VENTURE CAPITAL
It is a form of equity financing designed specially for funding high risk and high reward projects. This is combined with value addition in the form of management advice, marketing expertise and contribution to overall strategy. The concept was emerged in 1950s in the US and spread to other parts of the world. Today the venture capital market consist of large number of venture capital funds(VCFs) established by various companies and individuals in the form of trust or company. A venture capitalist invest only in highly promising and rewarding projects which usually have high risk also. So it is a high risk capital.
Definition
According to Indian Venture Capital Association (IVCA), "venture capital means, money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors." VCFs provide seed, start up and first stage financing and also funds the expansion of companies that have already demonstrated their business potential but do not yet have access to the public securities market or to credit oriented institutional funding sources."
Financing Pattern
Venture capitalists can finance a project in many ways at different stages. Many of venture capitalists provide funds in the form of equity capital. They usually subscribe 49% of equity shares. This ensures that the ownership remains with the entrepreneur. As the cash flows are uncertain in the initial years equity financing is more beneficial to the entrepreneur than debt financing. In certain cases venture capitalists provide loan which may be converted into equity shares at a later date. The amounts are given as seed capital. It is a help for the entrepreneur to get money in the early stages of project formulation. Research programmes before the product is launched into the market also needed when the market also needs money. Funds are also needed when the business starts picking up. Venture capitalists also provide finance for expansion and diversification. In certain cases the company may not be able to raise funds through public issue. Entrepreneurs usually approach venture capitalists for funds in such circumstances.
Stages of financing
I. Early Stage Financing
II. Later Stage Financing
I. Early Stage Financing
This is the first stage financing when the firm is undertaking production and need additional funds for selling it's products. The capital is provided for product development, R&D and initial marketing. It involves different type of financing like;
a) Seed Capital / Seed money
b) Start up Capital
c) First Round Financing
d) Second Round Financing
II. Later Stage Financing
This stage of venture capital financing involves established businesses which require additional financial support but cannot resort to public issues of capital. This stage of financing includes financing development, expansion, buyouts and turnaround needs. Thus different forms of financing in this stage are;
a) Development Financing
b) Bridge Financing
c) Replacement Financing
d) Buyouts / Acquisition Financing
e) Turnaround Financing
It is a form of equity financing designed specially for funding high risk and high reward projects. This is combined with value addition in the form of management advice, marketing expertise and contribution to overall strategy. The concept was emerged in 1950s in the US and spread to other parts of the world. Today the venture capital market consist of large number of venture capital funds(VCFs) established by various companies and individuals in the form of trust or company. A venture capitalist invest only in highly promising and rewarding projects which usually have high risk also. So it is a high risk capital.
Definition
According to Indian Venture Capital Association (IVCA), "venture capital means, money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors." VCFs provide seed, start up and first stage financing and also funds the expansion of companies that have already demonstrated their business potential but do not yet have access to the public securities market or to credit oriented institutional funding sources."
Financing Pattern
Venture capitalists can finance a project in many ways at different stages. Many of venture capitalists provide funds in the form of equity capital. They usually subscribe 49% of equity shares. This ensures that the ownership remains with the entrepreneur. As the cash flows are uncertain in the initial years equity financing is more beneficial to the entrepreneur than debt financing. In certain cases venture capitalists provide loan which may be converted into equity shares at a later date. The amounts are given as seed capital. It is a help for the entrepreneur to get money in the early stages of project formulation. Research programmes before the product is launched into the market also needed when the market also needs money. Funds are also needed when the business starts picking up. Venture capitalists also provide finance for expansion and diversification. In certain cases the company may not be able to raise funds through public issue. Entrepreneurs usually approach venture capitalists for funds in such circumstances.
Stages of financing
I. Early Stage Financing
II. Later Stage Financing
I. Early Stage Financing
This is the first stage financing when the firm is undertaking production and need additional funds for selling it's products. The capital is provided for product development, R&D and initial marketing. It involves different type of financing like;
a) Seed Capital / Seed money
b) Start up Capital
c) First Round Financing
d) Second Round Financing
II. Later Stage Financing
This stage of venture capital financing involves established businesses which require additional financial support but cannot resort to public issues of capital. This stage of financing includes financing development, expansion, buyouts and turnaround needs. Thus different forms of financing in this stage are;
a) Development Financing
b) Bridge Financing
c) Replacement Financing
d) Buyouts / Acquisition Financing
e) Turnaround Financing
