Venture Capital: What it is and how it works
Venture Capital (VC) is a form of financing that involves investing in small or medium-sized companies, especially startups, with significant growth and expansion potential. This type of financing is characterized as high risk since companies in the early stages of development do not have an established history and therefore cannot obtain financing through public equity markets or banks.
How Venture Capital works
The management process of a VC fund is structured differently stages:
Fundraising: The venture capital firm seeks financing and funds from different investors.
Investment search: Once investors are found, investment opportunities are identified.
Investment commitment: It is decided where and how much will be spent on each investment.
Investment management: Once all of the funds assigned for this purpose have been invested, the venture capital entity begins to manage the companies that will invest in them.
Fund liquidation: The fund is closed and the proceeds are distributed to the investors and the private equity firm.
Impact of Venture Capital
Contribution to Economic Growth and Employment:
According to the data presented, venture capital has had a significant impact on the creation of quality and innovative jobs:
In 2021, venture capital-invested companies increased their headcount by 50%, representing an increase of 26,658 jobs. This demonstrates the great potential of venture capital to generate jobs. Venture capital-funded startups tend to be in innovative and high-tech sectors.
Venture capital funds not only provide capital but also experience, knowledge, and strategic, advice to help growing companies grow. This helps generate high-skilled jobs in dynamic environments with innovation potential.
The technology and energy/environmental sectors are two of the main sectors that were boosted by the contributions of high-risk funds. These areas have experienced significant growth due to the growing demand for innovative technological solutions and the need of growing companies in this sector for financing to develop their products and services.
Case of study
Venture Capital has been key to the growth of several successful companies. The following are some examples:
The Brazilian fintech offering international payment solutions became a unicorn in 2021 after receiving a venture capital investment. This demonstrates the impact of venture capital on the growth of innovative companies.
This Chilean e-commerce company was funded by venture capital and has managed to expand to several countries in the region. The support of venture capital investors has been fundamental to its development.
The Chilean startup broke records by receiving the largest Series B funding round for a Spanish-speaking startup in Latam, with US$111 million. This has allowed it to accelerate its growth and consolidate its position in the market.
The Argentine payments fintech’s solutions received a venture capital investment that allowed it to expand its infrastructure throughout Latin America and invest further in R&D. Venture capital has been a key driver of its growth.
Venture Capital: Future Trends and Perspectives
Current Trends
Social Impact: Venture capital firms are focused on incorporating positive social impact into their investment thesis, encompassing sustainability, clean technology, and diversity.
Corporate Venture Capital: Corporate venture capital (CVC) has gained ground in the market, allowing corporations to invest in startups and technology ventures, which boosts the innovation ecosystem and makes companies more competitive.
Leading sector: The fintech sector has been the leader in venture capital investment in Latin America, with startups such as Nubank and Clip achieving great success.
Future Perspectives
Restructuring and Evaluation: International funds are restructuring and evaluating projects and markets in which they will invest in 2023, which may lead to further specialization in specific sectors such as fintech, healthcare, and education.
Industry Growth: Although venture capital investment in Latin America has experienced a decline in 2023, the industry continues to grow and is critical to the economic and social development of the region.
Strengthening the Ecosystem: The need for a greater number of venture capital funds and a more robust support ecosystem for entrepreneurs is evident. The disparity between Latin America and the United States is notable, and it is essential to encourage an entrepreneurial spirit that drives innovative and scalable solutions.
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