The Fundamentals on Venture Capital and Investment Banking


Feb
08
2013

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  • Speaker: David Schick
  • Host Department: Michigan in Washington Program
  • Date: 02/08/2013
  • Time: 4:00 PM - 5:00 PM

  • Location: UCDC Room 210

  • Description:

    If you had a lot of money and wanted to start a business, you could use all your own money to pay for that start-up. Many of us don’t have that much money, so we look for other ways to raise the capital (money) we need to start or expand a business. We could be patient and use the profits made while it is a little business to make it grow into a bigger business.   We could go to a bank and get a loan. The banks that most of us are familiar with are commercial banks, where we have our checking and savings accounts or borrow money to buy cars or houses (house loans are called mortgages). Commercial banks have clients who are individual people and businesses.

    Another way a person or a business can raise capital is to find someone or some organization that has money who would like to be a partner in the business, which is owning part of the equity of the business.  That someone who would like to invest and become a partner is a venture capitalist and the money invested in the business is called venture capital. See the video at http://www.investopedia.com/video/play/venture-capital/#axzz2JeaWnB11.  Starting or expanding a business is inherently risky, but a venture capitalist is willing to take that risk, in order to make more money (called return on investment, or ROI).  In the video, everything works out for the venture capitalist, who makes money.  The venture capitalist can also lose money.

    Venture capitalists can be individuals, but there is a special kind of banking called investment banking that raises capital (money) for start-ups and business expansions.  Investment banks are not the same as commercial banks.  A business that needs capital can go to an investment bank with a proposal and ask for money. The investment bank has clients who have invested their money in the investment bank, hoping to make more money.  The investment bank can “underwrite new debt and equity securities,” as Investopedia website puts it, meaning the investment bank invests money in that company. The clients of the investment bank would then have a stake in that company. If the company makes money, the investment bank and its clients prosper and get a return on their investment (ROI).

    The investment bank is an intermediary between companies that need money and people or organizations who have money to invest.  Investment bank clients can be individuals or families, but clients may also be institutions (including universities, unions, or governmental employee retirement fund organizations).  See http://www.investopedia.com/articles/08/investment-banks.asp#axzz2JeaWnB11 , and pay special attention to the history and why commercial banking and investment banking were separated by federal law.