Venture capital represents financial investment in a highly risky proposition made in the hope of earning a high rate of return. It is generally considered as a synonym of high risk capital, capital is provided by venture capital funds which are prepared to finance an untried company that appears to have promising prospects.
According to Pratt, “Venture capital is thought of as, “the early stage financing of new and young enterprises seeking to grow rapidly.” The venture-capitalist finances high and new technology based enterprises whereas the banks or financial institutions generally support proven technologies with established markets. But technology is not a necessary condition for venture financing.
According to Wan, “Venture capital is also described as unsecured risk financing”. Reason being that new, high tech venture carry high risk and are also unable to offer suitable collateral for securing capital.
Venture capital is a power mechanism with the help of which innovative entrepreneur ship can be institutionalized through the venture capitalist and the entrepreneur joining hands together. In other words, venture capitalist and entrepreneur would act as ‘partners’ where venture capitalist not only directly purchases the equity shares of the entrepreneur but also participates in the management of the entrepreneur’s business, helps him to protect his investment, increases his investment by actively involving and supporting the entrepreneur.
Venture capitalist also gives the – entrepreneur his marketing, planning, and management skills and technology to the new firm. He plays the role of a banker, development financier and that of a stock market investor as well. He sees the company growing with the intention to make capital gains by selling the equity shares of the company in future.
According to I.M. Pandey. Venture capital is an investment, in the form of equity, quasi-equity and sometimes debt-straight or conditional (i.e. interest and principal payable when the starts generating sales), made in new and untried technology, or high-risk venture, promoted by technically or professionally qualified entrepreneur, where the venture capitalist
- expects the enterprise to have a very high growth rate,
- provides management and business skills to the enterprise,
- expects medium to long-term gains and
- doesn’t expect any collateral to cover the capital provided.
Features of venture capital :
The terms and conditions on which venture capital is provided are not standardized, the following are the main features of venture capital : —
1. The venture capitalist participates in the entrepreneur’s business through direct purchase of shares, options or convertible shares.
2. The objectives of the venture capitalist is to make capital gains by selling off the investment once the enterprise becomes profitable.
3. The venture capital firm (VCF) is inclined to assume a high degree of risk to make capital gains.
4. Venture financing is a long-term illiquid investment where investment can be liquidated in the assisted firm only after a long-period, say 4-8 years.
5. The financial burden of the assisted firm tends to be negligible during the first few years.
6. The VCF, in addition to providing funds, takes an active interest in guiding the firm in various ways and supports the entrepreneur through all the stages of the company’s development — monetarily and non-monetarily.
Venture capital financing includes development, expansion and buyout financing for the enterprises which are unable to raise funds through conservative financing channels. As per Pratt’s Guide (1988) VCFs also provide turn around— finance to revitalize and revive sick enterprises.
Eligibility for venture capital Financing :
According to Government of India guidelines, the following enterprises are eligible for venture capital financing :
1. Size. Total investment should not exceed Rs. 100 million.
2. Technology. New or relatively untried or very closely held or being taken from pilot to commercial stage or incorporating some significant improvement over the existing ones in India.
3. Entrepreneur. Relatively new, professionally or technically qualified persons with inadequate resources or backing to finance the project. Venture capital excludes financing of enterprises engaged in trading, broking, investment of financing services, and agency or liaison work. A venture capital! firm in India is required to invest at least 75 percent of its funds in venture: capital activity, and must be managed by professionals.