By Gbenga Agbana, Punch on the Web –

With the ongoing reforms in the banking industry, getting loans from banks to finance small and medium scale companies is becoming more difficult.

Not only that banks are not willing to lend, because most of them burnt their fingers in the recent past, the process of getting the loans or funds for expansion for small businesses is now very cumbersome.

Though the Federal Government mandated banks to set aside a certain percentage of their income to finance SMEs, what happened in the industry recently, is making banks skeptical to lend to small companies and even big ones.

However, funding for SMEs can come in any form, including venture capital.

Venture capital, also known as Venture, according to Wikipedia, the free Encyclopedia, is provided as seed funding to early-stage, high-potential, companies in the interest of generating a return through an eventual realisation event such as an Initial public Offering or trade sale of the company.

Venture capital investments are generally made in cash in exchange for shares in the invested company. It is typical for venture capital investors to identify and back companies in high technology industries such as biotechnology and information technology.

Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms.

Venture capital firms typically comprise small teams with technology backgrounds, or those with business training or deep industry experience.

A core skill within venture capital is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. By definition, venture capitals also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital, thereby differentiating venture capitals from buy out private equity which typically invest in companies with proven revenue, and thereby potentially realizing much higher rates of returns. Inherent in realising abnormally high rates of returns is the risk of losing all of one‘s investment in a given startup company. As a consequence, most venture capital investments are done in a pool format where several investors combine their investments into one large fund that invests in many different startup companies. By investing in the pool format the investors are spreading out their risk to many different investments versus taking the chance of putting all of their money in one start up firm.

A venture capitalist is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments.

A venture capital fund refers to a pooled investment vehicle that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans.

Venture capital is also associated with job creation, the knowledge economy and used as a proxy measure of innovation within an economic sector or geography.

In addition to angel investing and other seed funding options, Venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company‘s ownership value.

Young companies wishing to raise venture capital require a combination of extremely rare yet sought after qualities, such as innovative technology, potential for rapid growth, a well-developed business model, and an impressive management team.

The Managing Director of Partnership Investments Limited, Mr. Victor Ogiemwonyi, said small companies , especially those in the real sector would gain a lot from venture capital.

He said, ”Venture Capital companies are early stage investors in an enterprise, when they think a venture has prospects, they invest in it and hope to cash out when growth is realised. SMEs that want equity or sometimes a combination of Equity/debt will have to approach a venture capital company and demonstrate the prospects they think they have, for them to be able to benefit.

”The kind of SMEs likely to benefit will be companies in the real sector with an innovative idea that has a market, but lack capital and some times may also need management support. Entrepreneurs who run SMEs who are not prepared to share ownership and management control cannot get venture capital support.”

Another stockbroker who is also the Managing Director of GTI Capital Limited, Mr. Abubakar Lawal, agrees that there are some benefits for small scale businesses in venture capital.

He said, ”The benefits are in the synergy that cuts across financial, management, technical and sometimes ownership.”

However, the Managing Director of Goldbanc Management Associates Limited, Mr. Olu Abayomi Sanya stressed the need for the government to provide the incentive, through the Securities and Exchange Commission, for some market operators to create venture capital funds, for people to put money in them, for the benefit of the small-scale businesses.

He said, ”Venture capital is a venture that you don‘t know whether it will thrive or not. The government should give incentives through the SEC for operators to create a venture capital fund for the people to put money in it.

”The government was doing it through SME‘s funding by banks, but they did not allow professional fund managers to manage it. There should be a model that would create all other policies towards the same goal. The United States developed angel investing to venture capital and then a public liability company.

”The benefits to SMEs and small investors are enormous, as it enables them to have access to funds for their operations, develop their ideas, grow cottage industries and establish new ones. It will give them the wherewithal to employ more people and feed more families.

”It will have a multiplier effect on the economy. All the microfinance banks also invest in venture capital funds certified by the SEC and that will help the economy.”