Investment funds that help investors seeking private equities in startups, small, and mid-sized enterprises possessing strong growth potential, by managing their money are known as Venture Capital Funds (VCF). They are institutions that are dedicated to funding new ventures and are regulated by the guidelines issued by the Securities and Exchange Board of India (SEBI). Though there is a high-risk involved in funding new projects, the investors are eager to do so because they anticipate high returns on the investment.
Venture Capital Funds ensure that the money of the investors is used to fund projects which have a potential to grow and the money provided in the process is known as Venture Capital. Venture capital funds are given out on the basis of the company’s assets, size and stage of product development. Since these firms in question are usually start-up/ small in size, they are said to have high-risk/high-return profiles.
Features of Venture Capital Funds
- The main focus of VCFs is on early-stage investment but sometimes, it can also involve expansion-stage financing.
- Often, equity stakes of the enterprises or companies that are funded by the VCFs are purchased by the VCFs.
- Along with the capital, VCFs also bring with them the knowledge and experts of the investors which will help the company make further advancements.
- Sometimes the VCFs also help in developing new products/services and acquire latest technologies that will help the company to improve efficiency.
- The biggest advantage that VCFs offer is the networking opportunities. With influential and wealthy investors promoting the company, it will in no time, achieve stellar growth.
- VCFs hold the authority to influence the decisions of the enterprises they are investing in.
- To mitigate the risks involved in funding new projects, VCFs invest in a variety of young startups with a belief that at least one firm will achieve massive growth and reward them with a large payout.
How a Venture Capital Fund operates:
Depending on the maturity of the business when the investment is done, venture capital investments can be seen as early-stage capital, seed capital or expansion-stage financing. However, the investment stage does not affect how venture capital funds operates.
To begin with, before making any investments, venture capital funds (like all funds), has to raise money. Potential investors are given a prospectus of the fund after which they commit money to. Once a commitment is made, the fund's operators call all the potential investors and finalize individual investment amounts.
After that, private equity investments that have the potential of generating positive returns for its investors are sought out by the venture capital fund. This process involves the fund's manager/ managers reviewing business plans in hundreds, searching for potentially high-growth companies. Investment decisions are made by the fund managers and are decided according to the prospectus and the investor’s expectations. An annual management fee of around 2% will be charged by the fund once an investment is made.
When a portfolio company exits, investors of a venture capital fund make returns either in a merger and acquisition or an IPO. Along with the annual management fee, the fund will also keep a percentage of the profits, if the investment makes a profit.
Types of Venture Capital Funds
Venture Capital Funds are classified on the basis of their utilisation at different stages of a business. The 3 main types are early stage financing, expansion financing, and acquisition/buyout financing.
Early stage financing
There are 3 sub-categories in early stage financing. These are seed financing, startup financing, and first stage financing. Seed financing is a small sum given to the entrepreneur to serve the purpose of qualifying for a startup loan. Startup financing is when the companies receive funds to complete the development of its services and products. When companies need capital to begin the business activities in full swing, they need first stage financing.
Expansion financing is classified into second stage financing, bridge financing, and third stage financing. The second stage and third stage financing are given to companies so that they can start their expansion process in a major way. Bridge financing is offered to companies in the form of monetary support when they employ Initial Public Offerings (IPO) as a principal business strategy.
Acquisition or buyout financing
Acquisition finance and leveraged buyout financing are the categories falling under acquisition or buyout financing. When a company needs funds to acquire another company or parts of a company, acquisition financing comes to aid. Leveraged buyout financing is required when a management group of a company wishes to acquire another company’s particular product.
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.
Top 10 Venture Capital Firms in India
The Indian startup ecosystem highly relies on venture capital funding. However, many entrepreneurs are confused, hesitant, and sometimes find it difficult to ascertain which investors are reliable. Therefore, we have made a list of the top 10 venture capital firms in India and also provided some basic information about these firms below:
- Accel Partners
- Helion Venture Partners
- Sequoia Capital India
- Nexus Venture Partners
- Venture East
- Blume Ventures
- Inventus Capital Partners
- Fidelity Growth Partners
- Qualcomm Ventures
- IDG Ventures India
With over 3 decades of experience in the field of venture capital financing, Accel Partners have helped hundreds of companies evolve. Its vision is to provide assistance to the global entrepreneur community.
Investment structure - Invests between $0.5 million and $50 million.
Industries - Infrastructure, Storage Technologies, Data-Driven technologies, Cloud-based services, Mobile and Software, SaaS, Biotechnology, Healthcare, Education.
Startups funded - BookMyShow, Urbanclap, Swiggy, Rentomojo, Freshdesk, Myntra, Commonfloor, Flipkart, BabyOye, TaxiForSure.
Based in Mauritius, Helion Venture Partners aids entrepreneurs to develop a strategy to accomplish their plan in the marketplace. Apart from financing startups, Helion also helps companies to solve complex business problems.
Investment structure - Invests between $2 million to $10 million.
Industries - Retail services, Outsourcing, E-commerce, Consumer Services, Mobile, Advertising, Healthcare, Enterprise Software, Travel and Tourism, Internet, Education.
Startups funded - MakeMyTrip, Yepme, NetAmbit, PubMatic, RedBus, SimpliLearn, EzeTap, Wooplr.
A venture capital firm that is specialised in funding startups, seed, early, series-A funding, etc., Sequoia Capital India, is an affiliate of Sequoia Capital based in California.
Investment structure - Invests between $100,00 to $1 million in seed stage, between $1 million to $10 million in the early stage, and between $10 million to $100 million in the growth stage.
Industries - Financial, Outsourcing, Public Sector, Energy, Healthcare, Technology, Mobile, Enterprise Software.
Startups funded - Practo, JustDial, Zomato, OYO Rooms, Groupon India, MobiKwik, Grabhouse, Knowlarity, iYogi, BankBazaar.
This venture capital firm looks for passion, innovation, feasibility, and differentiability in enterprises and has a decade of experience in guiding entrepreneurs.
Investment structure - Invests between $0.5 million and $10 million in the early growth stage. In their seed program, they invest up to $0.5 million.
Industries - Data Security, Infrastructure, Storage, Rural Sector, Mobile, Agribusiness, Energy, Media, Technology, Consumer and Business Services, Food, Tourism, Lifestyle.
Startups funded - Stayzilla, Craftsvilla, Delhivery, Snapdeal, Komli, Housing.com, PubMatic.
It is a venture capital firm that focuses on Indian startups. With over 15 years of experience, Venture East prefers to invest in fresh, strange, and potential ideas while also helping them to establish and be competent in the market.
Investment structure - Invests between $1 million to $10 million in multiple rounds.
Industries - Financial Services, Digital Healthcare, Internet of Things (IoT), Education, E-commerce, Life Sciences, Information Technology.
Startups funded - Portea, Seclore, Goli Vada Pav, Little Eye Labs, 24 Mantra.
Termed as ‘Founder’s VC’, Blume Ventures helps startups with funding, mentoring, and support. It was founded in 2011 and has over 60 active companies.
Investment structure - Invests between $0.05 million to $0.3 million in the seed stage.
Industries - Telecommunications Equipment, Mobile Applications, Data Infrastructure, Logistics, E-commerce, Fin-Tech, Hospitality Services, Gaming.
Startups funded - HealthifyMe, Instamojo, TaxiForSure, Cashify, Chillr, Explara, EKI Communications, Audio Compass, Exotel, Printo.
This venture capital firm primarily invests in technology-based startups and was founded in 2007. It is managed by industry veterans and entrepreneurs,
Investment structure - Invests between $1 million to $2 million in the first venture round and with the growth in business, it invests between $0.25 million to $10 million.
Industries - Hotels, Restaurants and Leisure, Healthcare, Information Technology, Telecommunications, Media, Hardware, and Equipment.
Startups funded - CBazaar, Poshmark, Savaari, Poshmark, PolicyBazaar, Insta Health Solutions.
Fidelity Growth Partners is the investment arm of Fidelity International Limited and has been rechristened as Eight Roads Ventures. It has invested in many sectors including technology, healthcare and life sciences, etc. since 2008 and focuses on the Indian startup ecosystem.
Investment structure - Invests between $10 million to $50 million.
Industries - Energy and Industrial Technology, Food and Agriculture, Data and Business Services, Education and Skills Development, Consumer and Enterprise Technology.
Startups funded - Yebhi, NetMagic, Coastal Projects, Milk Mantra Dairy Pvt. Ltd.
This venture capital firm was founded in 2000 and has more than 140 active portfolio companies under its belt. It is the private equity arm of Qualcomm Incorporated and has focus on investing in automotive, data center, mobile, and digital health sectors.
Investment structure - Not Applicable
Industries - Consumer Software, Business Software, Infrastructure, Automotive, Internet of Things (IoT).
Startups funded - Fitbit, Invensense, Appsdaily, Deck, Portea, Capillary, Cruise Automation.
IDG Ventures India holds a portfolio of more than 220 companies and has an experience of 15 years in the venture capital space.
Investment structure - Invests between $1 million to $10 million.
Industries - Consumer Media, Mobile, Media and Technology, Enterprise Software, Engineering, Fin-Tech, Health-Tech.
Startups funded - Lenskart, Zivame, Yatra, FirstCry, Ozone Media, UNBXD, Myntra.
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