Sourcing success: Venture capital in entrepreneurship development?

By Ama Abeyratne and Janith Serasinghe

Everything can be changed within a millisecond; a new turn in a science theory, the next level in technology, a new innovation to shake the market, etc. The advanced development phase in science and technology is extremely fast-paced and competitive, a mere blink of an eye could make a person lose in becoming the head in the game. 

Beating everyone ahead and taking full advantage of new opportunities, entrepreneurs stand well ahead of anyone else. At times they are innovators or inventors but entrepreneurs are definite risk takers. To come out as entrepreneurs, a great business innovation idea with extreme enthusiasm is not sufficient at most times. In a world where every passing millisecond brings you an opportunity or loss, if you wait, another will gain. More than struggling to come up with a great startup or business idea, entrepreneurs suffer in finding the right financial resources to start a venture.

Why do startups need venture capital?

Business startup ideas and small businesses often die well before they reach the surface due to the insufficient financing or none existence of finance to give life to an innovative thought. How many times have we heard a business startup with no or little history receiving instant financial assistance from financial institutions such as banks to run their ventures? Can a great business idea, a brilliant innovation, enter the market without a steady and strong financial backup and then survive as a success story?

Startup companies and small businesses that are believed to have long-term growth potential have the avenue for survival and success if they seek financing through investors, which is commonly known as ‘venture capital’. For startups that do not have any access to capital markets, venture capital is an essential money generator to implement the business. 

Is venture capital for real?

Venture capital financing has seen a sea change over the past few years. Venture funding initially started with the aim of supporting talented entrepreneurs and assisting them in strengthening their growing business and providing them with the much-needed financing which otherwise was not available to them. 

Acquiring a venture capitalist is a definite business success, since venture capitalists will only join hands with business ideas which have growth potential. Attracting such venture capitalists will be one of the first indications as to which direction the business is heading. However having a venture capitalist to finance the business is a challenge. Those who have strong start up proposals/plans; only will survive in drawing venture capital to themselves.

The venture capitalist expects the enterprise to have very high growth rate and will provide management and business skills to the enterprise. They will expect medium and long term gains and will not expect any collateral to cover the capital provided. 

Venture capitalists can provide large sums of money, valuable expertise advice and their mere presence will bring prestige. Just the fact that you’ve obtained venture capital backing means that at least in venture capitalists’ eyes, your business has considerable potential for rapid and profitable growth. 

The catch is that often you have to give up a large portion of your company to get this money. In fact, venture capitalist financiers so frequently wrest majority control and then eject the founding entrepreneurs. Thus they are sometimes known as “vulture capitalists”. 

However, venture capitalists come in all sizes and varieties and having a venture capitalist onboard will have its own pros and cons. Venture capitalists typically invest in companies they anticipate in being sold either to the public or to larger firms within the next several years. 

A venture capitalist involved business risk is typically high for investors, but they try to mitigate this risk by usually getting involved in vital company decision making.

When will a business need venture capital?

Commercialising of either a product or service innovation is a fundamental part of entrepreneurship. Even a minimum viable product cannot be commercialised without proper funding. This is why it is necessary to attract venture capital to the business at different stages. Such different levels are called the business lifecycle.  

Venture capitalists often define their investments by the business lifecycle. The stages of business lifecycle are: seed financing, start-up financing, second-stage financing, bridge financing, and leveraged buyout. 

Some venture capitalists prefer to invest in firms only during start-up level where the risk is at its highest but so is the potential for return. Other venture capital firms deal only with second-stage financing for expansion purposes or bridge financing where they supply capital for growth until the company goes public. Finally, there are venture capital companies that concentrate solely on supplying funds for management-led buyouts.

When considering the lifecycle of the enterprise, venture capital is important for development of each stage in any enterprise. It is difficult to experience and envisage rapid growth of a business (those who lack financing) without having venture capital. 

For entrepreneurs to expand their business, venture capital will be the best possible solution. That is why venture capital is a crucial fact for the development of entrepreneurship and entrepreneur. Partnering with the right venture capital at the right time is something which has to be done by entrepreneurs wisely with proper planning.

(The writers are students of the Department of Entrepreneurship, Faculty of Management Studies and Commerce, University of Sri Jayawardenepura.)