WORLD ACADEMY OF INFORMATICS AND MANAGEMENT SCIENCES
ISSN : 2278-1315
d. Tax deductibility of rental payments depends on
Features of Venture Capital Financing
the tax regime but typically they are tax deductible
a. The term ‘venture capital’ is normally used to mean
in one way or another.
capital provided to a private company by specialist
e. Finance leases are capitalized and affect key ratios
investment institutions, sometimes with support from
(ROCE, gearing)
banks in the form of loans.
b. The company must demonstrate to the venture
When Lease Financing is appropriate?
capitalist organization that it has a clear strategy and
a. Operating leases
i.
For the acquisition of smaller assets but
a convincing business plan.
also for very expensive assets.
c. A venture capital organization will only invest if
ii.
Common in the airline industry
there is a clear ‘exit route’ (e.g. a listing on an
exchange).
b. Finance leases
i.
Can be used for very big assets (e.g. oil
d. Investment is typically for 3-7 years
field servicing vessels)
When Venture Capital is appropriate?
a. An important source of finance for management buy-
outs.
Venture capital Financing
The term ‘venture capital’ is normally used to mean capital
b. Can provide finance to take young private companies
provided to a private company by specialist investment
to the next level.
institutions, sometimes with support from banks. Thus,
c. May provide cash for start-ups but this is less likely.
venture capital is a type of private equity, a form of
Financing by Business Angels
financing that is provided by firms or funds to small, early-
A business angel is an independent individual who provides
stage, emerging firms that are deemed to have high growth
capital for the development of a business. Business angels are
potential, or which have demonstrated high growth (in terms
wealthy individuals who invest directly in small businesses,
of number of employees, annual revenue or both).
usually by purchasing new equity shares. Moreover, business
In other words, venture capital is financing that investors
angels are wealthy, entrepreneurial individuals who provide
provide to startup companies and small businesses that are
capital in return for a proportion of the company equity. They
believed to have long-term growth potential. Venture capital
take a high personal risk in the expectation of owning part of a
generally comes from well-off investors, investment banks
growing and successful business. The business angel does not
and any other financial institutions.
get involved personally in the management of the company,
Venture capitalists might be willing to provide finance to
but hopes to make a large return on his investment from
new businesses in return for an equity stake in the business.
dividends and eventually from the sale of the shares when the
In addition to equity capital they might also agree to provide
company has grown.
extra finance in the form of preference shares. With some
The main problems with business angel finance are as
venture capital arrangements, a bank might also be willing
follows.
to provide loan capital as part of an overall financing
a. There are not many business angels, and it is usually
package for the company.
very difficult for a small company to identify an
The company will have to demonstrate to the venture
individual who might be willing to consider making
capitalist organization that it has a clear strategy and a
an equity investment in the company.
convincing business plan. It must demonstrate that its
b. Since there are not many business angels, there is far
management are experienced, have sufficient skills to make
too little business angel finance available to meet the
a success of the business and are committed to achieving
potential demand for equity capital from small
success. Sometimes the venture capital organization will
companies.
require a representative to be on the board or will appoint an
Features of Business Angels Financing
independent director.
a. Business angels are wealthy individuals who invest
SMEs will usually try to raise finance they need from
directly in small businesses, usually by purchasing
retained earnings and bank finance, and by leasing assets.
new equity shares but do not get involved in the
Working capital requirements can be reduced by negotiating
management of the company.
credit terms with suppliers, and possibly by factoring trade
b. Business angels are not that common.
receivables and obtaining some factor finance.
c. There is too little business angel finance available to
For SMEs with an ambitious strategy for growth, these
meet the potential demand for equity capital from
sources of finance are unlikely to be sufficient. In some
small companies.
cases it might be possible to raise new finance in the form of
When Business Angels Financing is appropriate
venture capital.
a. A way for small companies to raise equity finance.
Venture capital is capital provided especially, to a SME by
Private equity funding
one or more external investors, in the form of equity capital,
A private equity fund is a collective investment scheme used
preference shares or debt finance – perhaps a mixture of all
for making investment in various equity (and to a lesser
three. Some investment institutions specialize in providing
extend debt) securities according to one of the investment
venture capital finance to private companies to support their
strategies associated with private equity.
growing businesses. Venture capital investors require large
Acquisition targets might possibly be selected because they
returns on their investment, because of the high risks
provide an opportunity to increase total profits through
involved. They want the profits on their successful
improvements in efficiency. One reason for the success of
investments to cover the losses they inevitably suffer on
private equity funds in acquiring target companies has been
business ventures that fail.
their ability to achieve additional efficiencies and economies
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