Forms of Venture Capital Financing
Dr. S. Srinivas Rao
Asst. Profs, Department of Management Studies, TJPS College, Guntur
Email:ssr2160@gmail.com,
Abstract :
Venture Capital is risk financing available in
the form of equity or quasi-equity. A venture
capitalist provides management support and
acts as a partner and advisor to the
entrepreneur. Thus, he is different from a
banker and an investor of the shares of the
enterprise. The present paper focuses on
different stages in venture capital financing.
It also tries to bring out innovative avenues
for financing venture capital. Also, it
highlights the developments of venture
capital in India and elaborates on the
elements needed for success of venture
capital financing.
Keywords:Venture Capital, online venture
funding, conditional loan, disinvestment
Introduction:
Venture Capital financing is a growing
business of recent origin in the area of
industrial financing in India. It plays a
strategic role in financing small scale
enterprises and high technology and risk
ventures. Venture Capital can be explained
in terms of the meaning of the terms
‘venture’ and ‘capital’. A ‘venture’ refers to
an undertaking involving more than normal
business risk. The term venture capital,
therefore, refers to investment of capital in
relatively high risk enterprises but which, at
the same time, have strong potential for
growth. Venture Capitalists pool their
resources including managerial abilities to
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K. Saritha Devi
assist new entrepreneurs in the early years of
the project. Once the project reaches the
stage of profitability, they sell their equity
holdings at high premium. Venture capital
activity in developing and developed
countries has been encouraged because of
the large number of tax incentives available
to venture capital firms and investors, well-
developed avenues for buying and selling
shares of the small scale enterprises and
favourable social climate and government
policy for encouraging entrepreneurial
activities.
History:
Venture Capital as a new phenomenon
originated in the USA. American Research
and Development Corporation founded by
Georges Doriot soon after the Second World
War, is believed to have heralded the
institutionalization of venture capital in the
USA. UK occupies at the second place after
USA in terms of investment in venture
capital. The Charter House Development
Ltd. is the oldest venture capital company
established in 1934 in UK. Later,Venture
Capital investment also took root in many
developing countries. In India, it was the
Investment Corporation of India in 1937
which by acting as a venture capitalist,
successfully promoted hi-tech enterprises
such as CEAT Tyres.
Characteristics of Venture Capital
1. Equity participation – This may involve
the purchase of shares through options
July 2014 16
 or byallowing partial ownership in 5. Third-Round: Also called Mezzanine
exchange for financing. Venture financing, this is expansion money for a
financing is actual or potential equity newly profitable company.
participation through direct purchase of 6. Fourth-Round: Also called bridge
shares, options or convertible securities. financing, it is intended to finance the
2. Long term Investment – This requires a "going public" process.
long term investment attitude that
necessitates venture capital firms to wait Risk in each stage of financing
for a long period, say, 5-10 years to Financial Period Risk Activity
make large profits. Stage (Funds Perception to be
locked financed
3. Innovative technology – Generally in
venture capital undertaking starts with years)
new processes, or to introduce a new For
technology or new productsin the market supporting a
so as to have an advantage over the Seed concept or
7-10 Extreme
competitors. Money idea or R&D
4. Participation in management – Venture for product
financing ensures continuing development
Initializing
participation of the capitalist in the
operations or
management of the entrepreneur’s Start Up 5-9 Very High
developing
business. prototypes
Start
Criteria for investment in Venture commercials
Capital undertaking First Stage 3-7 High production
The venture must be a technically and
feasible proposition marketing
It should be commercially viable Expand
The entrepreneurs must be technically Second Sufficiently market and
3-5
competent and have managerial skills Stage High growing
capital need
The undertaking must have a long run
Market
competitive advantage over other units
expansion
acquisition
Stages in Venture Capital Financing Third and product
1. Seed Money: Low level financing 1-3 Medium
Stage development
needed to prove a new idea. for profit
2. Start-up: Early stage firms that need making
funding for expenses associated with company
marketing and product development. Fourth Facilitating
1-3 Low
3. First-Round: Early sales and Stage public issue
manufacturing funds.
4. Second-Round: Working capital for Innovative Avenues/Methods of Venture
early stage companies that are selling Capital financing:
their product, but not yet turning in a A pre-requisite for the development of an
profit. active venture capital industry is the

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availability of a variety of financial
instruments, which cater to the different risk-
return needs of investors. They should be
acceptable to entrepreneurs as well. In
developed countries, innovation of financial
instruments is a distinct feature of venture
capital.
Methods of venture capital financing in
developed and developing countries
1. Equity
2. Conditional loan
3. Conventional loan
4. Income note
5. Participating debentures
6. Cumulative Convertible Preference
Shares
In developed countries like USA and UK
7. Deferred Shares
8. Convertible Loan Stock
9. Special Ordinary Shares
10. Preferred Ordinary Shares
1. Equity
All VCFs in India provide equity. The
effective control and majority ownership
of the firm remain with the entrepreneur.
The advantage of equity financing for
the company seeking venture finance is
that it does not have the burden of
serving the capital, as dividends will not
be paid if the company has no cash
flows.
2. Conditional Loan
A conditional loan is repayable in the
form of a royalty after the venture is able
to generate sales. No interest is paid on
such loans. VCFs charge royalty ranging
from 2-15% depending on the factors of
the venture such as gestation period,
risk, and cash flow patterns etc.
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3. Conventional Loan
Under this form of assistance, a lower
fixed rate of interest is charged till the
assisted units become commercially
operational, after which the loan carries
normal or higher rate of interest. The
loan has to be repaid according to a
predetermined schedule of repayment as
per terms of loan agreement.
4. Income Note
A unique way of venture financing in
India was the income note. It was hybrid
security which combined the features of
both conventional and conditional loan.
The entrepreneur had to pay both
interest and royalty on sales, but at
substantially low rates.
5. Participating Debentures
A few venture capitalists, particularly in
the private sector, introduced innovative
financial securities known as
participating debentures. Such security
carries charges in three phases namely,
start-up phase, operational level phase
and at full commercialization of
operational phase.
6. Cumulative Convertible Preference
Shares
CCPSs could be particularly attractive in
Indian context since CCPS shareholders
do not have a right to vote. They are,
however, entitled to vote if they do not
receive dividend consecutively for two
years.
7. Deferred Shares
Deferred shares are those shares where
ordinary share rights are deferred for a
certain number of years.
8. Convertible Loan Stock
Convertible loan stock is an unsecured
long-term loan convertible into ordinary
shares and subordinated to all creditors.
July 2014 18
9. Special Ordinary Shares Top Cities attracting VC investments -2013
Special ordinary shares are the shares
having voting rights but without a No. of Amt.
Top
commitment towards dividends. Invest in Sectors
Cities
ments US$M
10. Preferred Ordinary Shares
Preferred ordinary shares are the shares Bengaluru 49 214 IT,ITES, Bio-
with voting rights and a modest fixed technology
dividend right and a right to share in Mumbai 49 164 Software
profits. services,
New form of funding–Online Venture BPO, Media,
Capital Financing: Graphics,
Recently, for example, US-based online Animations,
retailer eBay led a group of investors, Finance and
Banking
including Kalaari Capital, Nexus Venture
Delhi 24 69 Software
Partners, Intel Capital and others to invest services, ITE,
USD 133.77 million (about 830 crore) in the Telecom
New Delhi based Snapdeal (which is an e- Chennai 21 105 IT, Telecom
commerce company and one of the fastest Hyderabad 8 36 IT,ITES and
growing online market places in India. Pharmaceu-
Funding Innovation: ticals
Throughout its history, venture capital Development of Venture Capital in India:
investment has built entire industry sectors The venture capital industry in India is about
by funding ground breaking innovations. two decades old. The concept of venture
From bio-technology to IT, thousands of capital was formally introduced in India in
start-ups have been brought to life, 1987 to be operated by IDBI. The ICICI also
improving the way we live and work each started venture capital activity in the same
day. year. Later on, ICICI floated a separate
venture capital company – Technology
Development and Information Corporation
(TDICI).
VCFs in India can be categorized into
the following four groups
1. VCFs promoted by Central
Government – Risk Capital and
Technology Finance
Corporation Limited by the IFCI and
Risk Capital Fund by IDBI.
2. VCFS promoted by State Government
– Gujarat Venture Finance Company
Limited by GIIC and Andhra Pradesh
Venture Capital Limited by APSFC
3. VCFs promoted by Public Sector
Banks – Canfina by Canara Bank and
SBI-Cap by SBI

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4. VCFs promoted by Foreign Banks Segment wise growth of Indian life
and Private Sector Companies – Indus sciences industry
VentureFund, Credit Capital Venture 2008- 2014-
Fund, Grindlay’s India Development Segment CAGR
2009 2015*
Fund.
Total $20 $52
17%
Name of the Companies Pharmaceutical billion billion
Nature Domestic $8.1 $17.3
Organisation they funded
13.5%
SIDBI Axiom Governme Formulations billion billion
Venture Consulting, nt Venture Formulation $5 $14.9
Capital Ltd E-cubeIndia Capital 20%
Exports billion billion
Solutions, Funds
Bulk Drug $6.8 $19.8
Bravo 19.5%
(API’s) Exports billion billion
Health Care
ICICI Biocon, Bank $2.67 $8
Biotechnology 20%
Venture Deccan Venture billion billion
Funds Aviation, Firms Medical $2.7 $10.8
Management Pantaloon 22%
Devices billion billion
Company Ltd retail,
Contract
Reliance $2.5 $11
Research 28%
Petroleum, billion billion
Organizations
Shoppers
Stop Growth drivers for key Indian
iLabs DQ Private pharmaceutical companies
Venture Entertainme Venture Company Revenue Growth Drivers
Capital Fund nt Capital Licensing income; New
Intelligroup, Fund Aurobindo deals formed in Japan and
Cibernet,Me Korea.
gasoft
Licensing income will
drive the bio-pharma
Biocon segment; Sale of subsidiary
AxiCorp will lower overall
sales.
Higher exports from Indore
Cipla SEZ; Higher formulation
sales.
Gradual recovery of sales
Dishman
in line with the improving
Pharma
CRAMS industry.
Launching several new
Dr. Reddy’s
products like Prevacid,
Labs
Prograf, etc.

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 Out-licensing income and capital available to them. Venture Capital
Glenmark strong business can play a more innovative and
fundamentals. developmental role in a developing country
like India. It could help the rehabilitation of
High growth for
sick units through people with ideas and
Ipca Labs formulations segment,
turnaround management skills. Venture
while APIs will remain flat.
capitalists could also assist small ancillary
Recent demerger of APP units to upgrade their technologies so that
business will result in they could be in line with the developments
Jubilant Life
negative growth; CRAMS taking place in their parental companies.
segment will recover. VCFs can play a significant role in
Strong growth in regulated developing countries is the service sector
Lupin including tourism, health care etc. They
markets (US, EU) business.
could also provide financial assistance to
Flat growth as strong sales
people coming out of the universities,
due to the limited
technical institutes etc. This would
Ranbaxy exclusivity period
encourage the entrepreneurial spirit in the
stabilizes; new product
country. It is not only the initial funding
launches will continue.
which is needed from the venture capitalists
Consolidation with the but they should also simultaneously provide
Sun Pharma newly acquired Taro management and marketing expertise – a
business. real critical aspect of venture capital in
developing countries.
Elements needed for the success of
Venture Capital: References
Venture Capital by combining risk financing 1. Venture Capital – The Indian
with management and marketing assistance, Experience by I.M.Pandey, Prentice Hall
could become an effective instrument in of India, New Delhi.
fostering development of entrepreneurship 2. Ramesh S and Gupta A., “Venture
and transfer of technology in developing capital and Indian financial sector”.
countries. The experiences of developed and 3. Verma, J C (1997). Venture Capital
developing countries, however, indicatedthat Financing in India, NewDelhi
the elements such as Entrepreneurial 4. Chandershaker, (2000).Chandershaker
tradition, Unregulated economic Committee Report on Venture Capital in
environment, Disinvestment avenues, Fiscal India, SEBI.
incentives, broad based education, 5. Kumar, Vinay A (2002). “Venture Stage
Promotion efforts, Institute-industry linkage Priorities of Indian Venture Capitalists:
and, R&D activities are needed for the an exploratory Analysis of Principal
success of venture capital in any country. Components”, ICFAI Journal of Applied
Finance,Vol 8, No 2, pp 40-53.
Conclusion
However, there is no doubt that young, high-
tech companies would always look forward
to the venture capitalists for making risky

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