Mainly venture investors:
- They finance growing newly established companies or old companies which are interested in new technology.
- They buy shares of the company (funding through assets) they have a role to play in managing it.
- They help in product development, market development or new services.
- They create value through active participation and transfer in the company.
- They accept higher risks waiting for higher profits.
- They have long-term tendency but they also design the exit map.
In fact, venture capital is the financial intermediary between the main investor institutions (funds with investment capability like retirement funds, banks, insurance companies and so on) and rapidly growing innovation-driven companies. Generally, the main investor organizations act as a limited partner and venture capital act as general partner. Venture capital (VC) has the responsibility and agency of activities which are carried out through financial resources.
The superiority of small and medium-sized companies to larger companies is in their organizational way of doing business. Smaller companies are more flexible, they react to external changes, and they have more efficient internal communication. But they are facing problems from a managerial and technical point of view, and lack of financial resources. Generally, these companies are not that much successful in access to financing resources through bank loans and other traditional financing channels because the size of the business and its security level, are among the most important indicators for bank’s assessing for investment. That is why the bank managers prefer larger businesses to smaller ones. Small and new companies are not so credible to the banks both in terms of their position in the market and technically. On the other hand, other banks also incur the cost of exploring, managing, and tracking credits. Therefore, granting larger loans to smaller ones is more profitable for the banks.
Venture investors are certified expertise managers and capital risk. They take financial and managerial support from the most innovative and promising manufacturing or service companies. These supports is from the owners of new ideas that are not able or willing to finance through banks and they will take 5 to 8 years to complete products and services through partnership. In fact, when the investment takes place, the investor owns a part of an investment company with a managerial seat on its board of directors which is practically uncountable until the maturity of the company. (5 to 8 years later). At the same time, the technology-based company, needs more investments as well which happen usually every year or every two years based on agreed valuation. However, it cannot be precise until financial performance and financial statements are not listed and it has not entered the capital market.
Venture capital support companies in their simplest form – an entrepreneur with an idea that is a business plan- to matured independent companies. The success of these companies depends on cooperation and active partnership of venture capital companies.