For start-ups, venture capital is considered an imperative source of funding as they have a small degree of operating history with no access to capital markets. Venture capital is basically the amount of money that is provided by an outside investor for financing a new or expanding business.
The investors provide all the finances with the knowledge of significant risks that are involved in a company’s future development. In this process, investment is done for an equity stake rather than giving money in the form of loan. This investment is done with the hope that the future yields will be significant.
It may consist of just one wealthy financer or partnerships having a fund of pooled investment. Commercial banks, investment banks, small group of individuals or even an insurance company can also make such investments.
In 1980s, in USA, many of the job opportunities were created by the large organizations and firms. But in the 20th century, a major shift was observed when small firms or start-ups became more innovative than the larger organization and presented a fundamental change in the nature of growth in the economy.
Throughout the globe, Venture capital is considered a basic instrument for economic growth. In 2013, as the economic conditions improved, venture capital gained a lot of investor confidence by creating new trends in major markets.
Venture capital has the ability to constantly adjust and react to changes that occur in the major markets by supporting the growth of start-up companies and delivering returns to the investors.
Types of Funding:
Clients approach for venture capital in the following ways
- Seed capital:
This is for people who are just starters and have no organized company. At this stage probably a small amount of venture capital is offered to create a sample product, fund for market research and cover the administrative start-up costs.
- Start-up Capital:
Once a sample product created by the company, the venture capital funds are used to cover the employment of other key managements, advance market research and iterate the product for entering the market.
- Early Stage Capital:
A company with two or three years of experience is considered eligible for this type of venture capital. The capital provided at this stage helps the start-up or small firm improve their productivity and increase the efficiency.
- Expansion Capital:
When a company becomes successful in establishing itself, the venture capital investments are used for expanding the business, enter new markets and boost advertising efforts.
- Late Stage Capital:
This is the stage of a firm where it needs funds to increase the capacity, lift marketing strategies and increase the working capital.
Challenges and Opportunities for Venture Capital in Pakistan:
In Pakistan, venture capital is in the state of infancy and faces challenging issues in the form of entrepreneur attitudes, limited support from the state, SMEs limited regulations as well as family owned businesses.
With the passage of time, if government and the private sector play their roles and make concerted efforts, venture capital can grow. It can help in developing IT, exploiting the services of high-tech manufacturing sector, promoting entrepreneurship and creating job opportunities for a major section of the society.