Considerations In Extending Venture Finance

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Considerations In Extending Venture Finance

A venture capitalist has to consider the following points before extending venture capital to an entrepnreur:

(i)    Due Diligence. It refers to the process of investigating the merits of a project or prospective investment. Issues covered include qualifications of the founding entrepnreurs, size and growth characteristics of the venture’s market existing and potential competition, technical feasibility of production and delivery systems, potential for financial returns appropriate to the risks, etc. Preparation of a comprehensive investor-oriented business plan is an essential step by an entrepnreur in raising venture capital.

(ii)    Cost of Venture Capital. The cost of venture capital is represented by the ownership percentage relinquished by the entrepreneur or promoter to the investors. The cost of venture capital depends upon investors’ perceptions of risk. Consequently, for a given investment, investors will demand a larger stake in the company for early-stage deals than for later-stage deals. Investors in early- stage rounds typically look for compound annual returns in the range of 30 to 50%. But in practice they seldom earn these rates on their investorments because very few ventures achieve the results projected in their business plans.

(iii)    Exit Options. Venture capital is patient investment by the venture capital supplier. Realization of capital gains seldom occurs before 3 to 10 years from start up. Nevertheless,  venture inventors need to know how and when can expect to cash in their investments. The business plan should cover this issue in detail. Exit options include selling the company, turning it into a publicity held company and buying back to investors shares by the company itself or by its promoters.

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