A venture capital can be defined as a temporary equity or quasi-equity investment in a growth-oriented small or medium business managed by a highly motivated entrepreneur. The investment is combined with managerial assistance.
Venture capital finance
In the conventional method, investment is undertaken by companies through stock market. Companies normally get their finance through promoters or shareholders and later when they become highly profitable, they go for commercial borrowings.
After reaching a particular stage, companies expand their capital structure through the stock exchanges. It is very difficult for an entrepreneur to raise capital in traditional way even though he possess good knowledge.
Hence a new method of financing long term capital to medium and small scale sectors is adopted through institutional mechanism which gave birth to Venture capital finance.
Before going in for venture capital finance, the venture capital institution will have to assess the potentiality of the borrowing concern by a proper appraisal. This appraisal will be similar to the project appraisal undertaken by commercial banks.
Features of Venture capital
The following are the features of venture capital
1. It is basically financing of new companies which are finding it difficult to go to the capital market at their early stage of existence.
2. This finance can also be loan-based or in-convertible debentures so that they carry a fixed yield for the providers of venture capital.
3. Those who provide venture capital aim at capital gain due to the success achieved by the concern that borrows.
4. It is a long-term investment and made in companies which have high growth potential. The provision of venture capital will bring rapid growth for the business.
5. The venture capital provider will also take part in the business of borrowing concern whereby, the venture capital financier not merely confines to finance, but also provide managerial skill.
6. Not all the capitalists will experience high risk. But venture capital financing contains risks. But the risk is compensated with a higher return.
7. Not much of technology is involved in venture capital, it involves financing mainly small and medium size firms, which are in their early stages. With the assistance of venture capital, these firms will stabilize and later can go in for traditional finance.