Page 232 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 16: Venture Capital

2. Equity Participation: Venture capital financing is, invariably, an actual or potential equity Notes
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.
6. Investment is Liquid: A venture capital is not subject to repayment on demand as with an
overdraft or following a loan repayment schedule. The investment is realised only when
the company is sold or achieves a stock market listing.
It is lost when the company goes into liquidation.

Task List some of the venture capitalists operating under your territory and
analyse if their services miss any of the features discussed above.

16.3 Techniques of Venture Capital

Venture capital firms usually recognise the following two main stages when the investment
could be made in a venture namely:
1. Early Stage Financing:
(a) Seed Capital & Research and Development Projects
(b) Start Ups
(c) Second Round Finance

2. Later Stage Financing:
(a) Development Capital
(b) Expansion Finance

(c) Replacement Capital
(d) Turn Arounds
(e) Buy Outs.

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