VENTURE CAPITAL

Prof. Sarbesh Mishra,

Finance Area.
VENTURE CAPITAL: THE CONCEPT
 Finance provided by a specialized
institution to an entrepreneur.
 Start-up or developing business, where
a fairly high degree of risk is involved.
 Venture capitalist usually has a
continuing involvement in the business
of the customer after making an
investment.
Contd….
 Venturecapitalist seek to protect and
enhance his investment by keeping
close to the entrepreneur and his
team in an active supportive role.

A venture capital investment is illiquid

i.e. not subject to repayment on
demand as with an overdraft or
following a loan repayment schedule.
Contd….
 Investment is realised only when the
company is sold or achieves a stock
market listing.

 In the event of liquidation the

investment is lost.

 VentureCapital is risk financing at its

extreme.
ORIGIN
 The concept of venture capital
originated in USA during 19th. and early
20th. Century.

 European investors alongwith

American natives were involved in
backing construction and other new
industries viz. Rail, Road, Steel, Oil,
Gas and Glass.
VC SPECIALISATION
 The state of development of investee
company decided the financing stage as
perceived by the venture capitalist.
 The funds investments size range i.e.
minimum/maximum equity percentages
also vary from fund to fund.
 VC funds includes many financing
instruments i.e. Shares, Preferred Shares,
deferred shares, convertible loan stock.
 Contd….
 Venture capitalist specialize in specific
technology and their portfolio include a
significant proportion of business in the
areas of advanced technology.
 Time scale to realisation i.e. early stage
financing are inevitably taking a medium to
long-term (5-7 years) and later stage
financing will have a 3-5 years time scale.
 Geographical Limitations i.e. funds say also
specialize regionally.
 STAGES OF INVESTMENT
 Early stage investment Time Scale Risk
 Equity Share
c. Seed Capital and R&D Projects (7-10yrs.) Extreme
d. Start Ups (5-10yrs.) Very
High
e. Second Round Finance (3-7yrs.) High
6. Later Stage Investment
VII. Expansion Finance (1-3yrs.) Medium
VIII. Replacement Capital (1-3yrs.)
Low
IX. Turnarounds (3-5yrs.) Medium
X. Buy Outs (3-5yrs.) Low
 VENTURE CAPITAL FUNDS
 Finance Act, 2000 has made SEBI the single
point nodal agency for registration and
regulation of both domestic and overseas
venture capital funds (VCFs)
 No approval of VCFs by Tax authorities is
required.
 There will be no tax on distributed or
undistributed income of such funds.
 The income distributed by these funds will
only be taxed in the hands of investors.
 INVESTMENT RESTRICTION
 VCFs has to disclose the investment
strategy at the time of application for
registration.

 A VCF cannot invest more than 25%

corpus of the funds in one venture capital
undertaking (VCU).
 At least 75% of the investible funds has to
be invested in unlisted equity shares or
equity linked instruments.
 Contd….

2. Not more than 25% of the investible funds

may be invested by way of subscription to
IPO of VCU with a lock-in period of one
year.

 VCF cannot invest in the associated

companies
 REGULATION OF VCFs BY SEBI
 VCF is a fund established in the form of a
trust / a company including a body
corporate and registered with SEBI.
 Minimum investment in a VCF from any
investor would not be less than 5 lakh.
 The VCF will be eligible to participate in the
IPO through book building route as QIB.
 VCF is to provide venture capital activity for
every quarter starting from Dec. 31, 2000.