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Venture Capital

Venture Capital- Meaning, Stages, Sources & Guidelines

Venture Capital- Meaning 

The term ‘venture capital’ consists of two words – venture and capital. According to Oxford’s Learner Dictionary the term venture means an undertaking in which there is risk, danger or possibility of loss. The term ‘Capital’ means finance or money to start or run an enterprises. Thus, venture capital means capital to finance risky ventures or enterprises.

According to David H. Halt’s the term ‘venture capital’ means, “Money obtained through private investments or public investment funds directed to high risk and high earning potential enterprises.”

Venture capital is the most important source or form of equity financing for small entrepreneurs. Needless to say that corporate organizations i.e., companies or corporations can raise finance through equity i.e., the issue of securities (shares), whereas individual entrepreneurs or partnership firms cannot raise funds through the issue of shares. Individual entrepreneurs raise finance through venture capital as an alternative source. Venture capitalists finance high risk enterprises. They provide initial capital (seed money) and development funds to new ventures in their early growth stage and funds for expansion programmes to rapidly growing existing ventures.

Stages of Venture Capital Financing

Traditionally it was believed that venture capital is needed at the initial or start up stage. However, the fact remains that it is needed at every stage. Venture capitalists provide start up (seed money) capital for new ventures, development funds to businesses in their early growth stages, and expansion funds to rapidly growing ventures that have the potential to go public’ or those need capital for acquisition. Stages of venture capital can be classified as follows:

  1. Seed Capital :

    Young entrepreneurs find it extremely difficult to meet promoter’s contribution which varies from 10% to 25% of the owner’s capital. The purpose of seed financing is to help those entrepreneurs who do not have financial resources of their own to set up their projects. It is to them, seed capital is made available. In case public companies subscriptions upto 1% of equity shares or 1% of cumulative redeemable preference shares or both is made available. Seed capital assistance is repayable over a period of 10 years. A moratorium period of 5 years is allowed.

  2. Start up Stage:

    After the project report is found feasible, the start up stage or take-off stage is reached.

At this stage finance is needed for product development and initial marketing of the product.

  1. Development stage:

    After the stage of teething trouble of an entrepreneur is over i.e. product has been developed and test marketed, the stage is set for actual marketing of the product and its sales.

  2. Expansion stage:

    A successful entrepreneur does not want to remain inactive. He wants to expand his business further. A successful entrepreneur needs finance for modernization of his plant or/and expansion programme. It is comparatively less risky as compared to seed capital and development stage financing.

Sources of Venture Capital

In western countries like U.S.A. and U.K. there is a well developed network of venture capital firms. In fact U.S.A. is the birth place of venture capital. According to Halt, there are approximately 450 venture capital firms in the United States (excluding SBICs), and they invest nearly 3 billion annually through equity placements.

Of late India has made a humble beginning in the field of venture capital. Industrial Finance Corporation of India (IFCI) was pioneer to start venture capital financing in India. It established IFCI Risk Finance Limited in 1975. Later on its name was changed to IFCI venture capital Funds Ltd. In 1986 Industrial Credit and Investment Corporation of India (ICICI) established ICICI Ventures Limited. Thereafter a large number of Venture Capital companies started functioning in India on all India basis and at state level.

Guidelines for Venture Capital

To regulate and establish venture capital funds company the Reserve Bank of India laid down the following guidelines at the end of December, 2018.

  1. Establishment:

    All India Public Financial Institutions, Scheduled Commercial Banks including Foreign Banks operating in India and their subsidiaries, are eligible to establish venture capital funds/ companies subject to the approval of the Reserve Bank of India/ Government of India.

  2. Size:

    The maximum size of a venture capital fund/ company would be 10 crores. In case the company wants to raise funds from the public, the promoters contribution shall not be less than 40%.

  3. Debt-equity ratio:

    The debt equity ratio would be 1:15.

  4. Foreign Equity :

    Foreign equity to the extent of 25%. NRI investment is permitted upto 74% on non-repatriable basis and upto 25% to 40% on repatriable basis.

  5. Eligibility for Assistance:

    Assistance would be provided mainly to enterprises with high risk due to technology/ or lack of experience i.e., a new entrepreneur.

  6. Limit of Investment:

    Investment in a single enterprise would not exceed 10 crores.

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