Venture Capital

Venture capital refers to organized private or institutional financing that can provide substantial amounts of capital mostly through equity purchases and occasionally through debt offerings to help growth oriented firms to develop and succeed.

In broad terms, venture capital is the investment of long term equity finance where the venture capitalist earns his return primarily in the form of capital gain

The underlying assumption is that the entrepreneur and the venture capitalist would act as partners.

Thus it can prove to be a powerful mechanism to institutionalize innovative entrepreneurship. It is a commitment of capital, or shareholdings, for the formation and setting up of enterprises specializing in new ideas or new technologies.

Characteristics of VC

It is equity or quasi equity investment (investor assumes risk)

It is long term (involving money & time)

It is an active form of investment (involves participation in the management)

The main attributes of venture capital

Equity participation

Actual or potential equity participation through direct purchase of shares, options or convertible securities. The objective is to make capital gains by selling off the investment once the enterprise becomes profitable

Long term investment

Venture financing is a long term illiquid investment; it is not repayable on demand. It requires long term investment attitude that necessitates the venture capital firms to wait for a long term, say 5-10 years, to make large profits

Participation in management

Continuing participation of the venture capitalist in the management of the entrepreneur’s business. This hands-on management approach helps him to protect and enhance his investment by actively involving and supporting the entrepreneur. More than finance, venture capitalist gives his marketing, technology, planning and management skills to the new firm

Three main requirements for making significant growth of venture capital

Public attitude

A very favourable attitude by the public at large towards entrepreneurship, success as well as failures

Dynamic financial system

A very dynamic financial market illustrated by the existence of an efficient stock exchange, a tradition of company shares held by the public and a competitive banking system

Government support

Government intervention limited essentially to acting on the major framework conditions including the individual taxation system

Venture capitalist invest at three stages

start up (risky but promises high returns)money to finance the launching (so that other investors can join)growth capital for major expansion (facilitates economies of scale)

Early state financing

Seed financing for supporting a concept or ideaR&D financing for product developmentStart-up capital for initial production and marketingFirst stage financing for full scale production and marketing

Expansion financing

Second stage financing for working capital and initial expansionDevelopment financing for facilitating public issueBridge financing for facilitating public issue

Acquisition / buyout financing

Acquisition financing for acquiring another firm for further growthManagement buyout financing for enabling operating group to acquire firm or part of its businessTurnaround financing for turning around a sick unit

Venture capital in India is available in three forms viz., equity, conditional loans and income notes.

Conditional loans is repayable in the form of royalty Income notes have combinational features of conventional / conditional loans

A restricted definition of venture capital is followed in India for the purpose of the capital gains tax concession. According to Government of India guidelines, the venture capital financing to be confined to the enterprises fulfilling the following conditions:

Size

Total investment should not exceed Rs.100 million

Technology

New or relatively untried or very closely held or being taken from pilot to commercial stage or which incorporates some significant improvement over the existing ones in India

Entrepreneur

Relatively new professionally or technically qualified with inadequate resources of backing to finance the project

However, these conditions do not apply if the financial assistance is provided for the revival of sick units. Venture capital excludes financing of enterprises engaged in trading, broking, investment or financial services, agency or liaison work. Venture capital firm in India is required to invest at least 75 percent of its funds into the venture capital activity, and must be managed by professionals

In terms of government policy, the focus of venture capital in India is on providing seed capital and financing for high technology. In fact venture capital mechanism should be used for fostering the growth and development of enterprise, and need not be confined only to technology financing. Business enterprises in various sectors need venture capital for financing various stages of development. This broad approach would even help the venture capital firms to diversity their investment across various enterprises – some high tech, some low tech, and thus spread their risks. It does not make a business sense to expect venture capital firms to invest in high tech, high risk start-ups only.

VCC IN INDIA

IDBI VCFTechnology Development & Information Company of India (TDICI)Risk Capital and Technology Finance Corporation (RCTFC)Credit Capital Venture Fund (CCVF) India LtdSBI, Canara Bank, Grindlays Bank VCFsIndus Venture Capital Fund (IVCF)Venture Capital Fund of SIDBIOverseas Venture Capital Investments (MOF

The term venture capital thus denotes institutional investors provide equity financing to young businesses to play an active role advising their managements.

Venture capital thrives best where it is not restrictively defined.

Venture capital helps entrepreneurs to actualize scientific ideas and inventions.