What is a Venture capital fund?

Question

What is a venture capital? What is a venture capital fund? Who are the Venture capitalists?_x000D_
what are the various aspects related to venture capital?

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William 1 year 1 Answer 224 views Silver 0

Answer ( 1 )

  1. There are various ways of raising funds from the market. But when a newly set up business is concerned for raising funds it seems risky to invest due to risk of return. Every investor while investing in a business wants to be sure of a definite return. Most of the investors are focused on profit maximization only. But some wealthy investors always wish to take risk and maximize their wealth by investing with a long term growth prospective. They invest in new and innovative / creative ideas by Venture Capital funds and are called venture capitalists.

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    Venture capital fund is a mutual fund that manages venture capital money. Typically venture capital funds have a higher risk and higher return profile as compared to normal equity funds and investment in these would depend on interest and intention of the investor.

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    Background?

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    Venture Capital can be traced from 70s. A committee formed by the Government headed by Sh. R S Bhatt introduced the concept. The three All India Financial Institutions namely, IDBI, IFCI, ICICI started investing as venture capital in mid 80s.

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    In 1995, Govt permitted Foreign Finance companies to make investments in India and many foreign VC private equity firms entered India.

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    In 1996, government announced guidelines to regulate the VC industry.

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    In 1997, IT boom in India made VC industry more significant.

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    In Nov 1988, GOI decided to institutionalize Venture Capital Industry and announced guidelines. These guidelines were very restrictive and following a very narrow definition of VC.

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    In the recession during 1999-2001, the VC Industry was adversely affected.

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    Governing authority?

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    In India Securities and Exchange Board of India is the authority designated to govern the Venture Capital Investments.

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    Which type of businesses attract Venture capitalists?

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    Venture capitalists prefer to invest in “entrepreneurial businesses”. This does not necessarily mean small or new businesses. Venture capital investors are interested in companies with high growth prospects, which are managed by experienced and ambitious teams who are capable of turning their business plan into reality.

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    Governing law?

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    SEBI has issued guidelines for governing the VC Industry in India namely, SEBI ( Venture Capital Funds) Regulations, 1996. Various updates / amendments are made in the said regulations from time to time as required.

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    Difference between Private equity and VC funding?

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    Private equity refers to investments in high-growth (both public and private companies are covered).
    Private equity contains a class namely VC making it a wider concept than VC.

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    Process of investment?

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    1. Receipt of investment proposal through or directly from financial intermediaries.
    2. Due Diligence is carried out
    3. After receipt of due diligence report the VC funds decide the various terms and conditions and agree upon defined conditions.
    4. If revised terms are agreeable to entrepreneurs, VC fund issues Letter of intent for investment.
    5. All the required documents are drafted and further tasks are completed.
    6. VC fund keeps a continuous eye on the activities of the business.

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    Structure of VC?

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    Venture capital firms are typically structured as partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisors to the venture capital funds raised. However now a days in USA LLP form can also be adopted.

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    Liquidity of investment?

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    Since the investment is made in the equity share capital of the company for a long period of time, the investments lack liquidity and become illiquid.

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    Risk factor?

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    Since the investments are made in the newly establishing business, the level of risk is very high with a very high level of return.

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    Nature of return and objective?

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    Since the VC investments are made in newly starting business with a risk factor, the return from such investments is not expected in short run. The Business will become profitable after some time has elapsed. So, investments in VC are made with a long term growth objective. The main object of investing in these funds is wealth maximization.

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