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The guidelines issued by the Govt. of India were meant to encourage private promoters. However, individual non-institutional promoters were allowed to enter this field only in collaboration with public sector financial institutions, scheduled banks, State Bank of India, and the like, but their holding could not exceed 20% of the equity of such a joint effort. Who will bite a bait of only 20% participation in responsibility and profits in a high risk and uncertain gains? (ii) The guidelines speak of funding relatively new projects with no proven record in market acceptability. This does not make the Venture Capital financing an attractive investment. There are other more attractive options available to an investor. (iii) Section 372 of the Companies Act prohibits investment in a single company beyond 10% of the paid up capital of a company. The aggregate of the investment made in the same group should not exceed 20% of the capital of the investing company. There is also an upper limit which prohibits investment by the investing company beyond 30% of the capital of the investing company. (iv) Indian educational system fails to march laboratory research with commercial application. These results in the processes developed in the laboratories remaining only in the laboratories. (v) Lack of entrepreneurial tradition. People try to enter a field which has already established its commercial viability. (vi) In the present pattern of funding, if the Venture capitalist insists for major equity participation, the entrepreneur feels his position threatened. If it is the other way round, the Venture capitalist does not feel satisfied. There ought to be some say to satisfy both. (vii) Venture capital funds, as the position stands today mostly operate from metropolitan towns. An entrepreneur who is sitting at a distance does not therefore, have easy access to them. Unless he can manage the funds from other sources, he has no option but to drop his proposal. (viii) The venture capital has not been given tax incentives commensurate with the risks which they carry. (ix) At present, there are four kinds of rules applicable to venture capital funds (a) old Finance ministry guidelines, which are too restrictive (b) guidelines issued by Central Board of Direct Taxes for tax breaks (c) separate guidelines for offshore venture funds issued by the Ministry of Finance and (d) SEBI’s own regulations. (x) Section 372 of the Companies Act places restrictions on inter-corporate investments.
(xi) Section 369,309 and 387 of the Companies Act place restrictions on the remuneration of managing directors, directors and managers. (xii) Under Section 43A, private companies under certain circumstances, are deemed to be public companies. This provision acts as a disincentive for those promoters who desire to organise their businesses as private limited companies, and to keep a firm grip over the affairs of the company.
Challenges…in developing countries.
At the fall meeting of the Mont Pelerin Society, a preeminent international group of freemarket scholars, economists wrestled with how best to implement market principles in formerly communist economies. Under certain circumstances, the surest ideological route from Red Square to Mont Pelerin may be via Silicon Valley. The same can be said for other developing countries. A number of economic and political trends signal a more prominent role for Silicon Valley-type growth fueled by venture capital. The challenge is to mesh this dynamic and innovative form of financing with the goals of development aid providers and governments. WHAT'S GOOD FOR BUSINESS There is an increased global awareness that a modern economy cannot reach its full potential without nurturing the innovation of its entrepreneurs, and that realization enhances the prospects for venture capital. Venture capitalists provide equity or other types of financing for small- and medium-size enterprises that have growth potential and are not quoted on stock markets. They combine access to cash not available elsewhere with active management support. Their main objective is long-term capital gains to justify their financial risks. A new emphasis on the entrepreneurial process in developing countries is not enough, however, to increase and accelerate the flow of venture capital, particularly new capital from the developed world. A government-created "enabling framework" is first needed in developing countries to create an attractive playing field and entrepreneurial infrastructure for venture capitalists. The replacement of centrally planned economies with free-market ones is stimulating the demand for venture capital. The World Bank lists 80 countries that in recent years have made privatization their primary public-policy concern. (More than 7,000 large-scale privatizations have been undertaken, along with 100,000 small- and medium-size companies that have been sold to private parties.) Many of these newly privatized enterprises are insolvent and thus will be searching for alternative means of financing.
For many of these economies, a logical next step should include a primary role for venture capital to nurture the entrepreneurial seeds planted by the privatization process. Venture capital has benefited from the growth of strategic investment (acquisitions, joint ventures, and alliances) and financial investment (investment in publicly traded securities listed on stock exchanges) in developing countries that have embraced free-market reforms. For example, in the 18 months that ended at March 1993, foreign companies made approximately 1,700 strategic investments in Eastern Europe, valued at $42 billion. In the case of financial investors, U.S. pension funds increased their foreign holdings by $53 billion in 1993; approximately 25 percent of this was in emerging markets. In addition, U.S. pension funds expect to increase their overseas investments by an average of 50 percent during the next three years, according to a recent survey. EXIT AHEAD The increase in strategic investments provides venture capitalists with more and better exit strategies - ways for the initial investors to reap profits and yield their ownership or control to others. In a developed market, a venture capitalist's primary exit strategies are an initial public offering or an acquisition of the company by other investors. Unfortunately, the lack of a stock exchange or over-the-counter market in many developing countries (and the small number of listed companies in countries that have an exchange or market) often precludes an initial public offering as a viable exit. Venture capitalists in developing countries more often rely on exiting by way of an acquisition. The increase in financial investments is important because they are made by many of the institutional investors who buy into venture funds. The largest source of venture money in the world, representing approximately 40 percent of new committed capital for U.S. venture funds, is the U.S. pension and mutual fund system. Although most investments in developing countries by pension funds have been in exchange-listed securities, a number of these investors have expressed their intention to increase their investments in privately held companies in developing countries. This will help raise money for venture capital funds. Venture capital is also increasing in developing countries because of growing consumption of industrial and consumer products there. World Bank figures show that 77 percent of the world population lives in developing countries. While many developed markets are struggling, developing world economies are growing at a rate of five to six percent annually, creating vast groups of consumers. The U.S. Commerce Department has projected that developing countries will account for 40 percent of the growth in international trade in the next ten years.
Venture capital investors have been increasingly adopting global perspectives. In 1980, venture capital markets were practically nonexistent outside the United States. By 1990, more than half of the $80 billion of new capital committed worldwide by institutions and individuals to venture funds was outside the United States. Equity and quasi-equity investments made by venture capital funds increased in Europe from $1.9 billion in 1985 to $4.6 billion by the end of the decade, and in Japan from $500 million to $1.8 billion over the same period. This growth is not limited to developed countries. In the past decade, venture funds have been formed for a number of developing countries, including Indonesia, Malaysia, India, China, Mexico, Argentina, Russia, and Ukraine. VENTURE HIGHWAY All these factors will result in greater venture capital activities in developing countries in coming years. The question is whether a developing country's own government or a development aid provider like the World Bank or the U.S. Agency for International Development can accelerate this trend and increase these activities in a particular market. Current attempts to increase venture capital activities in developing countries are both legislative and non-legislative. Legislative efforts encompass a broad range of incentives, regulations, and policies that are implemented by any governmental, quasi-governmental, or regulatory body. Most of these efforts can be classified as incentives to enter or exit a market. Entry incentives reduce the initial costs and risks of an investment, thereby making it more attractive. Examples of these include tax credits, rebates, and income tax deductions for investments in eligible venture funds. In a developing country, entry incentives include efforts to enact corporate and securities laws that modernize the domestic regulatory structure. Exit incentives, such as favorable tax treatment of capital gains, the creation of stock exchanges, or over-the-counter markets, make it easier or more attractive for a venture capitalist to exit from a private equity investment. Non-legislative efforts include the formation of venture capital funds for equity investment in developing countries. Typically, a development aid provider will assist in fund formation and provide a percentage of the capital committed. Other non-legislative efforts include the creation of professional organizations and networks for venture capital firms, in the hope they will facilitate flows of information and capital between venture capital firms. What is noticeably absent from most of these efforts, however, is an acknowledgement that an accessible private equity market is the end result of a robust entrepreneurial environment. Yet this is critical to understanding why venture capital flows to certain
regions and not to others. To attract venture capital, a government typically focuses on reducing barriers to entry and increasing means of exit for private equity investors. Metaphorically, the government looks to build a road to come in and a road to go out. But ideally it should do more than that: it should provide a climate that encourages innovation and entrepreneurship. There is a genetic code to economic development, as many commentators have observed, and entrepreneurs and venture capitalists can play a central role in developing that code. While many entrepreneurial regions have developed haphazardly, hospitable places for venture capital investment can also be successfully planned. SILICON VALLEY REDUX Silicon Valley has been described as having a "social structure of innovation," an interactive system of venture capitalists, entrepreneurs, skilled labor, universities, support services, and entrepreneurial and supplier networks. It is the most sophisticated entrepreneurial infrastructure in the world and has helped make Silicon Valley the global center for venture capital. For a developing country to create such an entrepreneurial climate, an enabling framework would emulate this structure by codifying an intent to develop synergistic relationships between universities, entrepreneurs, established industries, and government. The first step is to encourage regional clustering of industries. A country's successful industries are often concentrated in a particular geographic region and clustered horizontally or vertically. This is thought to be caused by, and results in, increased information flows and diffusion of innovations. These activities are particularly prevalent in entrepreneurial areas. Regional clusters can be cultivated by a variety of legislative means: land grants, business incubators, zoning regulations, financial assistance programs, and tax incentives. Concentrated regions of entrepreneurial activity, whether planned, like Taiwan's Hsinchu Industrial Park for more than 140 science-based firms, or unplanned, like Silicon Valley, often evolve from or revolve around academic centers. But the potential benefits are not limited to regions with preeminent, privately owned research centers that focus on hightechnology subjects. The Emilia-Romagna region of Italy, for example, contains clusters that successfully compete in a number of low-technology industries, including ceramic tile production and textile manufacturing. Notwithstanding the alleged lack of rigor and uneven quality of programs offered by the predominantly state-run Italian university system, the Emilia region has benefited from the interaction between universities and local industries. Local educational and research programs tailored to the needs of regional
enterprises are a unique source of strength for these interactions. Other steps being taken to encourage interaction between the universities and firms include grants for research, encouragement for academic staff to participate in entrepreneurial firms, on-campus workshops for local businesses, and loans and grants to engage students in work-study programs. A framework needs government set-aside funds for loans, guarantees, or grants to or equity investments in venture capital firms to assist entrepreneurs in raising new capital commitments from local markets. Such funds could also be made available to establish industrial parks or business incubators or fund university research into technologies suitable for commercial application by entrepreneurs. Development aid providers can strengthen enabling frameworks through technical and financial assistance that encourages industrial clusters and helps provide strategic links between industries and universities. Tax legislation can provide a comprehensive incentive program for private equity investors and entrepreneurs. Such a program may include capital gains tax relief for gains that are channeled into private equity investments, capital gains tax exemption where gains are derived from private equity investments, income tax or capital tax relief on losses from private equity investments, and up-front tax relief on qualifying investments. Rather than merely transposing what is working in developed countries' venture capital markets, the framework is an attempt to create a DNA-like social structure of innovation: a small, unique element that holds the promise of a larger, more complex entity. The most prominent features of a regional cluster of innovative firms are the efficiency and rapidity of information and capital flows. A sovereign state desiring to provide its own entrepreneurs with greater access to venture capital or create an entrepreneurial infrastructure should seek to replicate these same qualities. As developing countries begin to participate in the information-based economy, the challenge will be to find ways to maximize technological innovation and change economic development programs in revolutionary ways. For the World Bank and organizations with similar roles, the first step is to recognize that the dynamics of information and capital flows are not monopolized by Silicon Valley and other high-tech entrepreneurial regions. For sovereign states, the enactment of an enabling framework could usher in a new maxim for economic development in the post-Cold War era: Das (Venture) Kapital.
This is the first post in a series of articles that discuss the challenges and opportunities for venture capital and angel investing primarily in technology companies based in developing countries like Pakistan. There is absolutely no doubt that the internet has leveled the playing field when it comes to reaching out and marketing a consumer internet service to a worldwide audience. The pervasive use of smart phones and handheld devices has further broadened the reach of these online services. Even business internet service providers like my friend Girish Mathrubootham’s India -based FreshDesk are thriving thanks to the internet’s equalizing power. To a person who is consuming an internet service like Facebook through a 17 inch window at home (read monitor) connected to the computer, the only thing that matters is good value packaged in a great user experience. Consumers of online services usually don’t care whether the company providing the service is based in Palo Alto, California or Cheechon Ki Maliaan in Pakistan. Locality of a business near the consumer doesn’t matter in most cases now. Even Fortune 500 companies nowadays are using customer care call centers in remote parts of the world to service their customers.
Technology Adoption Lifecycle. Source: Chasm Institute Website
Entrepreneurs in the developing countries who appreciate the huge opportunity all this presents are founding startups left and right. Some are able to come up with good ideas for a product or service for a large enough market, put together a great team and get the value proposition validated. As they begin to get traction and want to scale the business, the need for capital arises. This is where most come to the
realization that the playing field is not level any more. Access to venture capital or angel investments in developing countries is a huge problem regardless of the growth stage a tech business is in. Technology companies in this part of the world, already standing at the brink of Geoffrey Moore’s Technology Adoption lifecycle ‘chasm’ often find that the chasm is wider and deeper due to lack of access to funds. There are several reasons for this and I try to pen some below based on discussions with several local and international investors and my personal experience of working in both Silicon Valley as well as in Pakistan.
Inadequate Deal flow for Venture Capital and Angel Investments
Venture Capital or angel investing is a numbers game at the end of the day. Regardless of the savvy, experience and past track record of the investors, every new investment, despite the due diligence that goes into it, is basically a high risk move because there are just too many variables at play that determine the success or failure of a start-up. In order to hedge their bets, investors typically look for a market where there is a large pool of good companies to select from so they can make investments in several companies, ideally across industries if it’s not a tech focused fund. Pakistan and other developing markets lack this deal liquidity and hence fail to attract local investors. International funds with a wide regional focus can diversify their investments by tapping the deal liquidity across country boundaries, but they need awareness of the local deals and some show of support from local investors – topics I cover separately below. India based Global Superangels Forum Fund and Accelerator is a great example of a local effort getting support from world renowned 500 Startups and Europe’s Seedcamp.
Shrinking Risk Appetite of Investors and Fund Managers
Most VCs will tell you that less than a third of their investments have had a decent exit. Up until a couple years ago, 10 year returns of VC funds averaged -4.6% (yes that’s negative 4.6%) which barely recovered to a low IRR of 5.3% by middle of 2012.
Source: Cambridge Associates via CNN Money
There has been mounting pressure from LPs (Limited Partners that actually put money in Venture Capital funds) on GPs (General Partners that manage the fund) to increase the returns on their investments. Private angel investors are wary of these historical returns as well and know that tech investments are even higher risk. All this has resulted in VCs and angel investors flocking to ‘safer’ markets and invest with a herd mentality along with other investors. The country, security and geo-political risks (some real and most perceived) associated with developing countries like Pakistan tend to ward off investors who do try to break away from the herd. But that herd-based, seemingly safe bets approach, comes at a price. First of all, as investors converge to fewer markets, the deals become more expensive naturally due to increased demand. Secondly, the investments become subject to macroeconomic conditions of the ‘safe’ markets like the United States and United Kingdom. Besides, investors will soon realize that it goes against the spirit of venture capital which is to make high risk, high return early investments while fostering innovation and diversity. A few investors like the Samwer brothers’ with their 150 Million Euros Global Founders Fund are sure to break away from the herd and realize the potential that lies in budding entrepreneurs in the developing countries who are second to none in innovation, drive, passion and resourcefulness, and are diligently working to grow their companies despite the odds stacked against them.
Lack of Global Awareness about Local Startups
Even though good global investors and funds actively seek out deals in the countries that comprise their focus region, countries like India and China often trump the startups in the Middle East and Pakistan when it comes to making their presence known. Traditional press and online media rarely cover the upcoming, promising businesses and it’s worse when the companies are tech focused. Specialized, regional and entrepreneurship focused blogs like Wamda are doing their part, but the entrepreneurs themselves need to write more about themselves and their companies and invest some of the friends and family seed money in promoting their businesses through websites and online blogs. I hardly see local founders attend any conferences or converge at regional meet-ups and mix-ins. I generally attribute this to the introvert nature of most promising entrepreneurs I run into here in Pakistan and their subscription to something I call the ‘Stealth mode startup” mantra which I will talk about later and then in a subsequent post on this blog. Gradual exposure to experienced mentors and access to international conferences via tools like Google Hangout are slowly bringing about the
change necessary to address this issue. Mainstream media is catching up as well and highlighting local efforts to promote entrepreneurship.
Startup Founders’ Mindset
This one is a real mindboggler for me, but understandably a consequence of doing business in an environment where there is a general lack of trust and perception of inadequate legislation for protection of intellectual property or at least lack of sufficient case precedence.
Founders, young and old, novice and experienced alike, generally subscribe to the ‘stealth mode startup’ mantra. They don’t like to talk about their businesses, sometimes not even with their mentors or potential
investors (yes I have run into a few schmucks who will withhold critical information about the business model even from prospective investors). This might be because there is fear of someone else stealing the idea and executing better than them. I need a separate blog post on why such thinking is so ridiculous but for now it suffices to say that true competitive differentiation of a company is not in the novelty of the idea or product, but in how fast it can continue to execute, evolve and remain innovative. The second, and more plausible reason, is an ingrained fear of failure. The education system and culture in developing nations like Pakistan generally doesn’t encourage failure. It’s looked down upon instead of as a stepping stone to success. The single best feature of Silicon Valley, in my opinion, is the culture of not punishing failure and in fact even encouraging it. In order to replicate that else where, it will take time and perseverance on part of investors to stick it out with promising teams over their several reincarnations.
Source: Mason Myers Blog
An interesting side effect of this pervasive mindset (which thank God is changing slowly) is that the founders hold equity too dear to engage in meaningful negotiations with equity investors. The preferred mode of capital acquisition by founders is debt, which, needless to say, is not attractive for VCs and angel investors. This also results in founders usually looking to seek free advice from industry veterans instead of formalizing the relationship either as an adviser or an independent board member. Having someone to answer to is looked down upon and an unnecessary constraint. This is something that the entrepreneurs need to address themselves. Experience will teach them eventually but I already see young enterprising businessmen embracing good advice, investors and mentors and choosing to be rich rather than kings.
Entrepreneurs are the backbone and enterprises are the barometer of the economy. Entrepreneurs transform the abstract ideas into tangible products or intangible services. To give physical shape to ideas risk capital is required. Innovation and finance are inextricably linked (Sharpe, 2009). The sources of finance for innovative enterprises encompass a variety of mechanisms of equity provision as well as a broad range of public and private investors (Mina, 2009). Venture capital (VC) is highly upgraded concept when compared to conventional sources of finance. It is an appreciated source of finance by either high technology oriented firms or inventive firms. Bygrave and Timmons 1992; Gompers and Lerner 2004; De Clercq, Fried et al. 2006 explains that inventive firms require significant investments, business advice as well as risk capital. Existing VCs have failed to up bring, support and commercialize the inventions proposed by rural grassroots inventors- the people at the bottom of the pyramid. Neglect of prominent venture capitalists in field of funding the grassroots rural invention is underlined in the paper. Paper is concluded with the genesis of novel concept, its need, importance and emergence of Micro Venture Capital Finance (MVCF). The method to fill the void or lacunae existing in terms of non-availability of venture capital at grassroots level, by existing venture capitalists or new breed of venture capitalists (MVCF) are exhaustively discussed in the paper.
This paper attempts to summarize and systematize the landscape of the global venture capital industry. It presents major basic business models and investment strategies, assesses the contribution of venture capital (VC) to economic growth, and the incentives and constraints for VC’s development, and it identifies research gaps in this area. Venture capital is often regarded as the only source of support for start-ups, particularly for those in high-tech innovative sectors. The authors explore the reasons for this. In contrast to more traditional investors, VCs provide targeted investment, and they maintain a long-term strategic focus. Financial capital is only one benefit they provide for entrepreneurs. They provide industry knowledge and social capital, often vital for success. Also, venture capital serves as an intermediation device in finding further finance. These benefits focus the attention of public administration in venture capital and pro-investment policies to build strength and assure future competitiveness. The authors conclude that governments can only do so much to spur creative thinking and entrepreneurial activities. Their support is best placed in education, oriented toward a culture which rewards competitive and entrepreneurial thinking. Results of such policy mature slowly but they can be vital. In conclusion, the authors point to the need to introduce new and refined research strategies promoting VC. One key focus to study venture capital is to understand how the industry itself is developing through its own drive. It would help to examine comparatively a country’s initiatives, which would allow policy makers to understand where the industry is going and how best to support or participate in growth. It would also allow distinguishing among segments of the venture capital market. Finally, further analysis of the VC industry should be conducted through the prism of its internationalization.
Then consider these five economic challenges, listed in order of significance, that venture capitalists have had a decade to resolve – but haven’t. Reinventing communications. Venture investors poured tons of cash into media and entertainment over the last half-decade. But they did so in a perversely risk-averse way: they made investments dependent on 20th century advertising and communications, instead of investments focused on reinventing it. Any teenager could have told you five years ago that trying to cram the mediascape full of
even more ads was an idea even worse than the CueCat – and today, consumers are turning off and tuning out communications from firms like never before. Reconceiving capital markets. Here’s one of the most common complaints you’ll hear from a venture investor: the big banks aren’t interested in taking startups public anymore, and the IPO window’s closed. A clear signal that the capital markets are broken is being broadcast – and instead of seeing a crystalclear opportunity for reinvention, venture capitalists see an immovable barrier? Feel the lame yet? With revolutionaries like that, who needs beancounters? Business models for public goods. Here’s the paradox of the digital economy: digital goods are also public goods. So how do we capture value from them? It’s a tough problem – but most venture funds haven’t even tried most of the emerging solutions (here are some: turn goods into services, amplify scarcity, and democratize pricing). What does it say whena band – Radiohead – is better able to break new ground in developing business models for public goods than venture investors? Business models for radical responsibility. Over the last decade, it’s become increasingly clear that the radical irresponsibility of industrial-era business is deeply unsustainable. That irresponsibility must become radical responsibility. Yet, the trailblazers of making radical responsibility economically viable are non-profits and social businesses – not venture funds, who have been deeply reluctant to explore the economic possibilities of responsibly powered business models. Discovering new sources of advantage. Most venture capitalists accept the orthodoxy that sources of advantage are fixed – and that’s the single biggest mistake they make. Advantage isn’t fixed and permanent. New industries and markets are powered by new sources of advantage – which create economic growth. When the IT industry was born, owning the standard became a critical source of advantage. When biotech was born, experimentation sprang to life. We’ve never needed new sources of advantage more than we do today. The industries and markets of the 21st century cannot be powered by yesterday’s sources of advantage. Brands are losing relevance; cost advantage is often an illusion; differentiation is too often simply skin-deep; and market dominance stifles innovation and creativity – to name just a few. Yet, tomorrow’s sources of advantage remain largely unexplored – because venture investors have been systematically underinvesting in discovering them. Here’s the point. If venture investors can’t solve problems like these – are they obsolete? Probably. That’s because in a radically decentralized world, anyone can invent tomorrow’s industries and markets – yes, anybody. Want to be a radical innovator? Solve one of these problems – or check my Manifesto for the Next Industrial Revolution for a different set of big problems that need solving.
Fire away with questions, criticisms, or more problems that need solving in the comments, check out the first part of my commentary if you’ve got a sec – and hopefully, some of the questions you raise will be discussed by the VLab’s panel.
Introduction to Venture Capital
Raising funds for launching a new business is a hard and a challenging task. Despite of a great business idea, well-determined marketing niche and inspiring business plan, most of the banks would chose not to risk if the founders of a new business are young and don’t have much of an entrepreneurial experience. In addition, the business which exists only on the paper does not have enough property to secure the loan. Luckily, money can be found not only at banks. There are still individuals and companies which can afford to invest in risky startups - the venture capitalists.
Venture capital can be defined as a risky investment into a business project which according to its business plan has a chance to become super profitable. Very often those projects are closely related to some high tech research and production. The investor in this case is called a venture capitalist. The idea about such form of investment started to develop since early 1900s and became popular among rich families who were able to provide big sums of money not caring much about losing them. The development of computer industry in late 1970s and 1980s brought more popularity to venture capital. Thanks to such easily available funds, the technological centers like the SIlicon Valley were able to concentrate on research and development of new products and software with little or no risk of having cash flow issues.
How it Works
A simplified financial model according to which venture capitalists operate can be described as follows: provide funds for many risky but potentially super profitable projects and wait. If nine projects fail, but at least one becomes successful - return on investment of this project would cover all the losses and still bring a good profit. When deciding about using venture capital, there are many things to consider in advance. First of all, such investors would expect to have a have a big ownership share, sometimes upto 70%. Usually, this share of ownership is later sold to other partners in this business or to third parties. Also, they won’t be interested in the project, unless it promises a good profit (ROI of 20% and more). To find a good venture capital one has to prepare a state of the art business plan which would represent the project in a realistic manner. In fact, it has to be a sort of a financial offer written with a clear understanding of how much funds are needed, what is the probability of success, what are the risks and so on. In other words, the investor has to understand how much he can earn and how much he can lose. Another tip to keep in mind when working with venture capitalists is that there are no written rules and therefore the approaches should be different, depending on the situation.
Source: Sujin Jetkasettakorn / FreeDigitalPhotos.net
Venture Capital in Eastern Europe
Eastern Europe is also taking advantage of such form of startup fundraising. The majority of companies which provide such financing are the local branches of well-known international financial companies. One of such is the US based International Finance Corporation (IFC). They are able to invest in different kinds of projects up to $100 million. However, they won’t be interested to be the only contributor to the project. If the project that requires venture capital is new, the IFC would be able to provide up to 25% of total investment. However, in case if funds are needed for the project which is already running, the IFC would agree to provide a half of all required funds.
Experiment: Determining the Availability of Venture Capital for Eastern European Companies
In order to see if the international venture capitalists would agree to cooperate with companies from Eastern Europe I made the following experiment:
Step 1: found 125 international companies which, according to their web-sites, provide venture funds; Step 2: sent them the same official request for investment with a brief description of the project: production of an innovative product in Ukraine, for a new international market niche. Total required investment: $1,000,000. A detailed business plan was promised to be sent in case of initial interest. As a result, 14 companies out of 125 answered to my proposal. Most of them (12 out of 14) have refused, while 2 companies got very interested and asked for more information about the project. The goal of experiment was to prove that international venture companies would agree to cooperate with an Entrepreneur from Eastern Europe. Even 2 promising replies show that the venture capital is potentially available for everyone who has a good business idea. The results of experiment should not be used to determine the percentage of how many companies are interested or not, just because I was not very persistent with my offer and sent it only once via email. As we know, emails sometimes can be filtered out by spam filters, also, since I wasn’t sending from a corporate domain based email address, message could be interpreted as non legitimate. An interesting side-product of experiment was the ability to analyse what are the main reasons of rejection: 1) Not Enough Investment Required: 4 companies did not support the project because the required sum of investment was too small for them; 2) Wrong Investment Sector: 5 companies have rejected the project because it was related to production while their target is the service sector; 3) Geographical Factor: 3 companies told me that Ukraine wasn’t the target territory for their investments; 4) No Reasons 2 companies did not provide any reasons. Would You Consider Venture Capital When Raising Funds for Your Business Startup?
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Venture capital is a great form of investment for new businesses who are not eligible for bank loans because of not being able to secure it with available property. For investors - it is one of the ways to make their portfolio more diverse. However, before deciding about it, both parties have to consider all pros and cons.
With the proven availability of venture capital for companies everywhere in the world, talented entrepreneurs are able to materialise their creative ideas to make our life more interesting. Next time when you hear someone talking about what a great business he has in his mind but lacks money to launch it - tell him about venture capital, and remind him that adventure in business starts with venture capital!
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