About Venture Capital (VC) Starting and growing a business always require capital.

There are a number of alternative methods to fund growth. These include the owner or proprietors own capital, arranging debt finance, or seeking an equity partner, as is the case with private equity and venture capital. Private equity is a broad term that refers to any type of non-public ownership equity securities that are not listed on a public exchange. Private equity encompasses both early stage (venture capital) and later stage (buy-out, expansion) investing. In the broadest sense, it can also include mezzanine, fund of funds and secondary investing. Venture capital is a means of equity financing for rapidly-growing private companies. Finance may be required for the start-up, development/expansion or purchase of a company. Venture Capital firms invest funds on a professional basis, often focusing on a limited sector of specialization (eg. IT, infrastructure, health/life sciences, clean technology, etc.). 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. Given the nature of equity financing, venture capital investors are therefore exposed to the risk of the company failing. As a result the venture capitalist must look to invest in companies which have the ability to grow very successfully and provide higher than average returns to compensate for the risk. When venture capitalists invest in a business they typically require a seat on the company's board of directors. They tend to take a minority share in the company and usually do not take day-today control. Rather, 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 means fund made available for startup firms and small businesses with exceptional growth potential. Venture capital is money provided by professionals who alongside management invest in young, rapidly growing companies that have the potential to develop into significant economic contributors. The most flexible definition of Venture capital isThe support by investors of entrepreneurial talent with finance and business skills to exploit market opportunities and thus obtain capital gains

 Venture capitalist A venture capitalist (also known as a VC) is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. Venture Capital Fund A venture capital fund refers to a pooled investment vehicle primarily invests the financial capital of investors enterprises that are too risky for the standard capital markets or bank loans.

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Venture capital is a type of private equity capital typically provided by professional, outside investors to new, growth businesses. Generally made as cash in exchange for shares in the invested company, venture capital investments are usually high risk, but offer the potential for above-average returns. A venture capitalist (VC) is a person who makes such investments. A venture capital fund is a pooled investment vehicle (often a limited partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. The main features of venture capital are High Degrees of Risk, Equity Participation, Long Term Investment, Participation in Management, Achieve Social Objectives, Investment is liquid. Generally there are three types of organised or institutional venture capital funds: Venture capital funds set up by angel investors; venture capital susbsidaries of corporation; and private venture capital firms/funds. Venture capital subsidaries are established by major corporations, commercial bank holding companies and other financial institutions. Most venture capital funds have a fixed life of 10 years, with the possibility of a few years of extensions to allow for private companies still seeking liquidity. The investing cycle for most funds is generally three to five years, after which the focus is managing and making follow-on investments in an existing portfolio. Most venture capital firms are interested in investment projects requiring an investment of $250,000 to $1,500,000. Projects requiring under $250,000 are of limited interest because of the high cost of investigation and administration; however, some venture firms will consider smaller proposals, if the investment is intriguing enough. Different venture groups prefer different types of investments. Some specialize in seed capital and early expansion while others focus on exit financing. Biotechnology, medical services, communications, electronic components and software companies seem to be attracting the most attention from venture firms and receiving the most financing. Venture capital firms finance both early and later stage investments to maintain a balance between risk and profitability. A classic angel and venture capital boom was in the making. As the dollar volume of the industry grew in size, the number of venture capital firms increased accordingly. The number of venture capital firms rose from 458 to over 1000. Many U.S. and other foreign investors are evaluating alternatives for investments into software development, business process outsourcing, drug discovery and other tech and non-tech companies based in India. In the IT, life sciences and related sectors, many U.S.

and India venture capitalists still make early stage investments into a U.S. company which has a subsidiary in India for fulfillment. Some Indian state government funds are actively investing in India. These include SIDBI Venture Capital Limited, Gujarat Venture Fund Limited, RVCF, APIDC, Canbank Venture Capital Fund Limited, IFCI Venture Capital Funds Limited, Rajasthan Asset Management Co. Private Ltd., KITVEN and Kerala Venture Capital Fund Private Limited. Investments from these institutions have the advantage of lower cost of capital and hence can be more attractive to entrepreneurs; however, the maximum amount of capital available is typically $500,000.

FEATURES OF VENTURE CAPITAL Nature: Venture Capital is a long term investment. Since the project is risky, it may take time to earn profits. Therefore, it takes time to get the refund of capital as well as return on it. The investors can exist on success of the project. But it takes long time to get the success. Form: Venture Capital is mainly in the form of equity capital. Investors can subscribe the equity capital and provide the necessary funds to complete the project. The amount of equity invested by the venture capitalist is normally up to 49%of the total equity capital required for the project. Borrowers: The borrowers are the new entrepreneurs who raise venture capital because they cannot get such an amount from the general investors. Type of project: Venture Capital projects are high risk, high technology and long term projects. Management: Venture Capital projects are managed jointly by the entrepreneurs and venture capitalists. However, venture capitalist should not interfere in day to day activities of the management. The venture capitalist can take active part in the management and decision-making. New venture: Venture capital investment is generally made in new enterprises that use new technology to produce new products, in expectations of high gains or sometimes, spectacular returns. Continuous involvement:

Venture capitalists continuously involve themselves with the clients investments, either by providing loans or managerial skills or any other support. Mode of investment: Venture capital is basically an equity financing method, the investment being in relatively new companies when it is too early to go to the capital market to raise funds. Objective: The basic objective of a venture capitalist is to make a capital gain in equity investment. It is a long-term investment in growth-oriented small/medium firms. It is a long-term capital that is injected to enable the business to grow at a rapid pace, mostly from the start-up stage. Size of firms: Venture capitalists usually finance small and medium-sized firms during the early stages of their development, until they are established and are able to raise finance from the conventional industrial finance market. Many of these firms are new, high technology-oriented companies. High risk-return ventures: Venture capitalists finance high risk-return ventures. Some of the ventures yield very high return in order to compensate for the heavy risks related to the ventures. Venture capitalists usually make huge capital gains at the time of exit.

How does the VC industry work Venture capital firms typically source the majority of their funding from large investment institutions such as fund of funds, financial institutions, endowments, pension funds and banks. These institutions typically invest in a venture capital fund for a period of up to ten years. To compensate for the long term commitment and lack of both security and liquidity, investment institutions expect to receive very high returns on their investment. Therefore venture capitalists invest in either companies with high growth potential where they are able to exit through either an IPO or a merger/acquisition. Although the venture capitalist may receive some return through dividends, their primary return on investment comes from capital gains when they eventually sell their shares in the company, typically between three to five years after the investment. Venture capitalists are therefore in the business of promoting growth in the companies they invest in and managing the associated risk to protect and enhance their investors' capital. Venture Capital in India In 2006, total amount of private equity, including venture capital reached US$7.5 billion across 299 deals.

Investment Process
The investment process begins with the venture capitalist conducting an initial review of the proposal to determine if it fits with the firm's investment criteria. If so, a meeting will be arranged with the entrepreneur/management team to discuss the business plan. Preliminary Screening The initial meeting provides an opportunity for the venture capitalist to meet with the entrepreneur and key members of the management team to review the business plan and conduct initial due diligence on the project. It is an important time for the management team to demonstrate their understanding of their business and ability to achieve the strategies outlined in the plan. The venture capitalist will look carefully at the team's functional skills and backgrounds. Negotiating Investment This involves an agreement between the venture capitalist and management of the terms of the term sheet, often called memorandum of understanding (MoU). The venture capitalist will then proceed to study the viability of the market to estimate its potential. Often they use market forecasts which have been independently prepared by industry experts who specialise in estimating the size and growth rates of markets and market segments. The venture capitalist also studies the industry carefully to obtain information about competitors, entry barriers, potential to exploit substantial niches, product life cycles, and distribution channels. The due diligence may continue with reports from other consultants. Approvals and Investment Completed The process involves due diligence and disclosure of all relevant business information. Final terms can then be negotiated and an investment proposal is typically submitted to the venture capital funds board of directors. If approved, legal documents are prepared. The investment process can take up to two months, and sometimes longer. It is important therefore not to expect a speedy response. It is advisable to plan the business financial needs early on to allow appropriate time to secure the required funding.

STAGES OF VENTURE CAPITAL There are six stages in venture capital investment. These six stages are divided into two parts. They are:-

 Early stage financing Expansion financing Early stage financing 1. Seed financing, 2. Start-up financing 3. First stage financing Seed financing refers to a small amount of venture capital given to an entrepreneur or inventor who wishes to start a business. It may be used to build a management team, for market research or to develop a business plan. Start up financing refers to venture capital that is given when a business has been operating for less than a year. Their product will not have been sold commercially yet, and they will just be ready to start doing so. First stage financing is used when companies wish to expand their capital and to proceed full scale and enter the public business arena. Expansion financing 1. Second stage financing 2. Third stage financing 3. Mezzanine or Bridge financing Second stage financing is an investment used to expand a company that is already on its feet. The company is trading and has growing accounts and inventories, although it may not yet be showing a profit. Third stage financing is an investment to companies that are breaking even or becoming profitable. The venture capital is used to expand the business. It may be used in the acquisition of real estate or for further in-depth product development. Bridge financing or fourth stage covers a variety of different meanings. It is a short term. It is used when company restructuring is taking place. The money can also be used if an initial investor wants to liquidate his position and sell his stock.

ADVANTAGES The primary advantage of venture capital is that they allow entrepreneurs to build their company with OPM (other people's money)

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 also has a network of contacts in many areas that can add value to the company. 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

DISADVANTAGES The venture capital firm often requires some control over the business operations The investor will expect a return on his money either by the sale of the company or by offering to sell shares in the company to the public. VENTURE CAPITAL IN INDIA In India the Venture Capital plays a vital role in the development and growth of innovative entrepreneurships. Venture Capital activity in the past was possibly done by the developmental financial institutions like IDBI, ICICI and State Financial Corporations. Investment Co. in India Intel Capital Inventus (India) Advisory Company JAFCO Asia Lightspeed Venture Partners Netz Capital Nexus India Capital Norwest Venture Partners Ojas Venture Partners Reliance Technology Ventures ,Trident Capital, Venture East