Venture Capital Financing: Ever you thought about How a New Startup can Raise Funds from Venture Capitalists? and What is Venture Capital Financing? If not, then don’t worry, here I will clear all your questions on Venture Capital Financing.
Venture Capital Financing
Venture capital financing refers to the financing of new high-risk ventures promoted by qualified entrepreneurs who lack the experience and funds to shape their ideas.
In venture capital financing, venture capitalists invest to purchase equity or debt securities from inexperienced entrepreneurs who are undertaking highly risky ventures with the potential for future success.
In Simple Terms, Investor Invest their money into the New Startup and if it succeeds in the future then they will take part of the ownership of that new startup.
Venture capital Financing is basically equity finance in new companies and Startups.
It is a long-term investment by Venture Capitalists in growth-oriented small/medium companies.
Apart from providing funding, the investor also provides support in the form of sales strategy, business networking, and management skills, which enable the growth of the entrepreneur.
Methods of Venture Capital Financing
- Equity Financing
- Conditional Loans
- Income Note
- Participatory Debenture
1. Equity Financing
Venture capital finance is generally provided through equity share capital. The equity contribution of the venture capital firm does not exceed 49% of the total equity capital of the venture capital undertakings. so effective control and ownership remain with the entrepreneur.
2. Conditional Loans
Conditional loans are repayable in the form of royalties after the venture is able to generate sales. No interest is paid on such loans.
Venture capital financiers in India charge between 2 and 15 percent royalty, the actual rate depends on the venture’s gestation period, cash flow pattern, risk, and other factors of the enterprise.
Some venture capital financiers offer the enterprise the option of paying a high-interest rate (which can exceed 20 percent) in lieu of royalties on sales once it becomes commercially viable.
3. Income Note
It is a hybrid security that combines the features of both conventional loans and conditional loans. The entrepreneur has to pay both interest and royalty on sales but at a significantly lower rate.
IDBI’s VCF funds 80-87% of project costs for the commercial use of indigenous technologies.
4. Participatory Debenture
Such security carries a charge in three stages in the start-up stage, no interest is charged, and in the later stages, a lower rate of interest is charged till a certain level of performance, after which, a higher rate of interest is required.
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