Venture capital

economic-dictionary

It is called Venture capital to all those investments through shares that serve to finance small or medium-sized companies, normally startups (companies that have very few years of life and are in their first temporary phase).

They are unlisted companies and cannot obtain the desired financing on the public equity markets or through other traditional forms of company financing, such as banks.

Companies seeking this type of capital or financing are generally small, with high risk, without a history to support their future cash flows (which tend to be negative in their first years of life). And that, therefore, they are willing to offer large positions in the capital of the company to those who offer themselves as venture capital in exchange for growing the business.

Typically, there are usually very few tangible assets that can serve as collateral (collateral in relation to the loan transaction) in bank loans.

It is a high-risk operation, but those private equity firms that are dedicated to this type of operation obtain high returns and their business is to finance this type of entity, hoping to take advantage of a few very profitable companies, they take shares in the companies in which they invest. As we said, cash flows are negative in its first years of life, therefore, on many occasions, all the investment contributed can be lost.

Among the advantages for those who perform the venture capital, It is not only the profitability that they can obtain. The experience they obtain, the contacts, and the strategic advice they could provide is also very relevant.

Regarding the temporary period, as it is a fairly illiquid investment, investors must commit and immobilize said capital for at least between 5 and 10 years approximately before exiting the capital of the company. At this point, an appropriate exit strategy must be planned to obtain a high value, since normally such shares are exited in a Public Offering of Sale (IPO).

Stages of a venture capital

  1. Fundraising: Normally it is a stage that lasts between 6 months and 1 year. The venture capital entity seeks funds from investors, but in no case are they invested.
  2. Search for investments: Once the venture capital fund is closed to new investors, they begin to look for investment opportunities. In this second stage, the funds collected are not invested, on the other hand, if the commissions are designed. This stage can last up to five years.
  3. Investment commitment: At this stage it is decided in which companies will be invested and how much of the fund will be allocated to each one of them. At this stage, the funds are invested in companies, which as a general rule do not usually give positive returns. This stage usually coincides in the time marked with the previous stage, and usually lasts between 3 and 5 years.
  4. Investment management: At this stage all the capital has already been invested. This is when the venture capital entity begins to manage the portfolio of companies and provide them with business knowledge and experience. At this stage, the investment begins to pay off and that is when an exit plan begins to be developed.
  5. Liquidation of the fund: The fund is closed and the profits are distributed between the investors and the venture capital entity (commissions).

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