Venture Capital Financing In India

by Soniya Singh Smo And Seo

What Is Venture Capital?

Venture capital is one of the most important sources of finance meant to back small and medium-sized start ups with huge market potential but no proper avenues to raise capital. As such, venture capital financing involves huge risks as it deals with high-risk start ups but to minimize the risk, VC firms choose only selected start ups where they see assured profit potential. Before investing, they carefully scrutinize each and every project and only those start ups that fulfill all the requirements are ultimately selected for the investment.

The venture capitalists are professional investors that pool money from wealthy individuals and use it to back high-potential start ups. Usually, the VC firms expect a 25 to 35 percent higher return on their investment. Venture capital financing is quite different from all other types of financing options as the investors know very well that if one investment fails, the other investments can easily cover up the losses.

Venture Capital In India - An Emerging Sector

Ever since the budget of 1986-87, the venture capital in India slowly started to come into prominence. Venture capital in India is still in its nascent stage so there is huge scope of development and expansion in the sector. India, being a home to abundant talent, easily attracts venture capital financing from local and foreign venture capital firms.

Today, India has many local venture capital firms that are investing hugely in various sectors like technology, internet, e-commerce, energy, healthcare, etc. The rapid rise and success of the e-commerce giants like Flipkart and Snapdeal is a perfect example of how venture capital financing is increasingly spreading its wings in India.

Venture capital funds in India are, typically, categorized into three different parts based on their sources.

Firstly, there are funds that are promoted by the government backed development finance institutions. For example: ICICI Venture Funds Limited, IFCI Venture Capital Funds Limited (IVCF) and SIDBI Venture Capital LImited.

Second, there are funds that are promoted by State Government controlled development finance institutions. For example: Gujarat Venture Finance LImited (GVFL), Punjab Infotech Venture Fund, Kerala Venture Capital Fund Pvt Ltd. and others.

Third, there are funds offered by Public banks like Canbank Venture Capital Fund and SBI Capital Markets Limited.

Next are those funds that are offered by public sector firms such as Infinity Venture India Funds and IL&FS Trust Company Limited.

And lastly, there are funds that are promoted by overseas venture capital firms such as BTS India Private Equity Fund Limited, Walden International Investment Group and SEAF India Investment and Growth Fund.

The Securities and Exchange Board of India (SEBI) is the main governing body that looks after the registration and regulation of both local and overseas venture capital funds in India. There are two regulations, Securities and Exchange Board of India (Venture Capital Funds) Regulations 1996 and Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations 2000 that offer guidelines for the establishment of local and overseas venture capital firms in India. The guidelines include the establish, management structure, investment criteria and the size of the funds.

With the gradual expansion of the venture capital financing industry, the country is emerging as a preferred destination for start ups looking for venture capital in India. All they need is a unique business idea, an innovative business model, a great management team, excellent networking and a strong recommendation from someone who is very close to the investors.

An intelligent network that offers a great one-stop platform for buyers, sellers and strategic and financial investors and advisors of the startup ecosystem can also be of great help to entrepreneurs as this can significantly reduce the time they need to get in touch with their potential investors.

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