Question

1)Describe the process of Venture Capital.

2)Write down the important features of Venture Capital.

Answer 1

PROCESS OF VENTURE CAPITAL:

To obtain venture capital, the first step is to submit a detailed business plan to venture capital investors or an investment bank. If the investor is interested in the proposal, 

he will conduct due diligence. The investor conducts an in-depth analysis of the business model, management, operating history, and product viability during this stage.

Due to the fact that venture capital must invest a significant amount of money in a few companies, it is critical for them to thoroughly review the proposal.

Venture capitalists are specialists or professionals who specialize in a particular industry. For instance, if a venture capitalist possesses expertise in the fabric industry, he must have prior experience working in the field.

After due diligence is completed, the investor or company pledges to provide the investment in exchange for equity in the business. The investment is then released in full or in installments.

After investing in a business, the investor gains control over various business functions. After that, the investor monitors and advises on subsequent investments.

The investors will most likely exit the company four or six years after the initial investment, either through acquisition, merger, or initial public offering (IPO).

FEATURES OF VENTURE CAPITAL:

Differences in objective: The venture capital investor's and entrepreneurs' goals and objectives for a project may differ. As the investor seeks a high rate of return on his/her investment, the entrepreneur may seek to grow the business through market processes and obstacles.

Long-Term Investment Horizon: A venture capital investor's time horizon from investment to return is lengthy. Liquidity risk increases as a result of the time difference. As a result, the venture capital investor anticipates a high rate of return in exchange for the increased liquidity risk.

Lack of liquidity: Venture capitalists are typically less liquid than other types of investments that are trending in the market. Short-term returns are not an option for venture capital. The return on investment in venture capital occurs over time.

Market valuation discrepancy: Venture capitalists invest through private funds. They do not engage in organized commerce. This creates uncertainty in determining an investment's true value.

Lack of market information for entrepreneurs: The majority of venture capital investors invest in high-growth projects or businesses. This type of investment generates higher returns but also carries a higher risk. Both the entrepreneur and the venture capitalists are challenged in these situations to gather accurate, appropriate, and relevant information about the market and the business to be launched, which was previously impossible.