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November 14, 2013

Venture Capital Companies - Introduction, Features


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Venture Capital is an early stage of financing of new companies which seems to grow rapidly. The basic rule of venture capital is higher risks with higher returns, it is very difficult to assess the strength and weakness of a project at the initial stage. According to SEBI, "Venture Capital means a fund established in the form of company or trust, which raises money through loans, donations, issue of securities or units as the case may be and makes or proposes to make investments in accordance with the regulations". This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.

Features : The three main features of venture capital are :
  1. Equity participation : Venture financing is an actual or potential equity participation through direct purchase of shares, options or convertible securities. The object is to make capital gains by selling off the investment once the enterprise becomes profitable.
  2. Long Term Investment : It is a long-term capital investment. It has to wait for a long-period, say 5 to 10 years to make large profits.
  3. Participation in Management : The venture capitalist participates continuously in the management of financial unit. This helps him to protect his investment. More than finance, venture capitalist gives his marketing, technology, planning and management skills to the new firm. 
Venture Capitalists in India :
The setting up of Risk Capital Foundation by IFCI in 1975 marks the beginning of venture capital in India. In 1976, the Government of India created Technical Development Fund (TDF) in the Ministry of Industry with the assistance of World Bank. Later foreign banks (Grindlays Bank) and Indian Banks (State Bank of India and Canara Bank) entered into the business. Financial Institutions like IFCI, IDBI adn ICICI also set up units. 

That's all for now friends. In our next post we shall discuss about the SEBI guidelines for Venture Capital Funds. Happy Reading :)

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