Page 231 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes Innovative, hi-tech ideas are necessarily risky. Venture capital provides long-term start-up costs
to high risk and return projects. Typically, these projects have high mortality rates and therefore
are unattractive to risk averse bankers and private sector companies.
Venture capitalist finances innovation and ideas, which have potential for high growth but are
unproven. This makes it a high risk, high return investment. In addition to finance, venture
capitalists also provide value-added services and business and managerial support for realizing
the venture's net potential.

16.1 Meaning of Venture Capital

Venture Capital has emerged as a new financial method of financing during the 20th century.
Venture capital is the capital provided by firms of professionals who invest alongside
management in young, rapidly growing or changing companies that have the potential for high
growth. Venture capital is a form of equity financing especially designed for funding high risk
and high reward projects.
There is a common perception that venture capital is a means of financing high technology
projects. However, venture capital is investment of long term finance made in:
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.

16.2 Features of Venture Capital

"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.

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