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Question
The role of a venture capitalist in an organization is dependent on the stage at which an organization is being funded by the venture capitalist. Evaluate.
Solution
- Seed capital finance: It refers to the capital required by an entrepreneur for conducting research at the pre-commercialization stage. During this stage, the entrepreneur has to convince the investor (VC) why his idea/product is worthwhile. The investor will investigate the technical and economic feasibility of the idea. In some cases, some prototype of the idea/product is not fully developed or tested. As the risk element at this stage is very high, the investor (VC) may deny assisting if he sees no potential in the idea.
- Start-up finance: If the idea/product/process is qualified for further investigation and investment, the process will go to the start-up stage. The entrepreneur presents a business plan to the VC firm. A management team is being formed to run the venture. If the company has a board of directors, a person from the VC firms will take seats on the board of directors.
- Second-round financing: At this stage, we presume that the idea has been transformed into a product and is being produced and sold. At this stage, the entrepreneur needs assistance from the Venture Capitalist for expansion, modernization, and diversification so that economies of scale and stability can be attained. At this time, larger funds than the other early stage financing are required, entrepreneur should be extra careful because only if they and their management team can prove their capability of standing against the competition, only then is the VC firm interested in financing.
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