What Is Venture Capital  (VC)?

Money provided to unlisted, privately owned companies, by way of equity investment is Venture Capital (VC). In effect, the venture capitalist becomes a part owner of the company along with the original entrepreneur(s) who are the promoters of the company. The management of the company remains in the hands of the entrepreneur(s) while the VC takes the role of the experienced business advisor who ensures that the company moves steadily towards its desired mission and vision.

Venture Capital is very different from bank capital provided as loans. Bankers are essentially creditors who loan money with the primary objective of making a fixed return  and protecting their capital through personal guarantees and collateral security. VCs, on the other hand, are part owners of the business as they hold equity shares of the company.

If the business fails, banks can recover their capital through sale of the security for the loans. But VCs do not have any security to fall back upon apart from their equity investment. Since the risk in venture capital investments is very high, the VCs expect much higher return on their investment – generally about 3 to 5 times their investment in 5 to 7 years.

Venture Capital is basically private equity investment made for the launch, early development, or expansion of business. The meaning of Venture Capital and capital varies from country to country. In Europe, these terms are used interchangeably and venture capital thus includes MBO (Management Buy-Out) and MBI (Management Buy-In). This is in contrast to the US, where MBO/MBI are not classified as venture capital but are referred to as "Buy-Out Capital"