Many new firms or business with great growth potential have a difficult time getting started

because they cannot find capital. Banks do not customarily gamble on technology
undertakings, public markets handle larger companies and government programs are rarely
sufficient on their own. So for many of the above said firms, venture capital is the overriding
solution. Venture capital has emerged as an important transitional in financial markets,
providing capital to firms that might otherwise have difficulty in attracting external funding
meaning in the capital market (Gompers and Lerner, 2000).
Defining with simplicity venture capital is a particular type of finance designed to the
requirements of new technology or innovation based business. The combination of research
and development, intangible assets, negative earnings, uncertain projections and absence of a
proven track record, which are characteristic of start-up and pre-commercial initiatives, leads
to an unacceptably high perception of high risk for conventional financial institutions and
debt financing such as bank loans. Venture capital addresses the subsequent financing gap
through equity participation (Constantine and Oliver, 2002).
In addition to the above definition there are three general types of venture capital stipulated
as; seed capital, for ideas that have not yet come to market; early-stage capital, for companies
in their first or second stages of existence; and expansion-stage financing, for companies that
need to grow beyond a certain point to become truly successful. Venture capital can also help
a company merge with or acquire other companies (Kurtzman, 1999).
As the above discuss a point can be made that venture capitals niche exists because of the
structure and rules of capital markets. Someone with an idea or a new technology often has
no other institution to turn to. Usury laws limit the interest rate banks can charge on loans,
and the risks inherent in start-up usually validate higher rates than allowed by law. Thus,
bankers will only finance a new business to the extent that there are hard assets against which
to secure the debt (Daude and Stein, 2009).
Although some venture capital comes from private individuals, most venture capital comes
from venture capital firms good example is Microsoft Inc. which provides venture capital to
software innovations. These firms are often partnerships that obtain their investment funds
from wealthy individuals, investment banks, endowments, pension funds, insurance
companies, various financial institutions, and even corporations wishing to foster new
products and technologies (Kurtzman, 1999).

Furthermore according to Gompers, Paul, and Josh (1992) venture capital can be seen to
consist of a demand and a supply cycle. The demand meaning need for capital for the creation
and growth of companies while starts with the necessity for seed capital, to fund an initial
idea or basic research (Gompers, Paul, and Josh, 1992).
In addition to the said, like any other kind of businesses venture capital investment proceeds
with the funding requirements of the successive stages of a company's growth, such as test
marketing, product development, full-scale production through to final market rollout. The
cycle closes with the exit, typically a private trade sale on a stock market, and the return of
the invested capital plus gains (Constantine and Oliver, 2002).
Therefore a venture capital firm must raise the money it needs to make investments in new
businesses. This fund-raising is typically done by circulating a prospectus to potential
investors who then agree to commit money to the fund (Daude and Stein, 2009). Once the
venture firm has enough commitments, the firm may begin collecting or "calling" those
commitments when it wants to make an investment. If and when the venture capital firm
invests all of the fund's money, or if it simply wants to expand its investing activities, it may
start another fund. Most funds have a fixed life, meaning they must make their investments
within a certain period. Venture capital firms may have several funds going at the same time
(Guler, 2007).
In emphasizing the above, like any other kind of investment involving creation or raising of
capital, venture capital depends on different factors the can be grouped as factors due to
demand and that due to supply (Zidey, 1998).
Constantine and Oliver (2002) debate that on the demand side, factors affecting the expansion
of venture capital include:
Fiscal.
This means the reduction of capital gains tax, including attitude to stock options,
which provides the underlying incentive for entrepreneurs to launch and expand
companies.

Regulatory
o This includes labour market flexibility, which encourages the mobility of
skilled people and allows start-ups to easily adapt their workforce to rapid
changes of fortune and needs.

o Company law facilitating the creation of start-ups and removing the stigma
associated with bankruptcy.
In Infrastructure the establishment of facilities, such as research centres, regional
science and technology parks, and business incubator services, to encourage
commercial applications from research output and to facilitate the interactions
between entrepreneurs and venture capitalists.
Cultural aspects involve the indirect measures, in particular education and training, to
promote entrepreneurial spirit and risk-taking behaviour in the longer term.
Investee Management:
o To draw attention to and ensure funding for a robust business plan and revenue
model is called for, based on real value-added of the product or service being
offered and a clear path to profitability.
o The investee's management team must prove technical excellence.
On the other hand Daude and Stein (2009) discuss the side of supply in the venture capital
financing is being dependent to the following;
Fiscal
This means tax relief for private investors and business angels (experienced and
wealthy individuals who directly invest in and advise start-ups) to encourage the
channelling of capital to venture capital funds and individual initiatives.
Regulatory
o The measures to increase and diversify the supply of venture capital, such as
the creation of state-sponsored venture capital funds and the lifting of
restrictions on pension funds to invest in venture capital
o The measures to reinforce the protection of intellectual property rights (patents
and copyrights), which, on the one hand, encourage investment in intangible
assets typical of technology sectors, and on the other, can help secure
investment by providing collateral in the case of default.
In the cultural aspect the activities of promoting business angel networks and venture
capital funds with adequate experience to facilitate investment in start-up and early
stage technology sectors. There is more than circumstantial evidence that the best
qualified fund managers are those who have themselves benefited from venture
capital, also known as serial entrepreneurs.
Venture Capital Fund Management
o Firstly is thorough due diligence process of investees prior to investment,
requiring fund managers to have specific technology expertise, to ensure a
sectorial balanced supply of capital and avoid any herding behaviour where
investment decisions mimic market trends rather than adding value.

o Secondly is thorough monitoring of investees, requiring fund managers to

provide commercial and managerial support, as well as to supply successive
capital infusions adapted to the growth pattern characteristic of each sector
and to the specific type of product or service under development.
In a general term according to the findings by Gompers, Paul, and Josh (1992) venture capital
has advantages which includes;
First is the provision of the fund that a company needs to expand its business. It also
offers a number of value added services.
Then the primary advantage of venture capital is that they allow entrepreneurs to
build their company with other entrepreneurs equity.
Furthermore venture capitalist benefits when the firms increases in value and
ultimately gain liquidity event or sells to another company where they get a return on
their invested capital.
In addition to the above, venture capitalist can be an invaluable source of information,
resources and contacts to help you be successful. More times than not, venture
capitalists have experience building companies themselves so they can really help you
think strategically about how to grow and be successful.
On the other side Gompers, Paul, and Josh (1992) discuss the disadvantages of venture
capital includes;
Firstly the sensitive disadvantage is that, securing a business with a venture capital
can be a long and difficult process. The investor will be required to draw up a detailed
business plan, including financial projections for which will likely to need
professional help which involves payment of legal and accounting fees regardless
success in securing funds.
Secondly is the introduction of new parts in the business where control of the firm
changes and the managerial structure change may result to conflict of interests. The
understatement being having to give up a piece of your business and having to deal
with people who may tell you how to run it and don't agree with your approach.
In addition to the above, it may be said that most venture capitalists seek to realize
their investment in a company in three to five years therefore if an entrepreneurs
business plan anticipates a longer plan before providing liquidity, venture capital may
not be appropriate.

 Moreover the introduction (venture capitalist) of new control (venture capitalist) in

the firm may be confused to intrusion when the formal managerial part fails to
conform with new managers in the running the business.
Finally most review largely confirms that venture capital stimulates the creation and growth
of technology-based firms; helps translate the results of research and development into
commercial outcomes. In doing so, it plays a catalytic role for innovation (Kurtzman, 1999).
An equally significant aspect of Daude and Stein (2009) states that the perceived primary
economic benefits of venture capital include; job creation, especially by companies in the
initial start-up and early growth stages; creation of intellectual property and development of
new technology applications; exports, driven by investees aiming to maximise sales; regional
development, but mitigated by the risk of contributing to a clustering of technology activities
and causing equity gaps and unbalanced development.
Certainly, there is no shortage of disagreement within Daude and Stein (2009) findings that
the myth is that venture capitalists invest in good people and good ideas but the truth is they
invest in the good industries.
There is also, however, a further point to be considered that the venture capital industry may
be a natural place to test this hypothesis as venture capitalists are known to use their expertise
to provide feedback to entrepreneurs (Kurtzman, 1999).
Overall, joint venturing (being compared to venture capital financing) is a nice thing to do if
one (here being an entrepreneur with need of venture capital) plan on expanding and growing
a business much faster and if the same intend on having different lines of market. Sadly
venture capital funds are not easy to obtain. In fact, most business owners who apply for
venture capital funds will be turned down. Unless a business plan can easily demonstrate high
rates of return within a five year period, chances are very good that the request for venture
capital funds will be turned down.
Promisingly in Tanzania there is a chance for the growth of venture capital as Vodacom
company has created a scheme to help innovative youth to create and design software and
application in return funding them for their future business development (Web based
information www.vodacomappstar.com Retrieved on 21st October 2012

References;
Constantine C., and Oliver D., (2002) Financing innovative firms through venture capital.
European Investment Bank Journal of Economics 117, 12311294.
(Retrieved on 30th October 2012 from http://www.jstor.org )
Zidey, B., (1998) Venture Capital and the Finance of Innovation. Harvard Business
Review; President and Fellows of Harvard; November December Issue; Reprint 98611.
(Retrieved on 30th October 2012 from http://www.jstor.org )
Gompers, P., and Josh, L., (2001) The Venture Capital Revolution. The Journal of
Economic Perspectives 15(2): 145-168.
(Retrieved on 30th October 2012 from http://www.jstor.org )
Guler, I., (2007). Throwing Good Money after Bad? Political and Institutional Influences on
Sequential Decision Making in the Venture Capital Industry.

Administrative Science

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(Retrieved on 28th October 2012 from http://www.sciencedirect.com )
Kurtzman, J., (1999) PROSPECTS; Venture Capital" Journal of Investments; New York
Times
(Retrieved on 25th October 2012 from http://www.sciencedirect.com )

Daude J., and Stein, G., (2011) Motivating Innovation. Journal of Applied Business and
Economics vol. 12(3) 2011.
(Retrieved on 29th October 2012 from http://www.sciencedirect.com )