Venture Capital (VC) financing started in India in 1988 with the formation of Technology Development and Information Company of India Ltd. (TDICI) - promoted by ICICI and UTI. The first private VC fund was sponsored by Credit Capital Finance Corporation (CFC) and promoted by Bank of India, Asian Development Bank and the Commonwealth Development Corporation viz. Credit Capital Venture Fund. At the same time Gujarat Venture Finance Ltd. and APIDC Venture Capital Ltd. were started by state level financial institutions.
Venture capitalists take higher risks by investing in an early-stage company with little or no history, and they expect a higher return for their high-risk equity investment. Internationally, VCs look at an Internal Rate of Return (IRR) of 40% plus . However, in India the ideal benchmark is in the region of an Internal Rate of Return (IRR) of 25% for general funds and more than 30% for IT-specific funds. Most firms require large portions of equity in exchange for start-up financing
VC financing differs from the conventional bank financing in the following ways:
VC financing invests in equity of the company while conventional financing generally extends term loans
Conventional financing looks to current income i.e. dividend and interest, while in VC financing returns are by way of capital appreciation
Assessment in conventional financing is conservative i.e. lower the risk, higher the chances of getting loan. But, VC financing is a risk taking finance where potential returns outweigh risk factors.
VCs are in for long run and rarely exit before 3 years while a bank will fund a project as long as it is sure that enough cash flow will be generated to repay the loans.
In addition, Venture Capitalists lend management support and provide entrepreneurs with many other facilities. They even participate in the management process. VC generally invests in unlisted companies and make profit only after the company obtains listing. VC extends need based support in a number of stages of investments unlike single round financing by conventional financiers.
VCs carry out very detailed due diligence and make 2-7 year investments. The VCs also hand-hold and nurture the companies they invest in besides helping them reach IPO stage when valuations are favourable. VCFs help entrepreneurs at four stages viz., idea generation, start-up, ramp-up and finally in the exit.
Generally a Venture Capitalist looks at the following aspects before investing in any venture.
i) A strong management team - each member of the team must have adequate level of skills, commitment and motivation that creates a balance between members in areas such as marketing, finance, and operations, research & development, general management, personnel management, and legal and tax issues.
ii) A viable idea - establish the market for the product or service, why customers will purchase the product, who the ultimate users are , who the competition is, and the projected growth of the industry.
iii) Business plan: the plan should concisely describe the nature of the business, the qualifications of the members of the management team, how well the business has performed, and business projections and forecasts.
So while approaching a venture fund one needs to be fully prepared and keep the above requirements in mind while submitting the business plan.
ICICI
Venture Funds Management Company Limited
ICICI Venture (formerly TDICI Limited)
was founded in 1988 as a joint venture with the Unit
Trust of India. Subsequently, ICICI bought out UTI's
stake in 1998 and ICICI Venture became a fully owned
subsidiary of ICICI. ICICI Venture also has an affiliation
with the Trust Company of the West (TCW), which provides
it a platform for networking Indian companies with global
markets and technology. Strong parentage and affiliates
for ICICI Venture also translates into access to a broad
spectrum of financial and analytical resources thus
enabling a keen understanding of the Indian financial
markets and entrepreneurial ethos.
IFCI Venture Capital Funds Ltd.
(IVCF) was originally set up by IFCI as a Society by
the name of Risk Capital Foundation (RCF) in 1975 to
provide institutional support to first generation professionals
and technocrats setting up their own ventures in the
medium scale sector, under the Risk Capital Scheme.
In 1988, RCF was converted into a company, Risk Capital
and Technology Finance Corporation Ltd. (RCTC), when
it also introduced the Technology Finance and Development
Scheme for financing development and commercialisation
of indigenous technology. To reflect the shift in the
company's activities, the name of RCTC was changed to
IFCI Venture Capital Funds Ltd (IVCF) in February 2000.
SIDBI Venture Capital Limited
(SVCL) is a wholly owned subsidiary of SIDBI, incorporated
in July 1999 to act as an umbrella organisation to oversee
the Venture Capital operation of SIDBI. SVCL mission
is to catalyse entrepreneurship by providing capital
and other strategic inputs for building businesses around
growth opportunities and maximize returns on investment.
SVCL will manage the various Venture Capital Funds launched/
being launched by SIDBI.
IL&FS was incorporated in
1987, and commenced operations in May 1988 as a subsidiary
of Central Bank of India (CBI), one of the largest nationalised
banks in the country. The initial shareholders were
the Unit Trust of India (UTI) and the Housing Development
Finance Corporation Limited (HDFC). Thus, from its inception,
IL&FS inherited the experience and expertise of
these institutions.
Started in July 1990, at the initiative
of the World Bank, GVFL Ltd. is regarded as a pioneer
of Venture Capital in India. Over the past ten years,
GVFL Ltd. has provided financial and managerial support
to over 57 companies with a high growth potential.
GVFL Ltd invests all over India and
across industries. It has created a niche for itself
in small and medium scale companies. Investment and
monitoring such companies require considerable effort
and involvement as compared to large projects. Over
the last ten years GVFL Ltd. has been developing an
edge, dealing in such investments.
