Venture Capital Firms as Financial Intermediaries

Financial Intermediary• financial institution (such as a bank, credit union,

finance company, insurance company) which acts as ‘middleman’ between those who want to borrow. (Business Dictionary)

• an organization which facilitates the flow of funds from individuals, and from entities with a surplus of money, to those who are in need of funds. The classic example of a financial intermediary is a bank. (www.ask.com)

Venture Capital Firm

• any investment company that its shareholder’s money in startups and other risky but potentially very profitable ventures. (Investor Words)

• any government or private firms that provides start up or growth equity capital and/or loan capital to promising ventures for returns that are higher than market interest rates. (Business Dictionary)

VCFs as Financial Intermediaries

• Both (FI & VCF) are similar , because bank takes money from depositors and then loans it to businesses and individuals.VCF takes money from its investors and makes equity investments in portfolio companies.

• a VCF is a financial intermediary, meaning that they take the investors’ capital and invest it directly in company’s portfolio.

• Most commonly VCs are private independent firms. However, sometimes a VC firm is a:» Subsidiary of a commercial bank holding company

(BHC). This allows the BHC to provide (high-risk) equity financing that could not be made by BHC’s commercial bank subsidiary.

» Subsidiary of an investment bank. Investment banks see VC investing as a way to groom companies for an IPO.

» Subsidiary of a non-financial corporation (a.k.a. direct investing). The parent company’s capital is used to invest in young companies that may produce synergies or cost savings for the parent.

References:

www.rpi.edu/~tealj2/Entre05.pdf

http://business.illinois.edu/gpennacc/f461n04.ppt

www.inkling.com/read/venture-capital-andrew-metrick-2nd/chapter-1/1-1-what-is-venture-capital