DEFINITION OF 'VENTURE CAPITAL'
Money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.
INVESTOPEDIA EXPLAINS 'VENTURE CAPITAL'
Venture capital can also include managerial and technical expertise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. This form of raising capital is popular among new companies or ventures with limited operating history, which cannot raise funds by issuing debt. The downside for entrepreneurs is that venture capitalists usually get a say in company decisions, in addition to a portion of the equity.
'Venture Capital' is an important source of finance for those small and medium-sized firms, which have very few avenues for raising funds. Although such a business firm may possess a huge potential for earning large profits in the future and establish itself into a larger enterprise. But the common investors are generally unwilling to invest their funds in them due to risk involved in these type of investments. In order to provide financial support to such entrepreneurial talent and business skills, the concept of venture capital emerged. In a way, venture capital is a commitment of capital, or shareholdings, for the formation and setting up of small scale enterprises at the early stages of their life cycle.
Venture capitalists comprise of professionals of various fields. They provide funds (known as Venture Capital Fund) to these firms after carefully scrutinizing the projects. Their main aim is to earn huge returns on their investments, but their concepts are totally different from the traditional moneylenders. They know very well that if they may suffer losses in some project, the others will compensate the same due to high returns. They take active participation in the management of the company as well as provide the expertise and qualities of a good banker, technologist, planner and managers. Thus, the venture capitalist and the entrepreneur literally act as partners.
The venture capital recognises different stages of financing, namely:-
- Early stage financing - This is the first stage financing when the firm is undertaking production and need additional funds for selling its products. It involves seed/ initial finance for supporting a concept or idea of an entrepreneur. The capital is provided for product development, R&D and initial marketing.
- Expansion financing - This is the second stage financing for working capital and expansion of a business. It involves development financing so as to facilitate the public issue.
- Acquisition/ buyout financing - This later stage involves:-
- Acquisition financing in order to acquire another firm for further growth
- Management buyout financing so as to enable the operating groups/ investors for acquiring an existing product line or business and
- Turnaround financing in order to revitalise and revive the sick enterprises.
In India, the venture capital funds (VCFs) can be categorised into the following groups:-
- Those promoted by the Central Government controlled development finance institutions, for example:-
- Those promoted by State Government controlled development finance institutions, for example:-
- Those promoted by public banks, for example:-
- Those promoted by private sector companies, for example:-
- Those established as an overseas venture capital fund, for example:-
All these venture capital funds are governed by theSecurities and Exchange Board of India (SEBI) . SEBI is the nodal agency for registration and regulation of both domestic and overseas venture capital funds. Accordingly, it has made the following regulations, namely, Securities and Exchange Board of India (Venture Capital Funds) Regulations 1996 and Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations 2000. These regulations provide broad guidelines and procedures for establishment of venture capital funds both within India and outside it; their management structure and set up; as well as size and investment criteria's of the funds.
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