Venture capital: The term ‘venture capital’ represents financial investment in a highly risky project with the objective of earning a high rate of return.
Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth start-up companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT and software.
While the concept of venture capital is very old the recent liberalisation policy of the government appears to have given a fillip to the venture capital movement in India. In the real sense, venture capital financing is one of the most recent entrants in the Indian capital market.
Venture capital companies provide the necessary risk capital to the entrepreneurs so as to meet the promoters’ contribution as required by the financial institutions. In addition to providing capital, these VCFs (venture capital firms) take an active interest in guiding the assisted firms.
Features of Venture capital
- High Degrees of Risk: Venture capital represents a financial investment in a highly risky project with the objective of earning a high rate of return.
- Equity Participation: Venture capital financing is invariable, actual or potential equity participation wherein the objective of a venture capitalist is to make a capital gain by selling the shares once the firm becomes profitable.
- Long Term Investment: Venture capital financing is a long term investment. It generally takes a long period to recover the investment in securities made by the venture capitalists.
- Participation in Management: In addition to providing capital, venture capital funds take an active interest in the management of the assisted firms. Thus, the approach of venture capital firms is different from that of a traditional lender or banker.
It is also different from that of an ordinary stock market investor who merely trades in the shares of a company without participating in their management.
It has been rightly said, “venture capital combines the qualities of banker, stock market investor and entrepreneur in one”.