Venture Capital Funds are investment funds that assist investors seeking private stocks in startups, small and mid-sized businesses with great development potential by managing their money (VCF). They are institutions committed to investing new companies and are governed by the Securities and Exchange Board of India’s norms (SEBI). Despite the considerable risk of funding new projects, investors are willing to do so since they anticipate high returns on investment.
Venture Capital Funds ensure that investors’ money is used to fund enterprises with growth potential, and the money provided in the process is known as Venture Capital. Venture capital funds are distributed based on the assets, size, and stage of product development of the company. These firms are believed to have high-risk/high-return profiles because they are typically start-ups or small in size.
Features of Venture Capital Funds
- VCFs are mostly used for early-stage investment, although they can also be used for expansion-stage finance.
- The VCFs frequently purchase equity holdings in the enterprises or companies that they fund.
- Along with funding, VCFs bring with them the knowledge and expertise of the investors, which will aid the company in its future growth.
- VCFs can also assist in the development of new products/services and the acquisition of cutting-edge technologies that will help the company enhance its efficiency.
- The most significant benefit of VCFs is the networking opportunities. With influential and affluent investors backing the company, it will achieve phenomenal growth in no time.
- VCFs have the power to sway the decisions of the businesses in which they invest.
- VCFs invest in a number of fledgling businesses in the hope that at least one would achieve huge growth and reward them with a significant payment, thereby mitigating the risks associated with supporting new projects.
A Venture Capital Fund works as follows:
Venture capital investments can be classified as early-stage capital, seed capital, or expansion-stage finance based on the maturity of the business at the time of investment. However, the stage of investment has no bearing on how venture capital funds operate.
To begin with, venture capital funds (like all funds) must raise funds before making any investments. Potential investors are given a prospectus for the fund before committing funds. Following a commitment, the fund’s operators contact all possible investors to finalise individual investment amounts.
Following that, the venture capital fund seeks private equity investments that have the potential to provide positive returns for its investors. This procedure entails the fund’s manager or managers analysing hundreds of business plans in search of possibly high-growth enterprises. Fund managers make investment decisions based on the prospectus and the expectations of the investors. Once an investment is placed, the fund will incur an annual management fee of roughly 2%.
When a venture capital fund’s portfolio firm leaves, investors earn returns through a merger and acquisition or an IPO. In addition to the annual management charge, the fund will keep a share of the profits if the investment is profitable.
Types of Venture Capital Fund
Venture Capital Funds are classified according to how they are used at various phases of a firm. Early stage financing, expansion financing, and acquisition/buyout financing are the three basic forms.
1. Financing for the early stages:
Early stage finance is divided into three groups. There are three types of finance: seed financing, startup financing, and first stage financing. Seed finance is a small cash given to an entrepreneur in order for them to qualify for a startup loan. Startup finance is when a company receives funds to finish developing its services and goods. When a company need funds to launch its operations, it requires first stage finance.
2. Finance for expansion:
Second stage financing, bridge financing, and third stage financing are the three types of expansion financing. Companies are awarded second and third stage finance so that they can begin their expansion process in a big way. Bridge funding is provided to businesses in the form of monetary assistance when they use Initial Public Offerings (IPO) as a primary business strategy.
3. Financing for acquisitions or buyouts:
Acquisition or buyout financing includes the areas of acquisition finance and leveraged buyout financing. Acquisition financing comes in handy when a company requires money to buy another company or parts of another company. When a firm’s management group intends to acquire a specific product from another company, leveraged buyout finance is required.
Disadvantages of Venture Capital Funds
Though venture capital funds come with an array of benefits, there are also a few disadvantages that they offer. Some of them are given below:
- When investors fund a startup or a small enterprise, they partly become the owners of the enterprise which means that they have a control in the decision-making process. This results in the founders losing their control and autonomy.
- The entire process of venture capital financing is lengthy and complex.
- This form of financing is very uncertain and benefits can be realised only in a long run.
The Drawbacks of Venture Capital Funds
Though venture capital funds have numerous advantages, they also have a few negatives. Some of them are as follows:
When investors support a startup or a small business, they become partial owners, which means they have a say in the decision-making process. As a result, the founders lose power and autonomy.
- The entire venture capital fundraising process is lengthy and complicated.
- This type of funding is highly uncertain, and the benefits can only be realised in the long run.
Top 10 VC Firms in India
Venture capital funding is critical to the Indian startup ecosystem. However, many businesses are perplexed, apprehensive, and find it difficult to determine whether investors are trustworthy. As a result, we’ve compiled a list of the top ten venture capital firms in India and included some basic information about them below:
1. Accel Partners:
Accel Partners has over three decades of experience in venture capital financing and has assisted hundreds of firms in their growth. Its mission is to assist the worldwide entrepreneur community.
Structure of investment – Invests between $0.5 million and $50 million.
Infrastructure, Storage Technologies, Data-Driven Technologies, Cloud-based Services, Mobile and Software, SaaS, Biotechnology, Healthcare, Education are some of the industries.
BookMyShow, Urbanclap, Swiggy, Rentomojo, Freshdesk, Myntra, Commonfloor, Flipkart, BabyOye, and TaxiForSure are among the startups that have received funding.
2. Helion Venture Partners:
It is based in Mauritius, assists businesses in developing a strategy to achieve their goals in the marketplace. Helion, in addition to supporting startups, assists businesses in solving complicated business problems.
Structure of investment – Invests between $2 million and $10 million.
Retail services, Outsourcing, E-commerce, Consumer Services, Mobile, Advertising, Healthcare, Enterprise Software, Travel & Tourism, Internet, Education are some of the industries.
MakeMyTrip, Yepme, NetAmbit, PubMatic, RedBus, SimpliLearn, EzeTap, and Wooplr are among the startups that have received funding.
3. India Sequoia Capital:
Sequoia Capital India is an affiliate of Sequoia Capital, a venture capital firm based in California that specialises in investing businesses, seed, early, and series-A funding, among other things.
Invests between $100,000 and $1 million in the seed stage, $1 million to $10 million in the early stage, and $10 million to $100 million in the growth stage.
Financial, Outsourcing, Public Sector, Energy, Healthcare, Technology, Mobile, and Enterprise Software are some of the industries.
Practo, JustDial, Zomato, OYO Rooms, Groupon India, MobiKwik, Grabhouse, Knowlarity, iYogi, and BankBazaar are among the startups that have received funding.
4. Nexus Venture Partners:
This venture capital firm has a decade of experience advising entrepreneurs and looks for enthusiasm, innovation, feasibility, and differentiability in businesses.
Structure of investment – Invests between $0.5 million and $10 million in the early stages of growth. They invest up to $0.5 million in their seed programme.
Data Security, Infrastructure, Storage, Rural Sector, Mobile, Agribusiness, Energy, Media, Technology, Consumer and Business Services, Food, Tourism, and Lifestyle are some of the industries.
Stayzilla, Craftsvilla, Delhivery, Snapdeal, Komli, Housing.com, and PubMatic are among the startups that have received funding.
5. Venture East:
It is a venture financing firm specialising in Indian businesses. With over 15 years of experience, Venture East prefers to invest in new, unusual, and potentially profitable ideas while also assisting them in establishing and becoming market competent.
Structure of investment – Invests between $1 million and $10 million in multiple rounds.
Financial Services, Digital Healthcare, Internet of Things (IoT), Education, E-commerce, Life Sciences, and Information Technology are some of the industries.
Portea, Seclore, Goli Vada Pav, Little Eye Labs, and 24 Mantra are among the startups that have received funding.
6. Blume Ventures:
Blume Ventures, sometimes known as the ‘Founder’s VC,’ assists entrepreneurs with capital, coaching, and support. It was established in 2011 and currently includes over 60 active enterprises.
Investment structure – Seed stage investments range from $0.05 million to $0.3 million.
Telecommunications Equipment, Mobile Applications, Data Infrastructure, Logistics, E-commerce, Fin-Tech, Hospitality Services, Gaming are some of the industries.
HealthifyMe, Instamojo, TaxiForSure, Cashify, Chillr, Explara, EKI Communications, Audio Compass, Exotel, and Printo are among the startups that have received funding.
7. Inventus Capital Partners:
This venture capital firm, which was created in 2007, primarily invests in technology-based enterprises. It is run by industry veterans and business owners.
Investment structure – In the first venture round, it invests between $1 million and $2 million, and as the business grows, it invests between $0.25 million and $10 million.
Hotels, Restaurants, and Leisure, Healthcare, Information Technology, Telecommunications, Media, Hardware, and Equipment are all industries.
CBazaar, Poshmark, Savaari, Poshmark, PolicyBazaar, and Insta Health Solutions are among the startups that have received funding.
8. Fidelity Growth Partners:
Fidelity Growth Partners has been renamed Eight Roads Ventures, the investment arm of Fidelity International Limited. Since 2008, it has invested in a variety of industries, including technology, healthcare, and life sciences, with an emphasis on the Indian startup ecosystem.
Structure of investment – Invests between $10 million and $50 million.
Energy and Industrial Technology, Food and Agriculture, Data and Business Services, Education and Skills Development, Consumer and Enterprise Technology are some of the industries.
Yebhi, NetMagic, Coastal Projects, and Milk Mantra Dairy Pvt. Ltd. are among the startups that have received funding.
9. Qualcomm Ventures:
This venture capital firm was created in 2000 and currently has over 140 active portfolio businesses. It is Qualcomm Incorporated’s private equity arm, with an emphasis on investing in the automotive, data centre, mobile, and digital health sectors.
Not applicable investment structure
Consumer software, business software, infrastructure, automotive, and the Internet of Things are all industries (IoT).
Fitbit, Invensense, Appsdaily, Deck, Portea, Capillary, and Cruise Automation are among the startups that have received funding.
10. IDG Ventures India:
IDG Ventures India has a portfolio of over 220 firms and has been in the venture capital industry for 15 years.
Structure of investment – Invests between $1 million and $10 million.
Consumer Media, Mobile, Media and Technology, Enterprise Software, Engineering, Fin-Tech, and Health-Tech are some of the industries.
Lenskart, Zivame, Yatra, FirstCry, Ozone Media, UNBXD, and more startups have received funding.
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