What Is Venture Capital and its Functions, Objective, Features and Advantages

What Is Venture Capital?

The investment of long-term equity finance in high risk projects with possibilities of high reward is called Venture Capital. It is considered as a new financial service and helps in the new class of a new entrepreneur to translate their business idea into realities.

Venture Capital is known as VC in short form. Generally venture capital is the type of fund which is provided to small business and startup companies for business growth and development.

Features Of Venture Capital

  • Venture capital finances only the right tech,telecom and software projects.
  • It has a long gestation period.
  • It fetches a good amount of profit.
  • Venture capital is a long term investment process where profit or return comes after 5 to 10 years
  • It is an active form of investment.
  • Venture capital is a firm of financing and private equity which provides startup companies
  • It is concerned with conditionals and royalty.
  • Venture capital not only provides financial requirements but also it provides technical and managerial advice.
  • It provides financial support for long term or long term investment.
  • Venture capital is a high risk venture.
  • Venture capital provided by investors, some investment bank and financial institutions and high net worth individuals (Angel investors)

Objectives Of Venture Capital

  • It helps in building enterprise vision.It helps to achieve high returns on its investment.
  • It provides foresight with a free sense of direction.
  • It inspires enterprises to achieve success.
  • It always helps to fuel ambitions and dreams.
  • It helps to enable enterprise in overcoming rough passages.

What is Venture Capital Funds

The funds which are invested in a new company with the purpose of its future growth are called Venture Capital Funds. Generally it is entered at an early stage and new investors take the highest risk during the entering stage.

Advantages Of Venture Capital

The advantages of venture capital are broadly discussed under the 3 heads they are:

A.Economic Oriented

B.Investor Oriented

C.Entrepreneur Oriented.

A.Economic Oriented

On the ground of economic oriented venture capital helps the nation in following manner:-

  • It helps in the industrialisation of the country.
  • It helps in the technological development of the country.
  • It generates employment
  • It helps in developing entrepreneurial skills and knowledge.

B.Investor Oriented

Venture capital also proved as advantages from the investors point of view. It helps them in number of areas such as:-

  • It provides profit to venture capital companies.
  • It invites investors to invest only after the company starts earning profit.
  • It ensures economical investors of funds.

C.Entrepreneur Oriented

Venture Capital is also entrepreneur oriented. It provides number of advantages to the entrepreneurs they are:

  • It generates innovations in the country.
  • It promotes and fostered the entrepreneurs and entrepreneurship in the country.
  • It helps small and medium entrepreneurs to convert their business ideas into reality.

Functions Of Venture Capital

Venture Capital plays a significant role in fostering industry development by exploring vast and untabbed potentialities. Generally it performs various functions for the development of economic and satisfaction of investors. Some of the main functions of venture capital are highlighted below:-

  • It provides finance as well as skill to the entrepreneurs and enterprise.
  • It helps to fill the gap between owners and Fund.
  • It ensures adequate banking facility.
  • Locate outstanding corporate achievers.

Stages Of Venture Capital Financing

The selection of investment by a venture capitalist is closely related to the stages and type of investment. Such stages are categorised on the basis of different factors such as time, risk, return and other related features. The stages of venture capitals is broadly divided into two categories that is:

A.Early Stage Financing

B.Expansion or development stage of financing.

A.Early Stage Financing

The financing activities which are concerned with the early stage of business or during start-up of a new business is called early stage financing.

Generally it involves a very high degree of risk as funds are made available for a period of ranging between 3 to 10 years. These stages include Seed Capital, Start Up and Second round financing facilities.

What is Seed Capital?

The capital which was invested to start a new business is called Seed Capital.

What is StartUp?

The capital which was invested during the running of the business enterprises is known as Start Up.

What is Second round Financing?

Further capital which was invested to continue the business in the absence of profit is known as second round financing.

B.Expansion or development stage financing

The financing activities which are concerned with the expansion or growth of a business unit are known as expansion or development stage financing. Generally it aims at growing enterprises owned productive assets and other firms.

This stage of financing also involves low risk and its time frame ranging between 1 to 3 years. This stage of financing includes; Management by in’s and management by out.

Management by ins:

Funds provided outside management to buy an on going company.

Management by out: Funds required for buying any product line.

How is Venture Capital different from an Angel Investor?

Venture Capital and Angel Investor both provide financial help to the companies. Generally venture capital provides a huge requirement of funds to the small medium and startup business with expertise suggestions.

But in the case of Angel Investor, the investors choose to invest in new companies for the profit. They do not give any expertise, suggestion or guidance to the business enterprise.

Generally Angel Investors use their own money to invest in new business where venture capital investors invest other sources of money.

Difference Between Venture Capital vs Private Equity

Venture Capital is investment which provides small and startup companies to grow their company in the primary stage.

Where, Private Equity investment which provides to those which are not listed on public stock exchange.

Venture Capital focused on improving managerial skill where private equity focused on to improve corporate governance.

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