Introduction To Venture Capital
Venture capital is the risky capital collected through different sources to invest alongside management in rapidly growing industries. Venture capital is the an important source of equity for start-up companies. Venture capital firms (VCF) are private partnerships or closely held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalist. Venture capitalists are persons with razor sharp minds and deep pockets who are ready to take the challenge to enter into untested areas. They generally:
1. Finance companies with enormous growth
2. Purchase equity securities
3. Assist in the development of new products or services
4. Take higher risks with the expectation of getting higher returns than the normal course of investment
5. Have a long-term orientation
6. Besides providing capital gives experienced management support.
When investing, venture capitalists carefully screen the technical aspect and business of the interested company. Venture capitalists invest in a small percentage of the businesses they review. They work very closely with the company's management like for the formulation of the strategy, crucial decision making process etc. According to a report out of 100 proposals received by venture capitalist only 1 reach the final stage of discussion and evaluation, while the others are rejected. Venture capitalists reduce the risk by developing a portfolio of young companies and reduce the loss if any incurred in future. Companies such as Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and Genentech are famous examples of companies that received venture capital early in their development.India which is booming with the information technology venture capital in this particular sector may prove to be boon asthis particular sector is faced with the problems such as rapid changes in the technologies used, upgradation and high cost of employee retention. With the need for Venture capital having been realised the rules and regulation set by the nodal agency which also regulates the capital market, Securities and Exchange Board of India (SEBI).
Venture Capital Investment
The main idea of venture capital as by the definition - investment in risky projects with the anticipation of getting higher returns. These funds are invested in industries, which are unable to access the funds through the conventional sources such as banks and financial institutions. Such risky enterprises generally do not have any major collateral to offer as security, hence banks and financial institutions are averse to funding them. Venture capital funding may be by way of investment in the equity of the new enterprise or a combination of debt and equity, though equity is the most preferred route.
Most of the ventures financed through this route is specially in the "industries" like infotech, electronics, biotechnology and communication or in short can be said to be ICE industries. Venture capitalists apart from offering money take active participation in management of the company. They evaluate and monitor the project on a continuous basis. The returns of the investment to the venture capitalist generally come in the form of selling the stocks when they get listed on the stock exchange or by a timely sale of his stake in the company. Venture capitalists assess several projects and invest only in a handful after careful scrutiny of the management and marketability of the project. Exit is preferably process of getting out of the venture through an public issue and listing on stock exchanges. The Exit route through a public issue is the much talked about since the laws says that only companies which are in existance for the three continuous years can go in for an issue is becoming the hindrance.