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Venture capital on a wide scale is unknown in Argentina . Banks
and private financial institution loans are non-existent for entrepreneurs
in Argentina . Many entrepreneurs do not understand the process.
We would like to explain how the process works below.
The classic
approach is for a venture capital firm to open a fund .
A fund is a pool of money that the firm will invest. The firm gathers
this money from individuals and from companies that have money
they wish to invest. The fund will raise a fixed amount of money
in the fund - for example $10 million.
The venture capital firm will then invest the $10 million fund in
a number of different companies. For example 10 to 20 different companies.
Each fund has an investment profile. For example, a fund might invest
in real estate. Or the fund might invest in high-tech companies seeking
their second round of financing. Or the fund might try a mix of companies.
The profile that the fund chooses has certain risks and rewards that
the investors know about when they invest the money.
Typically the Venture Capital firm will invest the entire fund and
then anticipate that all of the investments it made will liquidate
in 3 to 7 years. That is, the VC firm expects each of the companies
it invested in to either "go public" (meaning that the
company sells shares on a stock exchange) or to be bought by another
company. In either case, the cash that flows in from the sale of
stock to the public or to an acquirer lets the VC firm cash out and
place the proceeds back into the fund. When the whole process is
done, the goal is to have made more money than the $10 million originally
invested. The fund is then distributed back to the investors based
on the amount each one originally contributed.
Let's assume that Koh Inversiones invests $10 million in 10 companies
($1 million each). Some of those companies will fail. Some will not
really go anywhere. But some will actually go public. When a company
goes public, it is often worth hundreds of millions of dollars. So
the VC fund makes a very good return. For one $1 million investment,
the fund might receive back $5 million over a 5 year period. So the
VC fund is playing the law of averages, hoping that the big wins
overshadow the failures and provide a great return on the $10 million
originally collected by the fund. The skill of the firm in picking
its investments and timing those investments is a big factor in the
fund's return. Investors are typically looking for 15% to 30+% per
year return on investment for the fund.
From an entrepreneur's standpoint, here is how the whole transaction
looks. The entrepreneur starts up and needs money to grow his/her
company. The company seeks venture capital firms to invest in the
company. The founders of the company create a business plan that
shows what they plan to do and what they think will happen to the
company over time (how fast it will grow, how much money it will
make, etc.). Koh Inversiones looks at the plan, and if we like what
we see then we invest money in your company. The first round of money
is called a seed round . Over time a company will
typically receive 3 or 4 rounds of funding before going public or
getting acquired.
In return for the money it receives, the company gives the VC firm
stock in the company as well as some control over the
decisions the company makes. The company, for example, might give
the VC firm a seat on its board of directors. The company might agree
not to spend more than $X without the VC's approval. The VCs might
also need to approve certain people who are hired, loans, and any
important decisions that could have a financial impact on the company.
In many cases, a VC firm offers more than just money. For example,
it often times has excellent contacts in the industry, connections
to governmental agencies, or good legal and financial contacts or
it simply might have a lot of experience it can provide to the company.
One big negotiating point that is discussed when a VC invests money
in a company is, "How much stock should the VC firm get in return
for the money it invests?" This question is answered by choosing
a valuation for the company. The VC firm and the people in the company
have to agree how much the company is worth. This is the pre-money
valuation of the company. Then the VC firm invests the
money and this creates a post-money valuation .
The percentage increase in the value determines how much stock the
VC firm receives. A VC firm might typically receive anywhere from
30% to 60% of the company in return for its investment. More or less
is possible, but that's a typical range. The original shareholders
are diluted in the process. The shareholders own 100% of the company
prior to the VC's investment. If the VC firm gets 50% of the company,
then the original shareholders own the remaining 50%.
Entrepreneurs in Argentina desperately need venture capital firms
to start up because they need money for advertising, equipment, rent,
and employees. They need to advertise in order to attract visitors,
and they need equipment and employees to create the site. With no
other lending options available in Argentina , a great idea is meaningless
without the funds to move forward with that idea and vision. We help
entrepreneurs fulfill their dreams.
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