Venture capital is a form of investment in new small risky enterprises required to get them started specialists called venture capitalists. Venture capitalists are therefore investment specialists who raise pools of capital to fund new ventures which are likely to become public corporations in return for an ownership interest. They buy part of the stock of the company at a low price in anticipation that when the company goes public, they would sell the shares at a higher price and therefore make a considerably high profit.
Venture capitalists also provide managerial skills to the firm. Examples of venture capitalists are pension funds, wealthy individuals, insurance companies etc.
Since the goal of venture capitalists is to make quick profits, they will invest only in firms with a potential for rapid growth.
Venture capitalists, will only invest in a company if there is a reasonable chance that the company will be successful.
Reasons why Venture Capital markets are not well developed in Kenya
- Lack of rich investors in Kenya, hence inadequate equity capital.
- Inefficiencies of the securities market – NSE is inefficient and investors cannot sell the shares in future. Prices do not reflect all the available information in the market.
- Infrastructural problems – this limits the growth rate of small firms which need raw materials and unlimited access to the market factors of production.
- Lack of managerial skills on part of venture capitalists and owners of the firm.
- Lack of support from the government.
Disadvantages of Venture Capital
- Dilute ownership position of a firm
- Dilute control of a firm and interference with the firms operations.
- Venture capitalists may take over the business in the long run from the poor entrepreneurs.
- Venture capitalists take advantage of their financial power to acquire ownership in high growth potential businesses.
- Venture capitalists are selective since they only finance small businesses with high potential of growth.