FNCE90013 Financial Case Study - Venture Capital

is considered as risk capital or as the patient risk capital owing to the fact that it includes risk regarding losing of money if VC does not succeed which in turn will take medium to long run period for the investment for fructifying. Generally the VC comes from the individuals with high net worth and institutional investors and it is pooled together through dedicated firms for investments. Venture capital is the amount provided by the outside investors for financing growing, new or the business with troubles. While VCs offer funding they are well known regarding the fact that it involves significant risk regarding the future cash flow and profits of the company. VC is regarded as most appropriate option to fund the the costly source of capital for the entities (Bernstein, Giroud & Townsend, 2016). As most of the businesses require large amount of up-front capital they opt for VC as no better alternative is available. Main characteristics of VC investment are as follows –

• High risk
• Lon-term horizon
• Lacking in liquidity
• Capital gains and equity participation
• VC investments are made towards innovative projects
• Suppliers of VC participates in company management

(ii) Importance of venture capital

Importance of the venture capital is as follows –

• Promotes products – any new product with the modern technology becomes feasible commercially mainly owing to financial assistance from the VC institutions
• Promotes ownership – as the scientists bring the laboratory findings to the reality and makes that commercially successful, in the same way the entrepreneur transforms the technical know-how into commercially viable project with the help of the VC institutions (Drover et al., 2017).
• Encourages the customers – financial institutions offers assistance as a package deal that also includes marketing, management, technical assistance and others.
• Brings out the hidden talent – while funding the entrepreneurs, VC institutions influences more thrust to the potential talent of borrower that helps in growing borrowing concerns.  
• Promotes exports – VC institution influences the export oriented units that leads to earning of more foreign exchange to the country.
• As catalyst – VC institution acts more as the catalyst towards improving managerial and financial talents of borrowing concerns. Further, the borrowing concerns will be more concerned in becoming self dependent and thereby they will take required measures for repaying the loan (Burchard et al., 2016).
• Creates more opportunities for the employees – through promoting the entrepreneurship VC institutions encourage self-employment which in turn will motivate educated unemployed for taking up new ventures that are not attempted otherwise.
• Helps the sick entities – various sick entities are able for turning around after getting appropriate assistance from VC institutions.
• Helps in technological growth – as the country grows with the improvements in the modern technology. It can be achieved through strong financial back-ups that are obtained through VC institutions.
• Helps in economic growth – through promoting the new entrepreneurs and through revising the sick units it leads to economic growth of the country. It will further lead to increase in production of the consumers goods that improve the living standard of people (Da Gbadji, Gailly & Schwienbacher, 2015).
• Development of the backward areas – through promotion of industries in the backward areas, VC institutions are answerable for developing the human resources and backward regions.

(iii) Growth trends of Venture capital

Various successful companies like Xiaomi, Uber, Snapchat are funded through different VC investors. The pattern of VC funding has been changed and has gained popularity in various countries over the last few years. During 2015, market for VC consisted for $ 128.5 billion all over the world whereas 71 companies backed up by VC managed reaching the unicorn status in addition with the total deals around 7872 in numbers.

                                                   Figure 1: Growth rate for venture capital

                                                                 (Source: Inc.com, 2015).

As per the report of Crunchbase, average VC funding in 1^st quarter of 2017 was amounting to approximately 38% higher as compared to funding of 2016 1^st quarter. It indicates that numbers of the investors are excited and ready for investing in the new start-ups. In US flow of the VC investments generally comes from Boston, New York, Washington and San Francisco that represents 40% of entire VC of entire VC investments all around the globe (Grilli & Murtinu, 2014). Various types and sectors of VC investments are as follows –

• Advertising – although this sector is being the centre of attraction for many years, during the last 5 years the investment in this sector has been reduced from 15% to 5%. Reason behind the reduction is heavy influence of the advertising network that includes Facebook and Google.
• E-commerce – through the e-commerce is one of the most known business models with regard to VC investments, it faced 5% reduction and became 10% from 15% with series A being the the same level.
• Marketplace – this sector experienced increase in the funding from 2.5% to 10% in last 4 years. Current rate of growth has influenced the investors for considering this sector as potential investment sector (Ewens, Nanda & Rhodes-Kropf, 2018).

All in all, it is quite evidential that the VC investment has become one of the major sources of the finance for different successful businesses and at present it is dominating the global market at rapid pace.

Reference 

Bernstein, S., Giroud, X., & Townsend, R. R. (2016). The impact of venture capital monitoring. The Journal of Finance, 71(4), 1591-1622.

Burchardt, J., Hommel, U., Kamuriwo, D. S., & Billitteri, C. (2016). Venture capital contracting in theory and practice: implications for entrepreneurship research. Entrepreneurship Theory and Practice, 40(1), 25-48.

Da Gbadji, L. A. G., Gailly, B., & Schwienbacher, A. (2015). International analysis of venture capital programs of large corporations and financial institutions. Entrepreneurship Theory and Practice, 39(5), 1213-1245.

Drover, W., Busenitz, L., Matusik, S., Townsend, D., Anglin, A., & Dushnitsky, G. (2017). A review and road map of entrepreneurial equity financing research: venture capital, corporate venture capital, angel investment, crowdfunding, and accelerators. Journal of Management, 43(6), 1820-1853.

Ewens, M., Nanda, R., & Rhodes-Kropf, M. (2018). Cost of experimentation and the evolution of venture capital. Journal of Financial Economics, 128(3), 422-442.

Grilli, L., & Murtinu, S. (2014). Government, venture capital and the growth of European high-tech entrepreneurial firms. Research Policy, 43(9), 1523-1543.

Hsu, D. K., Haynie, J. M., Simmons, S. A., & McKelvie, A. (2014). What matters, matters differently: a conjoint analysis of the decision policies of angel and venture capital investors. Venture Capital, 16(1), 1-25.

Inc.com. (2015). 10 Growing Trends In Venture Capital for 2016. Retrieved 25 October 2018, from https://www.inc.com/lisa-calhoun/10-big-venture-capital-trends-to-watch-in-2016.html