Why do venture capital companies prefer to advance money in stages?
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A. Why do venture capital companies prefer to advance money in stages? If you were the management of Company Y, would you have been happy with such an arrangement? With the benefit of hindsight would Company X benefit or lose by advancing money in stages.
b. If the price at which a company X would invest more money into Company Y was not fixed in advance. But Company Y could have given an option to buy more shares at a preset price. Would this have been better?
c. At the second stage Company Y could have tried to raise more money from another venture capital company in preference to Company X. To protect themselves against this, venture capital firms sometimes demand first refusal on new capital issues. Would you recommend this arrangement?
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Venture Capital Funds
Some financial institutions such as insurance companies and pension funds, and wealthy individuals, often locate a certain portion of their capital to high-risk investments. Much of this risk capital is placed into venture capital funds managed by experienced professionals called "venture capitalists." Venture capital fund managers generally purchase either the common stock or convertible debentures of new businesses with the potential for rapid growth. Because of the very high risk associated with such investments, venture capitalists require a high expected rate of return, typically in the 20-40 percent range. Venture capital is a term to describe the financing of startup and early stage businesses as well as businesses in "turn around" situations. Venture capital investments generally are higher risk investments but offer the potential for above average returns. A venture capitalist (VC) is a person who makes such investments.
Venture capitalists ...
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