Venture capital as a source of funds to the new and potential industrial undertakings has become popular worldwide. In fact, many IT business firms like Google and Facebook could never have started their businesses had there been no fund support from the venture capitalist.
Venture capital is required in new business undertakings or for giving an innovation a commercial shape which does not normally receive fund support either from banks or cannot go public because of regulatory restriction. For instance, in Bangladesh, a business can go public if it earns profit in consecutive three years. A green field project can also go public but with regulatory
conditions.
The regulator does not give permission to a new business going public if it is managed by unknown Tom, Dick & Harry. As a result, investors or new businessmen do not get start-up capital for business even if the business holds good prospects. Banks normally do not fund the new entrepreneurs. Also, the banks provide only short-term working capital, not the permanent capital or equity capital for the business. In this case, what a prospective new business, or an innovator can do if he wants to go for business with his invented technique or researched results, is to approach venture capital which is ready to take risk in new business or innovation-backed business for fund. This type of risk-taking business in a new business firm is normally known as venture capital.
Venture capitalists collect their own seed capital from shareholders and look for prospective new businesses to invest in where the new entrepreneurs are unable to get the initial capital. In other words, in most cases, the venture capital helps kick-start the business which otherwise cannot be started on its own.
There is a difference between venture capital and private equity with the later normally engaging itself in old industries or business which became sick or turned out to be poorly-managed ones but otherwise have the potentialities. A private equity firm wholly or partly buys those ventures, manage those for a few years and then sell those out to the markets. In other words, private equity helps a dying industry or a sick business to turn around. Venture capital does not supply any fund to the old industries or business no matter how prospective these are. It finances the prospective ones, but that prospect must come from new innovation or new ideas.
In Bangladesh also, there are people who have new ideas for new business or have new innovation which can be put to business use, but the new businessmen or innovators do not have the capital to give a try. Venture capital can help these people and can create many new entrepreneurs in the economy. But the idea of venture capital is new in this country and that is why we are still not hearing about any success story of venture capital.
Private equity concept is even a newer one here. No private equity firm, to our knowledge, operates in Bangladesh. However, both venture capital and private equity will need required laws and regulations to operate. In this case, venture capitalists and private equity suppliers will be the real risk-takers. So laws and regulations should be such that these firms feel encouraged to take the fund. In other countries, these types of financing are already old, and updated regulations are there for their operation. Here the main concern for the both types of funds will be whether their investments will have an easy exit from the business or investment where they committed the funds.
If there is no easy exit route, the venture capitalist or private equity suppliers will be hesitant to undertake such risky investments. The regulations will have to pave the way for exit from such businesses. The Bangladesh Securities Exchange Commission (BSEC), in a draft report, suggested formation of Close-End Mutual Fund for such capital. The regulator also suggested for renaming the Mutual Fund as the 'Alternative Investment' or 'Collective Investment' so that such fund can cover also Exchange Trade Fund and Hedge Fund.
Re-naming will not matter if the proposed funds serve the purposes. We want to see both venture capital and private equity being made operational. One option, which is recognised world over, is to make the companies go public compulsorily where such funds are staked. That will give an easy exit for venture capital and private equity supplier with their invested funds. This regulation will also help our stock market grow with companies based on innovation and new idea.
The writer is Professor of Economics University of Dhaka.
abuahmedecon@yahoo.com
