Friday, February 13, 2009

VENTURE CAPITAL

Posted by Sandeep Dhama at 12:04 AM

Meaning and definition
The term venture capital comprises of two words- ‘venture’ and ‘capital’. The venture means a course of proceeding, the output of which is uncertain but which is accompanied by the risk of danger of loss. The capital means resources to start the enterprise.

Thus, venture capital implies committing capital resources to the enterprise that has risk and adventure i.e funds made available for financing of new business ventures.
Venture capital is also called seed capital or start up capital.

It is money invested by professionals who invest and manage young rapidly growing companies that have the potential to develop into significant economic contributors.  

Characteristics of venture capital

1.Supports entrepreneurs by financial assistance
2.Provide management skill
3.Investments are generally in equity shares
4.Investor’s return is different from that of ordinary share holders
5.It is a chain joining investors and entrepreneurs
6.Venture capital is invested for new technological development
7.Investors are involved in management of the enterprise
8.High risk
9.Long – term investment

Stages/Steps Of Venture Capital Funding
1.   Early stage
2.   Expansion financing stage
3.   Maximum financing stage

Types of Venture Capital
1.
  • Equity participation
  • Conditional loans
  • Income notes
  • Participating debentures
  • Venture leasing
Problems of Venture Capital financing
1.
  • Requirement of an experienced management team
  • Requirement of an average rate of return on investment
  • Longer payback period
  • Uncertainty regarding the success of the product in the market
  • Questions regarding the infrastructure details of production like plant location, accessibility, relationship with suppliers and creditors, transportation facilities, labour availability etc.
  • The category  of potential customers and the packaging and pricing details of the product
  • The size of the market
  • Major competitors and their market share
  • Skills and Training required and the cost of training
  • Financial considerations like return capital employed (ROCE),cost of project, the Internal Rate of Return (IRR) of the project, total amount of funds required, ratio of owners investment (personnel funds of the entrepreneur), borrowed capital, mortgage loans etc. in the capital employed.

 

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