Venture Capital Investment Banking

Venture capital is required for the startup of a new venture and a capital investment is needed after the initial stage of seed funding. Venture capital is the ideal option for companies having a limited operating history and the companies which are too small to raise capital through other popular means. Venture capital investment is highly risky investment and traditionally, companies cannot secure a loan from a bank for venture capital investment or get a debt offering. Venture capital investment banking has been introduced recently to fund venture capital.

The Need for Venture Capital Investment Banking

A venture capital firm is a privately held equity group and most of the venture capital firms have their own funds to invest in the new businesses.Venture capital is the money provided to companies that do not possess a proven record of success and therefore, it is very risky investment. These firms have a set of criteria and screening system which is used to see if the new business has a potential to grow or not.

Most of the venture capital firms do not require funds from external sources. Most of the funds for venture capital come from the person who starts the business and the secondary funds come from the investor who is called angel investor.

Most of the venture capital funds started during the initial dotcom boom was profitable and many companies that invested in venture capital got quick and enormous amount of money in return during this era. Most of the companies that earned profits were public and the venture capital investors got their money back with huge returns as the companies going public sold the shares in open market and got very high value for each share.

The venture capital funding provided more than 20% of returns in the initial dot com boom which attracted many new investors into venture capital funding but it is not true for all cases. The individuals or company investing in venture capital funds faced losses at the end of dotcom boom. Many of the investors in venture capital face a high amount of risk of losing funds and if the company fails in the new venture and becomes underwater, the investor may lose all the money.

New Banks into Venture Capital Investment Banking

In case the funds are required for a new business, venture capital investment banking is the method which helps the venture capitalist to get loans. Traditional banks do not provide the service of venture capital investment banking because it is a risky provision but with new developments many new banks are venturing into venture capital investment banking.

To seek finance in the form of loans from banks, the new proposal or business has to undergo a process of screening and has to show a good prospect of return on investment to the venture capital investment bank. In traditional system of banking more than 90% of the proposals of venture capital seeking loans for new projects were rejected by banks but the upcoming venture capital investment banking systems adopted by new banks has the provisions to fund risky ventures.

The New Trend of Venture Capital Investment Banking

In the last few years, many new banks have started venture capital investment banking. The system of venture capital investment banking takes at least three to six months to sanction the funds. The key stage of venture capital investment banking includes the evaluation of the new business. Inventure capital investment banking the proposal is considered through a number of criteria such as the commercial viability ofthe product or service offeredby the company, the background of the business, the potential growth, the management strength and the risks involved in investment.

Different Types Of Banks into Venture Capital Investment Banking Systems

There are many different forms of venture capital investment banking (– through investment banks or merchant banks into venture capitalist).Venture capitalists mostly require finance at some point of investment and the need for investment depends on the stage of business. The capitalist may have well defined financial structure for equities and debts. The additional finance can be arranged through clearing banks, merchant banks or financing houses. Venture capital investment banking system mostly focuses on IPO and large private share offering while merchant banks finances small scale companies, and it even offers equity financing, mezzanine financing and bridge financing. Merchant bank offers finance to companies to bridge gap between the public offering and venture capital.

Venture Capital Investment Banking Vs. Finance through Individuals

Venture capital investment banking system is a betteroption for getting finance than individuals for finance because anybody funding for a project may demand a partial control over the business. The venture capital investment banks are contacted by the venture capital firms when the firm requires additional funds after the initial stage of start up.

Key Features of Venture Capital Investment Banking

In venture capital investment banking the bank has many in-house criteria which evaluates the prospectsof the startup business and tries to determine the ROI before making any decision of sanctioning funds to the firm in the form of loans for thenew business ventures. The venture capital investment banking system helps the new start up businesses to get additional funds and the evaluation process enables the firm to know about the positive and negative aspects of the new proposal and prepare for the new business venture. The venture capital investment banking system not only involves providing funds to a new business but it even helps in subsidizing risky investments. One of the most attractive features of venture capital investment banking is that it is highly subsidized as compared to other means of financing.

Ways Used By Banks in Venture Capital Investment Banking to ensure Flow Of Income

There are numerousways used by banksin the venture capital investment banking system to ensure a regular flow of income such as -real estate, financial advising and private equity. Evaluating the risks in investment is the major job of the venture capital investment banking system and the banks may not provide the loans if it considers the proposal too risky and unprofitable for investment.