The participations in the Capital

The capital is a set of resources put at the disposal of an enterprise by its owners.
Such putting at disposal has a permanent character: the capital becomes the property of the enterprise and there is no question of repayment, save in case of winding-up, reduction of capital or liquidation. It is either "seed money" (creation), or a new contribution (increase of capital).

The capital of which it disposes allows the enterprise:

• to start its activities (creation of the enterprise)
• to realise new investments (increase of capital)

The contribution of capital to the enterprise gives some rights: ownership of part of the enterprise, sharing of the profits generated by the activity, participation in the management, control of the managers, etc. This is why one talks also of "acquisition of holdings".
The nature and scope of these rights will depend on the importance of the contribution and of the agreements entered into among owners.

The contributed resources may be of different natures:

• financial : contribution of money or securities ;
• tangible : machines, equipment, buildings ;
• intangible : clientele, patents, know-how.

The venture capital

Principle:

The venture capital is a mode of financing consisting in entering the capital of the enterprise with an injection of capital?
Unlike the credit the operation does not guarantee either interest or recovery of the invested amounts.
The project will henceforth have to generate sufficient yield to offset the additional risk incurred by the moneylender.
Such return can have two forms:

• the profits realised by the enterprise and redistributed to the moneylenders (the dividends);
• the capital gain generated by the growth of the enterprise that will materialise itself upon resale of the participation.

It is a long-term investment banking on the progressive development of the enterprise.
The operation makes the moneylender one of the owners of the enterprise, which gives the right to participate in its management.
The grant of venture capital goes generally together with other forms of financing: mezzanine loans, subordinated loans and long-term loans (more details with this respect in the following chapters).

Advantages:

The acquisition of holdings does not generate any obligation of repayment, which: reduces the charges on the cash-flow of the enterprise and keeps its borrowing capacity intact.

The presence of a professional investor in the shareholding reassures the financial institutions, which makes the access of the enterprise to credit easier. The implication of the venture capitalist in the management allows the enterprise to profit by its  experience.

Utilisation:

• Acquisition of real property, capital goods, material, intangible assets (patent, market study), shares, etc.
• Development of a new activity or of a new market ("growth capital").
• Creation of a new enterprise ("start-up capital").
• Financing of studies preliminary to the creation of the enterprise ("seed capital").

Currency:

EUR, USD or local currency.

Term:

Although the acquisition of holding has a permanent character, the moneylender's implication is generally limited in time and determined upon the entry in the capital. It may range from a few years up to twelve years.

Cost:

The enterprise does not have to repay the capital, since it is an investment and not a loan.
The return required by the moneylender will generally be high (more than 15% per year), because it is not at all guaranteed. It will depend:

• on the profits realised by the enterprise and redistributed to the owners;
• on the capital gain realised by the moneylender when he quits the capital of the enterprise.

Conditions of grant:

The acquisition of holdings can be direct or indirect:

• direct: the financial institutions brings itself capital to the enterprise;
• indirect: the financial institutions entrusts the funds it wishes to invest to an organisation in-charge of selecting the projects that will get financing.

The financing organisations whether public or private submit their participation to the strict compliance of conditions relating to:

• the viability of the project: to profit by financing, the investment project should be sufficiently profitable. The various elements of the file filed by the enterprise will be appreciated according to criteria much more severe than for a long-term loan because of the absence of guarantees for the moneylender;
• the limits of the investor's implication, that are double: the moneylender's share remains, in percentage of the capital, lower than or equal to that of the founders; the invested amount should not exceed a specific maximum.
• the participation in the business management: the financial institution that enters the capital of the enterprise asks in most cases to be involved in its management, for instance by occupying an office in the board of directors; the implication of other organisations and of other tools in the financing of the project;
• the "exit strategy": the term of the participation in the capital of the enterprise and the conditions at which the shares will be resold are clearly defined contractually; the ethical character of the project: the DFI's are particularly paying attentivon to the compliance of the work conditions, prohibition of child labour, environmental impact and positive impact on the local community;
• the sectors of activity: some banks, MFI's and DFI's concentrate their action on a restricted number of sectors of the economy (more information on the Internet site of the various institutions or with their local representation (see the third part of the guidebook or the attachment).

Conditions of repayment:

The acquisition of holdings does not give rise to repayment. The venture capitalist has however the faculty to resell its participation in the enterprise, at a time and according to the terms agreed upon at the time of the acquisition of the holdings.