In the present Nigerian economy, access to required funding has become very much like drawing water out of a rock. In a period where Commercial banks are playing safe, this issue is further heightened in the case of start-up firms who are unable to source loans due to a lack of proven track record. It is therefore expedient that businesses begin exploring other sources of funding outside the banking market. One alternative method of financing businesses is Venture Capital funding. Venture capital is money provided by an outside investor to finance a new, growing, or troubled business in return for an equity stake in the company. Compared to bank loans, venture capital transactions is relatively on a small scale in Nigeria. This may be as a result of a lack of awareness of the benefits or a reluctance to relinquish some control of their business through the exchange of shares for cash flow and expertise support. This article seeks to understand venture capital financing as a financing option for new and developing business.
Venture capital investment is a type of private equity investment in which sophisticated investors invest capital in newly established or early development stage businesses in exchange for an equity stake in the Company. The purpose of venture capital investment is to help more businesses achieve their ambitions for growth by providing them with finance and strategic advice at critical stages of their development. Venture capital investments does not require purchasing a majority stake in the investee company by the investor, however, they perform an oversight role and offer managerial expertise to support the companies in their portfolio with resources like mentorship, board members, and strong management. Furthermore, venture capitalist tend to be medium to long term investors; they buy to hold for the purposes of achieving growth and expansion before divesting of their investment by way of a private or public offer of their shareholding.
There are different structures of venture capital funding and the structure to be adopted depends on industry and stage in the life of the entity at which the equity is injected. Indeed, most venture capital firms tend to specialise. As a finance option, it is suitable for new and emerging business that own a new product or innovative solution, which the investor firm can provide support to grow.
Although the dilution of the investee company's shareholding is viewed as a disadvantage, the benefits of venture capital finance outweighs this perceived drawback. Unlike debt finance which requires interest payments to be met regardless of the investee company's earnings and may require some form of collateral or guarantee, the access to long term capital and absence of interest payment obligation in venture capital finance eliminates the pressure of debt and collateral servicing and allows the investee company focus on business growth and expansion by recycling profits.
Furthermore, the investor brings in expertise to help grow and expand the business of the investee company through improved business activities, financial management and expansion of a network of contact.
Finally, the injection of capital by the investment company gives the investee company greater credibility and access to facilities from suppliers, banks and other creditors. This is particularly beneficial to start-ups who possess more intangible assets than tangible and will, therefore, require all the goodwill they can garner.
Ultimately, any company looking to raise funds in the current economy must, as a matter of astuteness, explore several options of financing to determine a credible option to traditional bank loans. While it can be said that venture capital investment is a preferred financing option for new and emerging businesses, knowledge of other different sources of finance is also essential in this era of business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.