Venture Capital is a monetary capital support for financing rapidly growing companies to expand their business and other commercial ventures. New biotechnology, manufacturing and information technology businesses are among the most sought after industries in this equity investment type.
They either rely on venture capitals provided by wealthy individual investors, professionally managed investment funds, insurance companies and subsidiaries of investment banking firms or by offering company shares in exchange of cash investments.
Venture capital is a high risk industry, as such, venture capital providers generally require a percentage of equity ownership, a greater degree of control over the company’s business strategies and a return of initial investment at a relatively short period of time as compared to standard investors. After such time, the equity is either offered on a public stock exchange or traded back to the client company, as regulated by venture capital law.
Venture Capital Law
Before a venture capital is provided to grow business, a formal venture capital law and proposal should be submitted and venture capitalists will need to conduct a thorough evaluation of the company among which are the products being offered, market size and projected earnings. Typically, majority of the proposals are rejected because they are viewed as unfit with the firm’s regulations and priorities.
Venture capitalists tend to focus more on the firm’s future potential. Companies or corporations with few competitors and those which offer new and rapid growth investment opportunities are most often prioritized. A company which has a committed management team with clearly defined responsibilities in their respective functional areas is a plus factor, but is not required by venture capital law.
As part of the company evaluation and venture capital law, venture capitalists may hire the following:
- External consultants to assess the technical feasibility of the proposition.
- Existing company vendors or suppliers to obtain data on the size and its competitive standing in the market.
- An auditors or chartered accountants to obtain the financial projections and other financial aspects of the firm and an attorney or legal person to ensure the registration of the business.
After careful evaluation and analysis, the venture capital organization prepares its own proposal. This would detail how much money to provide, amount of stock to require from the firm to surrender in exchange and the protective covenant for the agreement. Based on venture capital law, the proposal is then presented to the management of the firm until they reach a final agreement.