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Venture Capital In India Research Team | Posted On Tuesday, December 18,2018, 03:52 PM

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Venture Capital In India



Start-up Companies, which have the potential to grow, need a certain amount of investment. These companies cannot get finances from the public, as they don’t have access to secondary markets. In such cases, wealthy investors invest money in businesses like start ups, small and medium sized business or enterprises that have long-term business prospects. This capital is known as venture capital and the investors are known as venture capitalists.

What is venture capital?

Venture capital is a private investment made by investors into new businesses like start-ups and small and medium size enterprises. This type of investment generally comes from wealthy investors and high net-worth individuals and is pooled together by dedicated investment firms.

Venture capital investment is also known as risk capital financing as it involves the risk of losing money, if the venture does not succeed. The capital investment is done in exchange for an equity stake in the business, rather than a loan.

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Venture Capital In India

Venture capital financing process:

 The venture capital investment involves the following process:

  • Idea generation and submission of the business plan: This is the initial step. As suggested, it requires the submission of the business plan. In this step the venture capitalist analyses the project in detail and decides whether to invest in the project or not.
  • Introductory meeting: The next step is a meeting called for discussing the project in detail.
  • Due diligence: This step involves solving the queries related to customer references, business strategy, product evaluation, management interviews and other exchanges of information.
  • Term sheet and funding: If the due diligence is successful, then the venture capitalist offers a term sheet, stating the terms and conditions of the investment. After the agreement on the terms and conditions by both parties, a legal document is drafted and signed and funds are made available to the enterprise.

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Venture capital in India:

Venture capital fund also called VCF, is a type of investment fund that manages money from different investors with the aim to provide capital to small and medium sized enterprises and start-ups that have a strong growth potential. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships.

In India, these institutions are regulated through the guidelines issued by the Securities and Exchange Board of India. The laws relating to venture capital come under the SEBI (Venture capital funds) Regulations 1996. The venture capital fund regulations by the Securities and Exchange Board of India, are a comprehensive set of laws to be followed by the venture capital funds in India. These laws encompass everything from the registration of venture capital funds to the action which must be taken in case of default.

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Types of venture capital:

Venture Capital Funds can be divided into three main types. Listed below are the three main types of venture capital and their sub-categories:

  • Early stage financing: this can be further divided into three types of financing which are seed financing, start-up financing and first stage financing.  These are the three sub-categories in early stage financing:
  1. Seed financing: it can be defined as a small amount that an entrepreneur receives for the purpose of being eligible for a start-up loan.
  2. Start-up financing: It is given to companies for the purpose of finishing the development of products and services.
  3. First stage financing: when companies need capital to begin business activities on a large scale, they become the major beneficiaries of first stage financing. 
  • Expansion financing: This is the second type of financing that can be further classified into three categories. They are as follows:
  1. Second stage financing: These types of funds are provided to companies for the purpose of expansion.
  2. Bridge financing: This financing provides short term interest only financing option as well as a form of monetary assistance to companies that employ the initial public offer as a major business strategy.
  3. Third stage financing: It is a type of fund that is offered for major expansion in business.
  • Acquisition or buyout financing: Acquisition finance and leveraged buyout financing are the categories falling under acquisition or buyout financing. When a company needs funds to acquire another company or parts of a company, acquisition financing comes to aid. Leveraged buyout financing is required when a management group of a company wishes to acquire another company’s products.

Features of venture capital:

Discussed below are some of the important features of venture capital:

  • The primary focus of VCFs is on early-stage investment. However it can also involve expansion-stage financing.
  • Equity stakes of the enterprises or companies that are funded by the VCFs are purchased by the VCFs.
  • The VCFs funding is done to high risk projects which in turn ensures high profits.
  • The VCFs also help in developing new products and services by acquiring latest technologies that help the company, improve efficiency.
  • This type of funding opens opportunities for better networking of the companies.
  • The venture capitalists have the right to participate in the management of the company.
  • Venture capital investments are made in innovative projects that have a potential for future growth.

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