August 10, 2020

SB-Accounting

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Who is a venture capitalist (VC)

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Who exactly is a venture capitalist? In the last article, we define what venture capital means. In this lesson, the focus is on the individuals that make up a venture capital firm.

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Definition of a venture capitalist

A venture capitalist or VC for short is an individual or group of individuals who invest funds outsourced from investors in a growing startup with the aim of monitoring the firm and at the end find a means of exit to as to earn a huge return on its investment.

Key Explanations

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A VC is an individual or group of individuals. Generally, Venture Capital firms are partnership businesses. What this implies is that the firm is made up of a group of individuals or institution and not a single individual. However, each of these partners is a venture capitalist.

VC outsource funds from investors. VC firms are intermediaries. They outsource funds from persons with excess funds and use the funds to invest in companies that need such funds.

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VCs invest in growth startups. Venture capitalist does not invest in just any small business and startup. The business must be registered with the corporate affairs commission as a Limited Liability Company, LLC (or LTD).

The company must also be a growth company. VC screen companies and ensure that it invests in growth companies. That is companies that can be quoted in the Stock market after 5 to 8 years of operations. Or a company that can be sold out for a higher amount to meet their return on investment.

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VCs investment is a private equity investment. LLC companies are private companies. That can’t source for funds through public sources such as the New York Stock Exchange or the Nigerian Stock Exchange. Therefore, venture capital firms are a great way for private companies to get funds.

The funds provided by VCs are private equity. This means that the VC becomes a part-owner of the business and therefore as control over the company.

READ ON  Four Stages of Venture capital (VCs) fundings for startups

Venture capitalist monitor the startups they invest in. Since they have control over the growing startup, they can monitor the business and provide advice that can help the company succeed. Most VC are professionals in helping businesses grow. This is especially through as they are examining the company from the outside. So, they see things which management may not see and provide necessary advice that can help the entity grow.

Venture capitalist finds an exit route. The aim of VCs is to earn a huge return on its investment. However, it can’t earn this during the course of investing in the business. It has to be patient for years. As a normal rule 10 years for a Nigerian startup or 5 to 8 years if it can trade its shares in the New York Stock Exchange.

The VC will sell its shares in a stock market at a price higher than the amount invested in the company. Another form of exit is an outright sale of the startup to a big company. It will dispose-off the growth company at a price higher than the amount it initially invested. This gives the VC a high return on investment.

READ ON  Four jobs of a venture capital firm

To conclude, VCs are messiah to most startup companies. Jumia is one of those companies that was able to scale as a result of investments by a venture capitalist. Last year, Jumia was listed in the New York Stock Exchange, despite that, it is a Nigerian startup company. Other companies that are able to grow as a result of VCs investments in Nigeria are Gokada, Farmcrowdy, Andela, just to mention a few.

In the next article, the difference between a venture capitalist and Angels.

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