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Role of Venture Capital

The first generation entrepreneurs have to face the shortage of equity capital. Banks and financial institutions generally require a sizeable equity contribution from the promoter of a project before they sanction loans for it. Technocrats and scientists who want to set business ventures cannot provide much capital. Venture capital funds provide the much needed capital to them. A high degree of risk is involved in venture capital financing due to the high probability of loss in new ventures. The venture capital fund bears high risk in the hope of loss in new ventures. The ventures capital funds bears high risks in the hope of a high reward from the success of the project. The technocrat promoter contributes risk capital and management support. Once the venture settles down to profitable working, ankhs and retail investors are willing to invest in it. At this stage, the venture capital fund can sell out its shareholding in the enterprise.

Venture capital is an important source of equity for start-up companies. An entrepreneur starting a new project will invest some capital of his own and look for some other source to raise rest of the capital required for the project. That source could be a venture capitalist. It is the venture capitalist who takes the risk of contributing capital for such project with the expectation of higher returns in future.

Venture capital institutions often finance such companies which have high growth potential. They prefer to by equity shares in such companies. A venture capital institution may even insist on having representative appointed to the company’s board of directors to take care of its interests.

Venture capital funding is a boom to the first generation entrepreneurs who start ventures having great potential. For decades, venture capitalists have nurtured the growth of American high technology and entrepreneurial communities resulting in significant job creation, economic growth and international competitiveness. Companies such as Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel Microsoft and Genetic are famous examples of companies that received venture capital during the initial stages.

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