What Is Venture Capital? A Quick Look at VC Companies
Venture capital means equity funding for private companies in exchange for shares. Learn how VC firms work, their types and benefits in Indonesia.
Anyone who invests, or works with investors, has probably come across the term venture capital. Lately, new terms keep appearing as business and investment grow in Indonesia. What exactly is venture capital? Here is a short explanation.
What Venture Capital Means
Venture capital is a form of investment in which financing takes the form of an equity stake in a private company, with the investor acting as a business partner for a set period of time.
How It Works
Venture capital is usually provided as cash, which is exchanged for a number of shares in the partner company. Venture capital is a high-risk investment, but it also comes with high returns.
Investors generally know that these companies carry high risk and do not meet the standard requirements a public company needs to get a bank loan. As a result, most venture funds come from established investors, investment banks and financial institutions that pool money for this purpose. Venture capital is generally given to young companies known as startups.
Read also: Legal Basis and Definition of Venture Capital
Characteristics
The characteristics of venture capital are as follows:
- Venture capital financing is equity
- Long-term investment
- Financing in the form of risk capital
- Temporary in nature
- Profit comes as capital gains and dividends
- High rate of return
Benefits
The benefits venture capital can bring to a company include:
- Expands business activity
- Increases business potential
- Earns the trust of banks
- More efficient product marketing
- Improved liquidity
- Improved profitability
Types
Venture capital comes in four types:
- Equity financing
- Semi-equity financing
- New business ventures
- Profit sharing
Each type has its own strengths and weaknesses, and the choice depends on the investor and the company receiving the capital. A new company and an older company making a comeback have different needs. Venture capital can help both, though the results will differ.
Venture capital can be an alternative for growing a new company or restoring a company's reputation. It is temporary: at most ten years of funding for the partner company. Venture capital firms collect money from institutions and individuals who are financially well established, then invest the pooled money in companies likely to rise in value. The profit taken is usually around 20%. A venture fund earns a profit when the companies in its portfolio become more valuable and can be bought by large companies.
In Indonesia at least, venture capital firms are also governed by law and have their own regulations that must be followed when carrying out investment activities.
Indonesia has plenty of venture capital firms that have successfully built several hit startups. One of them is Alpha JWC Ventures, an investor in several startups you surely know, such as Kredivo, UangTeman, Sorabel and many more. To learn more about Alpha JWC, visit its website here: https://www.alphajwc.com
