VENTURE CAPITAL

DEFINITION

Venture capital can be defined as funds that are generally invested in the form of equity or quasi-equity which rarely affords any guarantee. Investments may take the form of simple shareholder's equity (common or preferred shares), as well as options, warrants, convertible debentures and other vehicles. The structure of the investment generally depends on the company's needs and its stage of development, taking into account the objectives of both the entrepreneur and the investor.

As a result, this form of financing is risky, which the investor hopes will be offset by a proportional return on his investment. The return is generally realized out of the capital gain or the increase in the company's share value.

INVESTMENT STRATEGY

With respect to investment strategy, venture capitalists have this in common:

1. They all strive to invest their money in companies that offer strong growth potential and a promising strategic position on their respective markets.

2. They endeavour to increase the value of their investments by providing the entrepreneur with capital, of course, but also with the expertise, the network and the experience necessary to accelerate the company's growth.

3. They invest for the medium and long term, in order to develop the company's potential to the fullest and thus maximize the return for all shareholders.

ADVANTAGES FOR THE COMPANY

• Because the investment is in the form of capital, the company's financial structure and financial ratios are improved accordingly, giving the entrepreneur the necessary flexibility and financial capacity to achieve his objectives;
• Little or nothing to repay in the short term, so that the capital invested and funds generated internally can be used exclusively to accelerate the company's growth;
• In most leveraged buy-outs and start-ups, it is the principal source of financing available;
• The venture capitalist is not there to manage the company, but to stimulate its growth through active strategic support and constructive involvement, by giving the entrepreneur the benefit of his own experience as well as that of his business network;
• Easier access to additional capital should the need arise.

STAGES OF DEVELOPMENT

Stages of development run from pre-start-up to merger and acquisition, including start-up, early stage development, expansion, turnaround financing and mezzanine financing. Each investor has its own policy regarding the stage of development of targeted companies.

INVESTMENT CRITERIA

The fundamental investment criteria of venture capitalists boil down to these three points:

- the management team

- the product or service

- the market

The management team is the key to a company's success and an important criteria for the investor. A strong, dynamic, highly committed team is essential. In addition to being motivated and competent, the team must have a clear and realistic strategic vision of the company's future growth, and be familiar with sound management techniques.

In addition to solid management, venture capitalists have a preference for companies with a unique technology or market approach, and that hold a promising strategic position on their respective markets.

In short, all these factors must convince the investor that the company's growth potential and its capacity to yield the desired return are real.

EXITING THE INVESTMENT

Another important point for the investor is exiting the investment. Investors have their own objectives with regard to length of participation. It is however crucial that the investor be able to identify possible exit routes from the outset. The most frequently used exit mechanisms are initial public offerings (IPO) and the subsequent sale of the investment holdings to third parties and other shareholders.

THE INVESTMENT PROCESS

Once a detailed business plan is received from the target company, representatives of the investor determine the opportuneness of an investment in a relatively short time. If it looks promising, the investor works with the management to gain a more thorough understanding of the company and to assess its objectives, the potential of the product and the market, the marketing strategies, and the management's ability to achieve the company's objectives. Generally, this stage requires 6 to 14 weeks of intense work.