VC or Venture Capital funds are raised by venture capital firms. These firms comprise professional investors who collects majority of their funds from large investors and institutions.
In a VC firm, professional investors are in charge of managing funds and works with start-up companies to ensure that the start-up business is growing in the right and profitable way.
Those who invest money in venture capital firms are called limited partners.
A start-ups or new company which is not in a position to raise capital through IPO generally takes fund from venture capital firms. These VC firms invest money with perceived long term growth potential.
Venture capital fund is invested in exchange of equity shares. In some cases, one of the VC’s representatives sits on the start-up company’s management to have control over the decisions of the company.
The main reason why entrepreneurs turn to venture capital firm for money because their own start-up business is risky and unproven on which banks and financial institutions will not be taking interest to invest.
To get funds, founders of the company prepare business plans and present it to the venture capitalists.
The plan generally covers what the company wants to do and how they will be growing in future. If VCs found it to be ok then the first round of money called seed funding are done. Based on its growth, Start-up Company receives funding in stages, generally in 3-4 stages before IPO or getting acquired.
Before allotting shares, VC should know the present valuation of the company. For that, both the start-up company and VC first have to agree on how much the company worth. Based on the valuation, VC firm invests their money in return of shares.
At each stage of investment, valuation is done to find out the exact value of the start-up company for fresh investments.
At the end of the term, which is generally 5 to 7 years, venture capitalists either sell their shares back to the owners or through IPO or to another VC.
Also Read: What is Seed Funding For Startups
In India, Venture Capital Firms are regulated by SEBI (Venture Capital Fund) Regulations, 1996. VC funds can be set up by a company or a trust after a certificate of registration is granted by SEBI on an application made to it.
SEBI regulations allow venture capital fund to invest in equity or equity related instruments of unlisted companies. These venture capital funds can raise funds from Indian, NRI and foreign investors. However, money so collected from investors can not be less than Rs 5 lakhs.
Each scheme launched or fund set up by a venture capital fund shall have firm commitment from the investors for contribution of an amount of at least rupees five Crores before the start of operations by the venture capital fund.
A venture capital fund may receive monies for investment in the venture capital fund only through private placement of its units. No Venture Capital fund shall issue any document or advertisement inviting offers from the public for the subscription or purchase of any of its units.
In India, Flipkart, Snapdeals, Practo, TaxiForSure and Myntra are among companies to receive venture capital funds during their start-up periods.
Companies like Apple, Compaq, Microsoft and Google are also invested by venture capital firms at their early stage.