram viaBi$imedia Commons.org53rbanrenewal

ublic Domain

BUSINESS ONERSHIP)!cusing !n business !wnersip f!r entrepreneurs and !,e based business ideas$

+. &e)hnolog, Is -haping the *ntrepreneurial #uture

. *ntrepreneurship. 'a$ing the (ight "e)isions

H. Learn the Ins and Outs of VC InvestmentsI. /reat Ideas for 'oms 0ho 0ant to 'a$e 'one, at !ome

-. 0hat are Corporate B,laws

History!edit"

A enture ,ay be defined as a pr!8ect pr!spectie c!nerted int! a pr!cess wit an

ade9uate assu,ed ris and inest,ent$ it few e+cepti!ns( priate e9uity in te first a"f !f
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5/11

te 20t century was te d!,ain !f wea"ty indiidua"s and fa,i"ies$ ;e a""enbergs(


6/11

Long-term commitment:Vent!e #a"ital $nds need to be lat#hed in $o! a "e!iod o$ $e' yea!s

be$o!e disinvestment& Investo!s 'ho do not "!e$e! illi*idity 'ill atta#h a "!emim to thei! $nds,

also %no'n as li*idity !is% "!emim& )he!e$o!e an investo! 'ho #an 'ait ot the time ho!i-on'ill bene$it $!om this "!emim& .nive!sity endo'ments 'ho see% VC $nds to invest in a!e an

exam"le o$ s#h investo!s&

Difficulty in determining current market values:It is di$$i#lt to evalate the #!!ent ma!%et

vale o$ the "o!t$olio o$ a VC& Limited historical risk and return data and limited information:Vent!e #a"ital $nds mo!e

o$ten than not invest in ne' and #tting edge indst!ies o$ a se#to!, 'he!e the!e is little histo!i#al

data o! #ontinos t!ading data& It is also di$$i#lt to estimate #ash $lo's o! the "!obability o$

s##ess&

Entrepreneurial/management mismatches:Ent!e"!ene!s may $a#e di$$i#lties 'hen the!e is

diltion o$ o'ne!shi" and #ont!ol& /ad management #hoi#es may s#ttle a good vent!e&

Ent!e"!ene!s sometimes $ind it di$$i#lt to ste" " as the vent!e gains si-e&

Fund manager incentive mismatches:Investo!s inte!ested in 'ell "e!$o!ming !athe! than la!ge

si-ed $nds need to $ind manage!s 'ho mat#h thei! investment obe#tives&

Knoledge of competition:As 'e dis#ssed ea!lie! sin#e most bsiness that a!e $nded a!e $!om

nas#ent indst!ies it is di$$i#lt to assess the #om"etition, than say in established indst!ies& A#om"lete #om"etitive analysis is the!e$o!e di$$i#lt to nde!ta%e $o! a VC $nd&

!intage "ycles:E#onomi# #onditions va!y $!om yea! to yea!& (!ing some yea!s vent!e #a"ital$nding is "lenty and the!e$o!e !et!ns $o! them lo'& In "oo! o! st!essed ma!%et #ondition, evengood $i!ms $ind it di$$i#lt to $ind VC $nding&

E#tensive $peration %nalysis and %dvice:Vent!e #a"ital $nds that "lan to invest in

te#hnology #om"anies may not have the !e*i!ed ex"e!tise to assess them& Finan#ial investment

%no'ledge alone is not s$$i#ient& ood $nd manage!s the!e$o!e !e*i!e both o"e!ating and$inan#ial analysis and advising s%ills& A $nd manage! 'ho does not nde!stand the bsiness 'ill

im"ede !athe! than im"!ove it&07features7Je2J>0

Icici /enture -apital 0undNe(s LA;*;BK 6*L*( 201 at 1@:03 M !urce: !neyc!ntr!"$c!,

*9uity utua" )unds c"!sed in green as te e9uity benc,ars c"!sed ,argina""y "!wer a,id

c!ns!"idati!n !n )riday( weiged d!wn by capita" g!!ds( ,eta"s( aut! and inde+

eayweigts "ie 6e"iance and ;#$

I-I-I Pru 20 launches -apital Protection 0und4Sr /II Plan B%! 0( 201 at 10:23 M !urce: !neyc!ntr!"$c!,

## Prudentia" ) "aunces ## Prudentia" #apita" Pr!tecti!n Oriented )und 7 eries 5 ?ays P"an B( a c"!se ended capita" pr!tecti!n !riented sce,e$

5iE 5he 6not& 7 plat.orm .or early stage entrepreneurs%! 01( 201 at 1:15 M !urce: #%B#7;

#atc te sec!nd editi!n !f ;i* ;e Hn!t in partnersip wit ;i* ?e"i7%#6$ ;i* ;e Hn!t is

a p"atf!r, were ear"y stage entrepreneurs are batt"ing it !ut t! raise funds fr!, s!,e !fndias t!p enture capita"s and ange"s$ atc !w f!ur start7ups strie a dea" and wi"" wa"

away wit !er 6s @$5 cr!re in funding$

NH7I recalls road pro8ects to li.eOct 1( 201 at 1=:15 M !urce: #%B#7;

%NAs pr!p!sa" wi"" be fina"ising e9uity saring te c!,panies ,ay bring in$ ;ey are a"s!

g!ing t! be pr!iding e+ecuti!na" assistance t! tese stuc r!ad pr!8ects$ #!nsidering tese

priate e9uity p"ayers are te !nes w! !n"y inest wen tey get iger returns( it wi"" be

interesting t! see !w tis 8!int enture pans !ut in a few days$
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7/11

I-I-I Prudential 20 launches Gro(th 0und 4 Series 9Oct 15( 201 at 1@:01 M !urce: !neyc!ntr!"$c!,

## Prudentia" utua" )und as "aunced ## Prudentia" r!wt )und 7 eries ( a c"!se

ended e9uity sce,e wit te !b8ectie t! pr!ide capita" appreciati!n by inesting in a we""

diersified p!rtf!"i! !f e9uity and e9uity re"ated securities$

23t may continue rally: li3e p;t ban3s& E( 201 at 20:1> M !urce: P;

;e pr!ceeds fr!, te issue w!u"d be uti"ised t! fund w!ring capita" re9uire,ents and

genera" c!rp!rate purp!se$ ;e "ead ,anagers !f te issue are Kes Ban Ltd and ##ecurities Ltd$

I-I-I Pru 20 launches I-I-I Prudential Gro(th 0und4Series @ep 1>( 201 at 1@: M !urce: !neyc!ntr!"$c!,

## Prudentia" utua" )und "aunces ## Prudentia" r!wt )und7eries 3 a c"!se ended

e9uity sce,e( tat ai,s t! pr!ide capita" appreciati!n by inesting in a we"" diersified

p!rtf!"i! !f e9uity and e9uity re"ated securities$

Hope rally o;er& hy you should go bac3 to Aboring sectorsAep 15( 201 at 12:3@ M !urce: !neyc!ntr!"$c!,

;e treet is bui"ding in a cape+ cyc"e !f te "ies in 200 and 200>( *"ara says( adding(

wi"e we d! n!t dispute te rec!ery signa"s( we are circu,spect !f te re"atie

!utperf!r,ance !f cyc"ica"s !er te ,ediu, ter, 12 ,!ntsC$

/ideos

;i* ;e Hn!t: A p"atf!r, f!r ear"y stage entrepreneurs
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8/11

%NA reca""s r!ad pr!8ects t! "ife

t ,ay c!ntinue ra""y "ie pt bans: *+perts

6s 10(0007cr!re fund wi"" act as fund !f funds: andu

Naen't yet decided !n se""ing L sares: 6* nfra
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9/11

,!re Q

Photos 3 / >
http://www.moneycontrol.com/tv/search_videos.php?search_str=Icici%20Venture%20Capital%20Fundhttp://www.moneycontrol.com/news/business/tie-the-knot-a-platform-for-early-stage-entrepreneurs_1217106.htmlhttp://www.moneycontrol.com/news/mf-news/icici-pru-mf-launches-capital-protection-fund-sr-vii-plan-b_1221756.htmlhttp://www.moneycontrol.com/news/mf-news/equity-mutual-funds-gain-as-markets-end-flat_1222660.htmlhttp://stepcarousel.stepby%28%27seopg%27%2C%201%29/http://stepcarousel.stepby%28%27seopg%27%2C%20-1%29/http://www.moneycontrol.com/tv/search_videos.php?search_str=Icici%20Venture%20Capital%20Fund


10/11


11/11
http://www.moneycontrol.com/news/market-outlook/hope-rally-over-why-you-should-go-back-to-boring-sectors_1179064.html

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