An entrepreneur/business owner at any point of the business requires capital/cash; many ventures without cash are unable to grow the business while carrying out operations, or for expanding (scaling up the business), increased production etc, a few reasons being
• Locked up capital
• Limited sources of capital
• No or minimal collateral for loans.
Problems arising out of these are:
• Inability to hire professional people
• Slow growth rate
• Lack of liquidity
• Time consuming expansion plans
Most entrepreneurs who are young will not be willing to risk it all and would prefer a time tested approach to mitigate risk.
A Private Equity/ Venture Capital firm will provide
• Cash / Capital
• Hire well qualified people.
• Its support (helps gain trust among suppliers, customers, others etc)
• Help ramp up the business
So what does a PE/VC gets out of aiding entrepreneurs? (apart from appreciation of capital provided by the PE/VC.) The firm gains:
• A stake in the business
• Share in profits
When the business assumes a hyper growth trajectory, the PE/VC firm may sell its stake at a profit to others including the founders themselves.
If the company goes under or wind up ,the PE/VC firm writes off the loss.
This is a simple view of how the PE/VC firms function.
