are Risk Capital Funds?
ITIPress.org - Marlon Jerez / Consultant in Economics and
understand what risk capital is, it is necessary to understand what it is
not. Financing provided by a bank to a company is not considered risk
capital. Neither do stocks or bonds which an investment company buys in
the market contain risk capital. Nor is the money raised by developers for
apartment buildings or shopping centers risk capital. If you and a group
of friends join together and invest money in a company so that it can
grow, then this type of capital can be considered risk capital. Money
invested in a new company which has a potential for rapid growth is risk
Investments in risk capital are characterized by the high risk which they
bear. The principal question which arises is, if prospects of the company
can compensate for the high interests which it has to pay in order to
obtain financing. What is the difference in financing a company with
standard financing or with risk capital? The difference is that with risk
capital the company can obtain management guidance.
Risk capital funds became very important on an international scale,
especially in developed countries, by focusing on providing financing for
micro, small and medium size companies. Their importance resides in the
fact that they constitute an element of development in the way in which
they are supporting the implementation of innovative new projects.
A growing number of emerging new companies are small and medium size, many
times founded by independent professionals, ex government officials and
researcher that possess very limited entrepreneurial experience. Those new
companies have a potential of high growth and profitability relativating
higher level of risk, but face problems related with scarce capital, lack
of management skills as well as low perception of market opportunities.
in obtaining financing to start their operations or expansions are not
always limiting micro, small and medium size companies with low technology
knowledge. If properly funded and administrated, they can occupy niches
within markets with strong prospects for growth and profitability.
Risk Capital Funds present a viable alternative for those types of
businesses. For investors they are a good opportunity to grow their assets
when adequately diversified while maximizing the return of their
For the companies, risk capital funds are a source of financing and
management assistance. They allow them to have access to financing without
being stalled with interest payments and amortization for bank financing,
and, at the same time, are a demanding partner that judges the viability
of new projects.
The participation of risk capital funds allow companies to overcome
obstacles because they:
* invest in companies, usually as minority share holder
* have a planning horizon for the return of their investments for the
have an active
participation in the activities of companies in their portfolios
for invested capital
Risk Capital Funds:
companies with clearly defined objectives
with good growth prospectus
companies, small, medium sized or innovative
Risk capital funds are currently present in most developed countries
gathering a wide spectrum of investors like large size private companies,
pension funds, public development institutions, international financing
bodies etc.; who are investing mostly in micro, small and medium size
companies related to technology. Those companies usually donít have
adequate management capabilities and resources, nor financing for new
projects guaranteed by banks. Their value is based on capacity of
innovation in terms of products and productive processes.
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