Venture Capital & Types of Venture Capital Funds

Venture Capital implies an investment of long term equity finance in high risk projects with possibilities of high reward. The Venture Capitalist essentially provides finance to businesses promoted by individuals who have sound projects ideas but do not possess adequate financial resources to implement them .Such projects generally have a high risk element inherent in them but they promise highly attractive returns to the investors in the event of success.  

Objectives of Venture Capital

  • Fulfilling the ambitions and dreams of business will lack of finance
  • Putting life into promising business ventures
  • Help to build the enterprise vision
  • Achieving high returns to its investment

Functions of Venture Capital

  • Provides finance as well as skill
  • Filling the gap in the owner’s funds
  • Adequate banking help
  • Locating outstanding corporate achievers

Types of Venture Capital Funds

Generally there are four types of organized or institutional venture capital funds. Venture capital funds set up by angel investors, that is, high net worth individual investors; venture capital subsidiaries of corporations and private venture capital firms / funds.

Types of Venture Capital Funds on the basis of the type of promoters are

  • Venture Capital Funds promoted by the Central Government: Controlled development financial institutions such as Technology Development and Investment Corporation of India (TDICI) by ICICI, Risk capital and Technology Finance Corporation Limited (RCTFC) by IFCI and Risk Capital Fund by IDBI.
  • Venture Capital Funds promoted by the State Government: controlled development finance institutions such as Gujarat Venture Finance Company Limited (GVCFL) by Gujarat Industrial Investment Corporation (GIIC).
  • Venture Capital Funds promoted by Public Sector Banks such as Canfina by Canara Bank & SBI- Cap by State Bank of India.
  • Venture Capital Funds promoted by the foreign banks or private sector companies and financial institutions such as Credit Capital Venture Fund, Indus Venture Fund etc.

Methods of Venture Financing are

  • Equity: All venture Capital Funds (VCFs) in India provides equity and generally their contribution does not exceed 49 per cent of the total equity capital.
  • Conditional Loan: It is repayable in the form of royalty after the venture is able to generate sales. No interest is paid on such loans. Rate of Royalty depends on factors such as gestation period, cash – flow, risk etc.
  • Income Note: It is a hybrid security. It is a combination of conventional loan and conditional loan .In this type , entrepreneur has to pay both interest and royalty on sales, but at substantially low rates.