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What are Risk Capital Funds?
ITIPress.org - Marlon Jerez / Consultant in Economics and Financial Issues

To 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 capital.

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.

The difficulties 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 investments.

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 long-term
have an active participation in the activities of companies in their portfolios
give guarantees for invested capital

Risk Capital Funds:

invest in companies with clearly defined objectives
choose sectors with good growth prospectus
finance private 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.

Send your questions to Marlon@TheInvestor.tv or Info@TheInvestor.tv

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