A ‘venture’ is a new risky business. ‘Venture Capital’ therefore, refers to providing start-up capital to new and risky business operations.
Every new business operation is risky. Then what distinguishes venture capital business operations from other business operations? In Venture Capital business:
(a) The promoters may be new technocrats, who have not proved their business at men or expertise so far; and
(b) The idea of new product is yet to be tested in the market.
Hartco, the venture capitalist (one who provides finance for venture capital business) takes a bigger risk in financing the production of a new product by persons who have not proven their business capabilities so far. It can be said that venture capital is the Equity investment in young private companies.
The venture capitalist may be financial institutions, banks, investment companies or even wealthy individuals. The venture capitalist is prepared to back untried business operations in exchange for a share of future expected profits.
The venture capitalists usually provide capital in stages depending upon growth of business operations and not at one stroke. If the business succeeds the venture capitalist makes big profit from a share in profit and form value appreciation of investment in Equity Shares.
In USA it started in a big way in 1980s. Even the US Government provided cheap loans to investment companies to encourage them to relend the money to deserving new entrepreneurs. There are many success stories of venture capital assisted business operations. However, failures of Venture Capital business are more than success stories.
In India Venture Capital business idea caught the minds of financial institutions only in 1990s. The Government allows banks tax concession for venture capital business operations. However, this business started only in a small scale in India so far.
The reason mainly is the reluctance of banks to provide funds for untested and doubtful business operations. However, new software engineers have started in a big way with venture capital assistance. In India, SEBI have laid down rules and regulations for venture capital business.
As per RBI guidelines banks providing finance to venture capital business can treat such advances as priority sector loans. The Technology Development and Information Company of India Ltd., Risk Capital and Technology Finance Corporation, SBI Capital Market, Canbank Financial Services and Credit Capital Finance Corporation are already financing high risk, new ventures under Venture Capital Financing Schemes.
As per “Venture Activity Report 1998” published by Indian Venture Capital Association, Bangalore total venture capital investment in India during the year 1998 amounted to Rs. 1256 crore. Information Technology (IT) sector has attracted the largest share of Rs. 324 crore followed by computer software sector which received investment totaling at Rs. 251 crore.