A Venture Capital Fund, also known as VCF, is a type of an investment fund which investors provide to homegrown or foreign startups that might have a long-term growth potential in the near future. This type of financing is generally undertaken by strong investors, investment banks or high net worth individuals.
It is often risky for investors who allocate funds to seed a startup, but the returns over the long term in case of a successful business are lucrative. SEBI (Securities and Exchange Board of India) is the prominent government body which has set up guidelines regarding venture capital investment and stake-holding.
Every startup has different stages of business operations which require funding at regular intervals. The three main types are mentioned below:
This is the initial stage of investment or the first step. Due to the complex nature of business, this is further divided into 3 substages - seed financing, startup financing and first stage financing. Seed financing is the first set of money given to the founder for establishing their startup. Startup financing is when the set of money is given for the development of products and services. When a startup intends to expand business, it requires first stage financing.
This is the second stage, once the startup has utilized its seed funding and requires funds for expansion and marketing. Expansion financing also includes bridge financing - the funds that are required by a startup during an IPO (Initial Public Offering).
When a company needs funds to acquire another company or parts of a company, it is known as acquisition financing. A buyout financing is when a company seeks to acquire another company’s particular product.
In the past five years, venture capital has played a critical role in sparking the startup revolution in India. They have successfully boosted the Indian economy by creating a new paradigm of disruptive economic growth. Many startups have become unicorns, rivaling the best of India Inc, simply because of venture capital funds.
Listed below are the various functions performed by venture capital funds.
Through VCFs, many startups and small businesses have finance and skills to develop their product even at the pre-start stage. The primary focus here is to provide resources for overall technological innovation.
VCF is managed by a group of experienced professionals who help the startup in developing a business plan. The business plan focuses upon market opportunity, the product, the development and financial needs.
Apart from developing a business plan and providing resources to do the same, venture capitalists also evaluate the merits/demerits of the technological innovation. This allows for better ways to meet the business objectives and efficient management of the technological innovation.
Venture capitalist also have a large network of other ventures across different industry. This is essential for a small business when it comes to professional networking.
Apart from providing financial aid, Venture capitalists are actively involved in supplying a broad spectrum of specialist services - technical, commercial, managerial, financial and entrepreneurial.
The most prominent feature of VCFs is that they provide seed funding and expansion-stage financing.
The nature of VC funding is such that the investment in a particular startup usually involves purchasing an equity stake by the venture capitalists.
VCFs bring with them the knowledge and experts of the investors which will help the small businesses scale up and grow economically.
VCFs help in developing new products & services and acquire latest technologies that will help the company to grow further.
VCFs offer networking opportunities. With influential and wealthy investors promoting the company, the company will scale up in no time.
Venture capitalists hold the authority to influence the decisions of the enterprises they are investing in.
Venture capitalists invest in multiple young startups across industrial sectors with a belief that at least one firm will achieve massive growth and reward them with a large payout. This brings about risk diversification
Business expertise - Venture capitalists come with valuable expertise, advice and industry connections. They are expert professionals who have deep knowledge of specific market standards and can keep your business from experiencing many downsides that are usually associated with startups.
Additional resources and connections - Along with monetary aid, VCs can act as HR consultants for the startup. They are specialists in hiring the best staff for your business. This helps in avoiding the hiring of the wrong person. It also offers a number of other such services such as mentoring, alliances and skill training.
Business expansion - Venture capital provides large funding that a startup requires to expand its business. This form of investment is not possible through bank loans or other methods.
Better Management - Since venture capitalists hold a percentage of equity in the business, they have a say in the management of the business. So, if you are not good at managing the business, the VCs can offer great assistance.
Risk Aversion - For a promoter or founder of a startup, there is no obligation to pay back the seed funding in comparison to a bank loan where it is mandatory to repay. The VCs take the investment risk because they believe in the company’s future success.
| Venture Capital Funds | Investment Structure | Industries | Startups Funded |
|---|---|---|---|
| Helion Venture Partners | Invests between $2 million to $10 million in each company with revenues of less than $10 million. | Healthcare, Education and Financial Services, Outsourcing, Mobile, Internet, Retail Services. | Komli, TAXI For Sure, PubMatic, Yepme, MakemyTrip, NetAmbit. |
| Accel Partners | Invests between $0.5 million and $50 million in its portfolio companies. | Cloud -Enabled Services, Internet and Consumer Services, Infrastructure, Mobile and Software. | Book My Show, Zansaar, Probe, Myntra, CommonFloor, Flipkart, BabyOye, Freshdesk. |
| Sequoia Capital India | SCI invests $100,000 to $1 million in seed stage, $1 million to $10 million in early stage and $10 Mn to $100 million in growth stage companies. | Healthcare, Outsourcing, Technology, Consumer, Energy, Financial. | Practo, JustDial, Knowlarity, iYogi |
| Nexus Venture Partners | Invests between $0.5 million and $10 million in early growth stage companies. Also, makes investments up to $0.5 million in their seed program. | Infrastructure, Cloud, Storage, Internet, Rural Sector, Outsourced Services, Agribusiness, Energy, Media, Mobile, Data Security, Big Data analytics, Consumer and Business services, Technology. | PubMatic, Delhivery, Snapdeal, Housing, Komli, ScaleArc. |
| Blume Ventures | Provides seed funding investments between $0.05 million – $0.3 million in seed stage. Also, provides follow-on investments to portfolio companies ranging from $.5 million to $1.5 million. | Internet and Software Sectors, Mobile Applications, Telecommunications Equipment, Data Infrastructure, Consumer Internet, Media, Research and Development. | EKI Communications, Carbon Clean Solutions, Audio Compass, Exotel, Printo. |
| Inventus Capital Partners | The firm does not invest in capital intensive businesses. It generally leads the first venture round with $1 million to $2 million and as the businesses grow, it invests from $0.25 million up to $10 million. | Media, Internet and Catalog Retail, Healthcare, Information Technology, Hardware and Equipment, Telecommunications, Consumer, Hotels, Restaurants and Leisure, | Insta Health Solutions, Cbazaar, Poshmark, Savaari, Farfaria |
| IDG Ventures | The firm invests $1 million to $10 million in India-based companies as well as in companies outside India. | Digital Consumer –Media and Technology-Enabled Consumer Services, Internet, Mobile, Enterprise Software – SaaS, Software Products and Enterprise services, Engineering – Medical Devices, Clean-tech and IP-led Businesses | Zivame, iProf, Ozone Media, UNBXD, Yatra.com, Myntra.com, FirstCry |
| Fidelity Growth Partners India | Typically, FGPI invests between $10 million and $50 million for a minority stake in the company | Technology, Healthcare and Life Sciences, Consumer and Manufacturing | Netmagic, Yebhi |
| Qualcomm Ventures | N/A | Consumer Software, Hardware, Health Care, Infrastructure, Semi/Components, Business Software, Cloud/Enterprise. | Consumer Software, Hardware, Health Care, Infrastructure, Semi/Components, Business Software, Cloud/Enterprise. |
| Venture East | Invests between $1 million to $10 million in multiple rounds. | Internet of Things (IoT), Education, E-commerce, Financial Services, Digital Healthcare, Life Sciences, Information Technology. | Little Eye Labs, 24 Mantra, Portea, Seclore, Goli Vada Pav. |
How does a venture capital fund work?
Venture capital fund provides early stage financing as well as additional skills and resources to a startup during the pre-start stage. The primary focus is to provide overall resources to a startup in order to develop the technological innovation from scratch.
What is meant by venture capital?
It refers to the fund provided by investors to startups and small businesses in the form of seed finance. This seed finance is required by startups and small businesses to develop their products and services.
How do venture capitalists get funding?
The source of funding of VCs comes through HNI investors or institutional investors such as investment banks. The VCs usually purchase an equity stake in multiple small business, which helps them grow further for a short duration with an exit period of 3-4 years.
Where do venture capitalists get money?
Venture capitalists get their money from institutional investors and high net worth individuals or dedicated investment firms. This can be in the form of monetary aid or managerial expertise.
What is a venture capitalist’s salary?
The salary of a venture capitalist is highly dependent upon the designation and the stake-holding of a VC. At a junior level the base salary can be a few lakhs while in a principal position, you can receive a CTC of ₹30-₹50 lakhs with employee stock options.
What rate of return do venture capitalists expect?
The minimum rate of return is based on the expectations set by the investors with respect to risk and other investment classes. The standard rate of return is around 20% per year.
Can I invest in venture capital?
No, you need to have a pre-existing relationship with a venture capital firm or an employee in order to invest in a VCF.
What is the difference between venture capital and private equity?
The most important difference between VCF and PE is the nature and purpose of investment. VCF invest in new and small business which have a high growth potential, while PE involves investment in larger, established companies for the purpose of purchasing equity.
What is venture capital in simple words?
When a small business or startup requires money or funding to develop their product or service, they look for venture capital. HNIs and institutional investors like to invest their money in such startups with a long-term growth perspective. This capital provided is known as venture capital.
What do venture capital firms do?
Venture Capital firms perform various functions when it comes to establishing a startup from scratch. They invest money in the form of seed funding, provide managerial and skill expertise. The people who invest the money are known as venture capitalists.
What are the types of venture capital?
The three main types of venture capital are business expansion, acquisition or leveraged buyout and early stage financing.
Who is an angel investor?
An angel investor in usually an HNI investors who provided funding to a small business or startup during the early stages of development. Close to 300+ startups in India receive angel funding in a year.
What is a fair percentage for an investor?
All VCs come under the liquidity preference clause which states that an investor will get first preference in case any of the business assets of a startup are subject to liquidation. If such a situation arises, a return of 1x-1.5x is applicable.
What is the difference between an angel investor and a venture capitalist?
Angel investors are HNIs who collectively pool their funds and allocate the same for investing in a particular venture. On the other hand, VCs are independent firms with partners and principals who raise funds from different investors.
Is venture capital long term?
Yes, the investment can only be realized post 3-5 years.
What is seed funding venture capital?
Seed financing is the first set of money given to the founder for establishing their startup. It is the first stage of financing for a startup given to develop the products and services of a startup.
