Business Finance How Firm Raise Capital by Essay

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  • Subject: Business
  • Type: Essay
  • Paper: #77938915

Excerpt from Essay :

Business Finance

How firm raise capital by using venture capital? What conditions we need to raise capital by using venture capital?

Many startup companies are not mature enough to obtain capital from the public or secure a loan with the local banks in their area. They therefore, have to rely on venture capital as a way of raising capital for the firm to continue with the daily operations. Firms hence, raise capital by going out and looking for people who are willing to invest their money in a company that they see has the potential for growth. The company looks for a number of people who can pitch in large amounts of money depending on the nature and type of the business which if successful is expected to give above average returns to investors (Krishnan & Ivanov et al. 2011).

There exist certain conditions for a firm to secure capital from a venture capital firm. These include; a firm needs to have in hand a business plan that shows potential for success. It is not enough to just have a business plan because if the venture capitalists are not impressed by the business plan, they will not be willing to risk their money in your firm. A firm needs to have a competent management team that shows unity and efficiency, a market size that is large or has the potential for growth, members who portray certain skills in the firm and an in-depth valuation of the firm that shows the potential for positive returns in the future. The most important condition is to identify the right venture capital firm to pursue for capital. Most VC firms want to invest in firms that are within their locations, preference or industry of choice (Krishnan & Ivanov et al. 2011).

2. What is venture capital, and what types of firms receive it?

Venture capital is where investors invests their money in a business that is more in its early stages of growth, considered to be of high risk by financial analysts, but may have immense potential if successful. Majority of the firms that receive it are startups companies that lack the resources to continue with the daily operations and need the capital from the venture capitalists to boost the company and help it expand by opening up other branches or expanding the main site or increase productions. These are firms that are considered to be of high risk though they have immense potential. They are unable to get loans from banks that may not be willing to take such a risk on them and are also not eligible to raise money from the public as they are not quoted in the capital markets as they are too young to meet the requirements for quotation (Krishnan & Ivanov et al. 2011).

3. What is the risk from using venture capital for both firms and investors (or there is no risk)?

There is always a risk when investments are made in the market. For starters, the firm has to follow certain decisions made by the venture capitalists since they have a say in the decision making of the firm because of their large contribution in it. Some of these decisions may lead to financial loss of the firm. Another risk occurs where the venture capitalist believe in the company but not in your management team. People are overprotective of their money and don't like seeing it wasted and will hence, they may decide to restructure a company's management team if they feel they are not the right people for the job. They may even suck the owner of the company who may be the CEO and keep him on the board as they have the power to do so. Venture capital therefore, makes it difficult for the owner of the business to run the firm without interferences. Another risk that exists to firm is the fact that when starting up the owner may own 100% of the business but by taking in more venture capitalist to help the firm grow, the owner's share of the company may diminish to almost 10% depending on the number of venture capitalists taken up (Hopp 2010).

The investors also faces risks from venture capital, this is where after investing their money in the business, if the firm fail to be successful and collapses, their money is illiquid and are not entitled to anything. Their whole investment goes down the drain and there is no possibility of a refund since it was a risk they were willing to take (Hopp 2010).

4. What is the benefit from using venture capital to raise the firm's capital for both firms and investors?

Raising capital through venture capitalism has its advantages for the firm in that; the firm is able to get a large amount of capital without having to attach any collateral to it. The capital is given freely by the investors with the only agreement being that they get a share of the returns once the company becomes successful and goes public. The owners have no liability to the investors if the company fails and are not entitled to repay the investors any money since they knew the risks when investing and were more than willing to go for it. The other advantage to firms is that they benefit not only from the capital they receive but also from the immense advice they get when they use strategic investors to invest in them. These are people who can contribute positively to the growth of the firm by providing valuable advice to the management on how to properly manage the firm, there advise and input goes a long way in helping the company grow and become public (Hsu 2010).

The advantage to investors is that by contributing capital to the firm, they obtain part ownership and have the right to participate in decision making and dictate on the direction in which the firm should take. Since the investors are risking big, so will there return should the company become successful and go public. There may be able to triple the amount they invested in should the company become successful in future (Hsu 2010).

5. How we raise firm capital by selling securities to public? How selling securities to public benefits both firm and investors?

A firm can raise the capital it needs to expand by selling its securities to the public. This can be done through an initial public offer where the public is invited to buy shares or stake in the company. This money that is collected is invested by the firm into helping the shareholders earn a favorable return in their investments in the company. Since an individual shareholders contribution may be little as compared to an individual venture capitalist share contribution, many people are invited to buy the shares the firm is offering and by doing so, the firm raises a lot of money. The firm is able to benefit from selling securities to the public since the money collected can be invested or used to expand the firm so as to increase production and generate greater revenue at the end of the fiscal year. Investors benefit in that; where the firm invests the money, greater returns will be realized that are shared among the investors earning a lot of money due to the high risk they took in investing in the firm (Arikan & Capron 2010).

6. On which condition that the company use selling securities to public to raise capital?

Not any company or firm existing in the country can raise capital by selling its securities to the public; there are certain conditions that have to be met. These include; the company has to be a public limited company, that is, it has to be quoted in the stock exchange for it to be able to sell its securities to the public. This means that private companies cannot sell their securities to the general public through an initial public offering. The firm needs to disclose all important information about the stock offering to the general public. This will help them make an informed decision about the company before purchasing the shares. The company also needs to submit its registration from for review to the Securities and Exchange Commission before being given a go ahead into selling its securities to the public (Arikan & Capron 2010).

7. Who sell the securities to public company or investor? Who will gain benefits from selling the securities to public company or investors? Is there any risk for sell the securities to public?

The company's securities are sold to the public by a brokerage firm that is in charge of linking the general public with the firm selling its securities. The public cannot by itself buy or sell securities, they need the assistance of a broker who buys the shares on their behalf and is also contracted when the public wants to sell the shares. The broker benefits from the purchase and…

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