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Starting and growing a business always require capital. There are a number of alternative methods to fund growth. These include the owner or proprietor’s own capital, arranging debt finance, or seeking an equity partner, as is the case with private equity and venture capital. (Source: Indian Private Equity & Venture Capital Association)

The goal of venture capital is to build companies so that the shares become liquid (through IPO or acquisition) and provide a rate of return to the investors (in the form of cash or shares) that is consistent with the level of risk taken. With venture capital financing,

  • The venture capitalist acquires an agreed proportion of the equity of the company in return for the funding.
  • Equity finance offers the significant advantage of having no interest charges.
  • It is "patient" capital that seeks a return through long-term capital gain rather than immediate and regular interest payments, as in the case of debt financing.
  • Look at investing in companies which have the ability to grow very successfully and provide higher than average returns to compensate for the risk.
  • Typically require a seat on the company's board of directors and they tend to take a minority share in the company and usually do not take day-to-day control.
  • Professional venture capitalists act as mentors and aim to provide support and advice on a range of management, sales and technical issues to assist the company to develop its full potential.

Venture capital has a number of advantages over other forms of finance, such as:

  • It injects long term equity finance which provides a solid capital base for future growth.
  • The venture capitalist is a business partner, sharing both the risks and rewards.
  • Venture capitalists are rewarded by business success and the capital gain.
  • The venture capitalist is able to provide practical advice and assistance to the company based on past experience with other companies which were in similar situations.
  • The venture capitalist also has a network of contacts in many areas that can add value to the company, such as in recruiting key personnel, providing contacts in international markets, introductions to strategic partners, and if needed co-investments with other venture capital firms when additional rounds of financing are required.
  • The venture capitalist may be capable of providing additional rounds of funding should it be required to finance growth.

What do VC's look for?

Venture capitalists are higher risk investors and, in accepting these risks, they desire a higher return on their investment. The venture capitalist manages the risk/reward ratio by only investing in businesses which fit their investment criteria and after having completed extensive due diligence. They look at the following factors,

  • Revolutionary Idea, good business model, location of the business, the size of the investment, the stage of the company, industry specialization, structure of the investment
  • Fantastic Management, Leadership team, Research and Advisory Board
  • Patented technology revenue-ready companies with a good business plan
  • Scalable business and minimum transaction size of  $1 million
  • To fund dynamic start-ups, development expansion or purchase of a company
  • Sector based funding in IT, Infrastructure, health, life sciences, clean technology, etc.,
  • Appropriate investment structure to produce the anticipated financial returns to investors
  • Exit opportunity through public listing or a third party acquisition of the investee company

After the initial analysis an investment proposal, a term sheet is issued within a time frame depending on the complexity of the business model, followed by 6-8 weeks to complete due diligence, investment documentation and disburse capital.

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