VENTURE CAPITAL: THE CONCEPT
Finance provided by a specialized institution to an entrepreneur. Start-up or developing business, where a fairly high degree of risk is involved. Venture capitalist usually has a continuing involvement in the business of the customer after making an investment.
Venture capitalist seek to protect and enhance his investment by keeping close to the entrepreneur and his team in an active supportive role.
A venture capital investment is illiquid i.e. not subject to repayment on demand as with an overdraft or following a loan repayment schedule.
Investment is realised only when the company is sold or achieves a stock market listing. In the event of liquidation the investment is lost.
Venture Capital is risk financing at its extreme.
The concept of venture capital originated in USA during 19th. and early 20th. Century. European investors alongwith American natives were involved in backing construction and other new industries viz. Rail, Road, Steel, Oil, Gas and Glass.
The state of development of investee company decided the financing stage as perceived by the venture capitalist. The funds investments size range i.e. minimum/maximum equity percentages also vary from fund to fund. VC funds includes many financing instruments i.e. Shares, Preferred Shares, deferred shares, convertible loan stock.
Venture capitalist specialize in specific technology and their portfolio include a significant proportion of business in the areas of advanced technology. Time scale to realisation i.e. early stage financing are inevitably taking a medium to long-term (5-7 years) and later stage financing will have a 3-5 years time scale. Geographical Limitations i.e. funds say also specialize regionally.
STAGES OF INVESTMENT
a. b. c. 2. I. II.
Early stage investment Equity Share Seed Capital and R&D Projects Start Ups Second Round Finance Later Stage Investment Expansion Finance Replacement Capital Turnarounds Buy Outs
Time Scale (7-10yrs.) (5-10yrs.) (3-7yrs.)
Risk Extreme Very High High
(1-3yrs.) (1-3yrs.) (3-5yrs.) (3-5yrs.)
Medium Low Medium Low
VENTURE CAPITAL FUNDS
Finance Act, 2000 has made SEBI the single point nodal agency for registration and regulation of both domestic and overseas venture capital funds (VCFs) No approval of VCFs by Tax authorities is required. There will be no tax on distributed or undistributed income of such funds. The income distributed by these funds will only be taxed in the hands of investors.
VCFs has to disclose the investment strategy at the time of application for registration. A VCF cannot invest more than 25% corpus of the funds in one venture capital undertaking (VCU). At least 75% of the investible funds has to be invested in unlisted equity shares or equity linked instruments.
Not more than 25% of the investible funds may be invested by way of subscription to IPO of VCU with a lock-in period of one year.
VCF cannot invest in the associated companies
REGULATION OF VCFs BY SEBI
VCF is a fund established in the form of a trust / a company including a body corporate and registered with SEBI. Minimum investment in a VCF from any investor would not be less than 5 lakh. The VCF will be eligible to participate in the IPO through book building route as QIB. VCF is to provide venture capital activity for every quarter starting from Dec. 31, 2000.