What is venture capital, Who are the venture capitalists

What is venture capital? Who are the venture capitalists?

Although it is still considered as an alternative source of funding, venture capital is formalised and organised. In his research paper, P. A. Gompers mentioned that venture capital or venture capitalists emerged around late 1970s and gained more prominence during the 1980s. Take note that large companies during the 1970s remained a potent force for influencing the growth and direction of the American economy. By 1980s however, small companies and startup businesses were becoming considerably influential. The explosion of small businesses provided employment and fueled market competition. It was during this time that venture capitalists have emerged to fund aspiring entrepreneurs and budding business ventures.

It is also worth mentioning that several smaller companies and startup businesses were more innovative than larger and established corporations. By the end of 1980s and the start of 1990s, millions of businesses emerged on a year-to-year basis. Venture capital or more appropriately, venture capitalists provided the necessary funding for these businesses.

Venture capital primarily emerged as an alternative to bank loans. Usually, startup businesses require large sums of money to fund or finance the early development stages of their ventures. While angel investors can be an option, the funds they can contribute were usually insubstantial. Banks was the established form and source of investment and funding during then. However, not all entrepreneurs can secure bank loans due to lack of asset or the presence of uncertainty. Venture capitalists entered into the picture to fill that gap left by banks.

As regards structure, venture capitalists usually follow five-pronged process. These are: (1) soliciting or creating novel investment opportunities; (2) assessing companies or proposed business ventures; (3) negotiate the terms of investments; (4) assisting in the management or direction of the business; and (5) exiting through liquidation of investments. Through these activities, venture capitalists usually structure themselves as a formal business organisation. Their business operation, in addition, revolves around looking for proposed business ventures and ideas that upon careful assessment, they believe would bring them profit through investment returns.

Nonetheless, venture capitalists play a critical role in the economy. Results from the survey of Fred Dotzler revealed that startup businesses usually benefit from their venture capitalist especially in the areas of leadership, business management, and financial management. A related study also revealed that venture capitalist plays a role that transcends beyond mere source of investments. Their active participation in emerging businesses contributes to the professionalisation of the organisations. Thus, venture capitalists can be instrumental in building successful companies.

The working paper of Dr. S. Shane further described venture capitalists as institutional investors. Like any other businesses, they are organisations subjected under the same laws and regulations pertaining to business operation, corporate law, and federal securities laws, among others.

But there have been several appeals to further regulate the operations of venture capitalists. In the wake of the 2008 Financial Crisis for example, experts have considered newer policy direction and regulations that might apply to the entire venture capital practice. Accordingly, because venture capitalists play a considerable role in the economy, newer policies should point to the drafting and implementing of legislations aimed at regulatory interventions and stimulations.

Suggested policies include promoting fundraising for venture capitalism, promoting risk capital investments especially in encouraging early-stage growth business organisations, and reassuring and supporting access to capital markets in order to enhance liquidity and exit opportunities.

More details of the study of Gompers are in the article “The rise and fall of venture capital” published in the journal Business and Economic History. Further details of the study of F. Dotzler are in the article “What do venture capitalists really do, and where do they learn to do it?” published in The Journal of Private Equity. More details of the working paper of Dr. S. Shane are in the article “The importance of angel investing in financing the growth of entrepreneurial ventures” published by the U.S. Government Small Business Administration.

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