subject: Article 387: Principles of Venture Capital and Angel Investment [print this page] Article 387: Principles of Venture Capital and Angel Investment
Hasan Yahya, Ph.Ds, Professor of Sociology -MSE Expert
Introduction
In the information age, new approaches rise for managing resources and business in a more rigor ways depend on logic and reasoning and more realistic and pragmatic application of management theories. The topic we refer to here is Venture Capital Investment.(VCI)
Definition
Simply put, when we buy a new company, expand operations, acquire a business, or raise Capital. We have to decide to go for Venture Capital (VC) funding as a bank loan, or asking money from Angel Investors (AI).
Angel investors are people who invest in companies in return for partial ownership of the company. The AI share VC, in looking for a large return on their investment. Often angel investors seek companies with growth rates of no less than 30% a year. So if any one think they have a home run of a business on their hand, they may qualify for business funding from an angel investor.
VCI promotes business, it begins small, and become huge through time and successful management. It begins with innovative workable idea as a start up, and opportunities to expand. That is why Venture Capitalists are interested in beginning venture projects. Venture Capitalists in fact invest in hopes of big yields in the future rather than investing in already flourishing businesses.
The Picture and Data about VCI and AI
On the negative side, the capital markets everywhere are a mess and with no liquidity, but on the positive side is that capital markets are efficient and will work around the bottleneck we are observing. Investors in venture capital, Angel & Private equity funds are discovering that their stakes are worth less than they paid for them.
There are plenty of people who believe the VC should follow a certain model. The debate recently, took off when recent study on the results of Venture Capital investments into angel-backed companies in the United States concluded that:
a) After a Venture Capital invests, chances of failing are increasing significantly;
b) 1000 of companies that deserve funding aren't getting it. For example, VC funds financed only 167 start-ups in 2002. 17.3% average return for early-stage VC funds during the 20-year;
c) Venture Capital has become a lottery system, examples, 4% of all VC reaped over 65% of the rewards; only 2% are "home runs", projects with annual returns of 100%.
VCI and Conflict:
VCI cannot be smoothly managed without conflicts. Expertise and attitudes sometimes influence business free-conflict zone. It is true to say: "Getting along better with others is easier said than done." Therefore, attitudes of financiers, mangers and engineers are powerful factors to make business projects successful.
Saying this, people usually look for satisfaction of their strongest desire, which is to be treated fairly and with respect. Therefore, it is important to acknowledge each other to create foundation for mutual trust, credibility, and friendship.
The Win-Win Situation:
Management thinking should follow the Win-Win approach to be more successful. In VCI stock holders as well as mangers should always be open to negotiation looking for the benefits of both parties in any venture capitalists Investment project.
Joint-Venture Projects
Many of us think of cross borders joint-venture projects. Some establish successful venture firms begins from one million to hundreds of millions in one or more projects cover several fields, such as the technology, the medicine, the pharmaceutical tools, and communication technology. Some invest part of their companies revenues for that purpose, a proportion between 5% to 50 % of their companies revenues for the purpose of venture investment. Almost all venture firms follow the ideal venture play invading wider markets. The most successful fields are those involved future health care, for example, followed by information and communication technologies. But some obstacles may stand ahead of some firms which lack raising venture capital, even though they have the ideas for investment. Therefore, failure of venture capital investment would be expected, where seven out of ten venture investments totally fail.
VCI Failure:
What makes venture investment fail is looking to achieve a multiple or triple or even ten times return in a short time. If the goal of such firms failed, then the whole venture investment project will fail.
VCI Needs:
Venture Capitalists needs building several principles. For example, confidentiality, positive reputations, credibility, trust and clarity in addition to attitudes. One more factor influence VCI and AI success is optimism: to be optimistic, I believe, is an essential factor in taking risk, is not enough for achieving successful venture investment, because the function of committees, groups, meetings, teams may delay the process by creating more problems than easing the way to success. Endless meetings without taking actively decisions to improve productivity may prevent efforts to continue optimism.(798 words) www.askdryahya.com
