Previous Year Question
What does venture capital mean?
A short-term capital provided to industries
A long-term start-up capital provided to new entrepreneurs
Funds provided to industries at times of incurring losses
Funds provided for replacement and renovation of industries
Correct Answer: B
Detailed Solution
Venture capital is long-term risk capital provided to new enterprises or start-ups possessing innovative ideas, high growth potential and relatively high business risk.
Unlike a conventional bank loan, venture capital is generally provided through:
Equity shares.
Compulsorily convertible instruments.
Equity-linked investments.
Other permitted quasi-equity instruments.
Instead of receiving a fixed interest payment, the venture-capital investor obtains an ownership interest in the enterprise. If the start-up succeeds, the investor may benefit from appreciation in the company’s value. If the venture fails, a substantial part of the investment may be lost.
Important characteristics of venture capital include:
Investment in early-stage or growth-stage enterprises.
A medium-to-long investment horizon.
Higher risk than conventional investment.
Possible technical, managerial and commercial guidance from the investor.
Exit through an IPO, strategic sale, acquisition or promoter buyback.
Importance for start-ups lacking sufficient collateral or an established credit history.
Examination of the options:
Option (a): Short-term capital—Incorrect
Venture capital is not short-term assistance comparable to working capital. Investors may have to wait for several years while the start-up develops and its valuation increases.
Option (b): Long-term start-up capital—Correct
It is long-term risk capital supplied to new entrepreneurs and start-ups with high growth potential.
Option (c): Funds during losses—Incorrect
Venture capital is not a general rescue fund for any loss-making industry. Investment is based on prospective growth and returns.
Option (d): Replacement and renovation funds—Incorrect
Ordinary industrial finance for replacing old machinery or renovating an industrial unit is not venture capital.
In India, Venture Capital Funds are generally regulated as Category I Alternative Investment Funds under the SEBI Alternative Investment Funds Regulations. This category includes funds investing in start-ups, early-stage ventures and sectors considered socially or economically desirable.