Venture capital funds are different from other capital funds in many respects as shown below:
Venture Capital and development capital:
Venture capital is advanced for ventures using a new technology or new innovation. In this type of financing, the venture capital company remains interested in the overall management of the project due to the high risk involved in the venture. Funds are made available throughout the project, commencing from commercial production to the successful marketing of products, to ensure continuous revenue earnings enhanced worth of the investments, and finally making available a proper exit route for liquidating the investments.
Development capital, on the other hand, is generally granted in the form of loans for setting up industrial units, and also for expansion ad modernization. The lender takes special care in ensuring the end use of the credit and requires prompt payment of interest ad repayment of the loan amount.
Venture Capital, Seed Capital and Risk Capital:
There is no tangible differences venture capital, seed capital. Both seed capital and risk capital are components of venture capital. Seed capital and risk capital are provided by all India financial institutions in the form of promoters’ contribution to the project with the emphasis on providing interest free finance to encourage professionals to become promotees of industrial projects.
Venture Capital and National Equity Fund for Small Entrepreneur:
The National Equity Fund, administered by SIDBI, was established in 1987, with the object of providing seed capital assistance to small entrepreneurs, in the rural as well as urban areas, with a population below 5 lakhs.
Stages of venture capital financing:
This is early stage financing. This stage involves primarily R&D financing. The European Venture Capital Association defines seed capital as the financing of the initial product development or the capital provided to an entrepreneur to prove the feasibility of a project and qualify for start up capital.
The stage involves serious risk, as there is no guarantee for the concept, idea and process pertaining to high technology or innovation. This stage requires constant infusion of funds in order to sustain the research and development work and establish the process to successful adaptation, going into the commencement of commercial production and marketing. Venture financing constitutes financing of ideas developed by research and development wings of companies or at university centers. Chances of success in hi-tech projects are meagre. The venture capital fund considers the following points to safeguard its own interest:
1. Successful performance record, entrepreneurs’ previous experience in similar products, technology and market.
2. Qualities of business management and technical innovation in the enterprise realistic business plan with clear future prospects for which seed capital is required.
Start up Financing:
The European Venture Capital Association defines start up as capital needed to finance the product devolopment initial marketing and the establishment of product facilities. This too falls under the category of early stage financing. The term ‘start up’ refers to the stage where a new activity is launched. The activity may be one emanating from R &D stage or arising from transfer of technology from overseas based business.
Venture capital finance is provided to projects which have been selected for commercial production. The activity chosen for funding has the potential for fulfilling effective demand. Venture capitalists provide finance with a view to take advantage of the capital gain arising from equity appreciation on completion of such projects and marketing of its product. The venture capitalists, on their part, take into consideration such factors as the managerial ability, capacity, experience, competence etc of the entrepreneur before making investments.
The entrepreneur should furnish the following information in their proposals to the venture capitalist/merchant bankers:
1. Brief history of business or project
2. A synoptic note on career history of entrepreneur and key managers
3. Description of product/ service to be manufactured/rendered
4. Description of market for the product/service with existing/future state of competition, growth prospects in the share market etc.
5. Description of technical process involved, and technology to be followed in the manufacturing process.
6. Degree of technological obsolescence in technical process.
7. Financial history and forward projections of turnover profits cash flows and borrowing over at least a two year period
8. Proposed deal structure for the funding being sought.
Venture capitalists appraise projects by taking the following key factors into considerations with the basic objective of assessing the degree if risk involved in financing and then judge the realistic expectation of the gains.