Venture Capitalists

Entrepreneurship is the process of starting a business. An entrepreneur is a person who establishes a business. An enterprise is the product of this process of establishing a business, i.e., the business unit. It’s worth noting that in addition to providing self-employment for the entrepreneur, entrepreneurship is also responsible for the establishment and extension of opportunities to the other two economic activities, namely employment and profession. Furthermore, each business creates other businesses, such as raw material and component suppliers, service providers, distributors, and mediators.

What is Venture Capital?

Venture capital is a term used to start businesses requiring a certain amount of capital. Wealthy investors like to put their money into firms with growth potential. Venture capital is the name given to this type of funding, and venture capitalists are the people who invest it. These investments are hazardous since they are illiquid but may pay off handsomely if made in an ethical business. The company’s development determines the venture investors’ rewards. Due to their high range investment, top venture capitalist firms have the potential to manipulate the firm’s choices.

Who are Venture Capitalists?

Venture capitalists are those people who are the investors or financiers of startup businesses or small companies. They make sure that the company they will invest in is high grossing as well as has good potential and fewer risk factors. Their role comes in those conditions where small companies or businesses are unable to get loans or borrow money from banks. 

In several conditions, venture capitalists invest in companies with a higher risk factor in exchange for a share or equity stake. They must not be confused with general investors. Venture capitalists invest in a company or small business and provide support, management, and guidance to build the company up from scratch and reach greater heights.

Entrepreneurship Concept 

Entrepreneurship is one of the primary components of production, including land, labour, and capital. When it comes to it, the first thing that comes to mind is commerce, investment, banking, etc. However, the term entrepreneurship is mostly related to military missions. It’s quite surprising that the concept has terminology related to the military, such as logistics, strategies, etc. 

Entrepreneurs have been fighting and struggling throughout their life to reach a stage where they can hold their own office, which is quite similar to the struggle in a military mission. Therefore, there’s quite a great correlation between entrepreneurship and military officials.

Entrepreneurship Characteristics

We saw that entrepreneurship is about starting a business in the SVO (subject-verb-object i.e.Entrepreneur-Entreprenuership-Enterprise) formulation of entrepreneur, entrepreneurship, and enterprise ideas. How does a person first decide to pursue entrepreneurship as a career? How does one recognise a market opportunity? How do they summon the courage to pursue it and mobilise the necessary resources? One can’t help but admire the process to the point where entrepreneurship is regarded as the exclusive domain of a select few gifted individuals.

• Lawful and Purposeful Activity: Lawful business is the goal of entrepreneurship. It’s vital to remember this since it’s possible to justify illegal activities as entrepreneurship by claiming that, like entrepreneurship, illicit firms come with risks. The goal of entrepreneurship is to create value for personal gain and social benefit.

• Innovation: From the standpoint of the business, innovation can be cost-cutting or revenue-generating. It is more than welcome to do both, even if it does nothing since innovation must become second nature. In the sense that it entails value production, entrepreneurship is creative. 

You must understand that ‘matter’ does not become a ‘resource’ in the absence of entrepreneurship. Entrepreneurs develop goods and services that fulfil society’s needs and wants by integrating multiple production sources.

• Production: Production refers to the development of form, location, time, and personal value. It includes the combined use of several production components, such as land, labour, money, and technology. An entrepreneur makes use of these resources to turn them into a profitable enterprise or organisation in response to a recognised business opportunity.

It should be noted that the entrepreneur may not have any of these resources; instead, he may only have the ‘concept’ that he promotes among the resource suppliers. He just has to persuade funding institutions in an economy with a well-developed financial system. He can engage in contracts to supply equipment, materials, utilities (water and electricity), and technology with the funds in place.

• Risk Taking: Contracting for a secured supply of numerous inputs for his project exposes the entrepreneur to the danger of paying them whether or not the company succeeds. As a result, the landowner receives the agreed-upon rent, capital providers receive the agreed-upon interest, and the workforce receives the agreed-upon wages and salaries. However, there is no guarantee that the entrepreneur will make a profit. It should be noted that the danger of total loss is unlikely since the entrepreneur does all in his power to make sure the firm does not face risks.

The Exit of Venture Capitalists

A venture capitalist invests in a company based on its potential, attractive structure, and low-risk factor. However, several conditions come up where the company goes down into the valley of death. Some investors or capitalists can observe the company’s downfall because of their experience in predicting whether a particular company might not grow as it was assumed to grow. 

In such a situation, they take a step back from the companies, which is called the exit. However, there are certain rules and regulations that must be followed in terms of this exit. A venture capitalist can exit from an investment at several stages, which will have different impacts on the return of the investment.

The Exit Strategies

Sometimes a situation arises where the venture capitalist might want to step back from investing in a company, termed ‘exit’. There are several exit strategies that these venture capitalists acquire:

1. 1. Secondary Market: Secondary market is the transfer of shares to another market, i.e., investors. A venture capitalist can sell the holdings or shares to a new investor before the company goes public. This trading or sharing of shares and holdings is done in a private equity secondary market.
   2. Share Buyback: The venture capitalist can choose the secondary market option. The buyer or purchaser of their holdings can be a private equity investor, acquirer, or another venture capitalist. At this condition, the acquiring bank of the holding of shares by an investee company is called the share buyback. 

• Initial Public Offering (IPO): The initial public offering has the lock-up period where the investors of the companies are not allowed to sell their shares after the initialisation of a public offering. However, venture capitalists can sell their holdings or shares before the company is open for public offering in the marketplace.

Conclusion

Venture capitalists are investors and investment firms specialising in funding new high-potential, high-tech entrepreneurial projects. The method of obtaining cash from venture capitalists is presented below: 

• They like to invest in enterprises in their second or third stages of growth. 
• They seek a high rate of return on their investments. As a result, they desire stock or a stake in the company in exchange for their money. 
• They are prepared to risk losing their investments in exchange for a chance to profit from the company’s success.

• Typically, small businesses seek venture capitalists to establish or develop a firm but cannot obtain financing from banks. 
• Because venture capital is very illiquid, top venture capitalist firms are more cautious when investing in any venture.