The objective behind any form of investment is to ensure returns. When an individual invests in the share market or even saves money in s bank deposit scheme, he or she expects returns on the investment in the form of dividends. Now consider it as a business activity and one will be able to evaluate the function of a venture capitalist. Portfolio companies or venture capitalists look for opportunities to invest in a company or an industry. However, unlike an individual investor a venture capitalist is much more involved in the investment itself. As a stakeholder of the investing firm, the venture capitalist’s returns are directly associated with the profit made by company he or she is investing in.
According to Miles Arnone MA, Managing Director of Cannon Capital opines that portfolio companies are essential to the growth and development of any fragmented section of an industry. Arnone a graduate from the prestigious University of Massachusetts believe that investment firms often provide the necessary funding to start ups and small or medium businesses, which would otherwise have not survived in a competitive business world. This is essential to boost the overall productivity of the industry as a whole. However it is essential to understand the business activities of a portfolio firm, from their perspective.
Some of the business activities carried out by a portfolio firm are as follows:
- Initial investment: If an equity investment considers a particular business proposition to be lucrative it will be prepared to invest in it. Usually, the investment to such propositions or projects begin absolutely from the grassroots level. Herein all the investment required starting from the development of the product to launching it in the market is made by the portfolio firm. Being the largest stakeholder in the project, the portfolio company stands to make the maximum gain if the product is a success.
- Amalgamation of firms: Portfolio companies often acquire smaller companies producing similar products and combine them into a single firm. The amalgamation of the firm ensures that the funds of two or more companies are combine to form one cohesive whole. The investment firm will then be involved in assisting with additional firms and overseeing the productivity of the merger.
- Acquisition of firms: Portfolio companies often buyout a firm that is running at a loss, but has the potential to do better in the recent future. An acquisition requires more investment on behalf of the portfolio firm. In case of an acquisition the equity management firm will be involved in the day to day activities of the firm that it has acquired. However, the equity firms often re-sell the acquired firm at a profit once it has stabilized the company.
Thus, Miles Arnone MA strongly believes that an investment firm or a portfolio company carries out an essential business activity, by providing funds and investing in small or medium businesses. Portfolio companies are thus essential to ensure the overall health of the industry and the economy as a whole.