Venture Capital

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Venture Capital

Venture capital, as an industry, originated in the United States and American firms have traditionally been the largest participants in venture deals and the bulk of venture capital has been deployed in American companies. However, increasingly, non-US venture investment is growing and the number and size of non-US venture capitalists have been expanding.
Venture capital has been used as a tool for economic development in a variety of developing regions. In many of these regions, with less developed financial sectors, venture capital plays a role in facilitating access to finance for small and medium enterprise (SMEs), which in most cases would not qualify for receiving bank loans.

In the year of 2008, while the Venture Capital fundings are still majorly dominated by U.S. (USD 28.8 B invested in over 2550 deals in 2008), compared to International fund investments (USD 13.4 B invested in everywhere else), there have been an average 5% growth in the Venture capital deals outside of the U.S- mainly in China, Europe and Israel. Geographical differences can be significant. For instance, in the U.K., 4% of British investment goes to venture capital, compared to about 33% in the U.S.

Venture capital (VC) is funding invested, or available for investment, in an enterprise that offers the probability of profit along with the possibility of loss. Indeed, venture capital was once known also as risk capital, but that term has fallen out of usage, probably because investors don’t like to see the words “risk” and “capital” in close conjunction. Venture capitalists often don’t tend to think that their investments involve an element of risk, but are assured a successful return by virtue of the investor’s knowledge and business sense.

Venture capital is the second or third stage of a traditional start up financing sequence, which starts with the entrepreneurs putting their own available funding into a shoestring operation. Next, an angel investor may be convinced to contribute funding. Generally an angel investor is someone with spare funds and some personal or industry-related interest – angels are sometimes said to invest “emotional money,” while venture capitalists are said to invest “logical money” – that is willing to help give the new enterprise a more solid footing. First-round venture capital funding involves a significant cash outlay and managerial assistance. Second-round venture capital involves a larger cash outlay and instructions to a stock or initial public offering (IPO) underwriter, who will sell stock in exchange for a percentage of what is sold. Finally, in the IPO stage, an investment bank is commissioned to sell shares to the public.

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