Venture capital funding is increasingly becoming a common capital raising source, and is most widespread in the rapidly evolving technology.
According to Foreign Direct Investments (FDI), Venture Capital Fund’ (VCF) means a Fund registered as a ‘venture capital fund’ under SEBI (Venture Capital Funds) Regulations, 1996.
Venture Capital refers to the money provided by an outside investor to finance a new, growing, or troubled business that are believed to have long-term growth potential.
A significantly high risk is associated with the Venture Capital investment as the company’s future profits and cash flow is uncertain. Capital is invested in exchange for an equity stake in the business rather than given as a loan. Venture Capitalist may exercise some level of control, influence, or participation in the activities of the company.
Depending on the stage of investment, Venture Capital Funds are of 3 types :-
Methods of Venture Capital Financing:-
Equity :– By contributing equity capital, Venture capitalist acquires the status of an owner, and becomes entitled to a share (not more than 49% of total equity capital) in the firm’s profits as well as the losses.
Conditional Loan :– No interest is paid on Conditional loans but they are repayable to the capitalist or the lender in the form of royalty after the venture capital undertaking is able to make revenue. The royalty rate may vary from 2% to 15%, on the basis of factors such as gestation period, external risk and cash flow patterns.
Income note :- If a Venture Capitalist invests in the form of Income Note, the Venture capital firm pays both the royalty and interest but at low rates.Participating Debentures :-
The participating debenture; is an example of innovative financial securities introduced by a few Venture Capitalists.
Such security carries charges in three phases:
Start-up phase– before the venture attains operations to a minimum level, no interest is charged.
Initial Operation phase– A low rate of interest is charged in the initial level of operation.
Full Commercial Operation- Once the venture starts operating on full commercial basis, a high rate of interest is required to be paid.