All you need to know about Venture Capital

Meaning – Venture Capital :

The term Venture Capital fund is usually used to denote individual or Institutional investors who provide equity finance or risk capital to little known, unregistered, highly risky, young and small private business. They’re known for backing high-growth companies in the early stages, and many of the best-known entrepreneurial success stories in India owe their growth to financing from venture capitalists. It’s a long term financial assistance backed up by high amount of risk.

In 1980s ICICI has formed a venture capital firm as a joint venture with Unit trust of India where they procured funds mainly for financing the highly growth oriented sectoral enterprises. It is India’s first venture capital firm.

Features :

(1) Highly risky :

It’s a well known fact that the level of risk is directly related to the amount of return. The more the risk one is ready to face the more amount of return he is able gain. Venture capitalist invest in highly growth oriented business where the level of risk in the initial period is very high when compared to the well established businesses. So if you are planning to become a venture capitalist then you need to be ready to face the risk involved in the investment.

(2) High return :

Venture capital earns high amount of return once if the business becomes successful in the market. Usually venture capitalist gain a lot during the tremendous success of the startups which they financially backed up.

(3) Moderate the financial burden of the startups :

At the initial stage of starting a business one may or may not get the success so easily. So in the times of initial operations of the business which we can call as a gestation period during which the financial statement of the entity contains only cost, the investment made by the venture capitalists help the startups immensely.

(4) Chance of getting finance based on real time needs :

Unless in banks and financial institutions venture capitalists provide the business with the required amount of investment considering the real time situational needs of the business. In case of banks one may not get the sufficient amount of investment to backup the enterprise.

Advantages :

(1) Opportunity to get the business expertise of venture capitalists :

The business expertise of the venture capitalists will help the aspiring young entrepreneurs having no experience of dealing with different dimensions of a business. Many venture capitalists have professional and trained staff in their team. Thus they can get benefited from the expertise and experience of the venture capitalists immensely.

(2) Business connection :

A well established venture capitalists firm has many business connections in the market which help the startups to expand their business without incurring any additional cost to develop their connections.

Disadvantages :

(1) Probability of losing the control :

In many cases venture capitalists may exercise a significant control over the enterprise as their investment is at high risk. Sometimes they dominate the business owners in terms of decision making.

(2) Uncertainty :

Sometimes a venture capital firm may think that the decision being taken by the business owners may not worth anymore , in such circumstances they may not be willing to invest any additional funds if required to backup the business.