Custom «Entrepreneurial Finance» Essay Paper

Custom «Entrepreneurial Finance» Essay Paper

Venture Capitalists

Venture capital is a fund or a capital pool that is established to make early to late stage types of investments in private equities. Venture capitalists in most circumstances invest in small private entrepreneurships with the hope of capital gains after such activities as Initial Public Offerings (Metrick & Yasuda 2007, p. 430). Such exit outcomes or acquisitions in most instances happen within three to five years after the investor’s initial investment. In such situations, the venture capitalist’s pay comes from the initial investments as well as any profits that the company makes. The profits are therefore split between the given company and the investor.

A business venture is a high-risk investment since it happens at an early stage of a business. Venture capital management is carried out by companies with great expertise in the given sector. Venture capitalists act as a great source of funding. In addition, they help manage and develop small companies (ed. Landstrom 2007, p. 70). However, there exists a great deal of risks associated with these types of ventures. Therefore, it is crucial that the venture capitalist adopts mechanisms that can mitigate the expected risks. Mitigation of such risks increases the chances of greater capital returns from the business. This paper intends to explore the risks and possible mechanisms available to venture capitalists for eliminating the risks.

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Risk and Risk Mitigation Mechanisms used by the Venture Capitalists

A person who decides to make an investments in the venture capital often faces several risks. However, it is important that the lender understands possible risks and analyses the available risk mitigation mechanisms. The probable risks form the following list.

Risks of the Unknown

When choosing a business to invest in, both hi-tech and low-tech options are considered. However, most argue that for the former, understanding of the given product or service qualifies is requied for one to make an investment in such a business. However, ed. Cumming (2010, p. 110) posits that most ventures take a lot of time to become successful and great ideas. The biggest challenge of a venture implementation is in the details as well as execution. For example, an individual with an e-commerce background may find it difficult to make an investment in a devices used for orthopaedics. Such decision may require the e-commerce investor to spend much time in trying to find out the right amount of field trials needed before pitching the venture to the right acquirer. For example, a firms such as Andreessen Horowitz dealing with the line of consumer products as well as services in the United States is a good example of a successful venture in 2014. To achieve such success, the organisation had to mitigate several risks such as the fear of the unknown.

To mitigate such risk, the venture capitalist may only invest in the areas where the venture managers, as well as the fund managers, have reasonable knowledge. In such cases, if the investor has interest in funding and supporting an idea where the funding management has little or no expertise, the fund management team should consider appointing an advisor (Malerba et al. 2015, p. 140). It should be an individual who is equipped with the needed skills and willing to work closely with the investment team.

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Risk of Running Out of Cash

Before getting the right funding, most ventures are in a bootstrapping mode. The spending in such ventures is conservative, and the prediction of expected revenue is optimistic. If an idea of such a business spreads virally, it works. To mitigate a risk of the lack of cash, the venture capitalist should assess how much money is needed according to the most rational forecast. According to Tobin & Parker (2009, p. 130), to achieve this aim, the outflow is multiplied by 1.5 and the cash inflows - by 0.5. The company that is suitable for funding is the one with at least a 20% more than the number one arrives at. Essentially, a start-up organisation requires at least 18 months runway. In addition, the venture capitalist can make a syndicate with an individual who can oversee the follow-up of the investment.

The Risk of Competition

Any venture entering the market has to guarantee profits for its investors and thus outdo the competitors successfully. There are not many fields with barriers to entry, but an example of such sphere may be technology. As such, such kinds of markets and ventures become more attractive for investors as compared to obvious and average products. The technological development in a successful organisation may act as the tool for increasing its competitiveness (eds Lee, Lee & Lee 2010, p.767). An example of a successful venture capitalist is Steve Anderson, who decided to invest in Instagram before other bigger venture capitalists, and the decision paid off well with Facebook bought the company. Such an investor had made an assessment of the risk of competition and by investing had mitigated the risk.

To mitigate this risk, venture capitalists have a duty of identifying such ventures. In addition, investors can promote and fund technological developments of such businesses. Through applying such mechanisms and increasing competitive edge, the organisation becomes protected from competition. Moreover, most venture capitalists prefer to fund organisations with better quality of science. Due to the risks associated with the competition,  venture capitalists at times decide to fund the venture in stages. More investment depends on passing a given milestone (Metrick & Yasuda 2007, p. 430).

Entrepreneurial Environment and Implementation Risk

Venture capitalists have greater interest in companies situated in a favourable entrepreneurial environment.  Favourable entrepreneurial environment has a sufficient number of companies with similar products, hence there is a large pool of talent. When there are several small similar companies in the same area, the CEOs can have sessions for sharing ideas and developing given solutions. Such environment also may support a large number of attorneys as well as accountants who are familiar with the venture.

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