Chapter Six: Venture Capital

6.1. Meaning of Venture Capital Investment

1. Capital is the lifeblood of businesses. While no amount of money will make a bad business
successful, no business can survive without enough money to develop products, hire
employees, establish markets and attract customers. For many businesses, particularly in the
early stages before profits become predictable, traditional sources of capital such as banks
and credit unions are simply unavailable. For those businesses, venture capital may be the
best hope to raise the money needed to succeed. Venture Capital/Private Equity is medium to
long-term finance provided in return for a shareholding in unquoted companies.
2. VC investment is defined as the provision of bearing capital, usually in the form of a
participation in equity, to companies with high growth potential. In addition, the Venture
company provides some value added in the form of management advice and contribution to
overall strategy. The relatively high risk for the capitalists is compensated by the possibility
of high return, usually substantial gains in the medium-term.
3. Venture Capital/Private Equity; provides long-term, committed share capital, to help
unquoted companies grow and succeed. If you are looking to start up, expand, buy into a
business, buy out a division of your parent company, turnaround or revitalize a company,
Private Equity could help.
4. Venture capital is money provided by an outside investor to finance a new, growing, or
troubled business. The venture capitalist provides the funding knowing that there’s a
significant risk associated with the company’s future profits and cash flow. Capital is
invested in exchange for an equity stake in the business rather than given as a loan, and the
investor hopes the investment will yield a better-than-average return.
5. Venture capital is an important source of funding for start-up and other companies that have
a limited operating history and don’t have access to capital markets. A venture capital firm
(VC) typically looks for new and small businesses with a perceived long-term growth
potential that will result in a large payout for investors.
6. Obtaining private equity is very different from raising debt or a loan from a lender, such as a
bank. Lenders, who usually seek security such as a charge over the assets of the company,
will charge interest on a loan and seek repayment of the capital. Private equity is invested in
exchange for a stake in your company and, as shareholders; the investors' returns are

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 dependent on the growth and profitability of your business. The investment is unsecured,
fully at risk and usually does not have defined repayment terms. It is this flexibility which
makes private equity an attractive and appropriate form of finance for early stage and
knowledge-based projects in particular.
7. Venture capital is provided as seed funding to early-stage, high-potential, growth companies.
To put it simply, an investment firm will give money to a growing company. The growing
company will then use this money to advertise, do research, build infrastructure, develop
products etc. The investment firm is called a venture capital firm, and the money that it gives
is called venture capital. The venture capital firm makes money by owning a stake in the
firm it invests in. The firms that a venture capital firm will invest in usually have a novel
technology or business model. Venture capital investments are generally made in cash in
exchange for shares in the invested company. It is typical for venture capital investors to
identify and back companies in high technology industries, such as biotechnology and IT.

8. Venture capital is attractive for new companies with limited operating history that are too
small to raise capital in the public markets and have not reached the point where they are able
to secure a bank loan or complete a debt offering. In exchange for the high risk that venture
capitalists assume by investing in smaller and less mature companies, venture capitalists
usually get significant control over company decisions, in addition to a significant portion of
the company's ownership (and consequently value).
9. A venture capitalist (also known as a VC) is a person or investment firm that makes venture
investments, and these venture capitalists are expected to bring managerial and technical
expertise as well as capital to their investments. A venture capital fund refers to a pooled
investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-
party investors in enterprises that are too risky for the standard capital markets or bank loans.
Venture capital is also associated with job creation, the knowledge economy, and used as a
proxy measure of innovation within an economic sector or geography.
10. Venture Capital is a subset of private equity, made for to launch, early development or
expansion of a business. Private equity in the sense of Venture Capital provides equity
capital to enterprises not quoted at the stock market. Private equity can be used to develop
new products and technologies, to expand working capital, to make acquisitions, or to

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 improve a company’s gearing. It is also used to resolve ownership and management issues as
the succession in family-owned companies or the buy-out or buy-in by experienced
managers.
 The key elements of Venture Capital are:
 Investments in unquoted companies
 Is equity capital by nature
 Is medium to long-terms targeted at companies with growth potential
 Is combined with an active shareholder influenced by the investor
6.2. Venture Capital investors/Involved Parties/Venture Capitalists
Venture capital typically comes from institutional investors and high net worth individuals, and
is pooled together by dedicated investment firms. Venture capital firms typically comprise small
teams with technology backgrounds (scientists, researchers) or those with business training or
deep industry experience. A core skill within VC is the ability to identify novel technologies
that have the potential to generate high commercial returns at an early stage. Venture capital
typically comes from four generic sources:
 Private venture capital firms;
 Individual investors generally referred to as “angel investors”;
 Corporations making strategic investments;
 Governmental sources.

a. Venture Capital Firms

The Venture Capital companies obtain their funds from investors. These are institutional
investors, the parent companies of the Venture Capital companies, private individuals and other
parties. Their money is comprised in a fund, which is managed by the Venture Capital Company.
The management decides to invest this money into investee- companies. In addition, the Venture
Capital companies can provide their investees management skills, contacts and market access. If
appropriate they find them external managers. VC companies are an active partner to the
investee company e.g. by providing know-how and obtaining a network, in order to promote the
company’s growth and general business stability. This is reflected by representation in the board;
act as management consultants and as financial advisors in certain projects.

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This management support is an important feature that differentiates Venture Capital from other
sources of finance. The investees are often highly innovative companies in their growth phase
that lack sufficient senior management skills.

Venture capital firms are entities, usually limited partnerships or limited liability companies that
raise funds from high net worth individuals and institutional investors to invest in a portfolio of
business ventures with an expectation of a high return on investment. They are managed by
experienced venture investors who have the credentials to entice sophisticated institutional and
high net worth investors to place large amounts of money under their management. Of the four
main categories of venture investors, venture capital firms are the most focused on generating the
highest possible return on investment, because that is what their investors are paying them to do.

There are many different types of venture capital firms with different styles, investment targets,
and return expectations. Some focus on early stage companies; others target later stage
businesses with proven track records. Some seek a balanced portfolio with some early and some
later stage investments. Still others specialize in specific industries, such as information
technology or energy. Many focus on a limited geographic area, although some larger funds may
invest nationally or internationally.
b. Angel Investors
Angel investors are high net worth individuals who invest in as few as one, or as many as a
dozen or so businesses, usually located near their home. They invest with an expectation of an
attractive return, using many of the same criteria for weighing investment risk and return
potential that a venture firm would use. Angels are attractive sources of capital for businesses
for several reasons. First, they tend to be somewhat more accommodating to entrepreneurs than
venture capital firms because they are investing their own money and have greater flexibility in
making investment decisions. Second, they are willing to invest smaller amounts of money than
venture firms and may be interested in investment prospects that are too small to interest
venture capital firms.

Third, many angels have valuable experience and contacts from running their own businesses
that can be useful to entrepreneurs, and they may have more time to invest than a venture firm
does. Finally, angel investors may be interested in making an investment for reasons other than
purely financial ones, such as a desire to share their experience with a local business, help out

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friends, or strengthen their community. The nature of angel investors makes them particularly
appropriate for early stage companies, helping bridge the financing gap until a company is ready
to approach venture capital firms. In many cases, this role in bridging the financing gap is
reflected in the way the angel investment is structured. For example, rather than developing an
elaborate term sheet and arguing about valuation, an angel may invest through a “bridge note”
that is designed to convert to equity on the same or similar terms and valuation as the next
financing round. In effect, the angel leaves the structuring and valuation decisions to the venture
firms who arrive later. If there is never another financing round, the investor hopes to get his or
her money back through payments on the note, or the note may convert to stock.

The greatest drawback to angel capital is the difficulty in finding the right angel. Most angel
investors do not advertise their investment interest, leaving it up to the entrepreneur to find them.
The best way to find an angel investor is through the entrepreneur’s existing network of friends,
relatives and business contacts. Other options include angel networks like the Common Angels
in Boston or forums like the Maine Investment Exchange or Capital Venue that bring
entrepreneurs and angels together.

c. Corporate Venture Investors

Corporate venture investors are companies that have their own business operations but that also
make venture capital investments in smaller businesses. Like venture capital firms, corporate
venture investors invest with the goal of an attractive return, using many of the same investment
parameters. The primary difference between a corporate venture investor and a venture capital
firm is that corporate investors usually invest in businesses that offer a strategic benefit to the
investor’s business or that might be potential acquisition candidates in the future. Strategic
benefits might include access to cutting-edge technology, insight into new business
opportunities, or the ability to provide input into the development of an attractive product or
service that the corporate investor needs. Finding corporate investors is usually a matter of
determining which companies might have a strategic reason to be supportive of the
entrepreneur’s business.

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 d. Governmental Funding
State and federal governments play a significant role in providing financial assistance to growing
businesses, often on better terms than can be obtained from private investors. Financial
assistance programs target job creation, rural development, research, and other public benefits.

6.3. Unique Features of VC Investments

“Venture capital combines the qualities of a banker, stock market investor and entrepreneur in
one.” The main features of venture capital can be summarized as follows:
i. High Degrees of Risk- Venture capital represents financial investment in a highly risky
project with the objective of earning a high rate of return.
ii. Equity Participation- Venture capital financing is, invariably, actual or potential
equity participation where in the objective of venture capitalist is to make capital gained by
selling the shares once the firm becomes profitable.
iii. Participation in Management- In addition to providing capital, venture capital funds take an
active interest in the management of the assisted firms. Thus, the approach of venture capital
firms is different from that of a traditional lender or banker. It is also different from that of an
ordinary stock market investor who merely trades in the shares of a company without
participating in their management. It has been rightly said, “venture capital combines the
qualities of banker, stock market investor and entrepreneur in one”.
iv. Long Term Investment- Venture capital financing is a long term investment. It generally
takes a long period to encash the investment in securities made by the venture capitalists.
v. Achieve Social Objectives- It is different from the development capital provided by several
central and state level government bodies in that the profit objective is the motive behind the
financing. But venture capital projects generate employment, and balanced regional growth
indirectly due to setting up of successful new business.
vi. Investment is liquid- A venture capital is not subject to repayment on demand as with an
overdraft or following a loan repayment schedule. The investment is realized only when the
company is sold or achieves a stock market listing. It is lost when the company goes into
liquidation.

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 6.4. How to Approach Venture Investors/ The Funding process
 The funding process may include the following steps:
Step 1: Business Plan Submission
Step 2: Introductory Conversation/Meeting
Step 3: Due Diligence
Step 4: Term Sheets and Funding
Step 1: Business Plan Submission
The first step in approaching a VC is to submit a business plan. The best way to be successful in
approaching venture investors is to offer them a well-constructed investment opportunity that
meets their goals and objectives. The easier it is for the investor to see how attractive the
opportunity is, the more likely he or she is to invest.
The business plan should be clear enough that the investor understands it and believes it. The
plan should be designed to convey to a prospective investor a fairly complete description of the
business and the investment opportunity. It should convince the reader that the author of the
business plan has thought through the need for the capital, how it will be used, and what the
impact on the business will be. A sloppy, incomplete, or superficial business plan gives a bad
impression of the investment opportunity and the entrepreneur.

The business plan should be clear in conveying the excitement about the opportunity, but should
also be frank in assessing the major challenges and risks. Failing to disclose and address major
problems will only call into question the rest of the business plan and the integrity of the author.
Once the executive summary and business plan are put together, the challenge is getting them in
front of investors.

The business plan is the most important document for a company seeking to raise finance from
private equity investors. It should demonstrate what the business opportunity is, the amount of
funds required to deliver the business plan and a management team capable of implementing it.
Venture Capitalists read numerous business plans from a wide range of sources and they must
invest in the best projects. Their first impression of your business plan will determine whether
they take their interest any further. It is absolutely essential that your business plan demonstrates
an 'investor ready' project. The following section is intended to give you a summary of what the
business plan should include:

Investment Management: Chapter Six: DBU, CBE, Dep’t of Accounting & Finance, By Mamaru G.
Executive Summary
The first step is to develop an executive summary describing the business opportunity in one to
two pages, backed up by a business plan that outlines the business, the need for financing, and
the opportunity for investors. While there are legendary deals cut over drinks and outlined on a
cocktail napkin, the vast majority of investment decisions are made in a more deliberative
fashion.

The executive summary is very important because it is often the key to getting an investor to
read the business plan. It is a brief summary of the business plan, drafted in such a way that it
communicates the excitement of the investment opportunity to the investor and whets his or her
appetite to read the business plan. In verbal form, it is often called an “elevator pitch”, which is
an explanation that is both compelling and brief enough to be delivered in the time it takes an
elevator to get from one floor to another.

This is the key part of the document which must immediately and clearly articulate the
investment opportunity for the reader. The Executive Summary should make a potential investor
believe that your unique proposition has the potential to make a good return on their investment
and that you and your team have the ability to deliver what the plan says. If this part of the
Business Plan is not presented with conviction and in clear language, you may miss the
opportunity of ensuring that a potential investor takes the time to read your entire plan.

Body of Business Plan

Detail discussion of important points are presented in the following section
1. The Product / Service
2. The Market
3. Management Team
4. Business Process / Operations
5. Financial Projections
6. Proposed Investment Opportunity

Investment Management: Chapter Six: DBU, CBE, Dep’t of Accounting & Finance, By Mamaru G.
1. The Product / Service
In simple language, this should explain what exactly the product / service offering is. This will
clearly demonstrate the unique selling point of your offering, differentiation from other products,
barriers to entry etc and how your product /service will add value to the purchaser.
2. The Market
A common mistake that entrepreneurs make is to express their market in terms of a global figure
representing all activity within their sector. The private investor requires comfort that there is a
commercial opportunity for your product/service and that the management team has the ability to
exploit this opportunity. The marketing section should demonstrate who the customer base is
likely to be, how the product / service will be priced, how it will be distributed to customers, an
analysis of competitors and how you will deal with competing goods and services. It is unlikely
that there will be no rivals in your market sector and you should avoid comments like 'there is no
competition' or, 'our product is totally new'. If no one has thought of offering a similar or
competing product, is it conceivable that there is no demand for your product or those customers
does not realize that they need it?
Market study should include: the market size, growth, trends, pricing, need for the product,
market strategy, sales cycle, sales channels available, sales costs, unique promotional, delivery of
other features etc.
3. Management Team
Most venture capitalists will tell you that they invest in people not ideas. The management team
must sell their experience to investors as well as their understanding of the market which they are
targeting. This section must convey the message that the team has the full complement of skills
required to deliver the plan. Indeed, it is prudent to identify skill gaps which must be addressed
in order to deliver the plan as new investors in a business can utilize their networks to fill the
gaps. Non-Executive Directors (NEDs) are an obvious source of expertise for early stage
companies to address this issue and Venture Capital Fund managers usually appoint a NED to
investor companies to help them avoid the pitfalls of growing a business. Further details on
NEDs can be found in the next section of the guide.
4. Business Processes / Operations
This section explains how the business operates, be that manufacturing products, delivering a
service, or both. It should demonstrate that any necessary R&D can be fully undertaken and that

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an appropriately skilled workforce is available. The location of the business and the physical
infrastructure will also be detailed. Care should be taken to demonstrate that there is sufficient
flexibility within systems, facilities and human resources to expand the business in line with its
projected growth. Whilst there may be a market for the product/service being offered, you must
ensure that the proposed location, process and utilization of resources (human and physical) are
the best available to exploit this opportunity.
5. Financial Projections
An investor will always wish to review a detailed set of integrated financial projections which
encompasses profit and loss accounts, balance sheets and cash flow statements. These figures
will be supported by detailed assumptions which reflect the content of the business plan. The
projections must be realistically achievable, but they must also be sufficiently ambitious to
demonstrate that there is an attractive investment opportunity. These projections will form the
basis of any term sheet which an equity investor may issue. Negotiation with the Venture
Capitalist over valuation, future milestones and ultimate exit opportunities will be influenced by
the delivery of the financial projections. Much consideration should be given to this section to
produce realistic projections and indicate openness to work with the investor in the future to
deliver a common goal – the maximizing of value.
It is necessary to show what cash is needed for what, and when. Short-term and long-term needs
should be identified. It is important to demonstrate an understanding of cash flow-pro forma
financial statements showing the best and worst case scenario should be prepared. It is important
to be professionally honest here.
Financial projection includes: Cost of initial investment of long-term assets, Working capital
during start-up, operating and non-operating revenue, operating non-operating revenue, operating
profit, cash flow from operations. Note that these components must be detail and justifiable.
6. Proposed Investment Opportunity / Exit
This is the opportunity to identify the level of funds required, how and when they will be spent,
and an outline showing how investors will receive a return on their investment. As with the
financial projections the exit opportunity should be realistic and take account of current market
conditions. It cannot be stressed too much that the Business Plan is the single most important
document that you will provide for potential private equity investors. It must be coherent, well
presented and of a length which maintains the interest of the reader. It is essential that you strike

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a balance between providing the investor with sufficient information to evaluate the investment
opportunity while not overloading them with technical information.
Once the VC has received your plan, it will discuss your opportunity internally and decide
whether or not to proceed. This part of the process can take up to three weeks, depending on the
number of business plans under review at any given time.
Don’t be passive about your submission. Follow up with the VC to check the status of your
proposal and to find out if there’s additional information you could be providing that might help
the VC with its decision. If you are asked for further information, respond quickly and
effectively. If possible, always try to get a face-to-face meeting with the VC.
Keep in mind that most VCs receive an average of 200 business plans each month. Of those, less
than five percent will be invited to meet with the VC’s partners. Just two percent will reach the
due diligence phase, and less than one percent will be offered a term sheet. Some 0.3 percent of
those submitting a business plan will ultimately obtain VC funding.
Step 2: Introductory Conversation/Meeting
If your firm has the potential to fit with the VC’s investment preferences, you will be contacted
in order to discuss your business in more depth. If, after this phone conversation, a mutual fit is
still seen, you’ll be asked to visit with the VC for a one- to two hours meeting to discuss the
opportunity in more detail. After this meeting, the VC will determine whether or not to move
forward to the due diligence stage of the process.
Step 3: Due Diligence
The due diligence phase will vary depending upon the nature of your business proposal. The
process may last from three weeks to three months, and you should expect multiple phone calls,
emails, management interviews, customer references, product and business strategy evaluations
and other such exchanges of information during this time period.
Step 4: Term Sheets and Funding
If the due diligence phase is satisfactory, the VC will offer you a term sheet. This is a non-
binding document that spells out the basic terms and conditions of the investment agreement.
The term sheet is generally negotiable and must be agreed upon by all parties, after which you
should expect a wait of roughly three to four weeks for completion of legal documents and legal
due diligence before funds are made available.

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A term sheet is a document that sets out the basic terms and conditions under which the VC will
invest in your company. Work completed in the due diligence phase of the funding process is
used to draft this document. The term sheet is generally non-binding and is used as a template,
along with further due diligence, to draw up more detailed legal documents.
6.5. Types of Funding /Stages of Financing
The selection of investment by a VCI is closely related to the stages and types of investment.
From analytical angles, the different stages of investment are recognized and vary as regards the
time scale, risk perception and other related characteristics of the investment decision process of
the VCIs. The stages of financing, as differentiated in the VC industry, broadly fall in two
categories:
1. Early stage;
a. Seed capital/pre-start-up
b. Start-up
c. Second-round financing
2. Latter stage;
a. Mezzanine/development capital, or Bridge/expansion,
b. Buyouts, and
c. Turnarounds
The first professional investor to a deal at the start-up stage is referred to as the Series A
investor. This investment is followed by middle and later stage funding – the Series B, C, and D
rounds. The final rounds include mezzanine, late stage and pre-IPO funding. A VC may
specialize in provide just one of these series of funding, or may offer funding for all stages of the
business life cycle. It’s important to know the preferences of the VC you’re approaching, and to
clearly articulate what type of funding you’re seeking.

1. Early stage Financing

i) Seed Capital: Seed capital and start-up capital are provided to finance the embryonic and
early growth phases of a company. Seed capital is essentially an applied research phase where
concepts and idea of the promoters constitute the basis of a pre-commercialization research
project usually to end in a prototype which may or may not lead to a business launch (Jain).

Investment Management: Chapter Six: DBU, CBE, Dep’t of Accounting & Finance, By Mamaru G.
Seed capital is used to determine whether an idea is worth further consideration and to transform
the idea into a working business concept. If you’re just starting out and have no product or
organized company yet, you would be seeking seed capital. Few VCs fund at this stage and the
amount invested would probably be small. Investment capital may be used to create a sample
product, fund market research, or cover administrative set-up costs.

ii) Startup Capital: It is a stage when products/services are commercialized for the first time in
association with VCI. Start-up capital finances the foundation of the company and about the first
year of its operation. Typical activities financed by start-up capital are prototype development
and testing and test marketing. At this stage, your company would have a sample product
available with at least one principal working full-time. Funding at this stage is also rare. It tends
to cover recruitment of other key management, additional market research, and finalizing of the
product or service for introduction to the marketplace.
iii) Second round financing: this represents the stage at which the products have already been
launched in the market but the business has not yet become profitable enough for public offering
to attract new investor. The promoter has invested his funds but further infusion of start-up of
funds by the VCIs is necessary.
2. Late Stage Capital:
Later stage is a stage of VC financing that involves established business which requires
additional financial support but cannot take recourse to public issues of capital. At this stage,
your company has achieved impressive sales and revenue and you have a second level of
management in place. You may be looking for funds to increase capacity, ramp up marketing, or
increase working capital. You may also be looking for a partner to help you find a merger or
acquisition opportunity, or attract public financing through a stock offering. There are VCs that
focus on this end of the business spectrum, specializing in initial public offerings (IPOs),
buyouts, or recapitalizations. If you are planning an IPO, a VC may also assist with mezzanine or
bridge financing – short-term financing that allows you to pay for the costs associated with going
public. A key factor for the VC will be risk versus return. The earlier a VC invests, the greater
are the inherent risks and the longer is the time period until the VC’s exit. It follows that the VC
will expect a higher return for investing at this early stage, typically a 10 times multiple returns
in four to seven years. A later stage VC may be seeking a two to four times multiple returns
within two years.

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i) Mezzanine/Development Capital: This is financing of established business which has
overcome the extremely high risk early-stage, has recorded profits for a few years but are yet to
reach a stage when they can go public and raise money from the capital market/conventional
sources. Among the uses of such type of VC financing are purchase of new equipment/plant,
expansion of marketing and distribution facilities, refinance of existing debt, penetration into
new region, introduction of new management and so on.

ii) Buyout: this refers to the transfer of management control. They fall into two categories:
management buyouts (MBOs) and management buyins (MBIs).

a. Management Buyouts (MBOs): In MBOs, VCIs provide funds to enable the current
operating management/investors to acquire and existing product line/business.
b. Management buyins (MBIs). MBIs are funds provided to enable an outside group of
managers to buy an ongoing company.
What do VCs look for?
Venture capitalists look for businesses that have the potential to grow quickly to a significant
size, yielding a significant return on the VC’s investment in a relatively short period of time.
VCs are not just interested in start-ups. Your company’s current size is less important than its
future aspirations and growth potential. A target company for a VC is one that may be capable of
becoming a large market leader in its industry due to some new industry opportunity and
competitive advantage. There’s no single determinant for a successful portfolio company, but a
VC tends to focus on the following factors:
 Commercially viable- Does the company have a product or service that can be reproduced
efficiently to generate revenue?
 Identifiable market- Is there a clearly defined market for the company’s product or service?
Does the company’s product or service meet an identifiable need in that industry? Does the
company have a reasonable plan to meet the identified need in an efficient, revenue-
generating manner?
 Strong management- Does the company’s leadership inspire confidence? Do they have the
vision, expertise, and the ability to propel a business to a significant level of growth? Does
the team consider best practices of those that have gone before them?

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 Sustainable competitive advantage- Has the company hit upon an idea that’s truly unique to
the industry, one that has significant barriers to entry that will inhibit others from
encroaching upon its market? Has the company considered economic and technological
change that may affect the business model? Who are the company’s potential competitors,
and what are those companies’ strengths and weaknesses?
Like a banker, a VC will also consider factors such as results of past operations, amount of funds
needed and their intended use, future earnings projections and conditions. But unlike a banker, a
VC is a part owner rather than a creditor, so it’s looking for potential long-term capital, rather
than interest income. A common rule of thumb is that a VC looks for a return of three to five
times its investment in a five- to seven-year time period.
Benefits of Venture Capital
In the current economic climate on the island, most fast growth start-ups are knowledge based.
Given that these projects cannot offer tangible security to traditional debt financiers or
predictable cash flows to service loans, private equity is the obvious source of finance to fill the
financing gap. Investment executives working with Venture Capital Funds attempt to identify the
best projects in order to minimize their investment risk. Research has shown that Venture Capital
backed companies grow faster than other types of companies, employs more people and is more
profitable when benchmarked against their peers. This is made possible by a combination of
capital, Venture Capitalists identifying and investing in the best investment opportunities and
input from Non-Executive and Executive Directors introduced by the VC investor (a key
differentiator from other forms of finance).
Venture capital is money provided by an outside investor to finance a new, growing, or troubled
business. The venture capitalist provides the funding knowing that there’s a significant risk
associated with the company’s future profits and cash flow. Capital is invested in exchange for
an equity stake in the business rather than given as a loan, and the investor hopes the investment
will yield a better-than-average return.

Venture capital is an important source of funding for start-up and other companies that have a
limited operating history and don’t have access to capital markets. A venture capital firm (VC)
typically looks for new and small businesses with a perceived long term growth potential that
will result in a large payout for investors.

Investment Management: Chapter Six: DBU, CBE, Dep’t of Accounting & Finance, By Mamaru G.