A form of equity financing designed specially for funding high risk and high reward projects is known as venture capital. Venture capital plays an important role in financing hi-tech projects, besides helping research and development projects to turn into commercial production. By financing the technology, venture capital assists in fostering the growth and development of enterprises. In Western countries much of this capital is used for establishing technology and expanding business.
Venture Capital derives its value from brand equity, professional image, constructive criticism, domain knowledge, industry contacts, etc as they bring to table the benefits at a significantly lower management agency cost.
A Venture Capital Fund (VCF) strives to provide entrepreneurs with the support they need to create up-scaleable business with sustainable growth, while providing their contributors with outstanding returns on investment, for the higher risks they assume.
Venture Capital Fund activities generally include financing new and rapidly growing companies that are specially knowledge based, sustainable, up-scaleable companies, purchase equity/quasi equity securities, assisting in the development of new products or services, adding value to the company through active participation, taking higher risks with the expectation of higher rewards, and having a long term orientation.
Venture capital refers to an equity related investment in a growth oriented small/medium business to enable the investors to accomplish corporate objectives, in return for monetary share holding in the business or the irrevocable right to acquire it.
Venture capital ‘private equity investment’:
Venture capital is a popular method by which investors support entrepreneurial talents with finance and business skills to exploit market opportunities with a view to obtaining long term capital gains. It involves the provision of risk-bearing capital, usually in the form of equity participation to companies with high growth potential besides providing some value addition in the form of management advice and contribution to overall strategy.
Long term investment, generally in high risk industrial projects with high reward possibilities, is called venture capital. The investment may take place at any stage of implementation of the project, between start up and commencement of commercial production. Venture Capital is also invested in financing the new business and professional activities that carry a higher degree of success and failure as well. Venture capital implies level of risk implicit in the investment of funds.
1. According to Dr Neil Cross, a Senior Executive with 3i, one of the world’s largest and oldest venture capital companies and a former Chairman of the European Venture Capital Association, Venture Capital Investment is defined as the provision of risk bearing capital, usually in the form of a participation in equity to companies with high growth potential. In addition the venture company provides some value added in the form of management advice and contributions to overall strategy. The relatively high risks from the venture capitalists are compensated by the possibility of high return, usually through substantial capital gains in the medium-term.
2. According to the Bank of England Quarterly Bulletin of 1984, Venture capital investment is defined as an activity by which investors support entrepreneurial talent with finance and business skills to exploit market opportunities and thus obtain long-term capital gains.
The organized financing activity connected with relatively new enterprises in order to achieve substantial capital gains, may be referred to as ‘venture financing’, such enterprises having very potential for growth due to advanced technology new products or services or other valued innovations.
The rationale for the venture capital arises on account of the fact that there is a high expectation for large gains for an entrepreneur which acts as the motivation behind taking up risky investments that carry high return profiles. Venture capital investment is made with the objective of obtaining equity ownership in such enterprises initially, and to take part in the growing prospects in the form of capital appreciation subsequently.