Venture Capital

A venture capital is provide long term finance to high technology projects which involve risk. Venture capital is a way in which investor supports entrepreneur in the form of equity participation. Venture capitalists pool their resources including their managerial abilities to assist in early years of project and when it reaches the stage of profitability they sell their share at a premium

Features of venture capital

It is basically in the form of equity participation. It also takes the form of long term debt or loan It is a long term investment in growth oriented projects where in new capital is injected to enable the business to grow rapidly Venture capitalist joins as co promoter and shares risk and rewards of the enterprise There is regular involvement of VC in the business after making investment Venture capital is not just injection of money but also an input to set up the firm design marketing strategy ,organize and manage it Investment is usually made in small and medium scale enterprise Once the venture starts earning profits the VC disinvests its holdings

Activities of VC
To provide seed capital so as to support the idea To provide additional capital at various stages To provide bridge finance

Disinvest Mechanism
The main aim of venture capitalist is to sell the investment and earn capital gains. This is done through 1 Promoters buy back 2 Public issue 3 Sale to other venture capital funds 4 Management buy outs

Stages of venture capital

1. Seed money stageIt is need for transforming an idea into business or to prove a new concept. Marketing is not included in this stage . 2.Start up-----Financing for a firm that started up in past and capital is need for manufacturing and product development 3.First Round Finance---Additional money to begin sales and manufacturing because firm is not able to generate adequate funds 4.Second Round Finance---funds are kept for working capital but it is still losing money 5.Third Round Finance---Financing for a firm that is breaking even an is contemplating an expansion project 6.Fourth Round Finance---Money is provided for firm that are likely to go public soon

Advantages to Promoters

Venture capital provides a solid capital base as they inject long term equity finance otherwise entrepreneur have to convince underwriters, brokers and investors Public issue involves lot of arrangements like underwriting, publicity etc which is not possible for a new entrepreneur and VC saves him all these efforts The VC acts as business partners who share the rewards as well as the risk VC provides strategic, operational and financial advice based on past experience in similar situations VC helps in appointing key personnel and obtaining co-investment with other VC firms and helps in taking decisions It helps to reduce the time lag between technological innovation and its commercial use Once the firm starts earning profits it will be to raise funds in the capital market and there is proper channelization of funds The economy will grow as new industries are induced in the market and brings about stability in the industry

Advantages to Public
The investing public will be able to reduce risk against management .Venture capital helps to stop malpractices by management by their constant involvement in business Venture capital will be able to forecast profits and as investors have no means to judge and this work is done by them The investors do not have any means to ensure that affairs of the business are done prudently and this is done by VC

Methods of VC
VC is available in India in 4 forms-- Equity Participation---VC directly buy shares not exceeding 49%and retain them till project starts making profits and sold them in the secondary market or is buy back by the promoters Conventional loanunder it lower fixed interest rate of interest is charged till the firm starts earning profits and latter higher rate until loan is repaid according to predetermined terms of loan agreement Conditional loan-----under it interest free loan is provided and a royalty is paid on sales and loan is repaid according to predetermined schedule Income Notes----It is a combination of conventional and conditional loan