Venture Capitalists and the Risks of Financing Entrepreneurs

Venture capital is private equity provided by investors in a new business with lots of growth potential. The investors providing this capital are often called venture capitalists. Venture Capitalists can provide critical financing that growing firms need but cannot obtain through conventional methods. However, the financing does oftentimes come with a price with the financiers gaining a stake on the company board and ownership of equity.

Investing in new firms is inherently risky because the company has a very little established presence in the business world from which conjectures can be made. It can take years for a start up firm to turn a profit and for the venture capitalist to realize some benefits from his investments. It is for these reasons that venture capitalists will only make the investment and provide equity to the growing firm if they can expect high returns sometime in the future.

The venture firm with go through a process termed ‘due diligence’ where risks are analyzed and evaluated for the prospective investment project. In this process the venture capital firm will assess risks internally with its own professional team and then will seek outside experts to get advice on specific topics. Outside lawyers may be required to scrutinize legal agreements including patent strengths, financial auditors could be needed to detail the financial strength of the new company, scientific experts could be called to appraise the value of new technologies, and industry experts could be consulted to specify development barriers the firm may face producing their product. This enables the venture capitalist to understand and minimize risks to their potential investment.

Obviously, venture capitalists have deep pockets and seek to make sound investments. These investors will have the best possible information available when making their decision on whether or not to supply a new firm with critical capital. It is through all this research and analysis that the venture capital firm decides whether the new firm really has that growth potential and if it finds that it does, will make the investment.

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