By

VENTURE CAPITAL M.M. Upendra Vasanth

PGDM171972050
1

S.no Contents Page

Number
1 Introduction 2

2 Problem Statement 3

3 History of Venture capital funds in India 5

4 Regulatory framework and constitution 6

5 Eligibility Criteria 7

6 Features 8

7 Forms of Venture capital financing 9

8 Funding process 10

9 Types and Stages 11

10 Advantages and Disadvantages 13

11 Examples 14

12 Learnings 15

13 Suggestions 17
2

Introduction:
Venture capital is a type of financing or loan where
investors provide funds to start ups and Small and medium-term
enterprises (SME’s) that are believed to have growth in future.
Venture capital generally comes from well-off investors, investment
banks and any other financial institutions.
However, it always no need to finance in monetary form, it can even
be in form of technical and mechanical expertise. Like Indian
companies getting technical support from foreign companies.
Though it can be risky for the investors who put up the funds, the
potential for above-average returns is an attractive payoff. For new
companies or ventures that have a limited operating history (under
two years), venture capital funding is increasingly becoming a
popular – even essential – source for raising capital, especially if they
lack access to capital markets, bank loans or other debt instruments.
The main downside is that the investors usually get equity in the
company, and thus a participation in company decisions. Software
and other intellectual property are generally the most common cases
whose value is unproven. That is why; Venture capital funding is
most widespread in the fast-growing technology and biotechnology
fields.
One important difference between venture capital and other private
equity deals, however, is that venture capital tends to focus on newly
emerging companies or start-ups seeking substantial funds for the
first time, while private equity tends to fund larger, more established
companies that are seeking an equity infusion or a chance for
company founders to transfer some of their ownership stake.
In India, Venture capitals are governed by The Securities and
Exchange Board of India(Venture Capital Funds) Regulations,1996.
3

Problem Statement
In venture capital business, investors should be aware
before investing for a particular business (i.e. buyer beware). As
they finance for start-ups. There are risks for those businesses
crashing in the market in short period as risks and returns are
unpredictable for newly emerging businesses.
The main problem in venture capital financing is that newly
formed start-ups can even earn huge profits in short term and
benefit the investors and there are even lot of chances that it
may go in failure.

Venture capital investors should be aware and follow necessary

steps, legal procedures before financing for a business to
maximize returns and minimize its risks.
4

Objective of the Study

To learn the entire process how venture capital financing is done, its
features, legal issues to be addressed, types and stages of venture
capital with an example.

Angel Investors
For small businesses, or for up-and-coming businesses in emerging
industries, venture capital is generally provided by high net worth
individuals (HNWIs) – also often known as ‘angel investors’ – and
venture capital firms.
The National Venture Capital Association (NVCA) is an organization
composed of hundreds of venture capital firms that offer funding to
innovative enterprises.
They are typically a diverse group of individuals who have earned
wealth through a variety of sources. However, they tend to be
entrepreneurs themselves, or executives recently retired from the
business empires they've built.
They look through several characteristics before investing
1. The majority look to invest in companies that are well-
managed, have a fully-developed business plan and are poised
for substantial growth.
2. Some investors offer funding to businesses that are involved in
the same or similar industries or business sectors with which
they are familiar.
3. If they haven't actually worked in that field, they might have
had academic training in it.
5

4. Another common occurrence among angel investors is co-

investing, where one angel investor funds a venture alongside a
trusted friend or associate, often another angel investor.

History of Venture Capital Funds in India

The Venture Capital takes part in a vital role in the

development and growth of innovative entrepreneurships in
India. Previously, venture capital funding was done by the
financial institutions. These financial institutions promoted
corporate bodies in the private sector with debt as a device of
funding. In India, the call for Venture Capital was acknowledged
in the 7th five-year plan and long-term fiscal policy of
Government of India. Venture Capital financing actually
originated in India, in 1988, with the formation of Technology
Development and Information Company of India Ltd. (TDICI) -
promoted by ICICI and UTI. The first private venture capital
fund was sponsored by Credit Capital Finance Corporation
(CFC) and promoted by Bank of India, Asian Development Bank
and the Commonwealth Development Corporation Viz. Credit
Capital Venture Fund.

Regulatory framework of Venture Capital in India

Venture Capital in India governs by the SEBI Act, 1992 and SEBI
(Venture Capital Fund) Regulations, 1996. According to which,
any company or trust proposing to carry on activity of a
Venture Capital Fund shall get a grant of certificate from SEBI.
However, registration of Foreign Venture Capital Investors
(FVCI) is not obligatory under the FVCI regulations. Venture
Capital funds and Foreign Venture Capital Investors are also
covered by Securities Contract (Regulation) Act, 1956, SEBI
6

(Substantial Acquisition of Shares & Takeover) Regulations,

1997, SEBI (Disclosure of Investor Protection) Guidelines, 2000.

Constitution of Venture Capital Funds

There are three layers of structured or institutional venture

capital funds i.e. venture capital funds set up by high net worth
individual investors, venture capital subsidiaries of corporations
and private venture capital firms/ funds. Venture funds in India
can be divided on the basis of the type of promoters.

1. Venture Capital Funds promoted by the Central government-

controlled development financial institutions such as TDICI, by
ICICI, Risk capital and Technology Finance Corporation Limited
(RCTFC) by the Industrial Finance Corporation of India (IFCI) and
Risk Capital Fund by IDBI.

2. It is promoted by the state government-controlled

development finance institutions such as Andhra Pradesh
Venture Capital Limited (APVCL) by Andhra Pradesh State
Finance Corporation (APSFC) and Gujarat Venture Finance
Company Limited (GVCFL) by Gujarat Industrial Investment
Corporation (GIIC)

3. Also, promoted by Public Sector banks such as Canfina and

SBI-Cap.

4. Venture Capital Funds promoted by the foreign banks or

private sector companies and financial institutions such as
Indus Venture Fund and Grindlay's India Development Fund.
7

Eligibility and Investment Criteria for Venture Capital

Funds(VCF)
1. For Venture Capital Funds it is required that Memorandum
of Association or Trust Deed must have main objective to
carry on action of Venture Capital Fund including prohibition
by Memorandum of Association & Article of Association for
making an invitation to the public to subscribe to its
securities.
2. In case of, body corporate, it must have been set up under
Central or State legislations and applicant has not been
refused certificate by SEBI.
3. A Venture Capital Funds may generate investment from any
investor (Indian, Foreign or Non-resident Indian) by means
of issue of units and no Venture Capital Fund shall admit any
investment from any investor which is less than five Lakhs.
Employees or principal officer or directors or trustee of the
VCF or the employees of the fund manager or Asset
Management Company (AMC) are only exempted
4. Employees or principal officer or directors or trustee of the
VCF or the employees of the fund manager or Asset
Management Company (AMC) are only exempted.
5. Employees or principal officer or directors or trustee of the
VCF or the employees of the fund manager or Asset
Management Company (AMC) are only exempted.
6. It is also mandatory that not more than 33.33% of the
investible funds may be invested by way of following as
stated below: -

 Subscription to IPO of a Venture Capital Undertaking

(VCU)
 Debt or debt instrument of a VCU in which VCF has
already made an investment by way of equity.
8

 Preferential allotment of equity shares of a listed

company subject to lock in period of one year.
 The equity shares or equity linked instruments of a
monetarily weak company or a sick industrial company
whose shares are listed.
 SPV (special purpose vehicles) which are created by
VCF for the purpose of making possible investment.

Features of Venture Capital investments

1. High Risk
The risk is high for this type of financing as they
finance for start-ups.

2. Lack of Liquidity
There is lack of liquidity. This may result either due to
limited market participation or because of a decrease in cash
held by market participants.

3. Long term horizon

The time duration will be high to get back the money as
the firms can repay only when they start to grow.

4. Equity participation and capital gains

Investors gain a share in the business for which they
are financing and earn capital gains out of it.

5. Venture capital investments are made in innovative projects.

6. Suppliers of venture capital participate in the management

of the company.
9

Forms of Venture capital financing

1. Equity- Its like investing in shares of that start-up and earn

capital gain

2. Participating debentures- This is like becoming a

debenture holder of the company. And earning interest
periodically.

3. Conditional loan- This is just like a normal loan having

certain terms and conditions.

4. Venture capital firms also provide services in form of

technological and merchandise support to the start-ups.

FUNDING PROCESS

Step 1: Idea generation and submission of the Business

plan
The initial step in approaching a Venture Capital is to
submit a business plan. The plan should include the below
points:
 There should be an executive summary of the business
proposal.
 Description of the opportunity and the market
potential and size.
 Review on the existing and expected competitive
scenario
10

 Detailed financial projections

 Details of the management of the company

If the investors are interested, they may invest in any

methods which is suitable for the particular business and
proceed for the next step.

Step 2: Introductory Meeting

After the first step is successfully completed, there is a
one-to-one meeting that is called for discussing the
project in detail. After the meeting the VC finally decides
whether or not to move forward to the due diligence
stage of the process.

Step 3: Due Diligence

The due diligence phase varies depending upon
the nature of the business proposal. This process involves
solving of queries related to customer references, product
and business strategy evaluations, management
interviews, and other such exchanges of information
during this time period.

Step 4: Term Sheets and Funding

If the due diligence phase is satisfactory, the VC
offers a term sheet, which is a non-binding document
explaining the basic terms and conditions of the
investment agreement. The term sheet is generally
negotiable and must be agreed upon by all parties, after
which on completion of legal documents and legal due
diligence, funds are made available.
11

Types and Stages of Venture Capital funding

The various types of venture capital are classified as per
their applications at various stages of a business. The three principal
types of venture capital are early stage financing, expansion
financing and acquisition/buyout financing.
The venture capital funding procedure gets complete in six stages of
financing corresponding to the periods of a company’s development

 Seed money: Low level financing for proving and fructifying a

new idea
 Start-up: New firms needing funds for expenses related with
marketing and product development
 First-Round: Manufacturing and early sales funding
 Second-Round: Operational capital given for early stage
companies which are selling products, but not returning a profit
 Third-Round: Also known as Mezzanine financing, this is the
money for expanding a newly beneficial company
 Fourth-Round: Also called bridge financing, 4th round is
proposed for financing the "going public" process.

A. Early stage Financing:

Early stage financing has three sub divisions seed
financing, start up financing and first stage
financing.
 Seed financing is defined as a small amount
that an entrepreneur receives for the purpose
of being eligible for a start-up loan.
12

 Start up financing is given to companies for the

purpose of finishing the development of
products and services.
 First Stage financing: Companies that have
spent all their starting capital and need finance
for beginning business activities at the full-
scale are the major beneficiaries of the First
Stage Financing.

B. Expansion Financing
 Expansion financing may be categorized into
second-stage financing, bridge financing and
third stage financing or mezzanine financing.
 Second-stage financing is provided to
companies for the purpose of beginning their
expansion. It is also known as mezzanine
financing. It is provided for the purpose of
assisting a particular company to expand in a
major way.
 Bridge financing may be provided as a short-
term interest only finance option as well as a
form of monetary assistance to companies
that employ the Initial Public Offers as a major
business strategy.

C. Acquisition or Buyout Financing

Acquisition or buyout financing is categorized
into acquisition finance and management or
leveraged buyout financing. Acquisition financing
assists a company to acquire certain parts or an
entire company. Management or leveraged buyout
financing helps a particular management group to
obtain a particular product of another company.
13

Advantages of Venture Capital:

 They bring wealth and expertise to the company.
 Large sum of equity finance can be provided.
 The business does not stand the obligation to repay the money.
 In addition to capital, it provides valuable information,
resources, technical assistance to make a business successful.

Disadvantages of Venture Capital:

 As the investors become part owners, the autonomy and

control of the founder is lost.
 It is a lengthy and complex process.
 It is an uncertain form of financing.
 Benefit from such financing can be realized in long run only.

Latest Updates in India

From the above picture, it is clear that Venture capital firms

in India are interested to invest for start-ups who are
involved in Data science and other growing technologies.
14

Examples
1. Helion Venture Partners
Helion was founded in 2006 as an early to mid-stage. It is
an India-focused venture fund with over $600 million
under management.

Industries covered Online Services

Ecommerce
Mobility
Enterprise Software
Outsourcing
Consumer Services
Others

Contact Details +91 124 461 5333 | [email protected]

Start-ups funded Yepme, MakeMyTrip, Red Bus, ShopClues, etc.

2. Sequoia Capital India

Sequoia Capital was founded in 1972 and has been highly
active in the Indian start-up market since the early 2000s
with an investment of around $100 million in the growth
stages of start-ups alone.

Industries covered Ecommerce

Internet
Outsourcing
Public Sector

Contact Details Bengaluru: +91 080 412 458 80

Mumbai: +91 022 4074 7272
New Delhi: +91 011 4956 7200

Start-ups funded Truecaller, Zomato, Byju, Oyo Rooms, Nearbuy, Micromax etc.
15

3. Nexus Venture Partners

Nexus Venture Partners believe in investing in the early
stages of a company. Their investment size ranges from
USD 500K to 10 million in early-growth stage companies.
They also like to participate in follow-on investments at
later stages for companies that successfully execute their
business plans.

Industries covered Business Services

Consumer Services
Data and AI
Enterprise
Healthcare

Contact Details Bengaluru: +91 080 662 60000

Mumbai: +91 022 662 60000

Start-ups funded Shopclues, Arkit, PaySense etc.

4. Kalaari Capital
Founded in 2006, Kalaari Capital is a technology-focused
venture capital firm with over $650 million in assets under
management.

Industries covered Ecommerce

Internet Services
Health and Wellness
Fintechs
EdTech
Mobile
Digital Media
Social Media
Ecommerce Enablers
16

Enterprise Software
Outsourcing
Others

Contact Details +91 +91 080 6715 9600 | [email protected]

Start-ups funded Scoopwoop, Industrybuying.com, Active.Ai, Cashkaro, etc.

My Learnings:

1. If I start a new start-up in India, I have the chance to

approach Venture capital firms.
2. We have to submit a proper business plan to get financed
in any form like Equity, Debenture, Conditional loan or
Technological support.
3. Its better if we approach the investors who are interested
in investing for the business which we are going to do.
Like if we are start a car workshop its better to approach
the Investors who are interested in that field.
4. Learnt how due diligence is done by investors for the
start-ups.
5. Investors should also be-aware before investing, they
should forecast the estimated growth of the business.
17

My suggestions for the start-ups and investors before

investing
For Start-ups:
1. It’s better for the start-ups to go for technological
support rather than monetary support.
2. Make a innovative and attractive business plan.
3. Make a list of investors and strike off those who
don’t meet your requirements
4. Spend some time to understand the venture capital
market. If you can align your pitch to their
requirement too, then it is bound to be a win-win
situation for all.
5. Don’t bank solely on a world-changing idea. Build
something before you approach a VC. Let them feel
that you are capable of converting ideas to reality.
6. Make a good Financial plan what form of funding
we need and in which stage we need the fund.
7. And Forecasting our business with present market
conditions is also important.
8. Must have a estimated plan about our return on
investment and duration of repayment.

For investors:

1. Must perform a proper due-diligence before

investing in a particular business.
2. Before investing the investors must forecast about
the liquidity and how long the business will last in
the market.
3. It better to have a Business analyst to analyse the
business. Using Fundamental and Technical
analysis.
18

4. Investors must also have a back up plan to come

out of the business which is going in loss
5. If the investors are ready to take the risk of loss,
they should have a certain amount of limit or
percentage.