The Organizations of Venture capital are “temporary businessmen” whose activity consists of investing like shareholders in the capital of companies that consider attractive, with a temporary scene and with the intention of to harness its management and therefore its value, later to desinvertir in this participation and to obtain the return to its investment.
- Three are the characteristics that they define to the Venture Capital
- Its investment is substantially of Capital. That is to say, they contribute bottoms like shareholders and to all the effects, as much of rights as of obligations, they are constituted in partner-proprietors of the business in which they have invested. Sometimes its contribution of capital resources can go accompanied of other people’s resources type convertible obligations, subordinate debt, participating loans, etc. But the substantially important thing is that its investment does partners and proprietors to them of a company and common project.
- Its investment has a Temporary Vocation. They invest in companies with a more or less predefined temporary scene. They buy or they invest in a business today to sell tomorrow.
- Normally they realise participation takings. Minority but Significant in the capital of companies unquoted. They want to be investing weathers but neither they want usually they do not assume the management of the business in which they invest. Its contribution comes more from the side to support and to professionalize the management that to control it and to assume it.
These three characteristics define to the Organizations of Venture Capital. Without spirit of dogmatizar, because each operation has its own characteristics, an investment realised by a Society of Venture Capital can imply a taking of participation of capital among the 20 40% a temporary scene among 5 and 10 years for its disinvestment and a presence in the Council of Administration that does not imply to assume responsibilities of operative management.
The terminology of this type of investing activity usually denominates “Venture capital”, “Capital Investment”, “Equity” or “Capital Venture” Prevails to you. And regardless of conceptual shadings, the philosophy that underlies in the mind of these companies of investment could be transformed in: “I invest in its company and I become partner his, we helped to develop its company him and in a defined temporary horizon we looked for a solution to sell my participation and to obtain a yield investment”. Evidently they also think, although not of so open form, in that: “the success of my investment is based on buying today cheap, helping him to create more value and of selling tomorrow more expensive”.
The main contribution of these societies to the economy is that a market organized is constituted relatively to invest resources in the form of capital in small and medium businesses with the intention to develop them to harness its value. Nobody can question that they play an important role in the economy since they allow to promote projects of enterprise development.
Nevertheless its activity in Spain so is not developed when comparing it with other European countries like Great Britain. And it would agree that its protagonism was much greater. However, in the last years a height of this activity has taken place and have arisen new companies of Venture capital that surely will imply a greater protagonism of this institution in the financing of enterprise projects.
In Spain numerous Organizations of Venture capital with a very different nature exist
- The Organizations of Venture Capital type VIP. (National or foreign) promoted or by private investors or financial institutions that operate on national scale and realise very selective investments and of great amount.
- The Organizations of Venture Capital of so large half. Promoted by private investors who operate on a more regional scale and realise investments of smaller quantity.
- Public Entities Risk Capital.That they are born to promote the regional development and that includes criteria of investment of public nature.
Based on its company and its project of expansion, it agrees to select to the entity type of Venture capital and his potential candidates not to lose the time offering its project to companies of Venture capital that have a philosophy that does not fit with its enterprise project.
As any investor looks for the greater possible yield and the disinvestment of their participation in an agreed temporary scene with the rest of partners.
- The yield can obtain it:
- Via dividends while they are partners of the company
- Via capital gain when to sell its participation. Reasonably its yield is ligature at this moment and the success of its operation is in having entered a good price and salary left to a price superior.
With respect to the disinvestment, they wish to define, previously to its entrance in the company, an action philosophy that is shared by the rest of partners. And the solutions can be many-colored:
- To sell the company (all the partners) to a third party
- To sell its participation (the ECR) to the rest of partners.
- To sell its participation (the ECR) to a third party.
- Exit to Stock market of the company (more theoretics than practical).
The Organizations of Risky Capital are especially sensible to this subject and hardly they will participate in a project if a philosophy of agreed exit does not exist. For this reason, usually he is habitual that demands club pacts that align the interests of all the partners and who allow to be active in the policy of disinvestment in a defined temporary horizon.
A company type does not exist that serves as example because each operator of Venture capital has his own philosophy of investment. Although it is certain that all look for attractive investments.
Next a series of parameters is detailed that give idea than it is an attractive company:
- Company in a dynamic and attractive sector.
- Potential of significant growth.
- Solid competitive advantages in front of competitors.
- Enterprise leadership with a undergone directive equipment.
- Yield based on succulent and stable a capacity to generate cash flows future.
- Low level of indebtedness.
- Active sector in acquisitions that can facilitate its exit in the future.
If its company fulfills substantially these attributes can be an ideal candidate for an Organization of Venture capital. If it considers advisable to approach his project of expansion with a new partner, perhaps wickers exist to make possible their project.
To select a partner is a strategic decision for its business. It agrees to know what a priori they can contribute this type of investors:
- Resources. That is to say, money. In the form of capital (and sometimes debt) with a permanent nature and without the obligations associated to the classic indebtedness in terms of cost and return.
- Professionalisation. They do not aspire to take part in the daily management of the business but they will demand a professionalized management that can imply some changes in the form to manage companies of familiar type.
- Credibility to the project. To incorporate a partner of this type allows to gain reputation before the banking community, clients and suppliers. It must remove benefit from this credibility.
- Relations and experience of management. The incorporation of new advisors in representation of its new partner (ECR) can be beneficial. To have active advisors that they contribute knowledge and experience of management will be positive for its Advice of Administration.
Although it is certain that “financial investors” denominate themselves because mainly they contribute money, its intention is to generate value in its investments being contributed not only money but also experience, knowledge and relations.
A tie classification to the state of the project exists:
- Capital-Seed.In projects of it cuts technological that aspire to materialize the viability of an idea and where there is still neither commercialization nor no production.
- Capital-Start-up. For projects of starting of business with uncertainties with respect to the viability and underlying yield in this type of investments.
- Capital-Expansion. For investments that have a demonstrated viability and an opportunity of tangible development.
Another classification exists, perhaps more practice:
- Capital-Development: The investors contribute bottoms that allow the society to undertake a clear project of expansion. One looks for a growth and consolidation of the business with an increase of yield. The resources are destined to acquire machinery, technology, to develop commercial network, to undertake the internationalization of the business, etc.
The money entrance takes place in the company to undertake its development and it does not destine to the property because there is sale but extension of no capital. These operations are appreciated by the Societies of Venture capital.
- Capital-Substitution: The new investor replaces part of the present shareholders for diverse reasons:
- Lack of enterprise succession.
- Partial substitution of partners.
- Acquisition of the company by the directive equipment with a helps of a Society of Venture capital in denominated the MBOs. In this case does not take place entrance of money in the company, since this one is destined to pay to the present property the sale of its participation.
- Mixed operations:Those that combine the development and the expansion of the company with the substitution from the present shareholder structure.
Without spirit of being exhaustive in the methodology, we remembered the main steps:
- Previous phase: Those previous and necessary works before leaving to look for a new partner for its business. Some of the main tasks that are due to undertake:
- To select an adviser.
- To consider the viability of the idea.
- To prepare a plan of business.
- To consider the value of the company.
- To select investing potentials.
- Phase of Negotiation: His adviser must try to select and to impel the negotiation with the Organizations Venture capital to demonstrate if they have a certain interest in investing in his company. The main tasks would have to be:
- To prioritize candidate-investors.
- To defend its interests against the Organization Venture capital
- To negotiate the bases of the transaction in a Letter of intent.
- To design the basic structure of the transaction.
- Phase of Closing: Reached an agreement frame, the following step is to manage to materialize all the agreements to conduct possible the operation. The main landmarks would have to be:
- To impel successfully “Due-Diligences”
- To negotiate the final bases of the transaction with the club pacts and necessary legal agreements
- To execute the structure of the most advisable transaction in legal, fiscal and economic terms.
If a partner of trip for his project considers that he can need and its company sufficiently seems to him “attractive” as we defined it previously, it can be that “wickers exist to make a good basket”.
Evidently the way is not of roses nor is solved from one day to the next. It asks for our advising, we are an equipment undergone in this type of operations, we will help to:
- To define its project and to give credibility him,
- To explain and to sell its project to investing potentials,
- To defend its interests in front of its future partner who legitimately aspires to buy cheap, and
- As well as possible to design and to orchestrate the transaction in fiscal terms legal.
The trip will not have done more than to begin. If a new partner has obtained with whom to share and to fund its project will have put the first stone. He does not forget that the really difficult thing comes later, to fight day to day to expand and to consolidate his business and of creating of maintained form a greater value for his company.