Challenges Ahead for Venture Capital Financing in India

think Capital is money provided by professionals who grade and manage young rapidly growing companies that have the potential to pullulate into large economic contributors. According to SEBI regulations, venture bang-up fund factor a fund established in the form of a order or trust, which raises money through loans, donations, issue of securities or units and marques or proposes, to make investments in accordance with these regulations. The funds so collected be purchasable for investment in potentially highly profitable enterprises at a high jeopardize of loss. A Venture Capitalist is an individual or a community who provides. Investment Capital, counselling Expertise, Networking & grocery storeing support trance funding and running highly modern & prospective areas of products as tumesce as services.Thus, the investments made by Venture Capitalists in general involves financial backing newfangled and rapidly growing companies. Purchasing faithfulness securiti es. Taking high risk in expectation of high rewards. Having a long frame of judgment of conviction period, generally of more than 5 6 years. Actively working with the gilds watchfulness to devise strategies pertaining to the overall functioning of the project. Networking and securities industrying of the product /service creation offered.In an attempt to bring together highly influential Indians victuals across the United States, a cyberspaceing society named IND US Entrepreneurs or connection was set up in 1992. The aim was to get the Indian friendship together and to foster entrepreneurs for wealth creation. A core free radical of 10 15 individuals worked hard to establish the nerve. The group (TiE) has now over 600 members with 20 offices spread across the United States. Some of the famous personalities belonging to this group are Vinod Dham (father of the Pentium Chip), Prabhu Goel, K.B. Chandrashekhar (Head of $ 200 mn. Exodus Communications, a fibre optic networ k carrying 30% of all Internet content traffic hosting websites like Yahoo, Hotmail and Amazon.)Venture Capital backing It generally involves start up financing to supporter technically sound, globally competitive and potential projects to compete in the internationalist markets with the high quality and reasonable greet aspects. The growth of South eastern United States Asian economies especially Hongkong, Singapore, South Korea, Malaysia along with India has been due to the large family of Venture Capital funds from domestic / offshore arenas.Venture Capitalists occupy their investment funds from a pool of money raised from earth and private investors. These funds are deployed generally as equity capital (ordinary and preference shares) and some times as subordinated debt which is a semi secured investment in the company (through debenture) ranking below the secured lenders that often requires periodic repayment. Today, a VC deal can involve common equity, convertible pre ferred equity and subordinated debt in incompatible proportions.The Venture Capital funding varies across the different full stops of growth of a firm. The various stages are 1. Pre seed portray Here, a relatively small amount of capital is provided to an entrepreneur to conceive and market a potential idea having good future prospects. The funded work besides involves product development to some extent.2. Seed show Financing is provided to discern product development and commence initial marketing formalities.3. Early demo / First Stage Finance is provided to companies to initiate commercial manufacturing and gross revenue.4. Second Stage In the Second Stage of Financing working capital is provided for the expanding upon of the company in terms of growing accounts receivable and inventory.5. Third Stage Funds provided for major expansion of a company having increasing sales volume. This stage is met when the firm crosses the break even point.6. Bridge / Mezzanine Finan cing or Later Stage Financing Bridge / Mezzanine Financing or Later Stage Financing is financing a company just before its IPO (Initial Public Offer). Often, bridge finance is integrated so that it can be repaid, from the proceeds of a public offering. at that place are basically four key elements in financing of ventures which are studied in depth by the venture capitalists. These are 1. Management The strength, expertise & unity of the key people on the board brings significant credibility to the company. The members are to be mature, experienced possessing working knowledge of blood and capable of taking potentially high risks.2. Potential for Capital kick upstairs An above average rate of drive out of about 30 40% is required by venture capitalists. The rate of return also depends upon the stage of the business cycle where funds are being deployed. Earlier the stage, higher is the risk and hence the return.3. Realistic Financial Requirement and Projections The venture capitalist requires a realistic view about the present health of the organisation as well as future projections regarding scope, nature and performance of the company in terms of scale of operations, operating profit and further cost related to product development through Research & Development.4. Owners Financial wager The financial resources owned & committed by the entrepreneur/ owner in the business including the funds invested by family, friends and relatives, play a very definitive role in increasing the viability of the business. It is an important avenue where the venture capitalist keeps an open eye.Problems of Venture Capital Financing VCF is in its nascent stages in India. The emerging scenario of global competitiveness has put an immense pressure on the industrial sector to improve the quality level with minimisation of cost of products by making use of latest technological skills. The implication is to reign adequate financing along with the necessary hi-tech equip ments to produce an innovative product which can succeed and grow in the present market condition. Unfortunately, our country lacks on both fronts.The necessary capital can be obtained from the venture capital firms who expect an above average rate of return on the investment. The financing firms expect a sound, experienced, mature and capable charge team of the company being financed. Since the innovative project involves a higher risk, there is an expectation of higher returns from the project. The payback period is also generally high (5 7 years).