Latin American Capital Markets

398 HANNES TAKACS AND KINGA KORCSMAROSTable 12-2 I Sources of Financing for Small and Medium EnterprisesI (continued)Financing sourceInstitutional venturecapital firmsMergers and acquisitionsStrategic investors andcorporate venture capitalistsIntermediariesProducts and Methods in Early-stage FinancingStart-up Financing/Seed CapitalFinancing characteristicsVenture capital firms are formally organized pools of venture capital.They collect funds from different sources, such as private investorsor large enterprises, and allocate them to young enterprises withhigh growth potential.Mergers and acquisitions (M&As) with "wealthy" companies can alsoprovide an important source of capital for young growing companies.M&As are associated with several structural, legal, and tax issues.There are many large corporations that have established venturecapital firms as subsidiaries.These venture capital firms usually lookfor investment opportunities within their own industries.Their goal isnot only the achievement of financial return, but also a strategicobjective, such as gaining access to unique technologies.Intermediaries (companies or individuals) are not a direct sourceof equity capital, but they usually assist growing companies in theirsearch for capital through commercial lenders, insurance companies,personal funds, or other institutional sources as well as equity investmentby private investors.Third-party financial sources require demonstration of the owner's willingness to riskinvesting in the business. Therefore, traditionally, entrepreneurs use their own resources,usually originating from savings, personal loans, or credit cards, to finance prelaunchexpenses and initial seed investment for their business. Entrepreneurs may alsoobtain the initial capital from family or friends. 5 Starting in the 1990s, so-called "angelinvesting" has become a critical source of financing for seed and early-stage companies,and its share in providing seed capital has grown significantly. In the United States,researchers at the Center of Venture Research at the University of New Hampshireestimate that 250,000 active "angel investors" invest approximately $20 billion annu-5 Own resources or resources of family, relatives, or friends ("love money") are an extremely significant source of SMECopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pubfinance and can be structured as either debt or equity finance.