Venture capital (VC) is a form of private equity and a type of financing that

investors provide
to startup companies and small businesses that are believed to have long-term
growth potential.
Venture capital generally comes from well-off investors, investment banks,
and any other financial
institutions. However, it does not always take a monetary form; it can also be
provided in the form
of technical or managerial expertise. Venture capital is typically allocated to
small companies with
exceptional growth potential, or to companies that have grown quickly and
appear poised to
continue to expand
Though it can be risky for investors who put up funds, the potential for above-
average returns is
an attractive payoff. For new companies or ventures that have a limited
operating history (under
two years), venture capital is increasingly becoming a popular—even essential
—source for
raising money, especially if they lack access to capital markets, bank loans, or
other debt
instruments. The main downside is that the investors usually get equity in the
company, and,
thus, a say in company decisions.
Venture capital (VC) is a form of private equity and a type of financing that
investors provide
to startup companies and small businesses that are believed to have long-term
growth potential.
Venture capital generally comes from well-off investors, investment banks,
and any other financial
institutions. However, it does not always take a monetary form; it can also be
provided in the form
of technical or managerial expertise. Venture capital is typically allocated to
small companies with
exceptional growth potential, or to companies that have grown quickly and
appear poised to
continue to expand
Though it can be risky for investors who put up funds, the potential for above-
average returns is
 an attractive payoff. For new companies or ventures that have a limited
operating history (under
two years), venture capital is increasingly becoming a popular—even essential
—source for
raising money, especially if they lack access to capital markets, bank loans, or
other debt
instruments. The main downside is that the investors usually get equity in the
company, and,
thus, a say in company decisions.
Venture capital (VC) is a form of private equity and a type of financing that
investors provide
to startup companies and small businesses that are believed to have long-term
growth potential.
Venture capital generally comes from well-off investors, investment banks,
and any other financial
institutions. However, it does not always take a monetary form; it can also be
provided in the form
of technical or managerial expertise. Venture capital is typically allocated to
small companies with
exceptional growth potential, or to companies that have grown quickly and
appear poised to
continue to expand
Though it can be risky for investors who put up funds, the potential for above-
average returns is
an attractive payoff. For new companies or ventures that have a limited
operating history (under
two years), venture capital is increasingly becoming a popular—even essential
—source for
raising money, especially if they lack access to capital markets, bank loans, or
other debt
instruments. The main downside is that the investors usually get equity in the
company, and,
thus, a say in company decisions.
Venture capital (VC) is a form of private equity and a type of financing that
investors provide
to startup companies and small businesses that are believed to have long-term
growth potential.
Venture capital generally comes from well-off investors, investment banks,
and any other financial
 institutions. However, it does not always take a monetary form; it can also be
provided in the form
of technical or managerial expertise. Venture capital is typically allocated to
small companies with
exceptional growth potential, or to companies that have grown quickly and
appear poised to
continue to expand
Though it can be risky for investors who put up funds, the potential for above-
average returns is
an attractive payoff. For new companies or ventures that have a limited
operating history (under
two years), venture capital is increasingly becoming a popular—even essential
—source for
raising money, especially if they lack access to capital markets, bank loans, or
other debt
instruments. The main downside is that the investors usually get equity in the
company, and,
thus, a say in company decisions.
Venture capital (VC) is a form of private equity and a type of financing that
investors provide
to startup companies and small businesses that are believed to have long-term
growth potential.
Venture capital generally comes from well-off investors, investment banks,
and any other financial
institutions. However, it does not always take a monetary form; it can also be
provided in the form
of technical or managerial expertise. Venture capital is typically allocated to
small companies with
exceptional growth potential, or to companies that have grown quickly and
appear poised to
continue to expand
Though it can be risky for investors who put up funds, the potential for above-
average returns is
an attractive payoff. For new companies or ventures that have a limited
operating history (under
two years), venture capital is increasingly becoming a popular—even essential
—source for
raising money, especially if they lack access to capital markets, bank loans, or
other debt
instruments. The main downside is that the investors usually get equity in the
company, and,
thus, a say in company decisions.
Venture capital (VC) is a form of private equity and a type of financing that
investors provide
to startup companies and small businesses that are believed to have long-term
growth potential.
Venture capital generally comes from well-off investors, investment banks,
and any other financial
institutions. However, it does not always take a monetary form; it can also be
provided in the form
of technical or managerial expertise. Venture capital is typically allocated to
small companies with
exceptional growth potential, or to companies that have grown quickly and
appear poised to
continue to expand
Though it can be risky for investors who put up funds, the potential for above-
average returns is
an attractive payoff. For new companies or ventures that have a limited
operating history (under
two years), venture capital is increasingly becoming a popular—even essential
—source for
raising money, especially if they lack access to capital markets, bank loans, or
other debt
instruments. The main downside is that the investors usually get equity in the
company, and,
thus, a say in company decisions.
The term venture capital has various meanings and definitions. Ventures
capital is
generally understood as investment made in high risk and high reward
industrial
projects. Risk refers to a high degree of uncertainty with regard to generation
of future
cash flows and creation of profits by the project. Venture capital also refers to
professional investment in risk capital of an enterprise and sharing of
ownership as
well as management responsibility with the entrepreneur. Thus, venture
capital is an
investment in equity share capital or long term debt capital of an unlisted
enterprise
 that is looking to start up, expand or buy out a business. The main attraction
is the
exceptional profitability of the enterprise. Venture capital investment is
mostly in
equity share capital of a company and, therefore, the return for the venture
capital firm
depends on the growth and profitability of the business of the investee. The
venture
capital firm generally acquires the equity shares of the investee company
through
private placement.
The organisation that provides venture capital is called the venture capital
firm or
venture capitalist or venture capital fund. According to SEBI (venture capital
funds)
Regulations, 1996, a venture capital fund is a fund established in the form of a
trust or
a company including a body corporate and registered under these regulations
that has
a dedicated pool of capital raised in a manner specified in the regulations and
invests
in accordance with these regulations.
The term venture capital has various meanings and definitions. Ventures
capital is
generally understood as investment made in high risk and high reward
industrial
projects. Risk refers to a high degree of uncertainty with regard to generation
of future
cash flows and creation of profits by the project. Venture capital also refers to
professional investment in risk capital of an enterprise and sharing of
ownership as
well as management responsibility with the entrepreneur. Thus, venture
capital is an
investment in equity share capital or long term debt capital of an unlisted
enterprise
that is looking to start up, expand or buy out a business. The main attraction
is the
exceptional profitability of the enterprise. Venture capital investment is
mostly in
 equity share capital of a company and, therefore, the return for the venture
capital firm
depends on the growth and profitability of the business of the investee. The
venture
capital firm generally acquires the equity shares of the investee company
through
private placement.
The organisation that provides venture capital is called the venture capital
firm or
venture capitalist or venture capital fund. According to SEBI (venture capital
funds)
Regulations, 1996, a venture capital fund is a fund established in the form of a
trust or
a company including a body corporate and registered under these regulations
that has
a dedicated pool of capital raised in a manner specified in the regulations and
invests
in accordance with these regulations.
VENTURE CAPITAL

Venture Capital is financing that investors provide to startup companies and small
business that are believed to have long term growth potential. Venture Capital
generally comes from well – off investors, investment banks and any other
financial institutions. However, it does not always take just a monetary form; it can
be provided in the form of technical or managerial expertise.

‘Venture Capital’ is an important source of finance for those small and medium-
sized firms, which have very few avenues for raising funds. Although such a
business firm may possess a huge potential for earning large profits in the future
and establish itself into a larger enterprise. But the common investors are generally
unwilling to invest their funds in them due to risk involved in these types of
investments. In order to provide financial support to such entrepreneurial talent and
business skills, the concept of venture capital emerged. In a way, venture capital is
a commitment of capital, or shareholdings, for the formation and setting-up of
small scale enterprises at the early stages of their lifecycle.
The term venture capital comprises of two words, namely, ‘venture’ and ‘capital’.
The term venture literally means a course or proceeding, the outcome of which is
uncertain but which is uncertain but which is attended by the risk of danger of
‘loss’. On the other hand, the term capital refers to the resources to start the
enterprise. However, the term venture capital can be understood in two ways.

A venture capitalist (also known as a VC) is a person or investment firm that

makes venture investments, and these venture capitalists are expected to bring
managerial and technical expertise as well as capital to their investments. A
venture capital fund refers to a pooled investment vehicle (often an LP or LLC)
that primarily invests the financial capital of third- party investors in enterprises
that are too risky for the standard capital markets or bank loans.

Features of Venture Capital

1) For New Entrant: Venture Capital investment is generally made in new

enterprises that use new technology to produce new products, in expectation of
high gains or sometimes, spectacular returns.

2) Continuous Involvement: Venture capitalists continuously involve themselves

with the client’s investments, either by providing loans or managerial skills or any
other support.

3) Mode of Investment: Venture capital is basically an equity financing method,

the investment being made in relatively new companies when it is too early to go
to the capital market to raise funds. In addition, financing also takes the form of
loan finance/ convertible debt to ensure a running yield on the portfolio of the
venture capitalists.

4) Long-term Capital: The basic objective of a venture capitalist is to make a

capital gain on equity investment at the time of exit, and regular return on debt
financing. It is a long-term investment in growth- oriented small/medium firms. It
is a long-term capital that is an injected to enable the business to grow at a rapid
pace, mostly from the start-up stage.

5) Hands-On Approach: Venture capital institution take active part in providing

value – added services such as providing business skills, etc., to investee firms.
Thy do not interfere in the management of the firms nor do they acquire a
majority / controlling interest in the investee firms. The rationale for the extension
of hands- on management is that venture capital investments tend to be highly non-
liquid.

6) High risk- return Ventures: Venture capitalists finance high risk-return

ventures. Some of the ventures yield very high return in order to compensate for
the heavy risks related to the ventures. Venture capitalists usually make hug capital
gains at the time of exit.

7) Source of Finance: Venture capitalists usually finance small and medium- sized

firms during the early stages of their development, until they are established and
are able to raise finance from the conventional industrial finance market. Many of
these firms are new, high technology- oriented companies.

8) Liquidity: Liquidity of venture capital investment depends on the success or

otherwise of the new venture or product. Accordingly, there will be higher
liquidity where the new ventures are highly successful.

Dimensions of Venture Capital

Venture capital in India is available in four forms:

1) Equity Participation: The venture capital finances up to 49% of the equity
capital and the ownership remains with the entrepreneur.

2) Conventional Loan: Under this, a lower fixed rate of interest is charged to the
unit till its commercial operation. After normal rate of interest is paid, loan is to be
repaid as per the agreement.

3) Conditional Loan: A conditional loan is repayable in the form of royalty ranging

between 2 and 15% after the venture is able to generate sales and no interest is paid
on such loans.

4) Income Notes: The income note combines the features of conventional and
conditional loans in a way that the entrepreneur has to pay both interest and royalty
on sales at low rates.

Venture Capital Funding Process:

Step 1: Idea generation and submission of the Business Plan

The initial step in approaching a Venture Capital is to submit a business plan. The
plan should include the below points:

 There should be an executive summary of the business proposal

 Description of the opportunity and the market potential and size
 Review on the existing and expected competitive scenario
 Detailed financial projections
 Details of the management of the company

There is detailed analysis done of the submitted plan, by the Venture Capital to
decide whether to take up the project or no.

Step 2: Introductory Meeting

Once the preliminary study is done by the VC and they find the project as per their
preferences, there is a one-to-one meeting that is called for discussing the project
in detail. After the meeting the VC finally decides whether or not to move forward
to the due diligence stage of the process.

Step 3: Due Diligence

The due diligence phase varies depending upon the nature of the business proposal.
This process involves solving of queries related to customer references, product
and business strategy evaluations, management interviews, and other such
exchanges of information during this time period.

Step 4: Term Sheets and Funding

If the due diligence phase is satisfactory, the VC offers a term sheet, which is a
non-binding document explaining the basic terms and conditions of the investment
agreement. The term sheet is generally negotiable and must be agreed upon by all
parties, after which on completion of legal documents and legal due diligence,
funds are made available.

Advantages of Venture Capital

 They bring wealth and expertise to the company

 Large sum of equity finance can be provided
 The business does not stand the obligation to repay the money
 In addition to capital, it provides valuable information, resources, technical
assistance to make a business successful

Disadvantages of Venture Capital

 As the investors become part owners, the autonomy and control of the
founder is lost
 It is a lengthy and complex process
 It is an uncertain form of financing
 Benefit from such financing can be realized in long run only

Stage of Venture Capital Financing

 Early Stage Financing:

1. Seed Capital Stage: This is the primary stage associated with research and
development. The concept, idea, process pertaining to high technology or
innovation are tested on a laboratory scale. Generally, the ideas developed
by R & D wings of companies or scientific research institutional are tried.
Based on laboratory trial, a prototype product development is carried out.
 Subsequently, possibilities of commercial production of the product is
explored. The risk perception of investment at this stage if quite high and
only a few venture capital funds invest in the seed capital stage of product
development. Such financing is provided to the innovation in the form of
low interest bearing personal loans.
2. Start – Up Stage :  Start- up financing coincides with the start-up stage of
the venture’s lifecycle; this is financing that takes the venture from having
established a viable business opportunity to the point of initial production
and sales. Start-up financing is usually targeted at firms that have assembled
a solid management team, developed a business model and plan and are
beginning to generate revenues. Depending on the demands placed on the
entrepreneur’s personal capital during the seed stag, the entrepreneur’s
remaining assets, if any, may serve as a source of start-up financing, family
and friends may continue to provide financing during start-up.
However, the start-up venture should begin to think about the advantages of
approaching other, more formal, venture investors.
3. Second Round Financing: After the product has been launched in the
market further funds are needed because the business has not yet become
profitable and hence new investors are difficult to attract. Venture Capital
funds provide finance at such stage, which is comparatively less risky than
the first two stages. At this stage, finance is provided in the form of debt
also, on which they earn a regular income.

 Later Stage Financing:

1. Expansion Finance: Venture capitalists perceive low risk in ventures

requiring finance for expansion purposes either by growth implying bigger
factory, large warehouse, new factories, new products or new markets or
through purchase of existing businesses. The time frame of investment is
usually from one to three years.

At this stage, it may be necessary to finance the additional working capital

requirement in view of expansion of business activities. This stage of
financing is also known as bridge financing. Bridge financing is a short-
term financing provided until long term financing is arranged.
2. Replacement Finance: Replacement Finance: In this form of financing, the
venture capitalist purchases the shares from the existing shareholders of the
company who are willing to exit from the company. Such a course is often
adopted with the investors who want to exit from the investee company, and
the promoters do not intend to list its shares in the secondary market, the
venture capitalist perceives growth of the company over 3 to 5 years and
expects to earn capital gain at a much shorter duration.

3. Turn Around: When a company is operating at a loss after crossing the

early stage and entering into commercial production, it may plan to bring
about a change in its operations by modernising or expanding its operations,
by addition to its existing products or deletion of the loss-making products,
by reorganising its staff or undertaking aggressive marketing of its products,
etc. For undertaking the above steps for reviving the company, infusion of
additional capital is needed. The funds provided by the venture capitalist for
this purpose are called turn around financing. In most of the cases, the
venture capitalist which supported the project at an early stage may provide
turn around finance, as a new venture capitalist may not be interested to
invest his finds at this stage.

Turn around financing is more risky proposition. Hence the venture

capitalist has to judge in greater depths the prospects of the enterprise to
become viable and profitable. Generally substantial investment is required
for this form of financing.

Besides providing finance, the venture capitalist also provides management

support to the entrepreneur by nominating its own directors on the Board of
the company to effectively monitor the progress of recovery of the company
and to ensure timely implementation of the necessary measures.
4. Buyout Deals: A venture capitalist may also provide finance for buyout
deals. A management buyout means that the shares (and management) of
one set of shareholders, who are passive shareholders, are purchased by
another set of shareholders who are actively involved in the operations of the
organisation. The latter group of shareholders buyout the shares from the
inactive shareholders so that they derive the full benefit from the efforts
 made by them towards managing the enterprise. Such shareholders may need
funds for buying the shares, venture capitalist provide them with such funds.
This form of financing is called buyout financing.

Exit Route of Venture Capital

The venture capital company/fund after financing a venture capital undertaking

nurtures it to make it a successful proposition, but it does not intent to retain its
investment therein forever. As the venture capital undertaking starts its commercial
operations and reaches the profit-eaming stage, the venture capitalist endeavours to
disinvest its investments in the company at the carliest. The primary aim of the
venture capitalist happens to realize appreciation in the value of the shares held by
him and thereafter to finance another venture capital undertaking. This is called the
exit route. There are several alternatives before venture capitalist to exit from an
investee company, as stated below:

1. Initial Public Offering: When the shares of the investee company are
listed on the stock exchange(s) and are quoted at a premium, the
venture capitalist offers his holdings for public sale through public
issue.
2. Buy hack of Shares by the Promoters: In terms of the agreement
entered into with the investee company, promoters of the company are
given the first opportunity to buy back the shares held by the venture
capitalist, at the prevailing market price. In case they refuse to do so,
other alternatives are resorted to by the venture capitalist.
3. Sale of Enterprise to another Company: Venture capitalist can
recover his investments in the investee company by selling the
holdings to outsider who is interested in buying the entire enterprise
from the entrepreneur.
4. Sale to New Venture Capitalist: A venture capitalist can sell his
equity holdings in the enterprise to a new venture capital company,
who might be interested in buying the ownership portion of the
venture capital. Such sale may he distress sale by the venture capitalist
 to realise the investments and exit from the enterprise. Alternatively,
such sale may be for inducting a willing venture capitalist who wishes
to take the existing liability in the company to provide second round
of funding.
5. Self-liquidating Process: In case of debt financing by the venture
capitalist, the process is self-liquidating in nature, as the principal
amount, along with interest is realised in installments over a specified
period of time.
6. Liquidation of the Investee Company: If the investee company does
not become profitable and successful and incurs losses, the venture
capitalist resorts to recover his investment by negotiation or
settlement with the entrepreneur. Failing which the recovery is
resorted to by means of winding up of the enterprise through the
court.