What is meant by Venture Capital? State any four features of venture capital finance.

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Accepted Answer

**Venture Capital** is a type of private equity capital provided as seed funding to early-stage, high-potential, high-risk, growth-up companies/entrepreneurs who lack the necessary experience and funds to give shape to their ideas. It is an equity-based investment in a growth-oriented small to medium business to enable the investors to accomplish objectives, in return for minority shareholding in the business or the irrevocable right to acquire. It is more accurate to view venture capital broadly as a professionally managed pool of equity capital.

Four features of venture capital finance are:

1. **Equity Finance:** It is basically equity finance in relatively new companies. Venture capital is invested in exchange for an equity stake in the business, not as a loan.

2. **Long-term Investment:** It is a long-term investment in growth-oriented small or medium firms, usually occurring over a five-year period. Venture capitalists look for an "exit" in the time frame of typically 3-7 years.

3. **Business Skills Provided:** Venture capitalists not only provide capital but also business skills to investee firms. They offer proactive advice, guidance, industry connections, and mentoring.

4. **High Risk-Return Spectrum:** It involves a high risk-return spectrum. Since the investments are in early-stage companies with untried technology, the risk is very high, but so is the potential for returns.