VENTURE CAPITAL

Introduction
Venture capital is a growing business of recent origin in the area of industrial financing in India.
The various financial institutions set-up in India to promote industries have done commendable
work. However, these institutions do not come upto the benefit of risky ventures when they are
undertaken by new or relatively unknown entrepreneurs. They contend to give debt finance,
mostly in the form of term loan to the promoters and their functioning has been more akin to that
of commercial banks. The financial institutions have devised schemes such as seed capital
scheme, Risk capital Fund etc., to help new entrepreneurs. However, to evaluate the projects and
extend financial assistance they follow the criteria such as safety, security, liquidity and
profitability and not potentially. The capital market with its conventional financial instruments/
schemes does not come much to the benefit or risky venture. New institutions such as mutual
funds, leasing and hire purchase Companys have been established as another leasing and hire
purchase Companys have been established as another source of finance to industries. These
institutions also do not mitigate the problems of new entrepreneurs who undertake risky and
innovative ventures.
India is poised for technological revolution with the emergence of new breed of entrepreneurs
with required professional temperament and technical know how. To make the innovative
technology of the entrepreneurs a successful business venture, support in all respects and more
particularly in the form of financial assistance is all the more essential. This has necessitated the
setting up of venture capital financing Division/ companies during the latter part of eighties.
What is Venture Capital?
Venture capital is money provided by professionals who invest alongside management in young, rapidly
growing companies that have the potential to develop into significant economic contributors. Venture
capital is an important source of equity for start-up companies. Professionally managed venture capital
firms generally are private partnerships or closely-held corporations funded by private and public pension
funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the
venture capitalists themselves.
Venture capitalists generally:

Finance new and rapidly growing companies;

Purchase equity securities;
Assist in the development of new products or services;
Add value to the company through active participation;
Take higher risks with the expectation of higher rewards;
Have a long-term orientation

When considering an investment, venture capitalists carefully screen the technical and business merits of
the proposed company. Venture capitalists only invest in a small percentage of the businesses they review

and have a long-term perspective. Going forward, they actively work with the company's management by
contributing their experience and business savvy gained from helping other companies with similar
growth challenges. Far from being simply passive financiers, venture capitalists foster growth in
companies through their involvement in the management, strategic marketing and planning of their
portfolio companies. They are entrepreneurs first and financiers second.
VENTURE CAPITAL IN INDIA
Venture capital funds (VCFs) are part of the primary market. There are 35 venture capital funds registered
with SEBI apart from one foreign venture capital firm registered with SEBI. Data available for 14 firms
indicate that total funds available with them at the end of 1996 was Rs.1402 crores, which Rs.672.85
crores had been invested in 622 projects in 1996. Ventura capital which was originally restricted to risk
capital has become now private equity.

Venture capital represent funds invested in new enterprises which are risky but promise high returns.
VCFs finance equity of units which propose to use new technology and are promoted by technical and
professional entrepreneurs. They also provide technical, financial and managerial services and help the
company to set up a track record.
Once the company meets the listing requirements of OTCEI or stock exchange, VCF can disinvest its
shares.
CHARACTERISTICS OF VENTURE CAPITAL
The three primary characteristics of venture capital funds which may them eminently suitable as a source
of risk finance are :
(1) that it is equity or quasi equity investments;
(2) it is long-term investment; and
(3) it is an active from of investment.
Regulations of Venture Capital:
VCF are regulated by the SEBI (Venture Capital Fund) Regulations, 1996. The regulation clearly states
that any company or trust proposing to carry on activity of a VCF shall get a grant of certificate from
SEBI. Section 12 (1B) of the SEBI Act also makes it mandatory for every domestic VCF to obtain
certificate of registration from SEBI in accordance with the regulations. Hence there is no way that an
Indian Venture Capital Fund can exist outside SEBI Regulations. However registration of Foreign Venture
Capital Investors (FVCI) is not mandatory under the FVCI regulations.
A VCF and registered FVCI enjoy several benefits:
No prior approval required from the Foreign Investment Promotion Board (FIPB) for making
investments into Indian Venture Capital Undertakings (VCUs).

 As per the Reserve Bank of India Notification No. FEMA 32 /2000-RB dated December 26, 2000, an
FVCI can purchase/ sell securities/ investments at a price that is mutually acceptable to the parties and
there is no ceiling or floor restriction applicable to them.
A registered FVCI has been granted the status of Qualified Institutional Buyer (QIB), so they can
subscribe to the share capital of a VCU at the time of intial public offer. A lock-in of one year is
applicable to the shares subscribed in an IPO.
The lock-in period applicable for the pre-issue share capital from the date of allotment, under the SEBI
(Disclosure and Investor Protection) Guidelines, 2000 is not applicable in case of a registered FVCI and
VCF.
Under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 if the promoters
want to buy back the shares from FVCIs, it would not come under the public offer requirements.

The Stages in Venture Capital (VC) Investing

Angel investors are most often individuals (friends, relations or entrepreneurs) who want to
help other entrepreneurs get their businesses off the ground - and earn a high return on
their investment. The term "angel" comes from the practice in the early 1900s of wealthy
businessmen investing in Broadway productions. Usually they are the bridge from the selffunded stage of the business to the point that the business needs true venture capital. Angel
funding usually ranges from $150,000 to $1.5 million. They typically offer expertise,
experience and contacts in addition to money.
1. Seed - The first stage of venture capital financing. Seed-stage financings are often
comparatively modest amounts of capital provided to inventors or entrepreneurs to
finance the early development of a new product or service. These early financings
may be directed toward product development, market research, building a
management team and developing a business plan.
A genuine seed-stage company has usually not yet established commercial
operations - a cash infusion to fund continued research and product development is
essential. These early companies are typically quite difficult business opportunities to
finance, often requiring capital for pre-startup R&D, product development and
testing, or designing specialized equipment. An initial seed investment round made
by a professional VC firm typically ranges from $250,000 to $1 million.
Seed-stage VC funds will typically participate in later investment rounds with other
equity players to finance business expansion costs such as sales and distribution,
parts and inventory, hiring, training and marketing.

2. Early Stage - For companies that are able to begin operations but are not yet at the
stage of commercial manufacturing and sales, early stage financing supports a stepup in capabilities. At this point, new business can consume vast amounts of cash,
while VC firms with a large number of early-stage companies in their portfolios can
see costs quickly escalate.
o Start-up - Supports product development and initial marketing. Start-up
financing provides funds to companies for product development and initial
marketing. This type of financing is usually provided to companies just
organized or to those that have been in business just a short time but have
not yet sold their product in the marketplace. Generally, such firms have
already assembled key management, prepared a business plan and made
market studies. At this stage, the business is seeing its first revenues but has
yet to show a profit. This is often where the enterprise brings in its first
"outside" investors.
o First Stage - Capital is provided to initiate commercial manufacturing and
sales. Most first-stage companies have been in business less than three
years and have a product or service in testing or pilot production. In some
cases, the product may be commercially available.
3. Formative Stage - Financing includes seed stage and early stage.
4. Later Stage - Capital provided after commercial manufacturing and sales but before
any initial public offering. The product or service is in production and is commercially
available. The company demonstrates significant revenue growth, but may or may
not be showing a profit. It has usually been in business for more than three years.
o Third Stage - Capital provided for major expansion such as physical plant
expansion, product improvement and marketing.
o Expansion Stage - Financing refers to the second and third stages.
o Mezzanine (bridge) - Finances the step of going public and represents the
bridge between expanding the company and the IPO

5. Balanced-stage financing refers to all the stages, seed through mezzanine.