Venture Capital Investment: Worth the Risk? Long Term Benefits Can Tip the Scales in Favor of This Type of Financing

By Hofman, Clement L. | American Banker, July 31, 1984 | Go to article overview

Venture Capital Investment: Worth the Risk? Long Term Benefits Can Tip the Scales in Favor of This Type of Financing


Hofman, Clement L., American Banker


Venture capital investments represent the financial grist for the development of new technologies in American industries. Through venture capital subsidiaries, banking organizations are capable of providing the financial catalyst for those fast-growing "new generation" companies.

Venture capital activity can achieve two significant objectives that are critical to preparing banking organizations for operating in a deregulated environment.

A venture capital subsidiary can be a substantial source of other operating income for its banking parent, alleviating some of the impact deregulation of interest rates has had on a bank's net interest income. Income from the sale of securities resulting from venture capital investments is typically taxed at the long-term capital gains rate.

A venture capital arm also can serve as a marketing tool for growing banks. As such, it is capable of projecting a progressive image for a bank holding company to small- and medium-sized companies that are experiencing an expansion or high-growth phase. Venture capitalists traditionally take a position on the ground floor of new companies, and as those firms mature, venture capital investors may refer the firm to a bank for traditional financing.

Venture capital is one of the fastest growing sources for investment funds in the nation. In 1976, an estimated $65 million of new capital was invested in venture capital funds. By the end of 1983, that amount had increased to over $3 billion. Once an elite and little-known group of investment funds managers, venture capitalists today are competing for opportunities to provide ground-floor equity financing for small businesses that plan to become substantial concerns in a relatively short period of time. Bridging the Gap

But banking organizations considering plunging into the venture capital field should not treat this relatively new business activity lightly. Venture capital is a risk-taking business and runs contrary to the traditional role of banking organizations, which are credit-oriented. Therefore, a successful venture capital subsidiary must be able to bridge the historical gap between credit and equity investment philosophies. The bank that decides that it will become a player in the venture capital industry must find a fund manager who has experience and an orientation toward equity investments.

While venture capital generally involves a higher degree of risk than the credit buinsess, that risk can be offset by the opportunity to provide business assistance to the companies that are recipients of venture capital funds. In many respects, the managers of a venture capital fund serve as management consultants who have a vested interest in a company's health and its prognosis for growth.

Venture capital investments are equity investments, and in some respects criteria for investment may be compared to stock market investments in mature, publicly traded firms. The most important component when considering a venture capital investment is the quality and depth of the management of a company. In many cases, there are seemingly, contradictory qualities which, ideally, should exist.

On one hand, the chief executive officer, if not the entire management team of a firm being considered for investment, should have total confidence that the company's products will succeed. That confidence should almost border on being an ego problem. On the other hand, management should have an analytical, non-emotional approach toward problem-solving. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Venture Capital Investment: Worth the Risk? Long Term Benefits Can Tip the Scales in Favor of This Type of Financing
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.