We have all heard of the word Venture Capital some time or the other. Usually, people in the startup arena are highly familiar with the term ‘Venture Capital’. However, Venture Capital was first introduced during World War II in the United States of America.
Venture Capital in India – Introduction
Many wealthy families such as the Rockefellers, Vanderbilts, and Warburgs were famous investors in various emerging companies. George Doriot who is also known as the father of venture capitalism was the founder of the first-ever Venture Capital firm also known as the American Research and Development Corporation (ARDC). ARDC is well-known for funding successful firms such as Holland Venture, Greylock Partners, and Morgan.
When the liberalization movement gained momentum in 1986, Venture Capital was first introduced in India. The Indian government released some formal guidelines for venture capital investors by 1988. However, venture capital in India was restricted to large financial institutions in the early years.
Later on, Silicon Valley was booming with startups that had Indian founders and the world knew that India had talent that could particularly contribute towards economic growth and development. During the government budget of 2014-15, the former finance minister, the late Arun Jaitley had announced a start-up fund of around INR 10,000 Crores encouraging the young generation to introduce new businesses in the country. Since then start-ups have gained momentum as venture capitalists are aggressively investing in the booming companies with growth potential.
What is Venture Capital in India?
Suppose a founder of a start-up has a brilliant idea that could potentially transform the way businesses do digital payments. But for any idea to take shape you require two things: A] Action & B] Capital. Both of these go hand in hand.
Without action and lots of money, your business will never come to life and without money the only action you will burn out and eventually give up. So what is the capital that is required to start up any form of business? That is known as Venture Capital. In simple terms, Venture Capital in India is investing in a new business or a start-up that requires the capital to grow in its initial stage.
Venture Capital in India is usually an investment made by wealthy individuals or High Net Worth Individuals (HNIs). Venture Capital investment can also be pooled together by certain financial firms that are known as the Venture Capital Fund. Venture Capital in India is usually done through ‘Venture Capital Fund’ which is an investment fund that manages your money when you invest in start-ups or small-medium enterprises.
Venture Capital in India is regulated by the Securities and Exchange Board of India (SEBI) consisting of laws established under the SEBI (Venture Capital Funds) Regulations 1996. These laws are mainly established to regulate the institutions that run the Venture Capital Funds and consist of rules detailing from the registration of the fund to actions that have to be taken in case of default by the institutions.
Types Venture Capital in India
Venture Capital in India has gained a lot of significance in recent years. Every start-up requires funding when they reach the growth stage and need extra capital to scale up their operations. Venture Capital in India has started launching their own Venture Capital Funds which are registered with the fund houses or financial institutions that manage the investors’ money on their behalf.
There are mainly three types of Venture Capital financing which are done in the market:
- Early Stage Financing
Early-stage financing is done for the start-ups which are at the beginning stage of their operations. Early-stage financing is further divided into three sub-categories:
- Seed Financing: It is a small sum of capital given to the founder of the start-up which can help the business qualify for a ‘start-up loan’.
- Start-up Financing: The start-up receives this type of financing that can help them develop their products and services.
- First Stage Financing: This kind of financing will help the business to commence its operational activities.
- Expansion Financing
After the early-stage business has commenced in full swing, the founders will require expansion to move into the second stage. Expansion financing is further divided into two sub-categories:
- Second & Third Stage Financing: Once a business has started its operations, it will need some funds to expand those operations which can help it sustain in the longer run. Second and Third Stage Financing will provide the business with additional capital to expand their business.
- Bridge Financing: Bridge Financing is offered to those companies that require monetary support to fulfill their plans of Initial Public Offering (IPO) by getting listed on the stock exchange.
- Acquisition/Buyout Financing
Acquisition financing is required by those who won’t venture capital in India to acquire other companies for expansion or to strengthen their operations. Buyout Financing on the other hand is a sort of leverage that is required when the management wishes to acquire a product from the other company.
Features of Venture Capital in India
The features of the Venture Capital are listed below:
- Risky Business:
Investing in a venture capital fund can be highly risky. Not every early-stage start-ups are successful in terms of their idea or operations. As a venture capitalist, you face some losses or even in the worst-case scenario lose your money. Not every start-up could be the next Facebook and as a result, you should be very careful while making your investments.
- Long-term Investment Horizon:
Start-ups take more time to scale up their operations than other businesses. As a result, the venture capitalist has to invest his money from a longer-term perspective. If the business performs well as a private venture then the firm can get listed on the stock exchange at attractive valuations. Venture Fund investors can easily exit their stake by offering it for sale in the public offer.
- Business Participation:
Other than providing funds the Venture Capital in India Investor also participates in the management of the start-up. Some of the investors may directly participate in the early-stage business or may appoint someone to overlook the operations on behalf. Venture Capitalists often have experience in terms of mentoring various start-ups which can help them while managing early-stage businesses.
- Pre-defined Exit:
Even before entering into an investment, the venture capitalist knows when they will exit from the business. The venture capitalist in India may exit the business once the firm goes public or via buyback programs. At the end of the day, venture capitalists are more interested in the number of capital gains they can acquire on their investment. Hence, many of the venture capitalists mark their early exit from the business upon its success.
Top 10 Active Venture Capital Firms in India
The following are the top 10 active Venture Capital firms in India:
1. Helion Venture Partners
Helion Venture Partners came to life in 2006 and has been an India-focused Venture Capital Fund with over $605 million assets under management. The major focus of the investment is on companies that specialize in outsourcing, the internet, technological products, retail products, healthcare, etc. Helion follows an investment structure whereby they invest approximately $2 Million to $10 Million in each of the companies whose revenues are less than $10 Million. Some of the start-ups funded by Helion are MakemyTrip, NetAmbit, TAXI For Sure, etc.
2. Accel Partners
Accel Partner is an American Venture Capital firm that was established in the year 1983 and has a worldwide presence across different countries like India, China, and Great Britain. Accel is a well-known venture capital firm for funding various internet-based and cloud-based start-ups. Accel follows an investment structure whereby they invest approximately $0.5 Million to $50 Million in its portfolio companies. Some of the start-ups funded by Accel are Flipkart, Book My Show, Myntra, etc.
3. Blume Ventures
Blume Ventures was founded in 2011 with a mission to provide financial aid to start-ups in the early stage. Blume Ventures is an early-stage venture capital fund that is popular for capital provision as well as mentorship programs that help the business in the early stage. Blume follows an investment structure whereby they invest approximately $0.05 Million to $0.3 Million in seed companies and follow-up investments ranging from $0.5 Million to $1.5 Million. Some of the start-ups funded by Blume are Audio Compass, Carbon Clean Solutions, Printo, etc.
4. Sequoia Capital India
Sequoia Capital India was founded in 2000 by specializing their form of investment in startup seed, expansion, and growth stages of the company. The fund is popular for investing in the areas of business that focus on consumers, technology, healthcare, and financial services. Sequoia Capital follows an investment structure whereby they invest approximately $100,000 Million to $1 Million in the seed stage, approximately $1 Million to $10 Million in the early stage, and approximately $10 Million to $100 Million in growth-stage companies. Some of the start-ups funded by Sequoia are Just Dial, Practo, iYogi, etc.
5. Nexus Venture Partners
Nexus Venture Partners was founded in 2006 and is a venture capital firm that specializes in its investments in early-stage businesses spread across the USA and India. The firm is well-known for investing in technology-based start-ups that specialize in Cloud, Big Data Analytics, Security along other areas of Energy, Business, and Consumer businesses. Nexus Venture follows an investment structure whereby they invest approximately $0.5 Million to $10 Million in the early growth stage and also invest approximately $0.5 Million in the seed stage. Some of the start-ups funded by Sequoia are Snapdeal, ScaleArc, Delhivery, etc.
6. Kalaari Capital
Founded in 2006, this is one of the active venture capital firms in 2021. Their primary investment portfolio has more tech startups and businesses in the seed or early stage. Kalaari Capital, apart from providing funds to these startups, also assists the young entrepreneurs by providing an experienced and reliable advisory board. They have invested in popular startups such as UrbanLadder, Instamojo, ScoopWhoop etc.
7. Tiger Global Management
One of the top venture funding firms, Tiger Global Management has provided funds globally to startups in diverse domains. Through 7 designated funds, they have invested in more than 442 companies. Incepted in 2001, Tiger Global Management is also one of the oldest venture capital funding firms to exist that is still active. Their key investing sectors are financial, consumer technology, software and internet. Some of the famous companies in their portfolio are Urban Company, Ninjacart, Razorpay etc.
8. India Angel Network
This angel network brings together CEOs and successful entrepreneurs from various countries in the world. The network has more than 470 investors belonging to more than 11 countries, including India. They are active in 2021 and India Angel Network has invested in Wow! Momo, Little Black Book etc. Their key investing sectors are very varied, and they value exciting and unique startups with great potential.
9. Omidyar Network India
This investment firm focuses on startups and businesses that provide social impact. Therefore, many companies in their portfolio are those that aim to provide some benefits and more inclusion in the society. It has invested in many nonprofits that focus particularly on education, financial services, emerging tech and more. Founded in 2004, the Omidyar Network India is one of the leading investment firms in India with more than $300 million investment in the Indian ecosystem. Therefore their key sectors are varied. Some of the companies they have invested in are WhiteHat Education, ZestMoney etc.
10. SAIF Partners
Based in Asia, the SAIF Partners firm has around $4 billion in capital and they have invested in multiple sectors and industries. They have invested in famous startups such as Swiggy, Aye Finance, Cleartax, Capital Float etc. The investment company has offices in China, Hong Kong and India. They have been active in investing in EdTech, entertainment, direct-to-consumer businesses, healthtech etc.
Advantages & Disadvantages of Venture Capital in India
|Advantages of Venture Capital in India||Disadvantages of Venture Capital in India|
|Expert Mentors||Reduction in Ownership|
|Opportunity for Expansion||Early Exit|
|Helps with Networking||Long-term Process|
|Zero Monthly Payments||Due Diligence Requirement|
|Additional Fund Raise||Losing Your Business|
Advantages of Venture Capital
- Expert Mentors
One of the most amazing things about Venture Capital in India is that people who invest in your business will also help you in managing your business. Venture Capitalists aren’t novices and have years of experience investing in various start-ups that can be helpful in the longer run. Their expert mentorship can help you solve problems at a faster pace.
- Opportunity for Expansion
Venture Capital provides you with the funds to develop the products or get started with the operations. You can easily use the money to allocate resources or even expand your business. Any of the banks need you to fulfill their overall requirements to apply for the loan and require collateral in case of failure of repayment. But venture capitalists are already taking a risk all by themselves because they believe that the firm will be successful in the long run.
- Helps with Networking
Someone who is running the business remains 100% focused on its operations which determine the firm’s success in the long run. As such they may not be able to have enough time to network with others. However, Venture Capitalists in India are known for having a strong network that helps the firm in forging new partnerships, getting new clients, and hiring efficient employees.
- Zero Monthly Payments
Venture Capitalists in India are known for investing in businesses in exchange for Equity and capital gains. In the case of a loan, you may need to make frequent payments on a monthly basis which could result in a cash outflow. Sometimes your business requires additional revenue to reinvest in the resources. Hence, venture capital is the most favourable form of investing for the early stage of business.
- Additional Fund Raise
Venture capitalists always ensure that you can raise additional funds at higher valuations that could benefit your firm in the longer run. Not only do venture capital firms introduce you to other firms who can assist you with additional capital raise but also ensure that they reserve their right to contribute additional funds in the future which can accelerate the growth of your start-up.
Disadvantages of Venture Capital
- Reduction in Ownership
While trying to raise additional capital for your business, the owners may have to dilute their stake in order to issue fresh shares to the investors. Beyond a point, the owners may lose their controlling stake in the firm thereby bypassing their decision-making power as well.
- Early Exit
Venture Capitalists invest to earn capital gains from their investment. Sometimes the Venture Capital in Indian firms may plan for an early exit from the business. If a business takes a long time to grow it may take some time for the investors to liquidate their positions.
- Long-term Process
Acquiring a venture capital investor is a long-term procedure that may require you to pitch your ideas, attend individual meetings to discuss the business. It may take the Venture Capital in Indian firms more time to invest in your business and it is a time-consuming process.
- Due Diligence Requirement
Before making any investment decisions, venture capital firms in India conduct thorough background checks to ensure the safety of their investments. It is the most essential procedure which can help the start-ups to address any problems in the development stage and resolve them quickly.
- Losing Your Business
Any founder who is underperforming can potentially lose their business. If founders have a careless attitude towards maximizing the shareholder’s wealth, running a profitable business, or using funds for personal outcomes then they can be kicked out of the board.
With the rising start-up culture, Venture Capital has become very popular especially in a country like India. People have been consequently encouraged to a start-up that can not only provide employment but rapid economic growth. Venture Capital has gained traction in recent years and will continue with its streak with the launch of new start-ups.
Frequently Asked Questions
Who regulates venture capital in India?
Venture Capital in Indian firms is regulated by SEBI under the regulation called SEBI (Venture Capital Funds) Regulations 1996.
How to get venture capital in India?
You can approach any of the venture capital in Indian firms that will assess your business before making an investment.
How to invest in Venture Capital in India?
There are venture capital funds in India set up by Institutions that will invest your money in the start-ups on your behalf.
How to impress a VC with a start-up idea?
First, check their portfolio to know what they invest more in. Participate in mock pitch sessions, talk to other fundraisers and learn the art of pitching and elevating your idea.
Are venture capital funds worth it?
It depends on your business idea and how you want to scale it. Often, the funds from a VC help a company extend and enhance its business operations.
What is the difference between private equity and venture capital?
Venture capital or VC is a subclass of private equity. Some of the other asset classes that private equity include are buyouts, venture capital, and mezzanine investment.
What is an ‘angel’ investor?
It is typically a high-net worth individual who provides direct investment to exciting startups in return for shares in them.