What is venture capital?

Definition

Venture capital is a financial instrument which principally consists of a venture capital group’s short-term and minority participation in a company’s capital, i.e. the group makes economic resources available to the business project, becoming a partner-shareholder in the subject company and, as a result, takes part directly in the risks and results of the business venture.

Venture capital should not be confused with traditional banking debt. In a loan, the financial entity has the right to a fixed rate of interest and to repayment of the money loaned regardless of the company’s development, normally guaranteeing repayment in the case of business failure.

However, with venture capital there is an input of money as a balancing item to the acquisition of minority interests in the company’s capital, with the result that the profitability and the repayment of the resources contributed by the investing organisation depend directly on the profitability and business success of the project.

Venture capital actors

Venture Capital Groups (SCR) sare public limited companies whose main corporate objective is the acquisition of temporary interests in the capital of non-financial businesses whose shares are not listed on the Stock Exchange.

To develop their main corporate objective, Venture Capital Groups can provide participation loans as well as other forms of financing, in the latter case only for participating companies. They can also act as consultants

Venture Capital Funds (FCR) are equities administered by a managing company, which have the same main purpose as that outlined in the previous point, with the managing company responsible for carrying out the consultation outlined therein.

The managing companies of Venture Capital Groups (SGECR) are public limited companies whose prime corporate objective is to administer and manage Venture Capital Funds and the assets of Venture Capital Groups. To complement this, the SGECR can also perform consultancy tasks for the companies they are linked to as a consequence of their performing their main activity.

They can also run Venture Capital Funds and manage the assets of the Venture Capital group, the management companies of Collective Investment Institutions regulated in Law 46/1984, of the 26th of December, which regulates Collective Investment Institutions.

Business Angels: These are private investors who invest capital in small and medium-sized businesses in the region where they live. These investors represent what is known as Informal Venture Capital.