What is Venture Capital?
Venture Capital is the capital provided by firms of professionals who invest alongside management in young,
rapidly growing companies have the potential for high growth. Thus a Venture Capitalist (VC) may provide the
seed capital for unproven ideas, products or technology-oriented firms. The VC may also invest in a firm unable
to raise finance through conventional means.

How is it different from other forms of finance?
VCs finance innovative, unproven ideas with high growth potential, making it high risk-high return game.
Besides, VCs provide value-added services and managerial support to realize the venture’s net potential.

What are the types of VCs?
Generally there are three types of organised VC funds: VC funds set up by angel investors i.e. high net worth
individual investors; VC subsidiaries of corporations and private venture capital firms.

VC subsidiaries are established by major companies and financial institutions. The primary institutional source
of VC is a VC firm. VCs take higher risks by investing in an early-stage company with little history, and expect
a higher return for their high-risk investment.

Which areas do venture funds prefer to invest in?
Different VC groups prefer different types of investments. Some specialise in seed capital and early expansion
while others focus on exit financing. Biotechnology, communications, electronic components and software are
attracting great attention from VCs. In India, the software sector has been the darling of VCs.

How hard is it to raise institutional venture capital?
Getting investment from an institutional VC fund is extremely difficult. In the US only 5% business plans are
viable and only 3% result in successful financing. In fact, the odds could be as low as one in 100. More than
half of the proposals to VCs are usually rejected after a 20-30 minute scanning, and 25 % are discarded after a
lengthier review. The remaining 15 % get a detailed review, but at least 10 % of these are dismissed due to
irreconcilable flaws. Another consideration in institutional VC is the amount being sought. Entrepreneurs should
emphasize their managerial capability, market attractiveness and cashout potential.

What type of returns are expected by venture capitalists?
In a start-up, institutional VCs look for average returns of at least 40 - 50 % for start-up funding. Second and
later stage funding usually requires at least a 20- 40 % return compounded per annum. Most firms require
large equity in exchange for start-up financing.

In calculating returns, many VCs end up owning substantial company stock, which sometimes gives them
equity control. The professional investor will look at company value before investment and the investor's
financial contribution when determining how much equity is necessary for the fund to get adequate return on
investment. This issue is often the largest financing hurdle for VCs and owners to work through.

What are incubators?
Incubators are non-profit entities providing advisory and certain support infrastructure including finance and
complementary resources. Incubators are mostly promoted by government or professional organizations
seeking to develop small enterprises in a particular area. Sometimes VCs also have their own incubators and
companies also set up in-house incubators. Incubators support the entrepreneur in the pre-VC stage, i.e.,
when he wants to develop the idea to a viable proposition which could be financed by a VC.

What do venture capital firms look for?
A strong management team — with adequate skills and motivation that creates a balance between members in
marketing, finance, and operations, R& D, general and personnel management. A viable idea — establish and
know the market for the product/ service, why customers will buy it, the ultimate users, the competition, and
the projected industry growth. Business plan: the plan should describe the nature of business, the
qualifications of the management team, performance history and business projections.