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Starting and growing a business always require capital. There are a number of alteto fund growth. These include the owner or proprietor’s own capital, arrangingseeking an equity partner, as is the case with private equity and venture capital.Private equity is a broad term that refers to any type of non-public ownership equitare not listed on a public exchange. Private equity encompasses both early stage (and later stage (buy-out, expansion) investing. In the broadest sense, it cmezzanine, fund of funds and secondary investing.Venture capital is a means of equity financing for rapidly-growing private companibe required for the start-up, development/expansion or purchase of a company.firms invest funds on a professional basis, often focusing on a limited sector of speciinfrastructure, health/life sciences, clean technology, etc.).The goal of venture capital is to build companies so that the shares become liquidacquisition) and provide a rate of return to the investors (in the form of cash orconsistent with the level of risk taken.With venture capital financing, the venture capitalist acquires an agreed proportionthe company in return for the funding. Equity finance offers the significant advantinterest charges. It is "patient" capital that seeks a return through long-term cathan immediate and regular interest payments, as in the case of debt financing. Givequity financing, venture capital investors are therefore exposed to the risk of theAs a result the venture capitalist must look to invest in companies which have thvery successfully and provide higher than average returns to compensate for the risWhen venture capitalists invest in a business they typically require a seat on the cof directors. They tend to take a minority share in the company and usually do notcontrol. Rather, professional venture capitalists act as mentors and aim to proviadvice on a range of management, sales and technical issues to assist the compafull potential.

Venture capital has a number of advantages over other forms of finance, s

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It injects long term equity finance which provides a solid capital base for fut

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The venture capitalist is a business partner, sharing both the risks and rcapitalists are rewarded by business success and the capital gain.

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The venture capitalist is able to provide practical advice and assistancebased on past experience with other companies which were in similar situati

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The venture capitalist also has a network of contacts in many areas that cthe company, such as in recruiting key personnel, providing contactsmarkets, introductions to strategic partners, and if needed co-investmventure capital firms when additional rounds of financing are required.

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The venture capitalist may be capable of providing additional rounds of funrequired to finance growth.In 2006, total amount of private equity, including venture capital reachedUS$7.5 billion across 299 deals.Please download the following presentation for more information on theIndian venture capital industry.IVCA PresentationFor more information on the origins and evolution of the Indian venturecapital industry, please see reports under the section ‘Resource Centre’.Venture capital firms typically source the majority of their funding from largeinvestment institutions such as fund of funds, financial institutions,endowments, pension funds and banks. These institutions typically invest in aventure capital fund for a period of up to ten years.To compensate for the long term commitment and lack of both security andliquidity, investment institutions expect to receive very high returns on theirinvestment. Therefore venture capitalists invest in either companies with highgrowth potential where they are able to exit through either an IPO or amerger/acquisition. Although the venture capitalist may receive some returnthrough dividends, their primary return on investment comes from capitalgains when they eventually sell their shares in the company, typicallybetween three to five years after the investment.Venture capitalists are therefore in the business of promoting growth in thecompanies they invest in and managing the associated risk to protect andenhance their investors' capital. The members of the Indian Venture Capital Association comprise a number of venture capital firms in India.The IVCA Directory of Members provides basic information about each member's investment preferences and isavailable from the Association.Prior to selecting a venture capitalist, the entrepreneur should study the particular investment preferences setdown by the venture capital firm. Often venture capitalists have preferences for particular stages of investment, amount of investment, industry sectors, and geographical location.An investment in an private, unlisted company has a long-term horizon, typically 4-6 years. It is important toselect venture capitalists with whom it is possible to have a good working relationship. Often businesses do notmeet their cash-flow forecasts and require additional funds, so an investor's ability to invest in additionalfinancing rounds if required is also important.Finally, when choosing a venture capitalist, the entrepreneur should consider not just the amount and terms of investments, but also the additional value that the venture capitalist can bring to the company. These skills

may include industry knowledge, fund raising, financial and strategic planning, recruitment of key personnel,mergers and acquisitions, and access to international markets and technology. Entrepreneurs should nothesitate to ask for references from investors.

Venture capitalists are higher risk investors and, in accepting these risks, they desirereturn on their investment. The venture capitalist manages the risk/reward ratio by only inbusinesses which fit their investment criteria and after having completed extensive due diliVenture capitalists have differing operating approaches. These differences may relate to lthe business, the size of the investment, the stage of the company, industry spestructure of the investment and involvement of the venture capitalists in the companies acThe entrepreneur should not be discouraged if one venture capitalist does not wish to pran investment in the company. The rejection may not be a reflection of the quality of thebut rather a matter of the business not fitting with the venture capitalist's particular icriteria. Often entrepreneurs may want to ask the venture capitalist for other firms thatinterested in the investment opportunity.

Venture capital is not suitable for all businesses, as a venture capitalist typically

Superior Businesses

Venture capitalists look for companies with superior products or services targeted at lgrowing or untapped markets with a defensible strategic position such as intellectual ppatents.

Quality and Depth of Management

Venture capitalists must be confident that the firm has the quality and depth in the mateam to achieve its aspirations. Venture capitalists seldom seek managerial control, rwant to add value to the investment where they have particular skills including funmergers and acquisitions, international marketing, product development, and networks.

Appropriate Investment Structure

As well as the requirement of being an attractive business opportunity, the venture capalso seek to structure a deal to produce the anticipated financial returns to investors. Thimaking an investment at a reasonable price per share (valuation).

Exit Opportunity

Lastly, venture capitalists look for the clear exit opportunity for their investment suchlisting or a third party acquisition of the investee company.Once a short list of appropriate venture capitalists has been selected, the entrepreneur cato identify which investors match their funding requirements. At this point, the entreprencontact the venture capital firm and identify an investment manager as an initial contactventure capital firm will ask prospective investee companies for information concerning tor service, the market analysis, how the company operates, the investment required anto be used, financial projections, and importantly questions about the management team.In reality, all of the above questions should be answered in the Business Plan. Assuming tcapitalist expresses interest in the investment opportunity, a good business plan is a pre-r