Building a business requires adequate funds that can later be developed to gain profits. One way to acquire these funds is through venture capital. Even though businesspeople are familiar with venture capital, they need to understand the ins and outs of its characteristics. Before delving deeper into the subject, here is a comprehensive explanation of venture capital.
Venture capital is one of the many types of private equity that assists businesspeople in funding their ventures. The funding in question involves providing business capital in exchange for investment by the venture capital parties.
After grasping the explanation of venture capital, it’s time to understand its characteristics. These venture capital characteristics can serve as a reference for entrepreneurs in need of capital and searching for the right investors. The following are the characteristics along with their detailed explanations.
Also read: What Does A Venture Capitalist Do? 7 Things You Need to Know
1. Stability
Characteristics of Venture Capital
Venture capital investments are typically made for the long term. The terms of this investment do not fluctuate like shares on the stock exchange. Venture capital does not offer short-term payment options like other stocks. Long-term returns from venture capital heavily rely on the success of the IPO.
Also read: The Top Venture Capital Firms in the World
2. Long-Term Investment Horizon
Venture capital benefits from a structural time gap between the initial investment and the eventual profit payment. This time gap heightens liquidity risk. Consequently, investors offer considerably high returns to compensate for the greater liquidity risk associated with businesses in general.
3. Significant Disparity Between Private and Market/Public Valuation
Instruments in venture capital greatly differ from the standard investment instruments traded on the stock market. Venture capital is wholly owned by private investors. This means that external investors cannot determine the investment’s value. Each investor will assign a different valuation. Likewise, holders of venture capital projects cannot ascertain the valuation of their investment. This results in IPOs being subjects of extensive speculation from both buyers’ and sellers’ perspectives.
Also read: The Differences Between Funding from Banks and Venture Capital
4. Entrepreneurs’ Limited Market Information
Venture capital projects generally involve innovative products intended to disrupt the market. These projects carry substantial risks, but the potential profits are commensurate. Given these facts, entrepreneurs and investors in venture capital projects operate in a realm of uncertainty. The absence of prior figures for the innovations they intend to introduce contributes to this uncertainty.
5. Disagreements Between Entrepreneurs and Venture Capital Investors
Characteristics of Venture Capital
Entrepreneurs may hold differing viewpoints regarding the goals of the project they are investing in. These differences of opinion can lead to conflicts. For instance, entrepreneurs often concentrate on the business development process, whereas investors prioritize the final profits achievable.
Also read: How to Get Investment from Venture Capital?
6. Misalignment Between Venture Capital Investors and Fund Managers
A fund manager oversees strategy implementation and capital management for business purposes. Fund managers often experience discord over project objectives when working with venture capital investors. These disagreements revolve around the contract signed by fund managers. For instance, fund managers are compensated based on the available capital, not on the profits earned. Consequently, fund managers might take excessive risks concerning the investment to secure their own profits.
also read: 12 Best Venture Capital in Southeast Asia
These are the characteristics of venture capital that businesspeople need to comprehend. These traits also define venture capital in the business world. Entrepreneurs must grasp the existing risks before opting for venture capital funding. Best of luck with your business!
