Today we are going to talk about risk capital and its definition. The classical definition of risk capital describes it as the activity consisting of the realization of a financial investment in companies that do not quote in capital markets through instruments of different nature, generally in the form of capital and sometimes in the form of debt or hybrid between them.
On the other hand, we can classify investments based on the needs of the receiving company. Based on these needs we find two figures of common appearance:
seed capital: This type of capital is used for the early stages of the creation of the company, mostly in the business idea phase. The level of project risk is quite high and therefore the probability of success is low. The most common investors in these phases are usually family and friends (although the Anglo -Saxon also extend it to the crazy ones: “Family, Friends and Fools”)
Business Angels: These in addition to financing the idea offer your Know How and your contact network to make the business idea more viable. Finally in this stadium we find crowdfunding or collective financing, born of the development of the Internet.
Break-Even Point ) in terms of results. In this phase the figure of the Venture Capital , pioneer societies in the development of risk capital activities.
And, finally, we would find the expansion capital This expansion can come from internationalization, development of new products/services, etc. This type of investment is also associated with venture capital companies mentioned.
On the other hand, we can also find the venture capital in acquisition with financial leverage : These purchase operations occur when the company is in the maturity phase, generating a level of attractive benefits and recurring. This implies that the company a relatively low level of risk, which causes the investment in it to be financed in relatively relevant with other resources outside its own capitals (for example with bank debt). Successive operations that may occur after the first purchase are called Secondary Buy-Out , Tertiary Buy-Out , etc.
On many occasions it is common for the management team to participate in the participation of the company giving rise to operations of:
1. “Management Buy-Out” (MBO): When the acquirers already belong to the acquired company.
2. “Management Buy-In” (MBI): When acquirers do not belong to the acquired company.
3. “Buy-in Management Buy-Out” (Bimbo): When part of the acquirers belongs to the acquired company while the other party does not belong to it.
Finally, it should be noted that there are also specialized risk capital companies in investing in companies that are in particularly complex situations in which their financial viability is seriously in question.
These are high -risk investments and therefore, in case of success, they should submit a fairly high return level. And, in any case, we must not forget that risk capital should be noted that it is intended to obtain a benefit, whether economic or social type. Therefore, if we seek to accommodate a venture capital in our business we must technically demonstrate that we are able to generate the expected benefit and flow and, for this, the elaboration of a correct business plan is fundamental. >
In Verum Management we are specialists in risk capital processes. If your company is weighing a risk capital operation, you can contact us by clicking