The term ‘venture capital’ represents financial investment in a highly risky project with the objective of earning a high rate of return. While the concept of venture capital is very old, the recent liberalisation policy of the government appears to have given a filip 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.
There is a significant scope for venture capital companies in our country because of increasing emergence of technocrate entrepreneurs who lack capital to be risked.
These venture capital companicss 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.
A young, high tech company that is in the early stage of financing and is not yet ready to make a public offer of securities may seek venture capital. Such a high risk capital is provided by venture capital funds in the form of long-term equity finance with the hope of earning a high rate of return primarily in the form of capital gain. In fact, the venture capitalist acts as a partner with the entrepreneur.
Features of Venture Capital
The main features of venture capital can be summarised as follows:
(i) High Degrees of Risk- Venture capital represents financial investment in a highly risk project with the objective of earning a high rate of return.
(ii) Equity Participation- Venture capital financing is, invariably, an actual or potential equity participation wherein the objective of venture capitalist is to make capital gain by selling the shares once the firm becomes profitable.
(iii) Long Term Investment- Venture capital financing is a long term investment. It generally takes a long period to encash the investment in securities made by the venture capitalists.
(iv) 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 of banker. It is also different from that of a 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.’