What is venture capital and how does it work?

In simple terms, venture capital is the kind of financing in which the capital is invested in a company, which is usually either a small business or a start up (basically something that is in need of the money) and this is done in exchange for the equity in the company. This is also quite a major subcategory of a quite larger and a much complex part of the landscape of finance which is also known as the private markets. Venture capital is the sum of money that gets invested in a business in its early stages, the growth stage of any kind of business or company.

It is important to remember that venture capital funding is not given to just any business. It is given to only those that shop an exceptional growth potential or to those businesses that, in the recent past, have shown a very quick growth and also show proof of how they are going to quickly expand.

Amongst financial advisory services will tell you as an investor that it is a very risky thing to invest in venture capital. However, it is also true that this is becoming an increasingly popular concept and even essential in a way which is becoming a source for raising money if they lack access to capital marketing, loan instruments and so on. Investors usually get equity in the company and hence, also a good say in the decisions that the company makes and that is an added advantage.

In a way, the concept of venture capital has evolved from quite a niche activity after the Second World War ended as it is in a sophisticated industry with multiple people and players which also play a crucial role in inciting innovation.

Therefore highlighting the importance of venture capital funding.

The pros and cons of involving your business with a VC

Are you in charge of a new company and want to get your business up and running? Or, are you a start-up with an idea that could bridge the gap between consumer demand and supply? No matter who you are, if your company is in its initial stages and wants to hit the ground running, you require a solid capital along with some top-end financial advisory services, counselling and guidance. Individually, these services will cost you more and will create different points of contact with different agencies involved. This is where venture capital firms come in. They are a type of investment firm that funds a start-up’s venture while mentoring them throughout their different stages of growth of a company and exit after their investment has been returned.

Here are a few advantages and disadvantages you should consider before making a decision.

• 1.      You get access to their business expertise – Venture capital firms are comprised of seasoned professionals who have hands-on experience in scaling a business from the ground up. This expertise comes handy when a young business has to make key business decisions including financial management, resource management, and strategy allocation.
• 2.      You get access to additional resources – Although on paper, a VC firm provides financial advisory services, most firms will also guide you through the various stages of a business which ensures faster transitioning towards success.
• 3.      You make connections – Venture capital firms are often huge funds that have a variety of companies from different industries in their portfolio. This gives you access to market-wide young innovators and experienced professionals which may present opportunities for you to collaborate with them.
• 4.      You lose decision-making control – Although the financial advisory services and other resources a VC firm brings in is more than appreciated, the investors involved may be too aggressive owing to their years of experience. The size of their investment would have a direct impact on their decision-making power for your business.

To sum up, you should make onboard a venture capital firm depending on your risk appetite and your involvement in the processes and decision-making opportunities.

Does it make sense for an investor to utilize the hedging strategy to gain an edge?

Hedging, as the name suggests means safeguarding or protecting. And finance companies in India and over the world have used this meaning to construct an apt strategy that ensures higher returns on your investment. It is a risk management strategy that is used by hedge funds to offset the risk of losses by diversifying your portfolio. In simple words, hedging can be considered as a form of insuring yourself against the negative events that take place in the financial markets. However, this does not mean that you will be insured from any loss that occurs whatsoever. It reduces the negative impact a certain event will have on your investments, helping you preserve your capital and make wealth over time. Now that you know what hedging strategy is, let’s take a deeper dive into this subject and broaden your understanding of hedging.

Hedging is typically done by hedge funds which are formed by individuals with large investment capacities to create financial partnerships and pooling funds together before using a bunch of different investment strategies to safeguard their investments. Unlike other finance companies in India, hedge funds are not completely governed by the authoritative regulatory body SEBI, and can therefore employ different strategies to secure the investments. Since their goal is to maximise investor returns, hedging is generally considered to be more aggressive in approach and is exposed to risks. This is also the reason why investing in hedge funds can only be done by wealthy individuals who can bear the brunt of a loss.

What makes hedging more attractive is the neutral standpoint of hedge funds. They hold a long position on their assets if they expect a rise and short stocks before an impending drop to help them make profits even in unsteady markets. Although this strategy was used to reduce risks, finance companies in India and over the world have strayed away from the traditional meaning of hedging and have started focusing aggressively on making huge profits.

So, although the traditional hedging strategies employed by mutual funds help you safeguard your money with small but consistent returns, you may choose to invest in a hedge fund if you are ready to take risks for better returns.