Question

Short Essay on Venture Capital

Answer 1

Venture capital (VC) is financial capital provided to early-stage, high- potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc.

The typical venture capital investment occurs after the seed funding round as growth funding round in the interest of generating a return through an eventual realisation event, such as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore, all venture capital is private equity, but not all private equity is venture capital.Venture Capital investments are generally made in exchange for shares in the invested company. Typically, such investments come from institutional investors. There are also dedicated investment firms, which pool together such capital to invest in enterprises that are normally risky for standard capital markets or bank loans. Such an investment firm (or sometimes a person) is called a Venture Capitalist. The pooled investment is known as a ‘Venture Capital Fund’ (VCF).

Venture Capital has been used as a tool for economic development even in many developing countries with not so well developed financial markets. In such countries, venture capital is known to play a role in facilitating access to finance for small and medium enterprises (SMES) which in most cases would not qualify for receiving bank loans.

In India, the union budget for 1999-2000 stressed the difficulty to access credit from the capital market for technology demonstration/development particularly for the SMEs. Stressing the need for higher investment in venture capital activity, it suggested the need to create a suitable environment for allowing the VCF to play a major role in providing capital for the SMEs.

Taking the cue from this, the Security Exchange Board of India (SEBI) initiated a process of interaction with industry participants to identify the issues and areas for the development of VCF industry in India. Towards this end, SEBI appointed a committee on Venture Capital in July 1999. Examining the impediments to the growth of VCF, the committee suggested several measures to facilitate the growth of venture capital activity in India.

Answer 2

Venture capital is financing that investors provide to startup companies and small buisnesses that are believed to havelong term growth potential . Venture capital generally come from well of investors ,investment bank and any other financial institutions .Though it can be risky for the investor who put up the funds the potebntial for above average return in an attractive payoff.For new companies or ventures that have a limited operating history,venture capital funding is increasingly becoming a popular-even essential-source for raising capital,especially if they lacks access to capital markets ,bank loans or other debt instruments.