Geetha has completed her B.Tech in chemical engineering from a famous IIT. She wants to start a chemical production unit using new and untried technology involving high risk factors along with high growth potential. She wants to raise funds from a source that provides private equity capital as seed funding. Suggest Geeta the source of finance. Give the meaning of the source suggested and state any four features of this source.

Question

Accepted Answer

Geetha should raise funds from **Venture Capital**. 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.

**Meaning of Venture Capital:**

Venture capital 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. Venture capital is a way in which investors support entrepreneurial talent with finance and business skills to exploit market opportunities and obtain long-term capital gains.

**Four features of Venture Capital:**

1. **Equity Finance in New Companies:** It is basically equity finance in relatively new companies. Venture capital is invested in exchange for an equity stake in the business.

2. **Long-term Investment:** It is a long-term investment in growth-oriented small or medium firms, usually occurring over a five-year period.

3. **Business Skills and Continuous Involvement:** Venture capitalists not only provide capital but also business skills to investee firms. They have continuous involvement in the business after making the investment, providing guidance and monitoring progress.

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. Venture capitalists look for innovative technology, potential for rapid growth, a well-developed business model, and an impressive management team.