Venture capital (VC) refers to independently managed and dedicated pools of capital that decides to put in an equity or equity-linked investments in privately held, high- growth companies; it generally expects a high return for the risk it takes and the waiting it takes to get its return. VC is generally synonymous with private equity.
VCs may obtain some income from dividends from the companies they invest in but they obtain most of their earnings from capital gain from their investments. They will often consider more high risk ventures than banks or finance companies but to compensate, look for superior gains upon exit.
It is important for them to consider exit options so that they would move to other ventures for further investment once the enterprise starts earning the expected levels of returns. They usually invest through the purchase of shares in a company and if the investment is large this may mean that they possess a majority shareholding.
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They usually require a seat on the Board of Directors. VCs would not generally take part in the day-to-day running of the company, although provision of management and technical expertise can often be a condition of VC funding.
They commonly act as mentors and a business partners to see that the company grows and succeeds, which is in the best interests of all concerned, including the venture capitalist. Several IT, Biotech and Pharmaceutical Companies have used VC funds very successfully in their initial years. They seek to exit within a period of five to seven years.
Exit strategies can differ and may include being bought out by the company’s principals, a public listing, or sales of the VC’s shares to a third party at a premium. The strategy needs to be negotiated at the beginning of the VC investment. Most VCs have a portfolio of investments to spread their risks evenly.