Venture capital refers to the private financing of small businesses and enterprises with potential growth invested by wealthy and big companies. These investors may be banks, well-off companies, and other financial institutions and also known as venture capitalists.
The investors are taking the risk of providing capital for those starting or young companies because of the possible higher return of investments when these ventures succeed. The investment made is usually in exchange for an equity stake. It means that an investor buys a share from a small company and becomes one of its financers. However, more venture capitalists also experienced failures because some of the starting firms are unproven and had poor business performance.
Generally, the process by which venture capital is invested consists of fundraising from various investors, evaluation of business opportunities, investment of capital into enterprises, governing the business to gain profit, generate income or revenues, and then distribute the return of investment to the investors.
Below are the characteristics of venture capital:
- Venture capital investments are illiquid which means that short-term investments are not encouraged. It does not offer easy and immediate payouts. Investors are choosing long-term commitments when it comes to this kind of investment.
- The financing of new or start-up firms has no historical data which makes venture capital investments estimate the rate of success.
- There are differences and mismatches between the goals or objectives of VC investors and fund managers.
- It is difficult to attract venture capital investors especially when there is economic stability which causes poor market conditions. Investors will be discouraged to fund unproven new firms.
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