Importance and Growth Trends of Venture Capital - Financial Case Study

This financial case study discusses the importance and growth trends of venture capital. It covers the definition, characteristics, and importance of venture capital, as well as the growth trends of venture capital investments in different sectors.

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Table of Contents
Answer (i)...................................................................................................................................2
Answer (ii).................................................................................................................................3
Answer (iii)................................................................................................................................4
Reference....................................................................................................................................7

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Answer (i)
Venture capital
It is the form of financing provided to the privately held businesses through investors
in return of entity’s partial ownership. The venture capitalists (VCs) recognizes the promising
products, new technologies, concepts and offer the require funds for moving forward the
project. In return as payments the VCs generally accepts stake, ownership or equities. The
general impression regarding venture capital is that it is quite typical, however, as per the past
records lower than 1% companies opted for VC money (Hsu et al., 2014). Canadian
policymakers and stakeholders strengthened VC sector on priority basis with regard to the
understanding that strong VC industry is crucial for developing vibrant tech ecosystem. As
per the recent trend Canada has made significant progress in VC.
Investment in venture capital capital is considered as risk capital or as the patient risk
capital owing to the fact that it includes risk regarding losing of money if VC does not
succeed which in turn will take medium to long run period for the investment for fructifying.
Generally the VC comes from the individuals with high net worth and institutional investors
and it is pooled together through dedicated firms for investments. Venture capital is the
amount provided by the outside investors for financing growing, new or the business with
troubles. While VCs offer funding they are well known regarding the fact that it involves
significant risk regarding the future cash flow and profits of the company. VC is regarded as
most appropriate option to fund the the costly source of capital for the entities (Bernstein,
Giroud & Townsend, 2016). As most of the businesses require large amount of up-front
capital they opt for VC as no better alternative is available. Main characteristics of VC
investment are as follows –

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 High risk
 Lon-term horizon
 Lacking in liquidity
 Capital gains and equity participation
 VC investments are made towards innovative projects
 Suppliers of VC participates in company management
Answer (ii)
Importance of venture capital
Importance of the venture capital is as follows –
 Promotes products – any new product with the modern technology becomes feasible
commercially mainly owing to financial assistance from the VC institutions
 Promotes ownership – as the scientists bring the laboratory findings to the reality and
makes that commercially successful, in the same way the entrepreneur transforms the
technical know-how into commercially viable project with the help of the VC
institutions (Drover et al., 2017).
 Encourages the customers – financial institutions offers assistance as a package deal
that also includes marketing, management, technical assistance and others.
 Brings out the hidden talent – while funding the entrepreneurs, VC institutions
influences more thrust to the potential talent of borrower that helps in growing
borrowing concerns.
 Promotes exports – VC institution influences the export oriented units that leads to
earning of more foreign exchange to the country.
 As catalyst – VC institution acts more as the catalyst towards improving managerial
and financial talents of borrowing concerns. Further, the borrowing concerns will be

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more concerned in becoming self dependent and thereby they will take required
measures for repaying the loan (Burchard et al., 2016).
 Creates more opportunities for the employees – through promoting the
entrepreneurship VC institutions encourage self-employment which in turn will
motivate educated unemployed for taking up new ventures that are not attempted
otherwise.
 Helps the sick entities – various sick entities are able for turning around after getting
appropriate assistance from VC institutions.
 Helps in technological growth – as the country grows with the improvements in the
modern technology. It can be achieved through strong financial back-ups that are
obtained through VC institutions.
 Helps in economic growth – through promoting the new entrepreneurs and through
revising the sick units it leads to economic growth of the country. It will further lead
to increase in production of the consumers goods that improve the living standard of
people (Da Gbadji, Gailly & Schwienbacher, 2015).
 Development of the backward areas – through promotion of industries in the
backward areas, VC institutions are answerable for developing the human resources
and backward regions.
Answer (iii)
Growth trends of Venture capital
Various successful companies like Xiaomi, Uber, Snapchat are funded through
different VC investors. The pattern of VC funding has been changed and has gained
popularity in various countries over the last few years. During 2015, market for VC consisted

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for $ 128.5 billion all over the world whereas 71 companies backed up by VC managed
reaching the unicorn status in addition with the total deals around 7872 in numbers.
Figure 1: Growth rate for venture capital
(Source: Inc.com, 2015).
As per the report of Crunchbase, average VC funding in 1st quarter of 2017 was
amounting to approximately 38% higher as compared to funding of 2016 1st quarter. It
indicates that numbers of the investors are excited and ready for investing in the new start-
ups. In US flow of the VC investments generally comes from Boston, New York,
Washington and San Francisco that represents 40% of entire VC of entire VC investments all
around the globe (Grilli & Murtinu, 2014). Various types and sectors of VC investments are
as follows –
 Advertising – although this sector is being the centre of attraction for many years,
during the last 5 years the investment in this sector has been reduced from 15% to
5%. Reason behind the reduction is heavy influence of the advertising network that
includes Facebook and Google.

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 E-commerce – through the e-commerce is one of the most known business models
with regard to VC investments, it faced 5% reduction and became 10% from 15%
with series A being the the same level.
 Marketplace – this sector experienced increase in the funding from 2.5% to 10% in
last 4 years. Current rate of growth has influenced the investors for considering this
sector as potential investment sector (Ewens, Nanda & Rhodes-Kropf, 2018).
All in all, it is quite evidential that the VC investment has become one of the major
sources of the finance for different successful businesses and at present it is dominating the
global market at rapid pace.

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Reference
Bernstein, S., Giroud, X., & Townsend, R. R. (2016). The impact of venture capital
monitoring. The Journal of Finance, 71(4), 1591-1622.
Burchardt, J., Hommel, U., Kamuriwo, D. S., & Billitteri, C. (2016). Venture capital
contracting in theory and practice: implications for entrepreneurship
research. Entrepreneurship Theory and Practice, 40(1), 25-48.
Da Gbadji, L. A. G., Gailly, B., & Schwienbacher, A. (2015). International analysis of
venture capital programs of large corporations and financial
institutions. Entrepreneurship Theory and Practice, 39(5), 1213-1245.
Drover, W., Busenitz, L., Matusik, S., Townsend, D., Anglin, A., & Dushnitsky, G. (2017). A
review and road map of entrepreneurial equity financing research: venture capital,
corporate venture capital, angel investment, crowdfunding, and accelerators. Journal
of Management, 43(6), 1820-1853.
Ewens, M., Nanda, R., & Rhodes-Kropf, M. (2018). Cost of experimentation and the
evolution of venture capital. Journal of Financial Economics, 128(3), 422-442.
Grilli, L., & Murtinu, S. (2014). Government, venture capital and the growth of European
high-tech entrepreneurial firms. Research Policy, 43(9), 1523-1543.
Hsu, D. K., Haynie, J. M., Simmons, S. A., & McKelvie, A. (2014). What matters, matters
differently: a conjoint analysis of the decision policies of angel and venture capital
investors. Venture Capital, 16(1), 1-25.

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Inc.com. (2015). 10 Growing Trends In Venture Capital for 2016. Retrieved 25 October
2018, from https://www.inc.com/lisa-calhoun/10-big-venture-capital-trends-to-watch-
in-2016.html