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Explain about venture capital in financial management.
Venture capital is the capital supplied to start ups or any small business by the investors in the form of share capital believing they have long term growth in their business.
Though, it involves risk in investing to the investors, they invest by seeing attractive payoff. The investors are capitalists. In venture capital, ownership is distributed to limited partners.
Methods of venture capital financing are as follows −
Equity financing − Equity financing is important for new companies, as they are not able to give returns on time to its investors.
Conditional loan − Lender will only charge royalty instead of interest.
Income note − It is a form of hybrid finance but, interest and royalty rates are low.
Participating debentures − Interest is paid on various rates at various stages.
Features of venture capital are as follows −
- High risk.
- Equity participation.
- Long term investment.
- Interest in management of the assisted firms.
Stages in venture capital are mentioned below −
Idea generation − People who came up with different/new ideas must impress venture capitalist, so that, they invest their money by believing the long term growth of the business.
Start-up stage − Newly formed firm needs money for marketing and product development. They already had their business plans ready.
First stage − This stage requires large amounts, because they are into manufacturing and sales.
Expansion stage − After completing the first stage, they need more capital to meet their demand by expanding their present business or to set up new business which supports their present ones.
Exist stage − If there are any acquisitions, mergers or IPOs, venture capitalist can sell their shares and take their returns.
Some of the advantages of venture capital are as follows −
- No monthly payments.
- Experienced investors.
- Network building.
- Industry experts.
Some of the disadvantages are given below −
- Dilution of ownership.
- Funds released based on the returns.
- Decision making.
- Funding is not easy.
- Cost of equity.
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