2.

1 Concept of Venture Capital The term venture capital comprises of two words that is, Venture and Capital.Venture is a course of processing, the outcome of which is uncertain but to which isattended the risk or danger of loss. Capital means recourses to start an enterprise. Toconnote the risk and adventure of such a fund, the generic name Venture Capital wascoined.Venture capital is considered as financing of high and new technology based enterprises.It is said that Venture capital involves investment in new or relatively untried technology,initiated by relatively new and professionally or technically qualified entrepreneurs withinadequate funds. The conventional financiers, unlike Venture capitals, mainly finance proven technologies and established markets. However, high technology need not be pre-requisite for venture capital.Venture capital has also been described as unsecured risk financing. The relatively highrisk of venture capital is compensated by the possibility of high returns usually throughsubstantial capital gains in the medium term. Venture capital in broader sense is notsolely an injection of funds into a new firm, it is also an input of skills needed to set upthe firm, design its marketing strategy, organize and manage it. Thus it is a long termassociation with successive stages of companys development under highly risk investment conditions, with distinctive type of financing appropriate to each stage of development. Investors join the entrepreneurs as co-partners and support the project withfinance and business skills to exploit the market opportunities.Venture capital is not a passive finance. It may be at any stage of business/productioncycle, that is, start up, expansion or to improve a product or process, which are associatedwith both risk and reward. The Venture capital makes higher capital gains throughappreciation in the value of such investments when the new technology succeeds. Thusthe primary return sought by the investor is essentially capital gain rather than steadyinterest income or dividend yield.The most flexible definition of Venture capital is-The support by investors of entrepreneurial talent with finance and business skills to exploit market opportunities and thus obtain capital gains.Venture capital commonly describes not only the provision of start up finance or seedcorn capital but also development capital for later stages of business. A long termcommitment of funds is involved in the form of equity investments, with the aim of eventual capital gains rather than income and active involvement in the management of customers business 2.2 Features of Venture Capital 2.2.1 High Risk By definition the Venture capital financing is highly risky and chances of failure are highas it provides long term start up capital to high risk-high reward ventures. Venture capitalassumes four types of risks, these are: Management risk - Inability of management teams to work together. Market risk - Product may fail in the market.

Product risk - Product may not be commercially viable. Operation risk - Operations may not be cost effective resulting inincreased cost decreased gross margins.2.2.2 High Tech As opportunities in the low technology area tend to be few of lower order, and hi-tech projects generally offer higher returns than projects in more traditional areas, venturecapital investments are made in high tech. areas using new technologies or producinginnovative goods by using new technology. Not just high technology, any high risk ventures where the entrepreneur has conviction but little capital gets venture finance.Venture capital is available for expansion of existing business or diversification to a highrisk area. Thus technology financing had never been the primary objective but incidentalto venture capital.2.2.3 Equity Participation & Capital Gains Investments are generally in equity and quasi equity participation through direct purchaseof shares, options, convertible debentures where the debt holder has the option to convertthe loan instruments into stock of the borrower or a debt with warrants to equityinvestment. The funds in the form of equity help to raise term loans that are cheaper source of funds. In the early stage of business, because dividends can be delayed, equityinvestment implies that investors bear the risk of venture and would earn a returncommensurate with success in the form of capital gains.2.2.4 Participation In Management Venture capital provides value addition by managerial support, monitoring and follow upassistance. It monitors physical and financial progress as well as market developmentinitiative. It helps by identifying key resource person. They want one seat on thecompanys board of directors and involvement, for better or worse, in the major decision affecting the direction of company. This is a unique philosophy of hands onmanagement where Venture capitalist acts as complementary to the entrepreneurs. Basedupon the experience other companies, a venture capitalist advise the promoters on project planning, monitoring, financial management, including working capital and public issue.Venture capital investor cannot interfere in day today management of the enterprise butkeeps a close contact with the promoters or entrepreneurs to protect his investment.2.2.5 Length of Investment Venture capitalist help companies grow, but they eventually seek to exit the investment inthree to seven years. An early stage investment may take seven to ten years to mature,while most of the later stage investment takes only a few years. The process of havingsignificant returns takes several years and calls on the capacity and talent of venturecapitalist and entrepreneurs to reach fruition.2.2.6 Illiquid Investment Venture capital investments are illiquid, that is, not subject to repayment on demand or following a repayment schedule. Investors seek return ultimately by means of capitalgains when the investment is sold at market place. The investment is realized only onenlistment of security or it is lost if enterprise is liquidated for unsuccessful working. Itmay take several years before the first investment starts to locked for seven to ten years.Venture capitalist understands this illiquidity and factors this in his investment decisions.

2.3 Difference between Venture Capital & Other Funds 2.3.1 Venture Capital Vs Development FundsVenture capital differs from Development funds as latter means putting up of industrieswithout much consideration of use of new technology or new entrepreneurial venture buthaving a focus on underdeveloped areas (locations). In majority of cases it is in the formof loan capital and proportion of equity is very thin. Development finance is securityoriented and liquidity prone. The criteria for investment are proven track record of company and its promoters, and sufficient cash generation to provide for returns(principal and interest). The development bank safeguards its interest through collateral.They have no say in working of the enterprise except safeguarding their interest byhaving a nominee director. They do not play any active role in the enterprise exceptensuring flow of information and proper management information system, regular boardmeetings, adherence to statutory requirements for effective management control where asVenture capitalist remain interested if the overall management of the project o account of high risk involved I the project till its completion, entering into production and makingavailable proper exit route for liquidation of the investment. As against this fixed payments in the form of installment of principal and interest are to be made todevelopment banks .2.3.2 Venture Capital Vs Seed Capital & Risk Capita
It is difficult to make a distinction between venture capital, seed capital, and risk capitalas the latter two form part of broader meaning of Venture capital. Difference betweenthem arises on account of application of funds and terms and conditions applicable. Theseed capital and risk funds in India are being provided basically to arrange promoterscontribution to the project. The objective is to provide finance and encourage professionals to become promoters of industrial projects. The seed capital is provided toconventional projects on the consideration of low risk and security and use conventionaltechniques for appraisal. Seed capital is normally in the form of low interest deferred loanas against equity investment by Venture capital. Unlike Venture capital, Seed capital providers neither provide any value addition nor participate in the management of the project. Unlike Venture capital Seed capital provider is satisfied with low risk-normalreturns and lacks any flexibility in its approach.Risk capital is also provided to established companies for adapting new technologies.Herein the approach is not business oriented but developmental. As a result on one handthe success rate of units assisted by Seed capital/Risk Finance has been lower than those provided with venture capital. On the other hand thereturn to the seed/risk capital financier had been very low as compared to venturecapitalist