A Venture capital fund, such as the CEDA Venture Capital, is a high risk, investor and, in accepting these high risks, will desire a higher return on their investment. The fund manages the risk/reward ratio by only investing in businesses that fit its investment criteria and after having completed extensive due diligence or complete assessment of the business. This process increases the probability of the success of a business, as it will identify gaps in the business model if any exist.
Venture capital funds will look at businesses from different angles. These take cognisance of a number of factors, which relate to the location of the business, the size of the investment, the stage of the company, industry specialisation, structure of the investment and involvement of the venture capitalists in the company’s activities. The entrepreneur should not be discouraged if a fund does not wish to proceed with an investment in their company as the rejection may not be a reflection of the quality of the business, but rather a matter of the business not fitting with the fund’s particular investment criteria.
Venture capital is not suitable for all businesses types and opportunities as a venture capital fund typically seeks:
Funds generally look for companies with superior products or services targeted at fast-growing or untapped markets with a defensible strategic position. Alternatively, for management buyouts, they seek companies with high borrowing capacity, stability of earnings and an ability to generate surplus cash to quickly repay debt.
Quality and Depth of Management
Venture capital funds must be confident that the firm has the quality and depth in the management team to achieve its aspirations. The fund seldom seeks to acquire managerial control; rather, it would seek to add value to the investment where it has particular skills including fundraising, mergers and acquisitions, international marketing and networks.
Corporate Governance and Structure
In many ways the introduction of a venture capital fund provides capacity by the fund manager for preparing the company for a public listing. The fund will want to ensure that the investing company has the willingness to adopt modern corporate governance standards, such as non-executive directors, including a representative of the fund, in order to meet the corporate governance and corporate citizenship requirements of a publicly, listed company.
Venture capital funds are put off by complex corporate structures without clearly defined ownership rights and where personal and business assets are merged.
Appropriate Investment Structure
As well as the requirement of being an attractive business opportunity, the venture capital fund will also be seeking to structure a satisfactory deal to produce the anticipated financial returns to all investors including the principal or promoters.
An Exit Plan
Lastly, the fund looks for clear exit routes for its investment such as a public listing of the company on the stock exchange or a third-party acquisition of the investing company. This is critical for the fund to realise the returns on its investments.
Venture capital has a number of advantages over other forms of finance. These advantages include:
The fund injects long-term equity finance, which provides a solid capital base for future growth. The venture capitalist may also be capable of providing additional rounds of funding should it be required to finance growth.
The fund is a business partner, sharing the risks and rewards. The fund is rewarded by the success of the business and thus the capital appreciation of the value of the shares it would hold in the business.
The fund is able to provide strategic, operational and financial advice to the company based on past experience with other companies in similar situations.
The fund also has a network of contacts in many areas that can add value to the company, such as in recruiting key personnel, providing contacts in international markets, introductions to strategic partners and, if needed, co-investments with other venture capital firms and financial institutions when additional financing is required.
Facilitation of Exit
The fund is experienced in the process of preparing a company for an initial public offering (IPO) and facilitating in the sale of the company to other companies as a means of facilitating its exit.
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