Venture Capital

Venture capital refers to a kind of capital required to start up a new business or expand an existing business. When an entrepreneur generates a business idea, he needs capital for converting his idea into reality.

He needs finance for startup expenses and working capital. Traditionally, the startup finance is raised in various ways such as personal savings, borrowing from friends and relatives.

However, this kind of financial resources are limited and is not sufficient to fund large projects. Later, banks and financial institutions have started funding new business.

But these institutions insist on collaterals, business track records and other conditions to sanction loans and advances. Owing to all these, it becomes difficult for any new entrepreneur with these pre-conditions to avail the required finance. Venture capital comes handy to new entrepreneurs in financing their startup business ventures without much hassle.

Roles of venture capital firms

In developing economies, venture capital plays a vital role in promoting business ventures. Most new startup up businesses are funded by informal venture capital community such as insurance firms, pension funds, foundations and professionally run venture capital companies, endowment funds, affiliates of major banks and foreign investors.

Sometimes wealthy individuals who possess expertise in certain business also run venture capital firms. The venture capital firms act primarily as the agents between new entrepreneurs and financial resources.

Venture capital firms are risk managers

Startup businesses inherit various risks associated with that particular business. Venture capital firms are basically expertise in managing such risks. As they process hundreds of business plans every year, they gain knowledge in handling risk and nitty-gritty of every business. Venture capital firms always fund businesses that are promising and viable.

Most venture capital firms aim at long-term capital appreciation rather than repayment of funds in short-term. On funding the business, they do not remain as a mere financier or fund raiser, but also take active interest in strategic management.

They infuse their expertise and professionalism along with their financial resources.

Thus, the new entrepreneur gains in ways, acquiring startup finance as well as managerial know-how.

Venture capital has benefited many firms worldwide. Some of the most successful global giants gained from venture are Apple Computers, Cirrus Logic, Intel, Federal Express, etc. Each company present success stories and this has resulted in attracting more institutional investors as well as foreign investors to start venture capital firms and help in promoting promising entrepreneurs.