Posted by Caitlin Howe On May 26, 2016
Venture capital is usually offered by investment banks for funding new commercial and business ventures. These institutions study the potential of start up ventures and decide to lend or put in funds for these ventures. Traditional banks usually cannot fund ventures that are risky and do not balance sheets to showcase their potential for profits. The venture capital banks on the other hand, evaluate the prospects of an entrepreneur. They calculate potential for return on investment before they decide to put in funds in a venture. This category of banks usually fund individual startups that need more funds to be put in.
Differences from traditional banks
The traditional banks usually cannot support entrepreneurial ventures which do not have a standing position or reputation in the market. For new business owners and start ups this poses a problem. That is where ventured capitalists and banks come into the picture. They understand the business it support requirements and other fund requirements a start up has, the possibilities for growth and profits and they provide loans accordingly with varying rates of interest and terms.
The risks in potential ventures that a venture capital bank is thinking about investing in are the major work of these bankers. They review proposals that are submitted as well as compare the risks or rewards that are expected from such ventures. Banks that provide venture capital take on elevated risks as they fund new ventures. In case the evaluation team is not convinced about turnaround potential of a business venture, they might not want to invest in such ventures.
Customers in venture capital
Those who are looking to launch new products or services in a market or wish to set up a start up business usually approach investment banks that offer venture capital. This is a straight forward way of asking for funds for a new business. The investors or the bank representatives, usually demand a part of the ownership shares of the company to be formed. The firms provide the funds necessary and in return, they determine the shares or the kind of control they will have on the startup venture.
New businesses pose risks due to which providing loans to these ventures can be refused by traditional lending institutions. An investment bank that offers venture capital will subsidize the loans to make them feasible offerings for the business IT support. These institutions usually diversify their investments in private equity, real estate and financial advisory services. With several revenue streams the loans are made safer. With greater returns they are able to invest in more start up businesses and entrepreneurial ventures. There are many venture capital firms that are run or privately owned by one or more individuals.