It is important to look at the problems that venture capital and private equity firms face. Many firms have had numerous problems in conducting their business. Pinnacle ventures came into existence in 2002 with its headquarters in Palo Alto, California. It mostly aimed to specialize in the unusual hybrid of equity and debt financing for most companies that were in their early stages.
In doing these the company evaluated deals and funded these startups consequently. More emphasis was laid on lending money to these startups while charging them interest. To safeguard the investments from any unexpected eventualities the company received warrants that could be easily converted into stocks.
Investments were only undertaken after looking at the companies’ first round of venture capital equity financing. This was all done with the hope of following on debt and equity financing. As of 2005 the company had invested in 50 technology and healthcare firms. An example of these companies is Windvane technologies that had no products, revenue, or cash flow but were seeking a $5 million growth loan capital.
Initially, there was venture leasing where lenders made the provisions for companies to fund the purchase of specific equipment and assets (physical). These were ultimately secured by the assets themselves (of the new startups). Whenever the lease period was over the company had an option of purchasing it.
Later on, these have evolved significantly and given rise to venture debts. Though wholesome, it refers to various products inclusive of equipment loans and growth capital. It can be consequently said that venture debt on many occasions’ complements equity financing and venture debt transactions.
Venture debt providers have in the process earned interest and received warrants that have the ease of being converted into equity in exchange for the loans. The venture market was initially dominated by financial services companies and banks but this has changed as specialized venture debt funds have become common.
On the other hand, this has seen most financial service providers close shop and leave the market. This is because the venture funds seemed to be more flexible as they offer loans without restrictive covenants and collaterals. These funds that are loaned outcome from limited partners, which are later on invested to earn returns.
The majority of these loans had 36 months duration with both the desirable interest and warrant components. In addition, some of the loans only guaranteed a first six months period interest. The company’s assets were enough to secure a growth capital loan while equipment could be used to secure equipment loans. This turned out to be very attractive to many companies because they could get enough time to rebuild their businesses. It could be easily done without securing a follow-on round of venture capital.
In doing all these companies could exceed financial projections and get ready for the next round of funding without any major concerns. Ultimately many companies have seen venture debt as the most efficient way to grow into the next frontiers. They have been eager to avoid dilution and the venture debt has allowed them to leverage their equity investments.
Despite all these gains that the new companies and other businesses have got from ventures capital and private equity financing the firms have continued to encounter some problems. These problems are supposed to be identified for the business to thrive well.
Problems of venture capital and private equity firms
The venture business has been recording progressive growth over the recent years and this shows that there are good prospects ahead. Many firms have been confronted with technical issues when dealing with new financing opportunities. Some deals need to be evaluated to determine if they are worth being pursued. The firms have had to choose between being burdened with financial pressure and remaining competitive in the market.
In ensuring that they provide the necessary financing to the market the firms have faced challenges in sustaining healthy returns. Most companies that have approached the firms for financing have been guided by the pursuit to participate in deals that offer the upside potential of their venture capital. In situations where these have not been promising, they have given it a second thought which is not good.
They have not been sincere as they are only attracted to be financed by the downside protection that they get from principal repayments and the attractive interest. Many have argued that the venture capital and debts provided have the potential of ultimately overburdening startups and emerging companies.
This can mostly be done with the debt that the financing will create. In the long run, the balance sheet is negatively affected which can dissuade future potential investors from investing in the firm. The potential investors may end up being concerned that their investments will mostly be used to repay the debts that relate to financing instead of being used as working capital. This alone has hurt venture capital and private equity firms.
It cannot be concluded to be their liking but it ultimately affects the way business is done by these firms. The venture debt space has been changing considerably over recent years. There was the demise of the internet bubble that can be said to be responsible for many financial and stock market declines.
Some firms have collapsed because of lending to business start-ups especially in periods of booms. This is because in such times everything has looked promising to be given a benefit of the doubt. An example is the Camdisco ventures that collapsed after aggressively lending to startups.
Like earlier before, companies had only concentrated on the equipment leasing business. In other terms, there was a lack of diversification which is a problem for any firm that wants to expand. Until recently is when firms like Pinnacle have been able to expand their business to include growth capital loans. It seems that they have had problems with embracing new frontiers in venture financing.
After venture capital and equity became lucrative there has been a lot of competition as is the case of Pinnacle. The crowding in the market has not been good for business. This can be attributed to the exit of financial companies. Some firms have colluded to have relatively consistent terms amongst themselves which have dealt a blow to the ethical culture of competition.
Other firms that have operated in the market are seen to ignore the fact that they are supposed to assist the startups to pick up instead of giving them the financing that they need. It should be noted that both the firm and the companies share the same destiny in the deal.
Over the recent years, firms have had rough periods, even the proven venture capitalists have had it extremely difficult to try and raise the needed funds. The risk and balance reward always promises good returns when it is done in the right way but this has not been capitalized on by the firms.
Although the firms have screened the deals, they have not monitored them to know the depth of business. On the other hand to solve the problem Pinnacle ventures have seen the need to monitor the best-chosen deals for months. Arguably the firms are supposed to take an equity mindset instead of having a general look at every deal as credit, loan, or collateral.
There seems to be a large gap between leasing and lending that these firms have not strived to fill. Although the fear might be unfounded there is a need to understand the diverse sides of the spectrum. These are initiatives that the firms have failed to undertake and it is high time they looked at this problem. In addition, these firms are more comfortable on either side but they cannot try it out on the other venture.
Value for portfolio companies has been lacking. The firms must rethink beyond providing capital to the startups. This can be approached from the provision of instructions to suppliers, potential investors, customers, and the management. Some firms have had to contend with a lot of startups that don’t have products and customers which seems to be very risky.
This is a general problem that all the firms that are in the venture business face because financing may not be easy as expected. Some of the startups might have had poor projections that might not return the expected projection which will ultimately affect the firm. In addition, the most competitive landscape of the business is dominated by startups.
As in the case of Windvane that needed financing from Pinnacle, the size of the capital loans that are demanded can be beyond the reach of the venture firms. In some cases, the companies have wanted to delay financing even though they have some debts in their balance sheets.
Venture financing is very flexible and many firms need to be alert so that they can improve their products. There is enough reason that the market has grown significantly and promises more returns for those who are ready to venture into the business. Although the market was dominated by financial companies in the initial years, there has been the emergence of more venture capital and private equity firms.
These firms have strived to give their best but are still facing some problems that are derailing their business. Most of the manifested problems can be solved through a partnership of the firms instead of viewing each other suspiciously. Pinnacle has been at the forefront in redefining the way venture capital and private equity financing are done. This can be reinforced by the fact that the company has recorded some progressive success over the years.
As the need for financing continues to increase numerous challenges will be seen. Globalization is availing many opportunities that firms can capitalize on. Venture debt providers have in the process earned interest and received warrants that have the ease of being converted into equity in exchange for loans. Since venture funding seems to be diverse the firms need to involve all the players in trying to solve the problems that are facing them as a whole.