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Who is venture capitalist?

The private equity investor that deliver the monetary assistance to the start-up ventures or the small companies to qualifying their projects and helps to encounter the shortage in the capital requirement for implementation of the project are known as Venture Capitalist. Venture capital is a type of financing that is provided to minor, early-stage, developing businesses that are estimated to have high growth prospective, or which have demonstrated high growth.


Venture capitalist (Group of investors)

Venture capitalists are the investors that assist in providing the capital to the companies or the small start up to initiate the project. The start-ups are generally established on an advanced technology and business ideal. Venture capital firms advance in very early-stage of company in interchange for equity and a possession stake. Venture capitalists proceeds on the possibility of supporting risky start-ups in the optimisms that some of the firms they care will become fruitful. Venture capital also known as seed funding for the start-ups.The purpose of providing the capital assistance is to help the small companies in setting up the projects through financial participation.



Venture capital ( Investment amount)

Venture capital is a form of private equity and a type of funding that financiers provide to new companies and minor industries that have the potential of improvement. Venture capital usually arises from rich depositors, investment banks and any other monetary organisations.


Why small start ups looks for private equity investor (venture capitalists)

An investment from a venture capitalist is a form of equity financing. The investor delivers money to the company in exchange of taking equity position. Equity financing is normally used by unestablished businesses or can say small start-ups that are unable to secure business loans from financial institutions because of insufficient cash flow, lack of security, or a very extraordinary outline.

Who controls the risky start-ups

Mostly firms acquire mainstream voting rights by having the maximum shares with extraordinary polling rights in exchange for providing funding,Investments in venture capitalist are well organized that if the circumstance for the selling of shares of the company arises, the financiers have primary privileges in terms of rewards. To safeguard their investments, venture capitalist firms take an active role in the businesses in which they make investment. They appoint a board member in the company and involve themselves in all key management.decisions, including exercising veto rights over such issues as the sale of the company, additional financing, and major business expenditures. The venture capitalist is usually in the form of partnership wherein the partners take the mutual decision in making investment decisions. Once the company has been targeted for making the investments, they pool their funds in the exchange of the sizeable equity stake. This venture capitalist will buy the stake in these firms, nurture the firm growth and earn good return once successful.

Process of the venture capital

Any business seeking for venture capital is to submit a business plan to a venture capital firm. If interested in the proposal then the venture capitalist firm must perform due diligence, which includes a thorough investigation of the company's business model, products, and management. It is necessary to research the background as these investor invest in very large amount. After completion of due diligence, the financier will initiate an investment of wealth in exchange for equity in the company. The investor actively participates the in the funded company and also advices and monitors its progress before discharging further funds.

Essentials of venture capital

The venture capital financing is different from traditional financing. In traditional, financiers invest in proven technologies and low risk ventures, whereas venture capitalists invest in new technologies and high risk ventures. Nearly the key distinctive types of venture capital may be concise as follows:


  • High Risk: Investor delivers investment to high risk high reward ventures. These risks involve technology risk, market risk, liquidity risk or any other type of risk.
  • Longstanding Investment: Venture funding is a continuing investment of funds. Funds are provided for 5 to 10 years. Venture capital is not repayable on demand. The investor has to wait for a long time to earn profit.
  • Management Participation: Venture capitalists participate in the management affairs and give his advice from time to time along with the investment in the equity shareholding of the entrepreneurs company.
  • Professional Entrepreneurs:Usually, the venture capital is provided to those entrepreneurs who qualified technically and skilfully but lack adequate funds to start a new venture.
  • Latest Technology: Entrepreneur who attempts innovative technology which may produce uncertain results is the main seekers of venture capitalists.

DOCUMENTS REQUIRED FOR REGISTRATION FOR VENTURE CAPITAL FUND

  • Moa, Aoa, Certificate of incorporation
  • Investor rights agreement, Voting agreement
  • Updated statement of accounts of term loan and cash credit
  • Affidavit that the company has not availed the venture capital in the past
  • Details of unsecured loan, if any raised by the company,
  • Immediately preceding bank’s inspection report
  • Bank’s confirmation that they will not release primary & collateral security without venture capitalist consent

PROCEDURE TO APPLY

New start up can approach a venture capital for funding as a company.

There are four phases in which the procedure is summarise and have to follow any start-up who wants to take venture capital funding.


Idea generation and proposal of the business project

The initial step in approaching a venture capitalist is to submit a business plan. The plan should comprise the points like

  • There should be an executive summary of the business proposal
  • Description of the opportunity and the market potential and size
  • Review on the existing and expected scenario
  • Thorough monetary estimates
  • Particulars of the company management
  • Before deciding whether to fund the project or not, detailed analysis is required on submitted plan
Introductory meeting

Once the primary study is done by the venture capital. If they find the project as per their preferences, there is discussion on the project in detail. After the meeting the Venture Capital finally decides whether or not to move forward to the due diligence stage of the process.


Thoroughly investigation

This due diligence fluctuates from business to business and depends upon the nature of the business application. This process involves solving of queries related to customer references, management interviews, evaluations of product and business strategy.


Term sheets and funding

If the due diligence phase is satisfactory, the Venture Capital offers a term sheet, a non obligatory certificate explaining the simple terms and circumstances of the investment agreement. This certificate must approved by both the parties and also negotiable, after which on completion of legal documents and legal due diligence, funds are made available to the applicant.


Registration process regarding how to form a Venture Capital Fund in India (Setting up a Venture Capital Fund In India)

Step 1: Check the eligibility criteria

The initial step in forming a venture capital fund is to incorporate the entity with the main objective is to carry the activity of funding. Company, trust, partnership/LLP or others are eligible to register a venture capital fund and make application to SEBI board for the registration. SEBI Board may not grant the certificate to the applicant until he checks the registration document. Document must permit to carry the activity of ‘Venture Capital Fund’.

To become eligible for venture capital fund, one has to comply all the below mentioned provisions.

Compliance for type of entity
  • Trust: Trust deed has been duly registered under the provisions of the registration act.
  • LLP: LLP Agreement duly filed with the registrar under the provisions of limited liability partnership act 2008.
  • Body Corporate: Memorandum of company is permitted to carry on the activities of Venture Capital Fund (VCF)’.

Step 2: Apply to SEBI Apply to SEBI in Form A as provided in the SEBI (Venture Capital Funds) Regulations, 1996 along with all the necessary documents. Form A should be appropriately filled, numbered, duly signed and stamped. Submit application fees of Rs.1 lakh by way of bank draft in favour. Online application will be file to SEBI as per the guidelines as prescribed.

Step 3: Check application status Applicant must fulfil the requirements as specified in the regulations. If the Board is pleased with the requirements then applicant is eligible for the grant of certificate, it shall send intimation to the applicant.

Compliance for applicant or sponsor or manager
  • These person are fit and proper persons based on the norms stated in Schedule II of SEBI Regulations.
  • VCF has necessary infrastructure and manpower to effectively discharge its activities.
  • VCF clearly described at the time of registration the investment objective, the targeted investors, proposed corpus, investment style or strategy and proposed tenure of the fund.
  • Its director, employee or prime officer must not convicted of any offence anytime involving moral turpitude.
  • Its director employee or prime officer must not is not indulge in any lawsuit connected with the share bazaar which may have an adversarial attitude on the business of the applicant.

Step 4: Pay registration fee On receipt of intimation from SEBI, applicant shall pay registration fee of 10 lakh specified in Part A of the Second Schedule in the manner specified in Part B thereof in favour of The Securities and Exchange Board of India.

Step 5: Issue registration certificate by SEBI After acceptance of registration fees, SEBI will grant the applicant the certificate of registration as a ‘Venture Capital Fund’ in Form B.

Step 6: Complete the compliance after registration Check SEBI website regularly for updation issued with respect to VCF activity. Inform to SEBI about the material change in the particulars already provided to SEBI within a reasonable period of time.

FOR FARMERS, THE VENTURE CAPITAL ASSISTANCE SCHEME

Venture capital assistance is financial support in the form of an interest free loan provided by SFAC (Small Farmers’ Agri-Business Consortium), a society encouraged by division of farming, collaboration and farmers welfare, ministry of farming, Government of India to be suitable schemes to meet shortage in the wealth requirement for execution of the project.

The purpose of providing the capital assistance is as follows:

  • To assistance in supporting agripreneurs to make reserves in setting up agroindustry plans through monetary contribution
  • To arrange for the interest free credit to the start-up.

Who can apply for venture capital?

Following are the person who can apply for funding

  • Farmers
  • Producer assemblies
  • Firms partnership or proprietary
  • Self-help groups
  • Company/ Agripreneurs
  • Units in agriexport regions

Document

1. Request letter of promoter addressed to the chief management SFAC(Small Farmers’ Agri-Business Consortium)

2. Sanction note of Approving authority addressed to recommending division

3. Bank’s permitted Evaluation note bearing sign of authorizing authority with terms of sanction of term loan

4. Updated statement of accounts of term loan and cash credit

5. Equity certificate required to be submitted if sanctioned

A) CA certificate having UDIN in case of partnership or proprietorship firms

B) PAS-3 having allotment of equity details, in case of companies

C) SH-7 and other documents pertaining to roc/ annual filling filed with roc for company

6. Farmer’s list/backward linkage duly supported by agreement

7. Affidavit that the company has not availed the venture capital in the past

8. Details of unsecured loan, if any raised by the company, ca certificate to be enclosed bearing the detailed description

9. Immediately preceding bank’s inspection report

10. Bank’s confirmation that they will not release primary & collateral security without venture capitalist consent

11. Justification for margin on working capital taken in the project cost


Procedure for registration

One can only apply online; offline application forms will not be accepted. Application form for seeking venture capital assistance is available online at start up website via link.

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FAQ's

A guide to venture capitalist and the start-ups

  • What are the advantages and disadvantages of venture capital?

    Advantages:

    They bring wealth and expertise to the company

    Large sum of equity finance can be received by small start up

    The business don’t have any requirement to recompense the fund

    Investor provides valuable information, practical support to create a business fruitful along with the capital,

    Disadvantages:

    Investors become owners by taking shares, the independence and control of the originator is vanished

    Process is very extended and composite

    Financing is very indefinite form

    Benefit from such financing can be realized in long run only

  • What are the factors to be considered by the investor to invest in start-ups?

    There are several factors to be considered by the venture capitalist. Different investor uses different criteria to judge an investment and the same will vary on the stage of investment in which the start-up is indulged and so on.

    Project analysis of the start-up

    Sales forecast, targeted audience are the other factors

    Management and its team in the affairs of the start-ups

  • What are the investor’s income sources from investing in start-ups?

    Payments is been made to the venture capital fund manager in the form of management fees and interest. There is an agreement wherein the profit sharing clause has been defined with the percentage of profit sharing ratio between the start-up and the investing partners.

  • What is the position of the venture capitalist?

    After investment has been made, the venture capital has been viewed as a partner. The venture capitalist takes the management position which may in the form of seat in the board of directors or contribution to the management decision.

  • What is a venture in business?

    The business venture is a new business that is formed with a plan and expectation that financial gain will follow. After determination of plan, small-business person develop and market the new service or product through which he can start a business venture.

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