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Venture Capital

“Venture capita” is a generic term used to refer to financing characterized by high risk and potential for substantial returns. The term is most often used to refer to the seed capital required to launch new commercial ventures and to finance their early-stage growth.

Venture capital is an alternative to equity financing for small business. In fact, a venture capitalist is similar to a mutual fund manager who finances equity investments for a pool of investors. Unlike mutual fund managers, venture capitalists focus on high-risk entrepnreurial ventures. They provide start-up (seed money) capital to new ventures and development funds to business units in their early growth stages.

Venture capital is a source of long-term finance to provide equity capital to ventures adopting new technology. The main objective of venture capital is to provide equity finance to ventures using new technology in order to commercialese the technology and develop new entrepreneurs in setting up new units. This also implies greater involvement of the promoter in the project. Such projects hold immense promise for the entrepreneurs who do not have any past performance track.  Therefore, sometimes the investments may prove a little risky.

Venture capital is a high risk-high return business. The high risk is due to the fact that projects are untested and are undertaken by novices. The targeted long-term returns form venture capital investment are naturally high. It is said three years” or “multiply money seven times in five years” or “earns a compound annual rate of return of 48 per cent”, in second stage financing, the rate of return of 35 to 40 per cent may be expected annually, while in third stage financing, the of 35 to 40 per cent may be expected annually, while in third stage financing, the rate expected may be 25 per cent per annum. Venture capital investment is necessarily a long term investment. The funds are usually expected to be tied up for three to ten years.

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