What is venture capital?

Venture capital refers to investments in Startups or MSMEs that need capital to grow their business. Venture funds are pooled funds like mutual funds or Portfolio Management Services (PMS). The fund is managed by investment professionals known as General Partners (GP). The investors will participate in the PE fund as Limited Partners (LP). The GP will look for investment opportunities in startups or early stage companies with high revenue growth prospects and strong profit margins. Such companies may look for capital infusion to fund the next stage of growth, increase business scalability to multiply revenues and profits. Venture capital investors look for very high returns on investment, usually multiples of growth e.g. 10 or 15 times growth of their investment.

Types of venture capital funding

Early stage funding : Seed capital to qualify the business for a loan, funding to develop products or services and first stage funding to setup manufacturing operations or factories.

Second stage funding : Funding to expand manufacturing capacity, short term working capital funding until long term funding is availed from other investors etc.

M&A funding : Funding to acquire other small companies or parts of companies with strong synergies with the business model of the company.

Difference between Venture Capital and Private Equity

Venture capital and private equity are similar in many respects but there are differences in the types of companies they invest in:-

Venture capital investments are usually made in early stages of growth, whereas private equity investments are made in companies with established companies and track record of profits

Venture capital investments are usually made in technology and other emerging industries like biotech, green energy, robotics, autonomous mobility etc. Private equity investments are sector agnostic.

Private equity funds may acquire majority stake in a company and appoint their own management team. Venture capital investments do not exceed 49%.

Private equity funds may finance leveraged buyouts (LBOs) or acquisition of majority stake in a company funded by debt. Current RBI prohibits banks, domestic institutions and NIRs from giving loans for the purpose of buying shares of any Indian company. However, offshore structures setup with equity can get take loans from a foreign PE fund to finance LBOs.

Difference between Venture Capital and Private Equity

In recent years, there is growing interest in Venture Capital from HNI / UHNI investors. There are several ways of investing in Private Equity. You can become an LP in a venture fund. Alternatively, you can invest in Alternative Investment Funds (AIF), which in turn in invest in venture capital, private equity and pre IPO opportunities.