Question

What is venture capital ?

• A. Bank loans used to pay the startup
• B. Financing for new firm's equity capital or loan capital
• C. Capital raised from issuing equity
• D. Equity funds from internal source

Hint:

Venture capital is a form of private equity targeted specifically at high-risk, high-growth-potential startups in exchange for an equity stake.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
Venture capital (VC) is a specialized form of private equity funding provided to early-stage, high-potential, and high-risk startups.
Startups often lack the collateral and steady cash flow required to secure traditional bank loans, making venture capital essential for their growth.

Step 2: Detailed Explanation:
Venture capitalists invest capital in exchange for an equity share (ownership stake) or a convertible debt structure in the startup.
Let us review the options:
- Option (A): Traditional bank loans are not venture capital, as banks avoid high-risk startup investments and require collateral.
- Option (B): This is the correct definition. Venture capital provides early-stage equity or loan financing to support a new firm's operations and expansion.
- Option (C): Capital raised from issuing equity is a general term that applies to public stock markets (IPOs) as well, making it too broad.
- Option (D): Internal source equity funds refer to bootstrapping or owner's personal savings, whereas venture capital is an external source of funding.

Step 3: Final Answer:
The correct option is (B).