Venture capital is equity or subordinated debt capital for newly founded companies that is provided by risk-ready investors with know-how and by financing companies in the early stages of development. The capital is not securitized and is not traded on public markets, it is Private equity or private debt.
Investments in companies or projects in these phases are characterized by special risks: The financial returns of the investment projects show a low level of stability, the risk of failure is relatively high, the sale of a participation is increased
Difficulties associated, asymmetrical information between insiders and financiers is pronounced.
As for the risks, there are considerable behavioral risks. The company founders could lose sight of the economic goal, prove to be weak managers, or even quarrel among themselves. That is why donors regularly want extensive information rights, perhaps decision-making rights or even a majority. In many cases they also offer know-how in the technical field or in marketing. Overall, they not only give money but also money plus advice, so-called smart money.
As a protection against the lack of liquidity of the financial contracts, they want explicitly agreed rules for the exit (exit rules).
Newly founded companies go through phases.
1. Seed phase. Here the founders are enthusiastic about their invention. They team up to start the business together. The partnership is equal, even if the founders are extremely unequal. One finds oneself. Everyone shows generosity towards the other. The founders now have to formulate a business idea. Occasionally there is an external sponsor who financially supports the "tinkering in the garage".
2. Startup phase. There is already a legal form, a company. Now the "handicrafts" have to be turned into real products that could be marketed. The first interested parties appear: The young company is trying out which direction it could go. It tries, it is experimented, which employees are suitable for which services. It is important to search in all directions because there is not yet complete clarity.
But it is also expensive to go in many directions at the same time. A young company can only do this if the financial risks are borne. Suddenly different perspectives become clear. One person wants more controlling, the other leaves behind it with quick decisions.
Differences of interest are naturally associated with this phase (startup); they have nothing to do with the specific person. Perhaps it will succeed in meeting each other with respect and knowing that this phase (startup) is one of searching in many directions and that there will be discussions. It's a shame when things get emotional and the original commonality of the seed phase is forgotten.
3. Innovation or expansion. Innovation does not mean the "invention", but the growth of the company and the development of the market. At this stage the company has to make an important change. By searching in many directions, it has to make a decision.
The determination to be made in the innovation phase is: In which of the attempted services and directions do we have a “dominant design” with which we will really have market success and generate sustainable growth?
If there is clarity about this, one can concentrate and grow. The implementation requires strength and distance: The baby fat accumulated while searching (startup) disturbs the concentration on one direction. In addition, the market must be opened up in the direction of the dominant design. In addition, resources, including financial resources, must be systematically planned for growth. “Strong management” is important.
The old people may now be a hindrance. One of them was too concerned with him in the search phase business arrested so that he could now manage to focus and shed the baby fat with independence.
The other one was good for the seed phase, image building and the startup, has external impact, but is not a professional manager who could set up a budget. We keep hearing from private equity firms that founders fail in this third phase of innovation. Occasionally it would be better if the founders withdraw.
All of this is easier to accomplish when you bring in a professional manager who is neutral and entrepreneurial. Clearer responsibilities are conducive to this phase. If professional management is important in this phase, then it is also the clear separation of powers, planning and controlling.