VC 101

Venture Capital

Venture capital is money provided to new, early-stage businesses that have a high potential for growth. The venture capitalist owns equity in the company it invests in as a reward for the risk they take by investing in a start-up.  

Although the fact that venture capital firms usually take active management roles is a source of controversy, this approach remains attractive for start-ups as they typically have little access to capital markets.

Similarly, micro venture capital works in much the same way, but instead offers financing to very small businesses and projects that are too small to attract the larger and more traditional venture capitalists.

 

Venture capital business models and examples 

Some venture capital comes from private individuals, although in most cases is comes from venture capital firms who take the time to carefully consider successful investment opportunities.  Venture capital investment usually follows the different stages of a company’s development.  

Firstly, the earliest round of financing is called seed funding. However, equity crowdfunding is also a popular approach at this stage of the company’s development. This funding is for ideas that have not yet come to market.

After this stage, venture capital can be used for the early stages of marketing and product development, and later used for early sales for companies that have just started out. Some venture capital models even offer a variety of non-financial services such as marketing and HR services.  

As well as this, some venture capital models invest at a later stage, when a company is already selling a product, but not yet turning a profit. However, venture capital can also be used for mezzanine financing, in order to provide expansion capital for companies that need to grow in order to become truly successful.  

Micro venture capital, on the other hand, is all about getting in at the ground floor. Micro venture capitalists focus mainly on early stage investing, and there is little evidence to suggest which model is actually better.

 

Benefits of venture capital  

In order to combat the competition from micro venture capitalists, many of the more traditional venture capitalists have taken to experimenting with early-stage investing.

Micro venture capitalists do well because they can get access to great investments from the very beginning; however, their risk remains very high. As well as this, micro venture capitalists must factor in the impact of dilution over time, whereas venture capitalists can afford to invest in companies at a later stage to help with their growth.  

Overall, micro venture capitalists are willing to accept the downsides of their business models due to the access they get to great investments. As well as this, they do not take the risk that venture capitalists do in spending more money on an already losing business. The appetite for risk might be a deterrent for this type if investors as it is considered a very high risk investment, but with high risk comes high return as well.

 

VC is critical for growth  

The VC arena is an important catalyst for small and entrepreneurial businesses to survive and grow. Many of this companies are ignored by banks and need both the financial and managerial support for them to grow and prosper.

At UCG,  we see a gap in the venture capital offering in the GCC. While there is a lot of interest in the support of small and upcoming businesses, the VC arena is still nascent and needs development and attention.

 

 

Tariq Linjawi

Founder/Partner

UCG