UNIT-III

VENTURE CAPITAL

VENTURE CAPITAL:
“enture capital is long term risk capital to finance high technology projects which
involve risk but at the same time has strong potential for growth”.
Venture capitalist pool their resources including managerial abilities to assist new
entrepreneurs in the early years of the project.
DEFINITION:
A Venture capital company is defined as “a financing institution which joins an
entrepreneur as a co- promoter in a project and shares the risks and rewards of the
enterprise.
Features:
New ventures.
Continuous investment.
Equity investment.
Objective
Hands-on approach
High risk-return venture.
Nature of firms.
Liquidity.
: New venture
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.
Continuous involvement:
Venture capitalists continuously involve themselves with the client’s investments,
either by providing loans or managerial skills or any other support.
Equity 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 debt to ensure a running
yield on the portfolio of the venture capitalists.
Objective:
The basis 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
injected to enable the business to grow at a rapid pace, mostly from the start-up stage.
Hands –on approach:
Venture capital institutions take active part in providing value-added services
such as providing business skills, etc to investee firms. They 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 nonliquid.
High risk-return venture:
Venture capitalist finance high risk-ruturn 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 huge capital gains at the time of exit.
Nature of firms:
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.
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.
Venture capital origin in India:
Venture capital that originated in India very late, is still in its infancy. It was the
Bhatt Committee in the years 1972, which recommended the creation of medium capital.
The committee urged the need for providing such capital to help new entrepreneurs and
technologists in setting up industries. A brief description of some of the venture capital
funds of India is as follows:
Risk capital foundation: The Industrial Finance Corporation of India (IFCI) launched the
first venture capital fund in the year 1975. the fund, Risk Capital Foundation(RFC)aimed
at supplementing ‘promoters equity’ with a view to encouraging technologist and
professionals to promote new industries.
Seed capital scheme: This venture capital fund was launched by IDBI in 1976,with the
same objective in mind.
Venture capital scheme: venture capital funding obtained official patronage with the
announcement by the central Government of the ‘Technology policy statement’ in 1983.It
prescribed guidelines for achieving technological self-reliance through
commercialization.
Other funds :The liberalized guidelines introduced by the government, in 1988,gave rise
to the setting up of a number of venture capital funds, especially in the private sector.
Some of these funds include the following.

Fund year
India Investment Fund 1987
Second India Investment 1989
Credit capital venture Oct 1989
Credit Capital Venture Jan 1990
APIDC Venture Capital Ltd Oct 1990
Gujarat Venture Finance Ltd Nov 1990
Twentieth century capital management Ltd Aug 1991
Indus venture capital Management Ltd Oct 1991
SIDBI venture capital Fund Apr 1994
Scope of venture capital:
Venture capital may take various forms at different stage of the project. There are
four successive stages of development of a project viz.
Development of a project idea.
Implementation of a the idea.
Commercial production and marketing.
Large scale investment to exploit and achieve stability.
Venture capital financing involves high risk-return spectrum. Some of the ventures
yield very high return to more than compensate for heavy losses on others which also
may have had potential of profitable returns. The return in such financing are essentially
through capital gains at the time of exits from disinvestments in the capital market.
Development of an idea –Seed finance.
Implementation stage-Start up finance.
Fledge stage –Additional finance.
Establishment stage –establishment finance.
Seed finance: This is an 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”.
This stage involves serious risk, as there is no guarantee for the success of the
concept, idea, and process pertaining to high technology or innovation. This stage
requires constant infusion of funds in order to successful adaptation, going into the
commencement of commercial production and marketing. venture capital constitutes
financing of ideas developed by research and development wings of companies or at
university centers. Chances of success in hi-tech projects are merger. The venture capital
fund considers the following points to safeguard its own interests:
Successful performance record.
Entrepreneur’s previous experience in similar products.
Successful technology and market.
Start-up Financing: The European venture capital Association defines start-up capital as
“capital needed to finance the product development, 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 the R&D stage, or arising from transfers of
technology from the 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.
Additional financing:
The venture capital association defines expansion capital or financing as “the
finance provided to fund the expansion or growth of a company which is breaking even
or trading at a small profit”. Expansion or development or additional capital will be used
to finance increased production capacity, market or product development and /.or
providing additional working capital.
This is the one of the later-stage financing methods, whereby finance is provided by the
venture capitalists for adding production capacity, once it has successfully gained a
market share, and faces increased demand for the product. Financing is also made
available for acquisition or takeover.
Growth of venture capital in India:

“Venture capital is the investment of long-term equity finance where the venture capital
earns his return primarily in the form capital gain”.
Capital provided by firms who invest alongside management in young companies
that are not quoted on investment.. Value is created by the young company in partnership
with the venture capitalist’s money and professional expertise.
Structure and Growth of venture capital in India:
1. VCFs Promoted by the central government controlled development
finance institutions:
TDICI by ICICI
Risk capital and Technology Finance Corporation Limited by IFCI
Risk capital fund by IDBI
2. VCFs promoted by the state Government controlled development in financial
institution:
Gujarat Venture Finance Co. Ltd(GVFCL) by Gujarat industrial Investment
Corporation(GIIC)
Andhra Pradesh venture capital limited (APVCL) by AP state Finance corporation.
(APSFC)
3.VCFs promoted by the public sector banks:
Canfina by Canara Bank
SBI-cap by SBI
4.VCFs promoted by the foreign banks or private sector companies &Financial
institutions:
Indus venture fund
Credit capital venture fund
Grindlay’s India Development Fund
“Venture capital is the investment of long-term equity finance where the
venture capital earns his return primarily in the form capital gain”.
Capital provided by firms who invest alongside management in young
companies that are not quoted on investment.. Value is created by the young
company in partnership with the venture capitalist’s money and professional
expertise.
Structure and Growth of venture capital in India:
1. VCFs Promoted by the central government controlled development
finance institutions:
TDICI by ICICI
Risk capital and Technology Finance Corporation Limited by IFCI
Risk capital fund by IDBI
2. VCFs promoted by the state Government controlled development in
financial institution:
Gujarat Venture Finance Co. Ltd(GVFCL) by Gujarat industrial Investment
Corporation(GIIC)
Andhra Pradesh venture capital limited (APVCL) by AP state Finance
corporation.(APSFC)
3.VCFs promoted by the public sector banks:
Canfina by Canara Bank
SBI-cap by SBI
4.VCFs promoted by the foreign banks or private sector companies
&Financial institutions:
Indus venture fund
Credit capital venture fund
Grindlay’s India Development Fund