Analysing the new high of venture capitalism

Analysing the new high of venture capitalismVenture capital levels are currently the highest they’ve ever been, which means we can look forward to greater growth and greater innovation in investee companies.

This is the expert opinion of Irene Peña, corporate consultant for Analistas Financieros Internacionales. In a recent presentation she explained that venture capital was aimed at companies with a high growth potential.

Looking at how the concept actually works, she said, ‘The strategy of the funds or investment companies is to create value,through their management, in the companies in which they participate [with] an exit strategy of four or five years.’

Although venture capital is an instrument of long tradition, she sees its recent development in Spain as a consequence of cultural factors and of factors related to the creation of a specific framework that would promote and favor its development.

Before and after

Explaining this, Peña continued, ‘Two stages of venture capital development in Spain can be identified. First, there was a clear period of economic growth between 2001 and 2007 which was paralyzed by the onset of the crisis. Then there was a second period which we are experiencing today. This can be said to have started in 2014, with a review of the normative framework of risk capital in an economic context similar to that of the previous period of crisis exit and high economic growth.’

Due to this, she believes risk capital in Spain has been registering maximum levels of activity which can be seen in the three indicators that determine its evolution.

‘On the one hand, in the past three years, the levels of fundraising which will subsequently be earmarked for investment in business, have reached levels exceeding 9,000 million euros compared to only 1,500 million in the period of 2010-2013. Divestment has also seen record levels.’

In the years of the crisis, many venture capital companies decided to delay their divestments in companies as they waited for the financial landscape to improve. We are seeing them come out of that period now as direct investment in companies has also grown. A major event for this came in 2017 when investments hit a historical high of 5,000 million euros.

Evolutionary thinking

There are two factors to explain this, she said. ‘Firstly, we’re coming from a prolonged period of low interest rates and high liquidity which, together with a favorable economic environment, would be expected to attract investment, both from domestic investors and international investors.

‘Then there is a change of mentality in companies which are reducing their dependence on external funding sources. Finally, regarding the destination of funds by investment, the focus of venture capital entities has usually been on high growth companies or mature companies. However, what has been seen in recent years is the greater importance of seed capital or venture capital funds, which redirect part of the investment to startups and SMEs.’

She believes this is very important as it encourages innovation, and she added, ‘In fact, as indicated by the European Commission, SMEs that have been funded by venture capital have higher levels of growth and a higher rate of survival when compared to other non-investee companies.’

For more information, please contact corporate law firm Argali Abogados

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