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UNIT III 4. Venture capital is available for new and novel ideas or new
VENTURE CAPITAL technology projects.
Meaning: 5. It is not merely an injection of funds into a new firm, it is a
Venture Capital refers to, investment in new and tried simultaneous input of skill needed to set up the firm, design
enterprises that are lacking a stable record of growth. its marketing strategy and organise and manage it.
Venture Capital is long-term risk capital to finance high 6. Venture capitalist joins the entrepreneur as a co-promoter
technology projects which involve risk but at the same time has in projects and shares the risks and rewards of the
strong potential for growth. enterprise.
7. Once the venture has reached the full potential the venture
Definitions: capitalist disinvest his holdings and depart with the venture.
Venture capital may be defined as, “a temporary equity or
quasi equity investments in a growth oriented business managed Scope of Venture Capital / Stages of Venture Capital
by the highly motivated entrepreneur”. Finance:
The RBI defines venture capital as, “an activity by which Venture capital may take various forms at different stages
an investor supports an entrepreneurial talent with finance and of the project. These are five successive stages of development
business skills, to exploit market opportunities and obtained long of a project viz., development of a project idea, implementation
term market gains”. of the idea, commercialization stage, establishment stage, and
A venture capital company is defined as, “a financial disinvestment stage.
institution which joins with an entrepreneur as a co-promoter in a Financial institutions and banks usually start financing the
project and shares the risks and rewards of the enterprise”. new project only at the second or third stage but venture
capitalists provide fiancé from the first stage itself. The
Features of Venture Capital: various stages in the financing of venture capital are:
The following are the main features of venture capital.
1. Venture capital is usually in the form of equity participation 1. Development of idea stage: - Seed Finance
or in convertible debt or long term loan. The venture capitalists provide seed capital for translating
2. Investment is made only in high risk but having high growth idea into business proposition. This is the finance provided at the
potential projects. project development stage. A small amount of capital is provided
3. Venture capital is a long term investment in growth-oriented to the entrepreneurs for concept testing or translating an idea
small or medium firms. into business. It takes a year or more.
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2. Implementation stage:- Start-up Finance iii. Sale to other venture capital funds
When the firm is set up to manufacture a product or iv. Sale in OTC market, and
provide a service, start up finance is provided by the venture v. Management buy outs.
capitalists. This is the stage of initiating commercial production
and marketing. At this stage, the venture capitalist provides Venture Capital in India
capital to manufacture a product. This start-up finance is in the The venture capital institutions (VCIs) in India can be
form of long term capital, which may be utilised for fixed as well broadly classified into 5 types.
as working capital requirements. 1. Venture Capital companies promoted by Development Banks
2. Venture capital companies promoted by Commercial banks.
3. Fledging stage:- Additional Finance 3. Venture capital companies promoted by State Finance
The project has made some headway and entered the Corporations
stage of maximum production but faces teething problems. 4. Venture Capital companies promoted by private sector
Additional funds are needed at this stage to meet the growing companies/private financial institutions
needs of business. In this stage venture capitalist provide 5. Venture Capital funds promoted by foreign financial
additional round of finance to develop the selling and distribution institutions
infrastructure facilities and network.
1. VC companies promoted by Development banks:
4. Establishment stage:- Establishment Finance a) IDBI – VFC (Venture Fund Company) : IDBI promoted
At this stage, the project is established in the market and venture fund company in the year 1986. It is promoted by
expected to expand at a rapid pace. It needs further financing the Technology Development Wing of IDBI.
for expansion and diversification of the project. At this stage
the project can reap economies of scale and attain stability. b) TDICI - Technology Development and Information
company of India Ltd. This was started in January 1988
5. Disinvestment stage:- Finance Exit with the support of ICICI and UTI. This is the country‘s
At this stage the venture capitalist disinvests their first venture fund (Venture Capital Unit Scheme). It was
shareholdings through available exit routs. The disinvestment started with an initial fund of Rs.20 Crores and it has
options available are: financed nearly 37 small and medium scale enterprises. At
i. Promoter’s buy back present, it has a total fund of Rs.120 crores. The initial fund
ii. Public issue has yielded a return of Rs.16 crores.
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c) RCTC – Risk Capital and Technology Finance Corporation 3. Venture Capital companies promoted by State Finance
Ltd.: It is a subsidiary of IFCI, started in January 1988. Corporations:
Its resource base has Rs.30 crores which has contributions This category includes Venture Capital Funds which are
from UTI, IFCI and World Bank. promoted by development finance institutions controlled by state
government.
d) SIDBI Venture Capital Ltd. (SVCL):
Incorporated in July 1999, SVCL is a wholly owned b) Gujarat Venture Finance Ltd: Gujarat Industries
subsidiary of SIDBI. It has a mission of catalyzing Investment Corporation Ltd., along with Gujarat Lease
entrepreneurship by providing capital and other strategic Finance Corporation Ltd., Gujarat Alkalies & Chemicals Ltd.,
inputs. SVCL has managed a lot of funds over the years. and Gujarat State Fertilizer Ltd., promoted Gujarat Venture
These include SME Growth Fund, National Venture Fund for finance Ltd. It has a venture fund of Rs.24 crores and was
Software and Information Technology, Samridhi Funds and started in 1990.
India Opportunities Fund.
c) Andhra Pradesh Venture Capital Limited (AVCL): This was
2. Venture Capital Companies promoted by Commercial Banks promoted by APIDC (Andhra Pradesh Industrial
Notable among the venture companies promoted by the Development Corporation), IDBI, Andhra Bank and Indian
commercial banks. Overseas Bank.
a) Canara Bank venture Capital Fund Ltd. (CVCFL) :
b) India Investment Fund and Second India Investment Fund d) The Kerala Venture Capital Fund Pvt. Ltd (KVCFL): It is
(Promoted by Grind lays Bank). functioning as the asset managing company of the Kerala
c) SBI Capital Markets Ltd. (SBICAP) Venture Capital Fund. Its main function is to manage the
d) HSBC Private Equity Management venture capital. The fund which was registered on
September 14th, 1999.

e) Punjab Venture Capital Limited (PVCL): The fund provides

startup, growth and seed capital to startups in India. The
fund invests in small and medium enterprises, primarily in
the Software and Information Technology Sectors. The size
of the fund is estimated to be $4 million.
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4. Venture Capital companies promoted by private sector 1. Government of India:

companies, private financial institutions: The Government of India has issued the following
These are promoted by private sector companies, private guidelines for various venture capital funds operating in the
financial institutions. In private sector, we have: country.
1. The financial institutions, State Bank of India, scheduled
a) Larazd Credit Capital Venture Fund banks, and foreign banks are eligible to establish venture
b) Indus Venture Management Ltd. (IVML) capital companies or funds subject to the approval as may be
c) Rajasthan Venture Capital Fund required from the Reserve Bank of India.
d) Adharshila Venture Capital Fund 2. The venture capital funds have a minimum size of Rs. 10
e) Aditya Birla Private Equity Trust crores and a debt equity ratio of 1:1.5. If they desire to
f) Blume Ventures Fund 1 raise funds from the public, promoters will be required to
contribute minimum of 40% of the capital.
5. Venture Capital funds promoted by foreign financial 3. The guidelines also provide for NRI investment upto 74% on
Institutions: a non-repatriation basis.
a) BTS India Private Equity Fund Ltd. 4. The venture capital funds should be independent of the
b) SEAF India Investment And Growth Fund Ltd. parent organisation.
c) India Infrastructure Investments Limited 5. The venture capital funds will be managed by professionals
d) ACTIS Infrastructure India Pcc Limited and can be set up as joint ventures even with non-
e) ADITI Investments Holdings Limited institutional promoters.
f) Americorp Ventures Limited 6. The venture capital funds will not be allowed to undertake
activities such as trading, broking, and money market
operations but they will be allowed to invest in leasing to the
REGULATION OF VENTURE CAPITAL IN INDIA: extent of 15% of the total funds deployed. The investment
In India venture capital Fund/Companies are regulated by or revival of sick units will be treated as a part of venture
the Government of India and SEBI (Venture Capital Funds) capital activity.
(Amendment) Regulations, 2000 and SEBI (Foreign Venture 7. A person holding a position of being a full time chairman,
Capital Investors) Regulations, 2000 chief executive or managing director of a company will not
be allowed to hold the same position simultaneously in the
venture capital fund/company.
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8. The venture capital assistance should be extended to the b. Debt or debt instrument of a venture capital
promoters who are now, and are professionally or technically undertaking in which the venture capital fund has
qualified with inadequate resources. already made an investment by way of equity.
7. The venture capital funds will be eligible to participate in
2. SEBI’s Regulations on Venture Capital: the IPO through book building route as Qualified
The SEBI (Venture Capital Funds) (Amendment) Institutional Buyer subject to compliance with SEBI
Regulations, 2000 empowers the SEBI to regulate the working of (Venture Capital Fund) Regulations.
venture capital institutions in India. The following are some of 8. Venture capitalists are prohibited from investing in the
the extracts of SEBI (Venture Capital Funds) (Amendment) securities of companies providing financial services.
Regulations, 2000 and SEBI (Foreign Venture Capital Investors) 9. Mutual funds, banks, insurance companies are permitted to
Regulations, 2000. invest in venture capital funds.
1. Every venture capital company must register with the 10. Venture capitalists are free to finance to any companies
SEBI. that has already been provided venture capital assistance.
2. The venture capital funds can be constituted in the form
of trust or company or limited liability partnership. Reasons for slow growth of venture capital industry in India:
3. The minimum investment in a Venture Capital Fund from In spite of the major steps taken by SEBI to encourage
any investor will not be less than Rs. 5 lakhs and the venture capital investment, there is still slow growth of venture
minimum corpus of the fund before the fund can start capital companies in India. They are due to:
activities shall be at least Rs. 5 crores. a. Lack of understanding about venture capital
4. Maximum investment in single venture capital undertaking b. Regulatory and taxation complexities
not to exceed 25% of the corpus of the fund. c. No proper venture capital exit policy
5. At least 75% of the investible funds to be invested in d. Lack of early-stage venture capital funding in India.
unlisted equity shares or equity linked instruments. e. Too many restrictions on foreign venture capital companies
6. Not more than 25% of the investible funds may be f. Risk aversion among Indian investors, both institutional
invested by way of; and individual. This has led to a preference for safer
a. Subscription to initial public offer of a venture capital investment options over high-risk startups.
undertaking whose shares are proposed to be listed g. Indian educational system – Job orient.
subject to lock-in period of one year.
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Advantages of Venture Capital: Disadvantages/Problems:

Venture capital has a number of advantages over other 1. Equity Dilution -The primary disadvantage of VC is that
forms of finance. Some of them are: entrepreneurs give up an ownership stake in their business
1. Access to capital - It is long term equity finance. Hence, i.e., dilution of ownership.
it provides a solid capital base for future growth. 2. Loss of Autonomy - Conflict of interest may arise between
2. Risk sharing - The venture capitalist is a business partner. the owners and investors, which can hinder decision
He shares the risks and returns. making.
3. Expertise and guidance - The venture capitalist is able to 3. Geographic Concentration - Venture capital is not readily
provide strategic, operational and financial advice to the available to all businesses. Startups in certain industries or
company. geographic regions may find it challenging to secure
4. Network building - The venture capitalist has a network of venture capital funding.
contacts that can add value to the company. He can help 4. Limited Investment Horizon - If a startup does not meet
the company in recruiting key personnel, providing the expectations of its investors, it may face financial
contracts in international markets etc. difficulties in getting additional finance or even face
5. Accelerated Growth - With access to substantial funding bankruptcy.
and expertise, startups can often accelerate their growth 5. Pressure for Rapid Growth - Venture capitalists typically
and capture market share more quickly than they would expect high returns on their investments, which can put
through organic means. immense pressure on the company to achieve rapid growth.
6. Flexibility - Venture capital can be a flexible form of
financing, as it doesn't require regular interest payments Suggestions for the growth of venture capital in India:
or collateral. Startups can use the funds as needed to Venture capital industry is at take-off stage in India. It
drive growth. can play a catalytic role in the development of new
7. Brand Credibility - Being backed by a well-known VC firm entrepreneurs. In order to ensure success of venture capital in
can enhance a startup's credibility and attractiveness to India, the following suggestions are offered.
customers, partners, and other investors. It can also make
it easier to attract top talent. 1. Regulatory Reforms:
8. Global Expansion - VC funding can support global Simplify and streamline regulatory processes for venture
expansion efforts, helping startups enter international capital firms to make it easier for them to invest in Indian
markets and compete on a larger scale. startups. Create clear and investor-friendly regulations to
encourage foreign VC investments.
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2. Tax Incentives: 7. Access to Global Markets:

Offer tax incentives to VC firms and investors, such as Facilitate partnerships and collaborations between Indian
lower capital gains tax rates for long-term investments in startups and international companies to expand market access.
startups. Consider tax deductions for angel investors to Support startups in going global by providing resources for
encourage early-stage funding. market research and international expansion.

3. Education and Awareness: 8. Regional Ecosystem Development:

Increase awareness about venture capital and its benefits Encourage the development of regional startup ecosystems
among entrepreneurs, investors, and the general public. Promote by providing infrastructure, mentorship programs, and
educational programs and workshops on venture capital and networking opportunities. Support the creation of startup hubs in
entrepreneurship. smaller cities and towns to decentralize startup activity.

4. Venture Capital Funds of Funds (FoFs): Review Questions:

Establish government-backed FoFs to co-invest with 1. What is venture capital?
private VC funds, thereby reducing risk and attracting more 2. Give the characteristic features of venture capital
investors. Encourage pension funds, insurance companies, and 3. Elaborate the various stages of venture capital financing.
other institutional investors to allocate a portion of their capital 4. What are means by which venture capitalists realize their
to VC investments. investments?
5. Discuss the various forms of venture capital support available
5. Data and Research:
to entrepreneurs in India.
Conduct regular research on the venture capital ecosystem
6. How venture capital companies and venture capital funds are
in India to identify trends, challenges, and areas for
regulated in India?
improvement. Share data and insights with stakeholders to
7. Enumerate the reasons for the slow growth of venture
inform policy decisions.
capital business in India and offer various suggestions for
6. Corporate Engagement: the growth of venture capital in India.
Encourage corporates to invest in startups and engage in 8. Describe the advantages and disadvantages of venture
corporate venture capital (CVC) activities. Foster partnerships capital.
between established companies and startups for innovation and 9. Offer some valid suggestions for the growth of venture
growth. capital in India.