Venture capital and its role in modern economy

The Constitution will include the rights attached to the various share classes, the procedures for issuance, transfer rights of shareholders and board meeting procedures. Once agreed upon by all parties, lawyers use the Term Sheet as a basis for drafting the investment documents. The more detailed the Term Sheet, the fewer the commercial issues that will need to be agreed upon during the drafting process.
Once the provisions of the Term Sheet have been negotiated and agreed upon, a Subscription and Shareholder’s Agreement is drafted that outlines the provisions in a legally-binding document.
CHAPTER 3 IMPACT AND ROLE IN THE WORLD ECONOMY
Venture capital markets have evolved around the world since the mid-1980s, with a particularly rapid expansion phase being seen in the late 1990s. This development has been fuelled both by public and private efforts, with the latter gradually becoming dominant in terms of investment value. Starting with the sharp contraction in 2001, however, a heavy consolidation of funds took place in most industries, and especially in high-tech. Having obtained heavy funding, many dotcoms subsequently faltered. Some went bankrupt, whereas others were appropriated by larger ones at a fraction of their previous valuations.
The various aspects of the impact of venture capital on the economy that were studied are:
the venture capital industry in the economy: role of catalyst responsible for economic growth, contribution to job creation, etc.;
regulatory and governmental aspects: support that the government should provide in the venture capital industry, etc.;
the role of VC in innovation: involvement of VC beyond financing and in different phases of innovation projects, access to the stock market for innovative businesses, etc.
In summary, the role of VC in economic development and job creation is significant and seems corroborated in several countries in which the industry is relatively mature. VC also has a significant effect on the rate of innovation of businesses (measured in various ways) and even on the development of innovations that come out of university research centres. The role of VC is felt as much on access to the stock market for major funding as on the marketing of inventions.
An aspect that seems to have been studied less involves the stages of development of innovation and the role of VCC. Does the latter change according to the degree of maturity of the innovation? According to whether the innovation is radical or incremental? What about financing problems in the first phases of development? Several studies show that VC has an influence on job creation and favours business start-ups. But we know less about the start of innovative businesses and even less when a project comes out of a university or government laboratory.
We know that VC plays a major role in the financing of innovative projects but for what proportion of the projects? What is the rate of refusal of requests for financing for innovative projects and is this different from the rate of refusal for traditional projects? Is the role of VC complementary to that of the other players in the capital market or is it a substitute? How could governments play a greater role in the demand for financing and try to make VC more accessible and acceptable to entrepreneurs?
Few authors have dealt with the risk of innovation projects and the excessive consequences that they can have on innovative businesses. How are innovation projects evaluated and what financing conditions are offered to the businesses that are financed? Can financing by VC in these sectors reduce entrepreneurship on account of the replacement of executives of creative and innovative businesses? What are the consequences for innovation in a longitudinal perspective?
Finally, innovative businesses present challenges that are different from those of traditional businesses, and the evaluation of non-material assets poses research problems that need to be analysed. There is a link to be made here with the approaches to evaluation, a research field that is fairly well developed but exploited little within the context of VC, which poses different challenges.
Turning new knowledge into commercial achievements represents a major challenge for most entrepreneurs and enterprises. Pooling different kinds or expertise, managing risk and planning for future competition all require attention. There is no single form of funding that holds the key to success. Nevertheless, the availability of venture capital stands out as a factor capable of playing an imperative, supportive role in all these respects. Venture capital is vital in fortifyin innovative activity and entrepreneurial talent and serves as an important tool for overcoming some of the inherent barriers to growth caused by prevailing industrial and institutional structures.
Figure 1: Venture Capital Funds under Management and GDP
Sources: EVCA, Asian Venture Capital Journal, NVCA
As shown in Figure 4, countries such as the US, UK and Finland, which have high levels of funds under management, tend also to have comparably higher levels of GDP per capita. This might indicate that concentrated venture capital helps to spur macroeconomic growth.
Venture financing has been accredited with remarkable growth and turnover at the microeconomic level too. For instance, venture-backed companies in the US employed 10.1 million people, generated US$1.8 trillion in sales and accounted for 9.4 per cent of the nation’s jobs. In addition, venture-financed companies had approximately twice the sales compared to non venture-backed companies (NVCA). Moreover, the difference between venture-backed and non-venture-backed companies is particularly marked among young, technology-based enterprises, where annual growth rates amount to 70 per cent on average for venture-backed companies compared to 10 per cent for a comparable sample of companies financed by non-venture investors (Kjærgaard and Borup, 2004). One conclusion is that venture capitalists manage to combine the unique ability to pick the winners with the ability to make the winners grow. Consequently, both the quality and quantity of venture capital markets greatly influence the extent to which a society is capable of capitalizing on its strengths in areas such as ICT, R&D and human capital, and has great impact on economic growth throughout the world.
Countries with market-based systems have higher levels of venture capital activity. It should be noted, however, that any comparison of venture capital activity internationally is bound to run into problems, since definitions and demarcation lines vary. In the US, venture capital is defined as capital provided by professionals who invest alongside management in young rapidly growing companies. It is considered an important source for startup companies in particular. The European Venture Capital Association (EVCA) accords a somewhat broader definition to venture capital. Here, venture capital is viewed as a subset of private equity and refers to equity investments made for the launch, early development or expansion of a business.















Conclusion
The experience of venture capital in most of the developing countries is a new one and its recent results are very limited. Its contribution proportion to the financing of projects does not exceed 10%. It is specialized in financing some certain sectors and not others. Those are less - risk sectors. This is attributed to the weakness of professional competence, lack of effective techniques to control the high - risk, the growing forms of corruption, lack of confidence, as well as the lack of transparency and credibility in the information provided on the financial conditions of companies, and the weakness of financial markets, political and economic instability, absence of democracy, and non - observance of human rights in most of these countries. The venture capital institutions are keen on selecting the projects to support and finance and remain as an active positive partner till they realize their determined goals of development and growth. More than 80% of the small and medium projects, in the experiences of some investigated countries, cannot emerge or witness such quick development without the venture capital. The results indicate that the venture capital financed projects outperformed those self - financed projects. This emphasizes one again the importance and effectiveness of funding through the venture capital.



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THE ROLE OF VENTURE CAPITAL,GLOBAL TRENDS AND ISSUES
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