- Venture Capital is defined by Wikipedia, as:
Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred to as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore, all venture capital is private equity, but not all private equity is venture capital.
In addition to angel investing and other seed funding options, 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).
Venture capital is also associated with job creation (accounting for 2% of US GDP), the knowledge economy, and used as a proxy measure ofinnovation within an economic sector or geography. Every year, there are nearly 2 million businesses created in the USA, and 600–800 get venture capital funding. According to the National Venture Capital Association, 11% of private sector jobs come from venture backed companies and venture backed revenue accounts for 21% of US GDP.
It is also a way in which public and private actors can construct an institution that systematically creates networks for the new firms and industries, so that they can progress. This institution helps in identifying and combining pieces of companies, like finance, technical expertise, know-hows of marketing and business models. Once integrated, these enterprises succeed by becoming nodes in the search networks for designing and building products in their domain.
- Globally, Singapore ranks 4th place as the country with the most attractive environment for VCPE with Malaysia at 18th place and Thailand at 34th place. Indonesia is at 48th place, Vietnam at 53rd place and Philippines at 58th place.
Thailand’s attractiveness dropped the greatest in the period between 2007 and 2011, by 6, with Philippines at 5. Gainers, apart from Indonesia’s up 11 points, include Vietnam increasing 9 points and Malaysia by 3 points.
- Overall, Singapore lead ASEAN with a score of 92.4. That is followed by Malaysia at 72.5, Thailand at 59.3, Philippines at 41.2, Indonesia at 45.2 and Vietnam at 42.2.
Overall, IESE said Singapore’s weakness is that the market for VC is less robust than for PE, and the threat is that alternative financing to VCPE exists. Malaysia’s weakness is that source of funds were dominant by government, and the threat is competition for VCPE deals. Thailand’s weakness is a bank oriented economy, and the risk is politics. Indonesia’s weakness and threat is in government regulating environment. Vietnam’s weakness and threat is an under-developed financial system. Philippines weakness is limited infrastructure and threat is slow economic reform.
While Thailand’s VCPR business, has tanked, the Yingluck government just established a US$500 million “Seed Money Fund” to be lend to university graduates to start business.
Wikipedia says Seen Money Fund, is an alternative to VCPE.
- Main alternatives to venture capital
Because of the strict requirements venture capitalists have for potential investments, many entrepreneurs seek seed funding from angel investors, who may be more willing to invest in highly speculative opportunities, or may have a prior relationship with the entrepreneur.
Furthermore, many venture capital firms will only seriously evaluate an investment in a start-up company otherwise unknown to them if the company can prove at least some of its claims about the technology and/or market potential for its product or services. To achieve this, or even just to avoid the dilutive effects of receiving funding before such claims are proven, many start-ups seek to self-finance sweat equity until they reach a point where they can credibly approach outside capital providers such as venture capitalists or angel investors. This practice is called “bootstrapping“.
There has been some debate since the dot com boom that a “funding gap” has developed between the friends and family investments typically in the $0 to $250,000 range and the amounts that most VC funds prefer to invest between $1 million to $2 million. This funding gap may be accentuated by the fact that some successful VC funds have been drawn to raise ever-larger funds, requiring them to search for correspondingly larger investment opportunities. This gap is often filled by sweat equity and seed funding via angel investors as well as equity investment companies who specialize in investments in startup companies from the range of $250,000 to $1 million. The National Venture Capital Association estimates that the latter now invest more than $30 billion a year in the USA in contrast to the $20 billion a year invested by organized venture capital funds.
Crowd funding is emerging as an alternative to traditional venture capital. Crowd funding is an approach to raising the capital required for a new project or enterprise by appealing to large numbers of ordinary people for small donations. While such an approach has long precedents in the sphere of charity, it is receiving renewed attention from entrepreneurs such as independent film makers, now that social media and online communities make it possible to reach out to a group of potentially interested supporters at very low cost. Some crowd funding models are also being applied for startup funding such as those listed at Comparison of crowd funding services. One of the reasons to look for alternatives to venture capital is the problem of the traditional VC model. The traditional VCs are shifting their focus to later-stage investments, and return on investment of many VC funds have been low or negative.
In industries where assets can be securitized effectively because they reliably generate future revenue streams or have a good potential for resale in case of foreclosure, businesses may more cheaply be able to raise debt to finance their growth. Good examples would include asset-intensive extractive industries such as mining, or manufacturing industries. Offshore funding is provided via specialist venture capital trusts, which seek to utilise securitization in structuring hybrid multi-market transactions via an SPV (special purpose vehicle): a corporate entity that is designed solely for the purpose of the financing.
In addition to traditional venture capital and angel networks, groups have emerged, which allow groups of small investors or entrepreneurs themselves to compete in a privatized business plan competition where the group itself serves as the investor through a democratic process.
Law firms are also increasingly acting as an intermediary between clients seeking venture capital and the firms providing it.
- Azkals must score against Singapore to make finals (rappler.com)
- Competitiveness: Can Yingluck rescue a tanking Thai Venture Capital & Private Equity industry with “Seed Money Fund?” (thaiintelligentnews.wordpress.com)
- Singapore Caps Year of Lust With Parliamentary Affair (bloomberg.com)
- Venture Capital: Who Are The Entrepreneurs Getting Funding? [Infographic] (grasshopper.com)
- Venture Capital: A Few Things to Remember (growthology.org)
- Venture capital access at risk – Today’s small business news roundup (simplybusiness.co.uk)
- Create venture capital pool but not as part of budget (jsonline.com)
- O’Brien: Venture capital: Is this a down cycle or a death spiral for the industry that fuels Silicon Valley? (mercurynews.com)
- Venture capital cleans up after investing in climate technology (evoenergy.co.uk)
- Hardware, the Ugly Stepchild of Venture Capital, Is Having a Glamour Moment #makerbusiness (adafruit.com)