Traditional investment suggests that investors invest in shares and debentures of public companies. That is, companies quoted in a stock exchange, such as the Nigerian Stock Exchange, NSE. However, there are alternative investment options. One of such is private equity funding.
In this case, companies not listed in the recognized stock exchange can still be funded and grow their business. Venture Capital in private equity companies. What exactly is it?
What is Venture Capital?
According to Investopedia, “Venture capital is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential.”
However, I define venture capital as a “financial intermediary that links investors and emerging companies (also known as a startup) by providing funds and technical knowledge for the purpose of aiding the same to profitability and later on find an exit point.”
According to the definition provided by Investopedia, the following points can be noticed:
Venture capital is a form of private equity. And rightly so. There are majorly two alternative forms of investing, which are private equity and hedging. Venture capital focuses on private equity. Private equity is an investment in a Limited Liability Company (LTD).
These companies are not quoted in a stock exchange market, so they can’t tap from the traditional form of fundings. In such a case, they need an alternative form. This is where venture capital comes in.
It provides funds to startups and small businesses. Venture capital and a venture capitalist provides funds to startups. That is small businesses that may find it hard to scale as a result of a lack of funds. Venture capitalist provides funds to these startups to help them scale, compound and earn profits.
Venture capital provides funds to companies they believe has long term potential. Only companies that the venture capitalist believe can scale in the long run receive investment. This is because of Venture capitalist acts like a Messiah. Most of the funds provided to the company are within 7 to 10 years. After which they expect to have a maximum return on investment through an exit point.
From my definition, the following points can be pinpointed
Venture capital is a financial intermediary. This type of financial institution is not regulated by the Central Bank. But they serve as an intermediary between investors and emerging companies. They source funds from wealthy investors and invest the money in startups.
A good example is when VerifyMe raises Series A funds from Consonance Investment Managers in January 2020. Consonance Investment Managers is a venture capital firm.
Venture capital invests in emerging companies or startups. The way Venture capital investments work, it is not just any startups they invest in. The startup company must have the capacity to grow into a large firm or a public limited company.
Funds and technical assistance are provided. Venture capital firms as already stated provides funds to startups. But they just don’t end there! They also provide technical knowledge to the investee companies.
All venture capitalist has at least one director on the board meeting of the company they have investments. Thereby, providing their expertise to startup in various areas including connections and employing the right staff.
They always look for an exit point. The funds provided by Venture capital are for long term periods. However, they must get returns for their investment. Therefore, they find an exit point. This point can either be the sale of the startup or through an IPO (Initial Public Offering) in a recognized stock exchange market. With this, they can sell their investment for a value higher than what was invested in the startup.
A good example here is Jumia. Last year, Jumia went public. Selling its shares in an IPO on the New York Stock Exchange.
In the next article, we will consider who is a venture capitalist.