What is venture capital

Starting and growing a business always require capital. There are a number of alternative methods to fund growth. These include the owner or proprietors own capital, arranging debt finance, or seeking an equity partner, as is the case with private equity and venture capital.

Venture capital is a means of equity financing for rapidly-growing private companies. Finance may be required for the start-up, development/expansion or purchase of a company. Venture Capital firms invest funds on a professional basis, often focusing on a limited sector of specialization (eg. IT, infrastructure, health/life sciences, clean technology, etc.).

The Venture capital sector is the most vibrant industry in the financial market today.Venture capital is an important source of equity for start-up companies.Venture capital can be visualized as your ideas and our money concept of developing business.
Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc

Venture capital is advanced for ventures using a new technology or new innovation. In this type of financing, the venture capital company remains interested in the overall management of the project due to the high risk involved in the venture. Funds are made available throughout the project, commencing from commercial production to the successful marketing of products, to ensure continuous revenue earnings enhanced worth of the investments, and finally making available a proper exit route for liquidating the investments. Both seed capital and risk capital are components of venture capital. Seed capital and risk capital are provided by all India financial institutions in the form of promoters contribution to the project with the emphasis on providing interest free finance to encourage professionals to become promotees of industrial projects.
Venture capital is also associated with job creation (accounting for 21% of US GDP), the knowledge economy, and used as a proxy measure of innovation within an economic sector or geography. Every year there are nearly 2 million businesses created in the USA, and only 600-800 get venture capital funding. According to the National Venture Capital Association 11% of private sector jobs come from venture backed companies and venture backed revenue accounts for 21% of US GDP. Venture capitalist

Venture capitalists are people who pool financial resources from high networth individuals, corporates, pension funds, insurance companies, etc. to invest in high risk - high return ventures that are unable to source funds from regular channels like banks and capital markets.

The venture capital industry in India has really taken off in. Venture capitalists not only provide monetary resources but also help the entrepreneur with guidance in formalizing his ideas into a viable business venture. A financing institution which joins an entrepreneur as a co-promoter in a project and share the risks and rewards of the enterprise When venture capitalists invest in a business they typically require a seat on the company's board of directors. They tend to take a minority share in the company and usually do not take day-today control. Rather, professional venture capitalists act as mentors and aim to provide support and advice on a range of management, sales and technical issues to assist the company to develop its full potential.

Features of Venture Capital Financing

Form of equity participation, convertible debt or long term loan High risk but high growth projects Commercialization of new ideas or technologies. (not for trading, agency, etc.) Joins as a co-promoter and shares profits and losses Continuous guidance VC disinvests his holdings Inputs needed during the setting up of the business Small and medium scale industries

What is involved in the investment process?

Is the product or service commercially viable? Does the company have potential for sustained growth? Does management have the ability to exploit this potential and control the company through the growth phases? Does the possible reward justify the risk? Does the potential financial return on the investment meet their investment criteria?

Disinvestment Mechanism
Objective of VC s to sell of the investments made by him at substantial gains. Objective of investment is not profit but capital appreciation at the time of disinvestment Options available Promoter s buy back Public issue Sale to other venture capital funds Management buy outs

Advantages of Venture Capital

Advantages to Investing Public Reduce risk significantly against unscrupulous management VCC representing directors will ensure that the affairs of the business are conducted prudently Advantages to Promoters Convincing only officials of the venture fund Efforts required are less compared to those of entrepreneurs choosing to raise capital through public issue General advantages Intermediary between investors (high returns) and entrepreneurs Development of economy Acts as a cushion to support business borrowings New products/process

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It injects long term equity finance which provides a solid capital base for future growth. The venture capitalist is a business partner, sharing both the risks and rewards. Venture capitalists are rewarded by business success and the capital gain. The venture capitalist is able to provide practical advice and assistance to the company based on past experience with other companies which were in similar situations. The venture capitalist also has a network of contacts in many areas that can add value to the company, such as in recruiting key personnel, providing contacts in international markets, introductions to strategic partners, and if needed co-investments with other venture capital firms when additional rounds of financing are required.

The venture capitalist may be capable of providing additional rounds of funding should it be required to finance growth.

Venture Capital Financing Stages

There are typically six stages of financing offered in Venture Capital: A. EARLY STAGE FINANCING Seed capital and research and development projects Start ups Second Round Finance B. LATER STAGE FINANCING Development Capital, expansion finance, replacement capital, turn around, Buy out.

] Financing stages
There are typically six stages of venture round financing offered in Venture Capital, that roughly correspond to these stages of a company's development.[22]

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Seed Money: Low level financing needed to prove a new idea (Often provided by "angel investors") Start-up: Early stage firms that need funding for expenses associated with marketing and product development First-Round (Series A round): Early sales and manufacturing funds Second-Round: Working capital for early stage companies that are selling product, but not yet turning a profit Third-Round: Also called Mezzanine financing, this is expansion money for a newly profitable company Fourth-Round: Also called bridge financing, 4th round is intended to finance the "going public" process

Between the first round and the fourth round, venture backed companies may also seek to take "venture debt".[23] Seed Capital: This is early stage financing. This stage involves primarily R&D financing. The European Venture Capital Association defines seed capital as the financing of the initial product development or the capital provided to an entrepreneur to prove the feasibility of a project and qualify for start up capital. The stage involves serious risk, as there is no guarantee for the concept, idea and process pertaining to high technology or innovation. This stage requires constant infusion of funds in order to sustain the research and development work and establish the process to successful adaptation, going into the commencement of commercial production and marketing. Venture financing constitutes financing of ideas developed by research and development wings of companies or at university centers. Chances of success in hi-tech projects are meagre. The venture capital fund considers the following points to safeguard its own interest: 1. Successful performance record, entrepreneurs previous experience in similar products, technology and market. 2. Qualities of business management and technical innovation in the enterprise realistic business plan with clear future prospects for which seed capital is required. Start up Financing: The European Venture Capital Association defines start up as capital needed to finance the product devolopment initial marketing and the establishment of product facilities. This too falls under the category of early stage financing. The term start up refers to the stage where a new activity is launched. The activity may be one emanating from R &D stage or arising from transfer of technology from overseas based business.
Venture capital finance is provided to projects which have been selected for commercial production. The activity chosen for funding has the potential for fulfilling effective demand. Venture capitalists provide finance with a view to take advantage of the capital gain arising from equity appreciation on

completion of such projects and marketing of its product. The venture capitalists, on their part, take into consideration such factors as the managerial ability, capacity, experience, competence etc of the entrepreneur before making investments

Factors Affecting Investment Decision

Strong mgt team A Viable Idea Business Plan Project Cost and Return Future Market Prospect Existing Technology Miscellaneous Factors
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Business situation: Some VCs tend to invest in new ideas, or fledgling companies. Others prefer investing in established companes that need support to go public or grow. Others invest solely in certain industries. Others prefer operating locally while others will operate nationwide. Company expectations often vary. Some may want a quicker public sale of the company, or expect fast growth. The amount of help a VC provides can vary from one firm to the next.

Objective of vc
VCs generally make investments with the objective of generating significant returns that are realized when the companys stock is liquidated through an exit, such as an acquisition of the company or an IPO. 1) venture groups within corporations often invest with the objective of generating both returns and creating strategic value for their parent company and 2) socially responsible venture firms seek to bundle returns with social benefit. Venture capital funds are managed by one or more individuals that invest on behalf of the investors mentioned above. These managers identify and select investment opportunities,they often join the boards of directors of their portfolio companies and generally assist the portfolio companies through their development.

3)The goal of venture capital is to build companies so that the shares become liquid (through IPO or acquisition) and provide a rate of return to the investors (in the form of cash or shares) that is consistent with the level of risk taken.

Difficulties in India:
1.The restrictive legal and financial framework is one of the main reason for the lack of development of venture capital. 2. There are no private pool of capital of finance risk venture in India. 3.Small companies have no access to share capital or long term debenture capital.

Five critical success factors have been identified for the growth of VC in India, namely:
India process a pool of young educated and technically qualified entrepreneurs with real innovative mind. Vast potential of our country need to be properly tapped for continuous development The regulatory, tax and legal environment should play an enabling role as internationally venture funds have evolved in an atmosphere of structural flexibility, fiscal neutrality and operational adaptability. Resource raising, investment, management and exit should be as simple and flexible as needed and driven by global trends. Venture capital should become an institutionalized industry that protects investors and investee firms, operating in an environment suitable for raising the large amounts of risk capital needed and for spurring innovation through start-up firms in a wide range of high growth areas. In view of increasing global integration and mobility of capital it is important that Indian venture capital funds as well as venture finance enterprises are able to have global exposure and investment opportunities Infrastructure in the form of incubators and R&D need to be promoted using government support and private management as has successfully been done by countries such as the US, Israel and Taiwan. This is necessary for faster conversion of R&D and technological innovation into commercial products. With technology and knowledge based ideas set to drive the global economy in the coming millennium, and given the inherent strength by way of its human capital, technical skills, cost competitive workforce, research and entrepreneurship, India can unleash a revolution of wealth creation and rapid economic growth in a sustainable manner. However, for this to happen, there is a need for risk finance and venture capital environment which can leverage innovation, promote technology and harness knowledge based ideas.

The entrepreneur should furnish the following information in their proposals to the venture capitalist/merchant bankers: 1. Brief history of business or project 2. A synoptic note on career history of entrepreneur and key managers 3. Description of product/ service to be manufactured/rendered 4. Description of market for the product/service with existing/future state of competition, growth prospects in the share market etc. 5. Description of technical process involved, and technology to be followed in the manufacturing process. 6. Degree of technological obsolescence in technical process. 7. Financial history and forward projections of turnover profits cash flows and borrowing over at least a two year period 8. Proposed deal structure for the funding being sought. Venture capitalists appraise projects by taking the following key factors into considerations with the basic objective of assessing the degree if risk involved in financing and then judge the realistic expectation of the gains.

Suggestion to VC's
VC firms should increase transparency when it comes to what they are looking for. Not so much in terms of industry sector or company stage (most firms already do that), but in terms of the actual pitch process and typical terms. Be specific about how entrepreneurs should approach you, what you're looking for in a presentation, and what terms you are probably willing to offer if interested (not valuations, but participation, etc.). This stuff is rarely trade secret, and can save both the VC and the entrepreneur valuable time and effort. Moreover, it will help VCs from missing out on certain opportunities because of the presentation rather than because of the potential In the traditional early-stage venture capital investment model, a vibrant IPO market is necessary for success. Backing early-stage companies is risky and, in any venture capital fund portfolio, the anticipation is that a number of investments will end up being written down or written off. Traditionally, the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio.

How is Venture Capital different than Private Equity?

Venture capital is a type of private equity. It is a subset of private equity. Therefore all venture capital is private equity, but not all private equity is venture capital.

Venture Capital is the early stage form of private equity where investors focus on investing in startup (highly risky) ventures. Private equity is just a pool of private money (not publicly trades as in stocks, bonds, etc) that invests in private companies.

Private Equity deals are normally in later stage companies.

Financially, the key difference between how VC and PE deals are financed has to do with leverage. PE deals use lots of leverage, while VC deals do not. For more information about this topic, please see our discussion on financial leverage

Why should investors invest in private companies?

why to Private equity investors invest? the only reason: to achieve higher returns than can be achieved in the public stock market. If not, then there is no reason to take on the additional risk associated with a private company. Private investors should expect a risk-premium. Returns should be higher (see our discussion on ROI return on investment).. Table 1. The most attractive sector for investment over the next 5 years (dark blue marked increase in the investors interest, green - a stable interest, blue - the decline of interest)*

1. Telecom; 2. Semiconductors; 3. Software; 4. New Media / Social Networks; 5. Biopharmaceuticals; 6. Medical equipment; 7. Green technologies; 8. Consumer Goods / Services; 9. Financial services; 10. Services for health care.
We remind the international forum Investor Day. Internet-based technologies and innovations held in Kiev on 28-29 October this year. Kiev attended by over 300 representatives of funds, investors, experts and business angels from Ukraine, Russia, Central and Eastern Europe, the USA and Canada. 150 entrepreneurs from 12 countries of Central and Eastern Europe had the opportunity to present them with their ideas, development and business models.

SEBI(VENTURE CAPITAL FUND) REGULATIONS, 1996 Registration of venture capital funds:

1. Application of grant of Certificate 2. Eligibility Criteria: (i) if the application made by the Company

(ii) if the application by the trust (iii) if the application made by the body corporate II) Investment conditions and restrictions: Minimum investment in a VC fund: 1.) A Venture Capital fund may raise monies from any investor whether Indian, foreign, or non-resident Indian. 2.) No Venture Capital fund set up as a company. III) General Obligation and responsibilities:Prohibition on investing subscription from the public. Private Placement Maintenance of Books and Records Submission of Reports to the Board Winding Up IV) Inspection and Investigation:1. To ensure that the books of account, records and documents are being maintained by the venture capital 2. Investigate into complaints received from investors. V) Liability for action in Case of Default 1. Contravenes any of the provisions of the act 2. Fails to furnish any information relating to its activity as a venture capital.

Recent trends in venture capital

Given up for dead since 2000, Venture Capital has made a roaring come back in the last couple of years. VC firms invested $420 million across 69 investments during the first nine months of 2007, according to data from US-IVCA/Venture Intelligence.

IT & ITES companies continue to corner the majority share of VC investments accounting for about 70% in terms of number of investments. Within IT & ITES, vertically focused BPO companies have emerged as the favorite sector in 2007, followed by Internet-based Services (the 2006 favorite), IT Services and Mobile ValueAdded Services (M-VAS). Especially interesting to VCs are sectors that tap the rising consumer spending in India. While means that they are more than willing to listen to pitches from start-ups in sectors like Media, Financial Services, Food & Beverages and Retail.

Venture capital in india Specialized financial institution and their financing schemes A. Risk Capital Schemes of IFCI B. Technology Development & information company of India (TDICI) of ICICI C. SEED Capital Scheme of IDBI Overseas Venture Capital fund: It look for investment in areas ensuring high and guaranteed returns such as tourism, hospitals, air transport, IT, Comm., etc.  Funds Promoted by State Level Institutions (a) Andhra Pradesh Industrial Development Corporation Ltd. (APIDC)- VCs Ltd. (b) Gujarat Venture Finance Ltd. (GVFL)  Funds Promoted by Public Sector Banks Such as Canara Bank VC Fund

 Private agencies:- It includes as the: 1. Credit Capital Venture fund 2. 20th Century VC fund 3. India Investment fund 4. Indus VC fund 5. SBI Capital Venture Capital fund  Funds Promoted by State Level Institutions (a) Andhra Pradesh Industrial Development Corporation Ltd. (APIDC)- VCs Ltd. (b) Gujarat Venture Finance Ltd. (GVFL)  Funds Promoted by Public Sector Banks Such as Canara Bank VC Fund  Private agencies:- It includes as the: 1. Credit Capital Venture fund 2. 20th Century VC fund 3. India Investment fund 4. Indus VC fund 5. SBI Capital Venture Capital fund