All about Venture Capital Funds

Venture Capital means funds made available for start-up firms and small businesses with exceptional growth potential.

It does not always take just a monetary form, it can be provided in the form of technical or managerial expertise.

Read more: Know about Angel Investing

Venture capital generally comes from well-off investors, investment banks and any other financial institutions.

For new companies or Ventures with limited operating history, venture capital funding is increasingly becoming popular. In return of investment, they usually purchase Equity securities which make these institutions part in decision making.

History of Venture Capitalism in India:

Venture capital in India started in the decade of 1970, when Government of India appointed a Committee to tackle the issue of inadequate funding to entrepreneurs and start-ups. However it is only after 10 years that the first all Indian Venture Capital Funding was started by IDBI, ICICI and IFCI.

Read more: Read all about Startups! Here is the collective link of all

In November 1988, the Government announced its guidelines in the CCI(Controller of Capital Issues). These focussed on a narrow description of Venture Capital and was extremely restrictive and encumbering, requiring investment in innovative technologies started by first generation entrepreneur. This made investment in Venture Capital extremely risky and unattractive. Later Government had abolished CCI and instead of it, decided to liberalize Venture capital industry. In 1995, Foreign Finance Companies were allowed to invest in country.

Venture Capital investing got considerably boosted by IT revolution in 1997, as the venture capitalist became prominent founders of growing IT and Telecom Industry.

Level of Risks for Venture Capitalist as per different level of Investee:

FINANCIAL STAGELOCK-IN PERIOD
(in years)
RISK LEVELSDESCRIPTION OF STAGE
Seed Money7-10ExtremeIt is low level financing stage to prove new idea. It involves supporting a concept or idea or R&D of new product.
Start Up5-9Very HighEarly stage firms needs funds for marketing & product development expenses.
First Round3-7HighIt involves early sales & manufacturing funds.
Second Round3-5
Adequately highWorking Capital of early stage companies that are selling product, but not yet earning profits.
Third Round1-3MediumAlso called Mezzanine Financing, that is expansion money for newly profitable company.
Fourth Round1-3LowAlso called Bridge Financing, it is intended to finance the 'Going Public' process.

Venture Investment Process:

  • Deal Origination:- Venture capitalist operates directly or through Intermediaries. Venture Capitalist informs their employees or intermediaries to focus on following:

Sector Focus

Stages of Business Focus

Promoter Focus

Turnover Focus

  • Screening:- Once the deal is sourced, the same would be sent for screening by Venture Capitalist. It is done by committee of senior level people of Venture Capitalist. Once it is done, it selects the company for further process.
  • Due Diligence:- It involves the process by which Venture Capitalist would try to verify the veracity of documents. It is done by external bodies. The fees is paid by Venture Capitalist or can be shared between Venture Capitalist and Investee.
  • Deal Structuring:- In this stage, the deal is structured which favours both parties. The exit situations are also designed in this stage.
  • Post-Investment Activity:- Venture Capitalist nominates its nominee in the Board of Company. The company has to adhere to guidelines like strong MIS, strong budgeting system, strong corporate governance, etc. Venture Capitalist also ensures that professional Management is set up in company.
  • Exit Plan:- Venture Capitalist would ask the promoter to spell out the details of exit plan. Mainly exit plan is in two ways- One way is to spell to third party. It can be in form of IPO or Private Placements to other Venture Capitalists. Second is that promoter would give a buy back commitment at agreed rate.