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Venture Capital Funds

Last Update Date : April 30, 2019
Estimated Read Time: 4 min

Venture Capital Funds are the invested money of investors in start-ups and small- to medium-sized enterprises with high-risk/ high-return opportunities. Let us know more about Venture Capital Funds in this guide by H&R Block, India.

Features of Venture Capital

  1. It involves high risk
  2. It lacks liquidity
  3. Long-term investment can be done
  4. It does equity participation and capital gains
  5. The investments are made in innovative projects
  6. Participation of suppliers of capital in the management of the company

Advantages of Venture Capital

Mentioned below are the merits of Venture Capital:

  1. It brings competence and wealth to the company.
  2. It provides a large sum of equity finance to the company.
  3. It investment is a long-term investment for the business.
  4. It also provides information, technical assistance and resources which is required for a business to be successful.

Disadvantages of Venture Capital

Mentioned below are the demerits of Venture Capital:

  1. It investors become part owners, which effects the founder to keep control over the business
  2. It is the time-consuming process
  3. It is a form of financing which is doubtful
  4. It is beneficial only in the long term for the business

Phases of Venture Capital

There are four phases for the company’s development in venture capital funding:

  1. Submission and idea generation
  2. Introductory Meeting
  3. Problem-solving
  4. Exit (Term Sheets and Funding)

Phase 1

The first step to approach for Venture Capital is to submit the plan of action for business as per below points:

  1. A management summary of the business proposal is required.
  2. Describe the business opportunity and also market potential and size of the business.
  3. Reviewing the prevalent and expected competition in the market.
  4. A detailed description of financial projections.
  5. Descriptions of management details of the company.

The plan is analysed by the Venture Capital to decide whether to take up the project or no.

Phase 2

There is a one-to-one meeting done for discussing the project in detail as preferred by the investors after the initial study about the project by venture capital investors. In meeting it is decided whether to move forward for the due diligence stage of the process.

Phase 3

This phase differs and also depend upon the nature of the business proposal. In this process, it solves issues related to customer references, product and business strategy evaluations, management interviews, and many information exchanges during this phase.

Phase 4

The term sheet is the non-binding document offered by venture capital which explains the term and condition of the investment agreement when the result of the due diligence phase is satisfactory. Funds are made available after the negotiation of term sheet which is agreed upon by all the parties and completion of legal documents and legal due diligence.

Who are Venture Capitalists?

Venture capitalists are the people who invest capital in a promising venture. They can either be a single investor or a group of institutional investors. They also invite high net worth individuals to invest via dedicated investment firms.

Points to be considered before Raising Venture Capital Funding

The current size of the organisation

By knowing the size of the organisation in the coming years helps you to decide to go for venture capital funding or no. You can also analyse the future growth of your company by planning innovative projections for the coming years.

The venture debt

It is handed out by venture capital firms or banks. Debt financing products for companies that are looking for backing from venture capital firm, it is also an assortment. As like any other loan, venture debt should also be paid back with interest.

Time to raise venture debt

The best time to raise venture debt is when it is most accessible in the market, business is at the booming stage, and all diligence materials are available. It allows Venture debt lender to leverage due diligence done by equity investor which saves processing time. Start-ups may raise venture debt as a part of their equity round by raising 20-30% of the financing round as debt which may help founders conserve equity and have more flexibility in building their business.

Venture Capital Corporate Strategy

The below strategies should be widely followed:

  1. To become the institution player who will lead in the venture capital sector of the country.
  2. To fulfil the financial needs of the industry, it becomes the solution provider.
  3. To appear for the upcoming enterprise, it should be the most trusted partner in the country.
  4. To work for economic development and employ the community.
  5. To promote entrepreneurship which helps in increasing the financial inclusion
  6. For the economic growth of the country it must be competitive, component and sensitive.
  7. To design the solutions that are customer-centric.
  8. IFCI (Industrial Finance Corporation of India) group image should be enhanced.

People also ask

Q. What is due diligence?

A. Due diligence is an investigation or audit of a business or person that determines whether the venture capital fund or other investors will invest in your company or not. This is done through the process of asking and answering a series of questions to evaluate the business and legal aspects of the opportunity.

Q. Is venture capitalist different from an angel investor?

A. Yes, angel investor invests their personal funds whereas venture capital is invested by firms using other people’s money.

Q. Are venture capital funds and mutual funds same?

A. No, they are different.

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Chetan Chandak (B.Com, LLB)
Chetan is the Head of Tax Research at H&R Block (India) with an experience of more than a decade in tax advising. He is also a regular contributor for some of the leading news publications in India such as Economic Times, Financial Express and Money Control. Professionally, Chetan is fascinated by international taxation and expat-related tax research.

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