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ventuie Capital
Many ordlnary people who haven'L some connecLlon wlLh flnanclng buslness buL
also a loL of Lhem who have Lhey don'L know whaL a venLure caplLal ls where lL
comes from whaL her purpose ls and how lL works So ln Lhe nexL few llnes l would
llke Lo make lL clear wlLh an easy an undersLandable way Lo Lhem whaL ls lL
llrsL of all a very sclenLlflc deflnlLlon
venture copito/ o Mooey fot lovestmeot lo looovotlve eotetptlses ot teseotcb lo
wblcb botb tbe tlsk of loss ooJ tbe poteotlol fot ptoflt moy be cooslJetoble
xttoct ftom 1be Ametlcoo netltoqe ulctloooty of tbe oqllsb looqooqe loottb
Jltloo
lo otbet wotJs veotote copltol (vc) ls o fltm wltb boqe floooclol copltol wblcb ls lt
ptovlJeJ to eotlystoqe blqb poteotlol blqb tlsk ooJ qtowtb stottop compooles 1be
veotote copltol potpose ls to floJ compooles llke tbe ooe l meotloo eotly wblcb
osoolly bove o oovel tecbooloqy ot bosloess moJel lo blqb tecbooloqy loJosttles socb
os blotecbooloqy l1 softwote etc 5lmply stoteJ vc ls oo eotetptlse wblcb ptovlJes
mooey to otbets fltms ooJ ote seekloq o blqb tetoto oo tbelt lovestmeots venLure
caplLal ls aLLracLlve for new companles wlLh llmlLed operaLlng hlsLory LhaL are Loo
small Lo ralse caplLal ln Lhe publlc markeLs and have noL reached Lhe polnL where
Lhey are able Lo secure a bank loan or compleLe a debL offerlng ln exchange for Lhe
hlgh rlsk LhaL venLure caplLallsLs assume by lnvesLlng ln smaller and less maLure
companles venLure caplLallsLs usually geL slgnlflcanL conLrol over company
declslons ln addlLlon Lo a slgnlflcanL porLlon of Lhe companys ownershlp (and
consequenLly value)1hey also rarely glves a young company all Lhe money lL wlll
need all aL once venLures CaplLal Lyplcally comes from four generlc sources
-rlvaLe venLure caplLal flrms
-lndlvldual lnvesLors generally referred Lo as angel lnvesLors"
-CorporaLlons maklng sLraLeglc lnvesLmenLs
-CovernmenLal sources

8uL Lhe mosL lmporLanL Lhlng for me ls LhaL someone musL undersLand how a
venLure caplLal ls worklng llrsL of all Lhere are usually slx sLages of flnanclng an
enLerprlse
O Seed money: Low level Iinancing needed to prove a new idea (OIten provided
by 'angel investors)
O Start-up: Early stage Iirms that need Iunding Ior expenses associated with
marketing and product development
O irst-Round (Series A round ): Early sales and manuIacturing Iunds
O Second-Round: Working capital Ior early stage companies that are selling
product, but not yet turning a proIit
O %hird-Round: Also called Mezzanine Iinancing, this is expansion money Ior a
newly proIitable company
O ourth-Round: Also called bridge Iinancing, 4th round is intended to Iinance
the "going public" process
But this is a very theoretical approach so to make it easier I will use an
example oI a company which approaches a VC to extract some capital and
Iinance its idea.
Let`s say we have the AutoMoto company which have some very unique and
maybe a proIitable idea which a VC decides to invest on. %his company was
established by an individual who had some savings and Irom a bank loan he
set up this Iirm with the Iollow simple balance sheet.
AutoMoto balance sheet (Zero-stage) (MarkeL values ln $ Mllllons)
Assets 1 Original equity hold by entrepreneurs 1
%otal Value 1 %otal Value 1
So aIter the VC decided to invest her money in this Iirm, they bought 1 million
new shares Ior 1$ each So now we have some changes ln Lhe balance sheeL
AutoMoto balance sheet (irst-stage) (MarkeL values ln $ Mllllons)
Cash Irom new equity 1 New equity Irom capital Iirm 1
Assets 1 Original equity hold by entrepreneurs 1
%otal Value 2 %otal Value 2
Now as a result the entrepreneur has gave up halI oI his company and accepted VC`s
represenLaLlves Lo Lhe board of dlrecLors but he gained a lot oI money to grow his
idea and probably the company.1he success of a new buslness depends crlLlcally on
Lhe efforL puL ln by Lhe managers ln our case by Lhe enLrepreneur 1herefore venLure
caplLal flrms Lry Lo sLrucLure a deal so LhaL managemenL has a sLrong lncenLlve Lo
work hard 1here ls also a blg probablllLy LhaL vC may flnance Lhe flrm agaln afLer
some Llmes pasL and lf Lhey see LhaL Lhe company goes well and have some 'good'
proflL AfLer Lhe secondsLage flnance whlch wlll be abouL a 2 mllllons Lhe balance
sheeL maybe wlll be llke Lhls




AutoMoto balance sheet (Second-stage) (MarkeL values ln $ Mllllons)

Cash Irom new equity 4 New equity Irom capital Iirm 4
Assets 10 Equity Irom the Iirst stage 5
Original equity hold by entrepreneurs 5
%otal Value 14 %otal Value 14

As we can see now Lhe value of Lhe flrm has lncreased dramaLlcally from 1 Lo 14
mllllons And Lhls mlghL be Lhe momenL where Lhe vC wlll Lry Lo enLer Lhls flrm ln a
sLock markeL so LhaL lL could afLer Lhe lnlLlal publlc offer sell lLs sLocks and make
some money So Lhey purpose ls very slmple make blgger a flrm enLer lL ln a share
markeL and afLer Lhe value of Lhe shares ls hlgh Lhe slmply sell Lhem and leaves Lhe
flnanced company and agaln searchlng a new one Lo lnvesL on lL
1o conclude l would llke Lo menLlon LhaL nowadays vCs are very lmporLanL ln
Lconomy because Lhey are flnanclng new companles whlch couldn'L flnd anywhere
else some caplLal Lo make Lhelr ldeas come Lrue

8eferences
1) 8realeyMeyers (2003) rlnclples of CorporaLe llnance SevenLh LdlLlon 1he
McCrawPlll Companles
) 1lmoLhy Agnew Charles ! Sples ||| llooocloq 8tlqbt lJeosA ltlmet oo
veotote copltol lo Moloe inance Authority oI Maine, 2003.
J) A website http://en.wikipedia.org/wiki/Venturecapital~