Definition: Venture Capital means, providing seed, start up and first stage financing and funding the expansion of companies that have already demonstrated their business potential but do not have access to the public securities markets or to credit oriented institutional funding sources.

Venture Capitalists also provide management/leveraged buyout financing. The processis of investing of risk capital in an enterprise in which the venture investor shares ownership as well as Board of Directors level management responsibilities with the funding management team.

It is risk finance for entrepreneurial growth oriented companies. It is investment for the medium or long-term, seeking to maximize medium or long term return for both the parties. The investor can add value to the company becaouse of his knowledge, experience and contact base.

It is an actual or potential equity investment in companies through the purchase of stock, warrants, options or convertible securities.

Venture Capital is an equity, equity featured capital seeking investment in new ideas, new companies, new products, new processes or new services, that offer the potential of high returns on investment. It may also include investment in turnaround situations.

CHARACTERSISTICS OF VENTURE CAPITAL

1. Investments are made in equity featured instruments of investment.

2. Young Companies that do not have access to public sources of equity or other forms of capital.

3. Industry, products or services that hold potential of better than normal or average revenue growth.

4. Companies with better than normal or average profitability.

5. Products/services on the early stages of their life cycle.

6. Turnaround companies

7. Long-term and active involvement with investee.

The importance of venture capitalists is not on account of the volume of capital it provides; it is more on account of its indirect benefits. These investments enable the development of entirely new lines  of business. They typically prefer to invest in  knowledge based industries such as Information Technology and Bio-tech.  This has in turn catalyzed entrepreneurship amongst professional managers and technologists to a considerable degree.

INDIAN VENTURE CAPITA INDUSTRY

There are mainly three categories of venture capital funds:

1. Funds promoted by All India development Finacial Institutions and State level Development Financial Institutions.

2. Funds promoted by commercial banks.

3. Funds promoted by private sector financial services companies.