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VENTURE CAPITAL AND PRIVATE EQUITY FINANCING FOR
ENTREPRENEURIAL VENTURES
I. Understanding venture capital and private equity
1.1. Defining venture capital and its role
VC is an important type of direct foreign investment targeting innovative startups demanding
high returns on the invested capital at the early stage of company development (Aernoudt, 2017).
This source of funds opines itself from traditional funded through banks or the sources available
in public domain by majorly giving shareholders a portion of equity in exchange to capital
(Alperovych et al. , 2015). In this regard, the aim of venture capital is to fund the development
and transformation of new businesses to became market disruptors, value co-creators, and
financial generating systems for both investors and owners (Angel & Batarce, 2021). In addition
to capital, venture capitalist firms offer portfolio companies expertise, industry knowledge, and
access to possible business connections to support their companies’ stability (Batjargal, 2007). It
is more than just a source of funding because it encourages the three important tenets of
economic development i. e. entrepreneurship, innovation, and growth through the funding of
young and often struggling startups that are unlikely to gain venture capital funding from
traditional sources (Bengtsson & Hand, 2011). It widens the support of new innovative business
concepts, making them functional forms of employment, technology, and competition. Also,
through venture capital, confidence and validation are provided to young start-ups through the
provision of venture capital leading to increased investment which then provide assurance of
sustainable growth and development (Angel & Batarce, 2021). Thus, venture capital acts as a
catalyst and facilitator whereby investors and entrepreneurs work hand in hand to ignite the
wheel of innovation and foster economic development so that specific sectors and even entire
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markets can become transformed and refashioned over time (Batjargal, 2007). Venture
capitalists also help startups by providing an essential sounding board, as well as gateways to
vital resources, the contacts, and customers that may be difficult for emerging firms to secure on
their own (Bengtsson, & Hand, 2011). This network benefit goes beyond capital, which creates
multiple opportunities for venture collaborations or connections for business that enable faster
progress of innovation and market growth (Angel & Batarce, 2021).
1.2. The private equity landscape and participants
Private equity domain can be described as complex and diverse sphere that is characterized by a
range activities focused on different stages of firm’s development, including venture capital,
growth capital, buyouts, and eventually distressed investing (Bengtsson & Sensoy, 2015). Of
those, venture capital has been identified as a segment whose activities include funding for
startup companies at an early stage of their development and young companies in their growth
stage by giving them the capital required to finance and grow their new ideas(Aernoudt, 2017).
In the context of the private equity market, the buyers, also called limited partners (LPs), may be
various types of institutional investors, pension funds, university endowments, family offices or
rich businessmen and businesswomen looking for high risk/return investments. On the other
hand, general partners (GPs) are responsible for the allocation of the capital gathered from the
Limited Partners (LPs), sourcing of attractive deals and added value to portfolio firms (Angel &
Batarce, 2021). The venture capital industry is not independently autonomous but rather a
subsystem intermeshed in a complex network. These include budding entrepreneurs who seek
seed and venture capital to transform their business ideas into productive ventures, business
angels who offer financial and technical inputs to young enterprises, incubators who provide
integrated packages of support to the new ventures and corporate venture capitalists who are the
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venture capitals of large corporations primarily seeking to invest in disruptive technologies and
other innovative ventures (Batjargal 2007). These different players play a role in energizing and
evolving the private equity industry through sponsorship, creativity, and development. Though
each of the segmentations of the private equity market is more suited for specific roles and aims
at specific prospects, these segments apply pressure on the markets for finance and keep the
overall competitiveness of these markets thriving. With their capital and operational and
organizational initiatives, private equity investors occupy a rather significant position of the
economic growth stimulation, innovation support, and value added to the investors and
entrepreneurial firms. Conclusively, private equity could be seen as an enabler that creates the to
medium through which innovative ideas are created and powered to become prosperous
businesses that foster advancement.
1.3. Risk-return profiles and investment strategies
Venture capital investments are defined as the investments suitable for the specific area and
increasing the company’s value and meaning a high risk for possible high outcome that can
reflect the general idea of risk and uncertainty that are always presented in new business ventures
(Bengtsson & Sensoy, 2015). In view of this reality and the high risks inherent in start-ups,
venture capitalists seek to adopt a risk diversification model whereby they spread out their
capital among various ventures in an endeavor to improve on the probabilities of realizing very
high revenues from the few successful start-up firms (Aernoudt, 2017). This strategy focuses on
identifying the portfolio of investors with various risks, maturity levels, and growth rates, in an
effort to create a diversified range of investments capable of withstanding the high uncertainties
of the market (Alperovych et al. , 2015). Though generic businesses have a high overall failure
level for individual ventures, the successful ones are capable of having great potential returns
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that are normally actualised via methods like IPOs or acquisitions by established giants
(Alperovych et al. , 2015). The following elements explain possible causes: Venture capitalists
follow strict criteria and specific methodologies to vet potential investments with an emphasis on
market size and niches, competition, business model, team, and growth opportunities (Angel &
Batarce, 2021). Lastly, they also typically offer operational and sometimes founder tips to
portfolio companies and seek to boost their progress and odds of success (Batjargal, 2007). The
financing of venture capital is complex and involves various stakeholders, such as patrons,
financiers, incubators, and corporate partners, who collectively contribute their energy and ideas
to the development regarding the venture capital context (Bengtsson & Hand, 2011).
Significantly, venture capital comprises an important foundation and a catalytic tool in
promoting innovation, enhancing the spirit of entrepreneurship, and stimulating economic
growth for fostering new startups and ventures displaying a high-growth potential.
II. Fundraising and deal sourcing strategies
1.1. Building a compelling business plan and pitch.
Developing an attractive business plan and idea is critical for external funding, particularly from
venture capital (Block, Hirschmann, & Semrau, 2022). A comprehensive business idea helps in
leading the strategic navigation of a startup by delineating its goals, objectives, market niche,
proposition, differentiation and development approach (Caselli, 2010). It should also give an
introduction of the business, the problem that it resolves, the solution that it offers, and the
market it seeks to operate in. Also, growth strategies, revenue streams, and financial forecasts
should be fully realized in the plan that will prove the soundness of the venture and its ability to
scale and become profitable in the future (Daskala & Andriosopoulos, 2020). As well, other
elements that should be included in the business plan include the operational and strategic
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elements, whereby there be an indication of the product development cycle, the place and
manner in which the product is to be marketed and a schedule of when and how the business is to
acquire its customers (Ewens & Farre-Mensa, 2019). However, competitive analysis should be
conducted so that assumptions are checked and see what challenges and opportunities may occur
(Fahy et al. , 2017). It is also essential to make a persuasive pitch, which is the ability to present
the idea of a business plan in the most effective and concise manner possible to help capture the
interest of potential investors in the startup and sell them the value proposition of the new
business (Chemmanur, Loutskina, & Tian, 2014). Most effective pitches are not just informative,
but also narrative and always sell the story, an attractive positioning, the achievements made by a
given start-up, the team behind the idea and the investment opportunity in a simple but appealing
manner (Cumming, Fleming, & Schwienbacher, 2009). In this context, the role of the business
plan and pitch is to enable the startups to convey their ideas, opportunities, and the arguments as
to why the venture capitalists should fund their businesses simply because these ideas are
worthwhile and hold the potential of creating value for all the stakeholders involved.
1.2. Networking and establishing investor relationships.
As a thematic element, networking is a critical factor in establishing trust between the trading
partners, especially in the case of the entrepreneurial firms and prospective investors; this is
because networking helps to ensure that there is a fundamental connection between the two
parties (Chahine et al. , 2012). To widen their networks, entrant entrepreneurs are recommended
to engage in various activities that include attending industry events, startup conferences, pitch
competitions, and networking forums to meet new people and seek out potential investors to
fund their efforts (Cumming et al. , 2019). The investor relationships are not just professional
and polite merely; it means elaboration of business with investors, and investors’ important
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information about the progress of the startup, and certainly more importantly, it requires deep,
meaningful industry knowledge and experience (Cumming, 2008). As it may take several years
to achieve success in the business, the entrepreneurs should keep their link with the investors,
that is, continue to contact them and report the necessary updates for the venture and the
achieved results to build reliable and credible relationships (Ewens & Rhodes-Kropf, 2016).
There are centralised structures of information for the investor type for entrepreneurs to approach
their past mentors, advisors, and peers for introduction to the investor and also for mobilising
funds (Gompers and Lerner, 2001). Networking or Meetup events can also be pre-arranged by
accelerators, angel investor groups or venture capital companies that offer a great chance for the
entrepreneur to pitch their start-up, seek feedback or meet experienced investors (Hallen, 2008).
Additionally, the internet isloaded with resources and social media outlets that allow the startups
to advertise, attract investors and increase attention towards their business by the investor
(Hochberg & Cohen, 2014). Acquiring capital is not the only benefit of developing a support
network of supporters, promoters and partners, as such network also provides opportunities for
further fruitful cooperation, guidance from experienced professionals and valuable information
about the field (Hsu, 2004). Hence, gaining the trust and support of a network is one of the most
critical factors needed by an entrepreneur to access resources like capital to help propel the
business forward rapidly.
1.3. Evaluating investor fit and term negotiations
The evaluation of investors cannot be a random process but must involve several evaluations that
may contribute to the success of the partnership which may include the following; The second
condition has to do with the ability of the entrepreneurs to weigh the compatibility factor with
the means through which the venture has to be funded and evaluate the compatibility between
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themselves and the potential funders with regard to vision, values and goals (Block et al. , 2022).
It is also important point that, it is possible to assess the investors’ experience in the industry and
the knowledge of the market trends in its turn allows the entrepreneurs to utilize their experience
and contacts for the advisement and value added (Cumming et al. , 2019). In addition to financial
support, entrepreneurs should focus on investors who can also bring value in terms of adding
knowledge, connections, and tools (Block et al. 2022). Of primary concern in the fundraising
process is the stage of determining the investment conditions and finalizing the agreements
between entrepreneurs and investors (Chemmanur et al. , 2014). Some of the things that will be
considered in the social negotiation process are the determining of the valuation of the startup,
the equity percentage awarded to investors, non-operational aspects, specification of the rights of
shareholders, the setting of the board critics, and the determination of the exit strategies, as
recommended in the Caselli’s work of 2010. Such conversations should be approached
strategically by the founders who would naturally strive to obtain the best possible deal but, at
the same time, must not lose sight of the best interest of investors as well as the overall original
purpose of business ideas (Cumming et al. , 2019). The adaptability of the reward system plays a
crucial role in creating a good relationship between startups and investors while simultaneously
protecting the long-term interest of each party; this is because it is always hard to achieve a
balance between providing value to the shareholders and providing value to the startups in the
long run (Caselli, 2010). Furthermore, internal and external investors need to be screened,
evaluating their previous experience, path, and appropriateness to the company’s organic
evolution sense (Block et al. , 2022). Negotiation requires every party to express ideas and
intentions freely thus promoting the development of a good rapport that is beneficial to
everybody involved (Chemmanur et al. , 2014). This means that by choosing the right investor
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and mastering investment bargaining, an entrepreneur obtains adequate capital and other
valuable resources that would ensure the company’s success and at the same time, minimize
misuse of investors’ funds and reduce negative implications to all parties involved in the
investment process.
III. Due diligence and valuation processes
1.1. Assessing the management team and market opportunity.
This basically holds when venture capitalists are looking at some investment opportunity for any
startup venture; they consider of various aspects in order to understand the prognosis of the
startup and its possibility of growth (Davila, Foster & Gupta, 2003). One of the potential
distractions is the identification of the management skills, experience, and past performance as
they significantly dictate the success and the ability to cope with unexpected situations in
compliance with the developed business strategy (Fitza et al. , 2009). As the matter of fact, VCs
actively look for those competent and experienced teams with rich skills, knowledge of the
industry, and past experience to strengthen the legitimate substantive nature of the startup in
relation to various uncertainties (Fitza et al. , 2009). Market opportunity is one of the most
important assessments of the startup that is carried out by venture capitalists to understand the
growth rate, competition, and positioning of the startup (Engelmann & Souček, 2022). This
involves evaluating market characteristics such as its size and growth trend, customers’ needs
and its competition to rate the attractiveness of the opportunity (Gompers & Lerner, 2001). The
awareness of market trends helps venture capitalists to uncover risks that may hinder growth,
market opportunities that are not well represented and areas where this particular startup has a
competitive advantage (Engelmann & Souček, 2022). Moreover, analysis of threats such as
establishing the barriers to entry and assessing the capability of the startup in developing a
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sustainable competitive position and the ability to enter and wrest market share are necessary
tools for ascertaining the sustainability and the enterprise’s potential growth path (Gompers &
Lerner, 2001). Hence, through periodic assessment of the management ability and the market
potential of the venture, the venture capital firms seek to invest in high quality deals that are
suited to their investment theme and risk/return requirements (Davila, Foster, & Gupta, 2003).
Such a stringent evaluation ensures that venture capitalists invest in high growth potential
entrepreneurial firms, well-established market opportunities, and qualified management teams
hence the chances of higher returns on the investors’ capital and (or) better exit outcomes in case
the investors sell their ventures to other companies which are looking for new growth avenues
(Gompers & Lerner, 2001).
1.2. Analyzing financial projections and growth potential.
Venture capitalists then analyse the business plans of the startups by carefully scrutinising all the
financial estimates in an effort to establish the growth prospects, the working model of revenues
and the profitability prognosis (Fried & Hisrich, 1994). These projections act an essential tool of
evaluating the startup’s capacity to generate revenues as well as the returns of the investment in
the long-run. They pay special attention to the profitability of the revenues that the startup firm
can generate, the costs involved in the firm’s operations, and the cash flow forecasts of the firm
(Gompers 1995). They calculate growth rates for the overall revenues and the gross margins of
the startup while also determining the costs of customer acquisition and customer lifetime value
to assess the scalability and potential of the startup to deliver high return rates (Edelstein, Liu, &
Tsang, 2021). As evaluating the financial position of the startup, venture capitalists focus on
understanding the concept of burn rate, runway, and capital efficiency (Fitza et al. , 2009).
Evaluating the burn rate, which measures the rate of spending that is common among the startup,
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gives insights on its operating style and the capacity to run out of the available cash. Longer time
from the initial investment or starting the startup’s operations and when the company spends all
the available capital is often considered better, as it gives the firm more time to meet important
checkpoints and attract more funds (Edelstein, Liu, & Tsang, 2021). Secondly, the evaluation of
capital effectiveness ensures that venture capitalists comprehend the kind of return on investment
a startup makes to appropriately finance its operations and obtain its business goals (Fitza et al. ,
2009). Entrepreneurs on the other hand, must prepare accurate financial statements and
projections through which venture capitalists can assess the viability of the business idea, in
relation to their risk and return preferences and investment requirements (Gompers, 1995). They
find out whether a startup is likely to have the potential of growth, whether the business model
that the startup intends to apply can work effectively and whether the startup will put the capital
in the right manner, in order to realise the expectations of the venture capitalist, in more often
than not, their investors (Fried & Hisrich, 1994).
1.3. Determining appropriate valuation and deal structure
Gompers and Lerner (2001) emphasized that VCs consider several factors while negotiating
valuation and deal structure when investing in startups, such as growth potential, risk, and the
overall market. The present case highlights the importance of conducting an effective evaluation
which focuses on the monetary value of the startup, the company’s positioning against respective
competitors, as well as other inherent risks associated with the investment (Fitza et al. , 2009).
Using DCF method, Comparable company method and VC method, venture capitalists control
the valuations to ensure that the estimated value of the startup created is the truest (Davila et al. ,
2003). These methods assist venture capitalists to come up with a reasonable figure to price the
startup since it is likely to generate revenue, size of the market, level of competition and options
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for exit (Gompers, p. 85, 1995). Through these parameters, it is possible for the venture capital to
arrive at the right value for the seed that has the capability to fuel its growth while putting into
consideration possible dangers out there. Furthermore, the VC may design the deal conditions in
such a way that the startup gets the interest of both the investors and the entrepreneurs to work
hard and ensure it is a success (Gompers & Lerner, 2001). Valuation and deal structure refers to
the process of gaining a mutual agreement on the expected value of a company as well as how to
divide it between the two merging companies by considering the market trends and practices
(Fitza et al. , 2009). Besides, venture capitalists need to find the right mix that will ensure the
investors can get their expected return and also the startup will need that capital in order to attain
its growth strategies. Therefore, while negotiating, everyone strives to set up terms that will help
the startup will help it perform to the best of its ability in future. There some other aspects of
value that can also come under consideration by venture capitalists in the course of the deal such
as quality of TEAM, strength of patents and prospects of disruptive technology (Davila et al. ,
2003). In the same way, the VCs may also look to include covenants to protect themselves from
a poor outcome of the investment for instance the anti dilution clause or the liquidation
preference (Gompers, 1995).
IV. Post-investment value creation and governance
1.1. Active involvement in strategic decision-making.
Venture capitalists often exercise strong influence in their investments by providing guidance
about the direction of portfolio companies based on their experience and existing connections
(Hellman & Puri, 2002). This involvement involves being involved in strategic decision making
and planning issues such as the development of market penetration strategies, introduction of
new products as well as considering how best to enter into new niches in the market (Kuratko,
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Hornsby, & Naffziger, 1997). In participating in these deliberations, the venture capitalists hope
to influence the company positively and work towards putting the firm on the right track that
would create sustainable competitive advantage. This is more than just coming during critical
decision making situations to give their opinion; venture capitalists consistently support and
assist the management team in addressing intricate issues and make the most of opportunities
that present themselves to the firm (Hsu, 2007). Such functions may require helping potential
partners or customers make initial contact, helping the company attract key human capital, or
providing advice regarding improvements to operational efficiency (Hellmann & Puri, 2002).
Moreover, owing to their vast networks, VCs can introduce portfolio companies to other industry
players in order to share resources, precedence, or possibly forge partnerships that would foster
growth thus deepening market traction (Kuratko et al. , 1997). In addition, venture capitalists
can also help in the strategic management of the firm: they possess a rational and impartial
approach to company’s strategy implementation, and can act as a buffer between various
stakeholders to prevent hasty decisions, underestimation of risks and untimely allocation of
resources during strategic decision-making (Hsu, 2007). Their active participation makes them
contribute towards development of more competitive strategic plans and proper implementation,
the company’s manoeuvring ability to exploit market opportunities and manage with competitive
forces gets improved (Hellmann and Puri, 2002). Venture capitalists’ interaction in strategic
management decisions and processes demonstrate their focus on optimization of invested
resources and on the enhancement of value for both the entrepreneurial start-up firm and the
investor. As financiers who source funds for investment into companies and use their skills and
connections to transform the companies’ strategic plan, venture capitalists remain a key cog in
the wheel of their portfolio companies.
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1.2. Providing operational and financial expertise.
It is not just the exchange of strategic advice with each other; instead VC firms offer business
and financial advice to the companies or the firms in which they have invested in order to have
better operational and financial performance and increased profitability (Metrick & Yasuda,
2010). Such support includes increasing the general efficiency of business processes, directing
and developing their operations; and deviating them to match internationally accepted standards
for maximum productivity (Lerner, 1994). Bringing along their extensive networks, VCs assist
growing firms to establish useful partnerships and acquire valuable relationships with consultants
or professionals in the relevant industries if need be, assist the firms in overseeing the
management of business operations through offering useful advice about the management and
opportunities for gain (Mulcahy, 2021). In the same way, VCs also serve as involved
gatekeepers for the funded firms to not only pass on their know-how regarding proper financial
management that would help the firm achieve the ability to withstand to the externalities as well
as Source funding the same firm (Metrick & Yasuda, 2010). It is instrumental in regulating,
forecasting, and being answerable for the financial recourses, which is an important point into
attaining the financial integrated start-ups, according to Lerner (1994). By offering suggestions
to the startup about finance management and control, Venture capitalists help the start-ups to
oversee various areas of finance in the start-up and utilization of resources, and to reduce the
probability of financial risks. This become even more advantageous to the early stage business
venture as they have some serious limitations with admiring their own financial affairs. Venture
capitalist organization and funding, thus, supply the backing to the venture capitalist conception
of firms, providing portfolio firms with the crucial support to improve their functioning and
fiscal health to be able to address these questions and aim for stability. These are roles played by
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venture capitalists as providers of hand or help, and source of useful materials these play their
role to contribute towards the viability and success of these start-ups.
1.3. Implementing effective corporate governance practices
Due to the high risk associated with venture capital investments, venture capitalists focus on
proper management practices by their portfolio companies (Jääskeläinen & Maula, 2014). They
have come out strong in support of the need to have sound corporate governance structures that
define the roles of key players in an organization such as the board of directors, executive
management, and shareholders (Ljungqvist & Richardson, 2003). This involves the development
of a statistical structure of authority, responsibility, and holding of accounts to avoid any blurring
of corporate responsibility that might affect operational and corporate integrity. Additionally,
venture capitalists are also involved in the management of their investments, which means that
they are sometimes seated in the board of directors or on the advisory board (Kuratko et al. ,
1997). As such, they offer direction, insights, leadership and support on business affairs and
hereby apply their knowledge and past work background in order to assess business
performance, detect any potential issues in its operation and make business-related decisions in
the best interest of the business and its owners (Jääskeläinen & Maula, 2014). Engaging in
governance, VCs act to ensure that all the parties involved act in a manner that is ethical and
responsible, and in the best interest of the venture to ensure viability and value
creation. Reporting practices, and other methods of communication are also effective corporate
governance practices adopted by venture capitalists (Ljungqvist, & Richardson 2003). Ongoing
transmission of financial and managerial details and proper communication between corporate
managements and shareholders enhances credibility and accountability among shares holders
(Kuratko et al. , 1997). Moreover, according to venture capitalists, entrepreneurs should follow
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ethical practices, be fulfilling high levels of integrity, and ensure compliance in their strategic
decisions to encompass corporal values and manage risks (Jääskeläinen & Maula, 2014). In an
effort to uphold good corporate governance, VCs seek to encourage the exhibiting of a clear
corporate governance strategy in their portfolio firms that promotes efficiency in management
and creditor, stockholder, and consumer confidence; making the portfolio firms more immune to
market fluctuations and fake products.
V. Exit strategies and harvest opportunities
1.1. Initial public offering (IPO) and listing requirements.
The decision to go IPO is a big step for companies and it takes place into a strict legal framework
environment (Phalippou & Gottschalg, 2009). Stock exchanges and regulatory authorities
therefore apply strict listing requirments including quantitative criteria that include financial
tests, qualitative tests that include standards of corporate governance and reporting requirements
as mentioned by Sahlman (1990). Listed companies going public must meet these parameters
that are usually set, for instance, requirements of minimum revenues, and the minimum level of
profitability to be realized, (Phalippou & Gottschalg, 2009). Besides, due to the implementation
of strict rules and regulations related to the financial reporting, companies have to subject for
rigorous due diligence checks in order to ensure that they are in compliance with these
regulations and to provide investors with the accurate and relevant information which reflect the
condition of a company (Raade & Dantas Machado, 2008). It involves the audits, disclosures,
and filings of various sets of filings, including the prospectuses outlining the nature of the
business, overall financial performance, risks and its future growth potentials (Raade & Dantas
Machado, 2008). Finally, it is also important to note that there are many advantages of a
successful IPO exercise and some of them are as follows: The IPO gives companies the
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opportunity to float in the public capital markets and it most allows the firm to mobilise large
amount of funds for the purpose of funding their growth and expansion (McGuinness & Rago,
2011). It will also be essential to mention that, with public listings, there is an exit for existing
shareholders whereby they can sell shares and get their money back, or even make profits
(Samila & Sorenson, 2011). Additionally, the availability of going public increases the
company’s market recognition and received trust from the customer, suppliers and business
partners, and improves the firm image in the market place (Sahlman, 1990). The first inherent
advantage arises from the fact that being a public company exposes the entity to more public
scrutiny and examination; this in turn makes the company more attractive to institutional
investors and analysts which in return can increase the demand for the share of the company
(Sahlman, 1990). There are various costs and challenges associated directly with an IPO such as
the underwriting fees, legal costs and even more importantly the continuous compliance costs
which are part of the firm’s operating expenses after the IPO (Phalippou & Gottschalg, 2009).
With regulatory authorities keenly monitoring public companies and controlling different aspects
of their operations, management may come across lots of challenges and short-term pressures,
which may affect the shareholder value (Samila & Sorenson, 2011). Hence it is clear that while
an IPO means accumulation of capital and unlocking of growth prospects, and several other
advantages offered by the processes of going public, going public is not entirely rosy there are
merits and demerits associated with going public that shows that the journey of changing into a
new entity is not a bid bargain.
1.2. Merger and acquisition (M&A) opportunities.
M&A possibilities also provide Venture Capitalists with the exit routes in case of which the
companies may be acquisition or merged with other companies, thus providing the investors with
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a way of getting returns on their investments (Schwienbacher, 2008). Certain key characteristics
of M&As include: In M&A transactions, the venture-backed company is purchased by someone
else, usually a strategic buyer or a PE firm, through the use of cash, stock or both (Sorenson &
Stuart, 2001). M&A deals, unlike IPOs, show higher and more definite valuations for exits of
investors, especially in those industries, which are experiencing consolidation trends more
sharply (Phalippou & Gottschalg, 2009). The outcomes of M&As depend on factors such as the
market forces exerted, competition in the industry and the M&A transaction strategy between the
buyer and the seller (Rajan, 2016). Market conditions that make M&As efficient, reasonable
valuations, and high demand from possible acquirers improve the chances of correcting M&As
(Rajan, 2016). Moreover, the concept of relatedness, which is a central consideration when
selecting acquisition targets, refers to the extent to which the acquiring company and target firm
have complementary strategies, indicating that strategic fit between the two is a determinant of
the attractiveness and value creation potential of such deals (Schwienbacher, 2008). Important to
note is that the primary motivation that leads to M&A transactions is strategic, and the key aims
may include, inter alias, the desire to access new technologies, patents, market share or
complementary competencies (Schwienbacher, 2008). Nonetheless, the acquisition process is
not without risks and complications: integration issues, cultural gap, and legal issues (Sorenson
and Stuart, 2001) As the following analysis of the IBM’s acquisition of PWC will show, post-ac
muscularity can also lead to value decay both at the level of the acquirer and the acquired (Sarno,
2007; Sorenson & Stuart, 2001). Hence, it is imperative that the leaders of the venture-backed
companies and its investors consider M&A as a viable source of liquidity, but the strategic,
financial and operational implication needs to be taken into account in order to harness the value
of the transaction and avoid the risks that may be associated with it.
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1.3. Management buyouts and secondary sales
MBOs and secondary sales are two different forms of restructuring the ownership and bringing
out the sale of holdings through different ways (Raade & Dantas Machado, 2008). In an MBO,
the preexisting management, usually in an association with outsiders such as Private Equity firms
buys out the company from its current owners (Samila & Sorenson, 2011). This transaction
enables the management team to steer the operation and overall trend of the business
organization more often while the current owners get a chance to recover their invested capital.
On the contrary, secondary offerings refer to the direct offering of the shares of the concerned
firm by existing shareholders to other shareholders or any interested party (Schwienbacher,
2008). They are Break-up fevers, provide founders, early investors or employees with an ability
to sell some or all of their shares with possible option to remain invested in the company success
story. Secondary offerings are especially bullish because investors have an opportunity to sell
some of corporate stakes without retreating from the operation altogether. MBOs require
relatively little overt coordination while secondary sales give flexibility in structuring
transactions and many destinations (Sorenson & Stuart, 2001) can be served. For instance,
MBOs provide levels of management with more effective incentives for the accomplishment of
organizational objectives and results in increased awareness and dedication to the company and
its shareholders’ welfare (Samila & Sorenson, 2011). In the same way, MBOs can help in
creating managerial succession as there can be a way which founders or existing owners can pass
on their businesses and have someone new come in to take over. In the same way, the concept of
secondary selling is highly beneficial for existing investors, as they can adjust their equity stakes
depending on their needs or changing circumstances, such as personal or strategic requirements,
or capital demands in their business (Schwienbacher, 2008). There are several advantages that
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secondary sales bring to the overall efficiency of the capital markets by enhancing liquidation
events and assisting in the primary aim of capital to be employed where it will be productive.
While MBOs and secondary sales are the main drivers in restructuring of the corporations and
capital markets, these organizational tools provide possibilities for stakeholders to obtain the
creation of the value, create proper motivation, and achieve strategic goals in the given
conditions of the business environment.
VI. Emerging trends and alternative financing models
1.1. The rise of crowdfunding and online platforms.
Crowdfunding is one of the ways through which the new generation of startups and small
businesses can finance their idea or project with ease through the use of the internet which has
recently emerged as a financing method for any kind of startup (Wright, Gilligan, & Amess,
2009). These platforms make it easier for entrepreneurs to source funding from the general
public in a less traditional and less structured manner than through a similarly risky and
structured banking or venture capital firm (Zider, 1998). Funding platforms also distinguish
several models such as the peer-to-Peer Lending model, equity crowdfunding, and reward-based
models necessary to meet the different funding requirements and investor interest (Sorenson and
Stuart, 2001). Coupled with the potential to generate demand for products and services through
the power of the crowd, crowdfunding has emerged as a definitive source of early-stage seed and
growth funding replacing bank loans and equity funding. The second interesting advantage of
crowdfunding pertains to its ability to decentralise the funding space as this form of funding
opens avenues to various other pools of would-be investors for the entrepreneurs (Sorenson &
Stuart, 2001). These online channels allow business people to create awareness about proposals
and attract investors, supporters, and consumers from various parts of the world, thus enhancing
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the funding process. At the same time, there are certain disadvantages of the mentioned forms of
financing, especially with regard to the violation of legislation and the lack of protection for
investors (Schwienbacher, 2008). Regulatory standards for crowdfunding are still a matter of
debate, which presents certain challenges for both owners of crowdfunding platforms and
investors in some countries. An issue of growth therefore arises from questions raised over
transparency, measures to conduct adequate due diligence and accountability of the platforms
which in turn forced the regulators to put up measures to protect investors and the sanctity of the
market. However, the increase in the use of crowdfunding cannot be overemphasized and is
therefore considered as a viable alternative source of funding for especially new start-up
opportunities and industries that are less favored in gaining access to traditional forms of finance
(Wright et al. , 2009). As new complexities arise within regulatory policies, as well as from
development of new platforms capable of encompassing new problems, crowdfunding is all set
to play an important role in powering the future of new age entrepreneurial financing.
1.2. Impact investing and sustainable venture capital.
This is following the emergence of impact investing which shows that the traditional focus on
the investor’s return on investment is an outdated model (Sorenson & Stuart, 2001).
Consequently, value-creating investments aim at generating both social/institutional returns and
financial returns to address needs and support the resolution of social issues within both
established and emerging organizations (Samila & Sorenson, 2011). Lee et al. state that, while
impact investing is a contingent of the investment industry, it incorporates specific social and
environmental outputs and outcomes in addition to financial returns (2012). Sustainable venture
capital funds, thus, refer to the class of impact investment that targets long-term business funds
with initiatives that offer solutions that can grow exponentially. This money measures
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opportunities in terms of factors like environmental ratings, social impacts, and proper
management of corporate governance (Sahlman, 1990). It brings value for money since it caters
for new and changing demanding consumer preference, contemporary regulation compliance and
ever advancing corporate social responsibility agenda (Samila & Sorenson, 2011). As concerns
about environmental pollution, treatment of minorities and animals, and issues of business ethics
becomes a severe draining, investors are looking forward to how they can invest their surplus
wealth profitably in ways that promotes value addition to the society as well as make reasonable
returns on investment as suggested by Sorenson and Stuart (2001). In addition, impact investing
has also contributed to new ideas and solutions that created worth in other nascent or emerging
industries by motivating start-ups to come up with solutions that meet social or environmental
needs (Wright, Gilligan, & Amess, 2009). In contemporary society, when investing money, they
help professionals to support and create successful business focused on such spheres as
developing renewable energy sources, progressive farming, health technologies, and social
business. With impact investment now on its growing stage, one realizes that the world of
investments and the financial markets as a whole are inextricably linked with societal
advancement and environmental agenda. As this part suggests, it is possible for an investor to
make a direct positive change in world while earning a good return on investment.
1.3. Regulatory developments and investor protection measures.
Some of the challenges of venture capital and private equity include venture capital and private
equity and private equity; the emergence of crowdfunding; impact investing; and other related
developments that require adequate regulatory frameworks in order to prevent the dilution of
financial markets and the exploitation of unsuspecting investors (Zider, 1998). This involves
disclosure obligations, investor categorisation criteria, fund-raising caps, and platform operating
22 | P a g e
licenses that apply to these frameworks (Schwienbacher, 2008). Information asymmetry,
illiquidity and portfolio concentration are two major sources of risk that early-stage investing
involves, and that is why regulatory oversight seeks to address (Sorenson & Stuart, 2001). These
assertions are evident in the goal of the regulators to regulate the markets with the view to
ensuring that various parties are treated fairly in the event that they are investing and that there
are no corrupt practices (Samila & Sorenson, 2011). In addition, boards of directors should
consider the relevant regulation in order to have the confidence of the investors (Wright, Gilligan
& Amess, 2009). Setting high standards of transparency and accountability means that
regulations contribute positively to the market integrity and encourage more investors to engage
in trading activities in the specific subjects of interest, such as AIM. Nevertheless, there are
certain challenges, which should be considered in the context of the regulatory frameworks, as
they need to protect investors effectively yet encourage entrepreneurial activity,. While certain
regulatory measures may hinder innovation and undertook capital availability for startup and
small businesses, excessive amount of restraint may prove risky for investors. It is an aspect that
creates a tough task for policymakers to find ways to satisfy the demands of investors and at the
same time, not overly restrain the market and its entrepreneurship factors. Over time, the area of
non-mainstream financial products and services is going to demonstrate significant changes;
therefore, the rules for identifying non-standard financial intermediaries, operating models, and
technologies will require updates in response to emerging market conditions. The purpose of this
paper is to discuss the impact of regulation on venture capital, crowdfunding and impact
investing and show that all key policy players should engage in continuous dialogue as to the
effectiveness, relevance, and appropriateness of regulation.
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