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November 14, 2013

Venture Capital Companies - Modes of Financing

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Friends this is the third lesson in the Venture Capital Series. We have already discussed about Introduction of Venture Capital Companies (Read that Here) and SEBI Guidelines (Read that Here).  Read those posts before reading this for better understanding. Now lets start our present topic. The Venture Capitalists provide funds for long-term in the following ways.
  1. Equity : Most of venture capital funds provide equity by financing 49 per cent of the total equity. Since the contribution is 49 per cent, management control remains with the entrepreneur. In the early period cash flows are uncertain. Hence, equity financing is the safest and desirable mode of financing. 
  2. Conditional Loan : For the venture capitalist equity participation is less preferable as it is an unsecured method of financing. A conditional loan, on the other hand, is preferable as the loan involves either no interest or a coupon payment at nominal rate. Further, royalty at an agreed rate is payable to the lender on sales turnover.
  3. Convertible Loans : Convertible loans are subordinate to all other loans which may be converted into equity if interest payments are due over the period. 
  • Venture capital companies are expected to provide the following capital to the companies.
    • Seed Capital
    • Start-Up finance
    • Beginners Finance and 
    • Arrangement Finance
Venture capital fund has played a positive role in United Kingdom. In India already it started gaining momentum. The Credit Capital Finance Corporation Ltd., has promoted venture capital mainly to revive sick units. In the public sector sate and central governments, nationalized banks and development financial institutions are providing venture capital. In private sector, wealthy individuals, either individually or organized into groups or finance companies provide venture capital. Normally, the venture capital companies takes part in the ownership of start up company.
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