Page 253 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes 1. Ventures promoted by technically or professionally qualified but unproven
entrepreneurs, or
2. Ventures seeking to harness commercially unproven technology, or

3. High risk ventures.
The term 'venture capital' represents financial investment in highly risky project with the objective
of earning a high rate return. While the concept of venture capital is very old the recent
liberalisation policy of the government appears to have given fillip to the venture capital
movement in India. In the real sense, venture capital financing is one of the most recent entrants
the Indian capital market. There is a significant scope for venture capital companies in our
country because of increasing emergence of technocrat entrepreneurs who lack capital to be
risked.
These 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.
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 venture
capital funds in the form of long-term equity finance with the hope of earning a high rate of
return primarily in form of capital gain. In fact, the venture capitalist acts as a partner with the
entrepreneur.

Thus, a venture capitalist (VC) may provide the seed capital unproven ideas, products, technology
oriented or start up firms. The venture capitalists may also invest in a firm that unable to raise
finance through the conventional means.
Features

"Venture capital combines the qualities of a banker, stock market investor and entrepreneur in
one."
The main features of venture capital can be summarised as follows:

1. High Degrees of Risk: Venture capital represents financial investment in a highly risky
project with the objective of earning a high rate of return.
2. 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. .

3. 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.
4. 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 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".
5. Achieve Social Objectives: It is different from the development capital provided by several
central and state level government bodies in that the profit objective is the motive behind
the financing. But venture capital projects generate employment, and balanced regional
growth indirectly due to setting up of successful new business.

248 LOVELY PROFESSIONAL UNIVERSITY