Sourcing Funds from Venture Capitalists, Creditors, Bonds & Equities Essay

Sourcing Funds from Venture Capitalists, Creditors, Bonds & Equities - Essay Example Funds are collected with some business objectives to realize the benefits of current innovations in the form of product launch, market campaigns, investments in profit making financial instruments, funding running projects with assured returns (like government projects bagged against tenders, infrastructure projects, conflict-free projects that have realized large payments prior to funding), etc. and invest the equities thus built (as an outcome of profits realized from projects) into diversifications, expansions, new Plant & Machinery purchase, new business initiatives, etc. This means that the primary objective of funding should be to invest in profit making ventures that can increase the valuation of the assets of the company and hence result in profits for the investors & in the process improve of share holder value. Faure-Grimaud and Gromb (2004. pp986-987) presented that block of funds raised by a corporation is controlled by insiders for the purpose of improving asset valuatio n of the corporation by allocating corporate resources or acquiring new resources. In the process of increasing firm's asset valuation, the shareholders increase their own wealth as well but this should be viewed more as an incentive of the shareholder's tangible value-increasing actions and not as the fundamental objective of fund raising. Amihud and Garbade et al. (1999. pp453) argued that after a company has taken the debt, a conflict of interest arises between creditors, managers and shareholders. Managers are forced by share holders to maximize their wealth and in this process may end up maximizing risk taking activities. Example, shareholders may be tempted to invest the debt (rather than equity) in high risk projects that may maximize equity at the cost of debt at the cost of overall devaluation of the company. These conflicts call for effective corporate governance which requires lot of contribution by finance managers. They have to manage the compromise between creditors and shareholders by keeping the former satisfied with the investment portfolio while controlling the wish list of the shareholders. Sources of Funds available in Europe (including Croatia) Bottazzi and Rin et al. (2002. 239-244) reported the source of long term funding in Europe (Croatia included) as the Venture Capitalist funding from Institutional Investors (includes endowments & pension funds), corporations, financial institutions (includes primarily banks, insurance companies and fund raisers from capital markets), Government and individuals. Unlike US, Europe has shown dismal maturity when it comes to venture capitalism as compared to US. This is understood from the fact that the funding contribution in US is largely by Institutional Investors (shows the maturity of US markets) but in Europe is largely from banks that control a major part of the mutual fund industry. There are many bank funded companies in Europe (having operations in