Venture Capital: Features, Functions, Sources of Venture

What is Venture Capital?

Venture capital is a method of business funding for companies that are looking to grow beyond normal rates of business growth. Venture capital is the money that comes into the business to help fuel growth.

It is a form of equity investment where the investor who gives money also gets partial ownership of the company through shares and after some sort of control in the company (seats on the board).

Venture capital is equity support to fund new concepts that involve a higher risk and at the same time, have high growth and profit potential. Venture capital (also known as VC or venture) is a type of private equity capital typically provided to early-stage, high-potential, growth companies in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company.

Venture capital is most attractive for new companies with limited operating history, which are too small to raise capital in the public markets and are too immature to secure a bank loan or complete a debt offering. In exchange for high risk.


Features of Venture Capital

The following are the features of venture capital:

  1. Highly Risky
  2. High-Tech Areas Investment
  3. Long Gestation Period
  4. Units Managerial and Marketing Assistance
  5. Investment
  6. Capital Gains
  7. Involvement in Management

Highly Risky

A venture investment is tremendously risky and chances of failure are high because it provides long-term start-up costs to high-risk high-reward projects.

High-Tech Areas Investment

The investment by venture capital firms is made in high-tech areas using new technology or producing innovative goods by using new technology.

Long Gestation Period

The benefit or profit from the venture capital investment will start occurring only after an average period of 4 to 5 years.

Units Managerial and Marketing Assistance

The venture capitalist also makes available to the assisted units managerial and marketing assistance.

Investment

It is an equity or quasi-equity form of investment.

Capital Gains

It is a long-term investment and returns are in the form of capital gains.

Involvement in Management

It is an active form of investment with a higher degree of involvement in the management of a venture.


Functions of Venture Capital

These are the functions of venture capital explained below:

  1. Venture Capital Provides Finance
  2. Seed Capital Funds
  3. Business Plan
  4. Technological Innovation
  5. Gap-Filling Function
  6. Ensure Banking Service
  7. Professionalize
  8. Technology Information Service
  9. Encouraging Entrepreneurial Process

Venture Capital Provides Finance

Venture capital provides finance as well as skills to new enterprises and new ventures of existing ones based on high technology innovations.

Seed Capital Funds

It provides seed capital funds to finance innovations even in the pre-start stages.

Business Plan

In the development stage that follows the conceptual stage, venture capitalist develops a business plan that will detail the market opportunity, the product, the development, and financial needs.

Technological Innovation

In the crucial stage, the venture capitalist has to ensure the intrinsic merits of the technological innovation, ensure that the innovation is directed at a clearly defined market opportunity, and satisfy him that the management team at the helm of affairs is competent enough to achieve the targets of the business plan. Therefore, venture capitalist helps the firm to move to the exploitation stage, i.e. launching of the innovation.

Gap-Filling Function

Venture capitalist fills the gap in the owner’s fund in relation to the quantum of equity required to support the successful launching of an existing business. It acts as a trigger in launching of a new business and as a catalyst in stimulating existing firms to achieve optimum performance.

Ensure Banking Service

A venture capitalist’s duty extends even as far as to see that the enterprise has proper and adequate commercial banking and receivable financing.

Professionalize

Venture capitalist assists the entrepreneurs in locating, interviewing, and employing outstanding corporate achievers to professionalize the firm.

Technology Information Service

Venture capital assistance is provided by the financial institution in the form of project loans, equity, conditional loans (quasi-equity, a comprehensive techno-managerial support and guidance service, including technology information service.

Encouraging Entrepreneurial Process

Venture capital activity would play a catalytic role in encouraging the entrepreneurial process in the Indian industrial scene. Encouraging a new class of promoters i.e. investors, innovators, professional executives, and technocrats, would lead to a greater dispersion of economic power.

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Sources of Venture Capital Financing

The following are various sources of venture capital:

The EXIM Bank

Export-Import Bank of India, set up in 1982, for the purpose of financing, facilitating, and promoting international trade in India is the principal institution in the country for the co-coordinating workshops of institutions engaged in financing exports and imports.

EXIM Bank has made an entry into venture capital finance by investing in a venture capital fund which is the India technology venture unit scheme promoted by Unit Trust of India (VII). The venture capital fund size is Rs. 150 crore. Other co- investors apart from UTI include LIC, Technology Development Board, GIC New India Assurance, Bank of Baroda, and Andhra Bank. The objective of the fund is investment in technology sectors like:

  1. Information Technology
  2. Internet
  3. Media and Entertainment
  4. Tele Communications
  5. Biotechnology
  6. Pharmaceuticals
  7. Health Care

IDBI Venture Fund

IDBI’s venture capital fund (VCF) was started in 1986 with an initial capital of Rs. 10 crore and is a part of the technology department of IDBI. It assists high technology, small, and medium-sized projects requiring funds between Rs. 0.6 to Rs 25 million (Rs. 2.6 crore).

It is meant primarily to assist projects which promote commercial applications for indigenously developed technology or which adopt imported technology for wider applications. IDBI sanctions funds in various fields like electronics, food products, medical equipment, biotechnology, chemicals, computer software, etc.

ICICI Venture Funds Management Company Limited

It was founded in 1988 as a joint venture with the unit trust of India, ICICI bought out VTI’s stake in 1988 and ICICI venture became a fully owned subsidiary of ICICI. ICICI is currently a private equity fund, although it provides venture capital as well.

IFCI Venture Capital Funds Ltd. (IVCF)

IFCI Venture Capital Fund Ltd. (IVCF) was originally set up by IFCI as a society by the name of Risk Capital Foundation (RCF) in 1975. Its objective was to provide institutional support to first-generation professionals and technocrats setting up their own ventures in the medium-scale sector.

The focus of IVCF is on growth-oriented industrial sectors and emerging knowledge-based industries such as IT, internet and E-commerce, biotechnology, health care, medical, etc. IVCF invests in the form of equity and equity-linked instruments such as optimally and fully convertible debentures, preference shares, etc. It normally provides finance between 1 crore to 4 crore.

Gujarat Venture Finance Limited (GUFL)

GVFL, a state-backed venture capital firm, supports early-stage companies in the IT and biotechnology sectors. It’s a pioneer of venture capital in India and has aided over 56 high-potential startups, offering both financial and managerial support. Unlike some other firms, GVFL focuses on new and greenfield ventures, making it unique in the venture capital landscape in India.

Sidbi Venture Fund

SIDBI launched the “SME Growth Fund” in 2004 with a substantial corpus of Rs. 500 crores (previously Rs. 100 crores). The fund aims to provide long-term capital to innovative and technology-oriented small and medium enterprises (SMEs) in India.

It’s registered with SEBI and invests in SMEs with strong growth potential, reliability, committed teams, and unique competitive advantages. The fund focuses on sectors like life sciences, engineering, food processing, IT, healthcare, logistics, and more. SIDBI has partnered with organizations like the Small Enterprise Assistance Fund and Kotak Mahindra Bank to support SMEs through funds like the India Growth Fund.

UTI Venture Funds Management Company

The venture capital (VC) and private equity (PE) arm of the Unit Trust of India (ITI) Group started off as a pure VC company. ITVUS, a venture capital fund finances companies that are in the technology, life sciences, and outsourcing sectors.

Can Bank Venture Capital Fund

It recently launched the Bharat Nirman fund, which has a capital of Rs 55 crore. The Can Bank VC funds aim to fund start-ups in manufacturing and service.

VCF’s of Commercial Banks

Among the India Banks many other banks the subsidiaries of SBI and Canara Bank floated VCFs. These banks provide VFCs either in the form of equity or conditional loans. SBI invests in equity shares of new and unknown companies. Canara Bank has set up a VF through its subsidiaries, which can bank financial services.

Private sector VCF’s

  1. ANZ Grindlays Bank has set up India’s first private sector VCF, namely India Investment Fund (IIF) with an initial capital of Rs 10. crore subscribed by NRT. The fund provides assistance to high-risk projects, to the promoters, and fresh issues of established companies with a good performance record. The objective of the fund is to achieve high capital growth for its performance record.

  2. Credit capital VF (India) Ltd (CCVF):- was launched in 1989 and happened to be the second VCF in the private sector in India. It was started with an initial capital of Rs 10 crore subscribed by institutions and the public. Its trust areas are small export-oriented units and ancillary units.

  3. Indus VCF-IVCF was established with a capital of Rs 21 crore subscribed by several Indian’ and international institutions and companies. The company provides venture financing, especially to industries such as health care products, electronics, computers, and higher quality sophisticated conserver products.
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FAQs About the Venture Capital

What are the features of venture capital?

The following are the features of venture capital:
1. Highly Risky
2. High-Tech Areas Investment
3. Long Gestation Period
4. Unit managerial and Marketing Assistance
5. Investment
6. Capital Gains
7. Involvement in Management.

What are the functions of venture capital?

The following are the functions of venture capital:
1. Venture Capital Provides Finance
2. Seed Capital Funds
3. Business Plan
4. Technological Innovation
5. Gap-Filling Function
6. Ensure Banking Service
7. Professionalize
8. Technology Information Service
9. Encouraging Entrepreneurial Process.