ISHA JAIN

2018BBRM016

1. What are Venture Capital Funds?

Venture capital funds are pooled investment funds that manage the money of
investors who seek private equity stakes in start-ups and small- to medium-sized
enterprises with strong growth potential. These investments are generally
characterized as very high-risk/high-return opportunities.

In the past, venture capital (VC) investments were only accessible to

professional venture capitalists, but now accredited investors have a greater
ability to take part in venture capital investments. Still, VC funds remain largely
out of reach to ordinary investors.

KEY TAKEAWAYS

 Venture capital funds manage pooled investments in high-growth

opportunities in start-ups and other early-stage firms.
 Hedge funds target high-growth firms that are also quite risky. As a
result, these are only available to sophisticated investors that can handle
losses, along with illiquidity and long investment horizons
 Venture capital funds are used as seed money or "venture capital" by new
firms seeking accelerated growth, often in high-tech or emerging
industries.
 Investors in a VC fund will earn a return when a portfolio company exits,
either through an IPO, merger, or acquisition.

Understanding Venture Capital Funds

Venture capital (VC) is a type of equity financing that gives entrepreneurial or
other small companies the ability to raise funding before they have begun
operations or started earning revenues or profits. Venture capital funds are
private equity investment vehicles that seek to invest in firms that have high-
risk/high-return profiles, based on a company's size, assets, and stage of product
development.

Venture capital funds differ fundamentally from mutual funds and hedge funds
in that they focus on a very specific type of early-stage investment. All firms
that receive venture capital investments have high-growth potential, are risky,
and have a long investment horizon. Venture capital funds take a more active
role in their investments by providing guidance and often holding a board seat.
VC funds therefore play an active and hands-on role in the management and
operations of the companies in their portfolio.

Venture capital funds have portfolio returns that tend to resemble

a barbell approach to investing. Many of these funds make small bets on a wide
variety of young start-ups, believing that at least one will achieve high growth
and reward the fund with a comparatively large pay-out at the end. This allows
the fund to mitigate the risk that some investments will fold.

2. Different Sources of Finance for Start-ups

One of the toughest challenges for a start-up is evaluating various sources of
finance and raising the money needed to get going. You are the entrepreneur,
and you believe you have a great idea that you can transform into a successful
business. But convincing others of the worth of your idea is no piece of cake. If
you are unable to raise capital finances, you might never be able to see your
idea become a reality.

It is essential to remember that careful planning is key when you wish to raise

finances. You need to:

1. Know exactly how much money is required.

2. Consider the setup costs, the investment needed, working capital, and
growth and development.
3. Evaluate how long you need these investments for and what security you
can offer.

1. Assessing Your Sources of Finance

When you have compiled this information, you can check out the different
sources of finance available for startups and opt for ones that seem suitable for
you.

1. Personal Investment
This one is a given. You have to make some personal investments, which could
include your savings or other assets.

You cannot start a business without putting something of your own into it. In
addition, others will hesitate to give you money if you don’t contribute. By not
investing yourself, you will demonstrate your lack of commitment or even
confidence in the venture.
2. Friends and Family
The second step is to reach out to people in your social circle and ask them
either to invest or to lend you the money.

This process is often referred to as patient capital, which is money that’s repaid
later when the business becomes profitable.

3. Angel Investors
This category refers to retired company executives or wealthy individuals who
make direct investments in start-ups and small firms.

These investors are typically leaders in their respective fields. They contribute
by means of their network of contacts and experience and also provide their
technical and management knowledge.

However, you should know that in exchange for their investments, angel
investors might monitor your start up management practices and might want a
say in your business.

4. Venture Capital
This funding source is ideal for tech-based start-ups that have a high growth
potential in communications, information technology, or biotechnology.

The venture capitalists basically invest in your start up in exchange for equity,
so you have to share ownership with an external party. Venture capitalists also
expect a high return on investment once the business is properly established.

Always look for venture capitalists who have a background in your business’s
industry and can bring relevant knowledge and experience.

5. Business Loans
Business loans are the most common source of funding, not only for start-ups
but also for small and medium-sized businesses.

Banks and other financial institutions offer many types of business loans in
return for regular interest payments. They will need you to have a solid business
plan in place. Your plan should show potential and have numbers to back it up.
Having a good idea is not enough; you need to have evidence to support it. In
some cases, banks might ask you for something as collateral, but every situation
is different. If you don’t offer collateral, they might charge you a higher rate of
interest but this will help you in avoiding bad credit too.

6. Incubators
This term refers to a university, company, or any organization that is willing to
provide you with resources for your start up. These resources could include
office space, laboratories, marketing, consulting, cash, or anything else you
might need.

What do incubators ask for in exchange? They are aware that you are in a
vulnerable position, so they will typically demand equity. The reason why is
they see a lot of potential in your idea and want to profit from it in the future.

7. Grants and Subsidies

Bringing innovations to light is not always easy. As a result, some government
agencies provide support to budding businesses.

Access to this funding allows you to cover different expenses, such as

marketing, research and development, equipment, salaries, and improvement in
productivity.

Technically, governments give grants to start-ups unconditionally and you don’t

have to repay them. But you cannot use the grant money for any other purpose,
or you will be vulnerable to legal action.

Once a government source has provided you with funding and you fulfil the
terms of the program, that agency might offer you additional funding in the
future.

8. Crowd funding
As the name indicates, crowd funding refers to getting funds from a crowd, i.e.,
the general public. Entrepreneurs typically use this option when developing a
product that’s essential to people and not available elsewhere.

There are crowd funding websites that enable members of the public to pool
their funds to help various causes. Every member can contribute as little as $10,
 and the money can go a long way if many people add to it. Use a good crowd
funding platform, and advertise your cause to get more people to contribute.

Start-ups can use any of these sources of finance to launch their operations and
offer quality products and services to people.

2. Different Government schemes regarding

entrepreneurship

To encourage budding entrepreneurs to kick-start innovative businesses that

will eventually create employment opportunities, the government offers
innumerable schemes to make the process easy.
The schemes provide financial assistance to potential individuals and
organisations in the form of subsidies and loans. 
Below are 10 schemes for people aspiring to become entrepreneurs: 

 Atal Incubation Centre (AIC) 

Started by the NITI Aayog in 2016, AIC is an innovative funding scheme to
promote entrepreneurs by covering their capital operational costs. 
The selected start-ups will be granted funding up to Rs 10 crore over a period of
five years. 
Students, researchers or newly formed organisations from fields including
transport, health, energy, education, agriculture, water and sanitation can apply. 
The AICs can be set up either in Public funded institutions or Private sector
funded institutions or in Public-Private Partnership (PPP) mode. 
The candidate will have to provide at least 10,000 sq. ft of space for the
infrastructure such as laboratory and workshop facilities, utilities, support
services, pre-incubation services, networking, mentoring and other facilities
within a period of six months from the date of release of funds for capital and
operational expenditure. 

 NewGEN IEDC
In 2017, the Department of Science & Technology (DST) introduced the New
Generation Innovation and Entrepreneurship Development Centre (NewGen
IEDC) programme. 
The programme is implemented by the Entrepreneurship Development Institute
of India (EDII), Ahmedabad.
It promotes “knowledge-based and technology-driven start-ups” through
mentorship, guidance and support. 
 The NewGen IEDCs are established in academic institutions where students can
work on innovative projects over a period of five years. In its first year, the DST
was successful in establishing 14 NewGen IEDCs. 
A onetime cost of Rs 25 lakh will be granted in phases. 
The institution should be a University/Deemed University or a premier
Institute/College offering Engineering, Technology, Science courses at degree
level or above for at least 5 years. 
They must provide a space of about 5000 square feet for housing the NewGen
IEDC with basic amenities like electricity, water, and telephone and internet
connectivity. 

 MSME Market Development Assistance

Start-up, Micro, Small and Medium Enterprises (MSME) and retailers
registered with Directorate of Industries/District Industries Centre can avail this
scheme to expand their businesses across the world through international trade
fairs and exhibitions. 
Companies registered with Directorate of Industries/District Industries Centre
can get up to 100 per cent reimbursement on air-fares and cost of placing their
stalls in such fairs/exhibitions, all over the world.
The scheme, by Office of the Development Commissioner, offers
reimbursement of 75 per cent of the one-time registration fee, airfare by
economy class and 50 per cent space rental charge. 

 The Women Entrepreneurship Platform (WEP)

Launched by the NITI Aayog, the WEP is for budding and existing women
entrepreneurs across India. 
It is divided into three aspects: 
 Iccha Shakti: motivating women entrepreneurs to start their business 
 Gyaan Shakti: Provides knowledge and ecosystem
 Karma Shakti: Provides hands-on support to entrepreneurs to set up or
scale business
Women at the ideation stage and established start-ups can register for the
scheme. Corporates, NGO, organisation, incubators can also apply provided that
they are supporting women in any form.
WEP also offers incubation and acceleration support to start-ups founded or co-
founded by women. 
The scheme will include benefits like free credit ratings, mentorship, funding
support to women entrepreneurs, apprenticeship and corporate partnerships. 

 Self-Employment Lending Schemes Credit Line 2 – Micro Financing

Scheme
 The National Minorities Development & Finance Corporation (NMDFC)
scheme provides loan at the doorstep of the beneficiaries. Only NGOs and Self-
Help Groups (SHGs) are eligible to apply. 

Persons from the lower economic background and women from the minorities
will be given preference. Applicants should belong to households with an
annual income of Rs 6 lakh. 
Each member of the organisation will get small loans up to 1.50 lakhs and 30
lakhs per group of 20 women. The loans will have to be repaid within a period
of 36 months. 
The interest rate for men will be not more than 10 per cent p.a. and 8 per cent
p.a for women beneficiaries.

 Swarojgar Credit Card

Small artisans including micro-entrepreneurs, Mall artisans, Handloom weavers,
Service sector, Fishermen, self-employed persons, rickshaw owners, and other
micro-enterprises are eligible for the Swarojgar Credit Card. 
Under this scheme, a loan of Rs 25,000 will be given per person and the interest
and margin will be as per RBI’s norm. 
The applicant will also be given a credit card along with a passbook for working
capital requirements. The charge of issue or processing card will not be more
than Rs 50.
The scheme is normally valid for 5 years subject to satisfactory operation of the
account and renewed on a yearly basis through a simple review process.

 Venture Capital Scheme for Agri-Business Development

Started by Small Farmer’s Agribusiness Consortium (SFAC) this scheme aims
to promote agricultural development in the country by providing a market to
producers and assisting farmers and agriculture graduates to enhance their
participation.
Individuals, farmers, producer groups, partnership/ Proprietary firms, self-help
group, Agripreneurs are eligible for the scheme. 
The cost of the proposed agribusiness project has to be above Rs. 50 lakhs. 
The amount of Venture Capital that SFAC will be 10 per cent of the total
project cost of 26 per cent of the project equity of Rs.75 lakhs whichever is
lowest. 
The beneficiary is expected to repay back the Venture Capital in a lump sum to
SFAC after full repayment of the Bank’s term loan.

 Raw Material Assistance scheme

In order to encourage entrepreneurs to improve the quality of their products, this
scheme under the National Small Industries Corporation finances the purchase
of indigenous and exported raw materials. 
 The scheme covers the material procurement in bulk and cash discounts for a
period of 180 days 
Only entrepreneurs of micro, small and medium scale industries can apply for
the scheme.
Once the application form is submitted, the NSIC will conduct a unit inspection
and then sanction the limit post. 

 Pradhan Mantri Mudra Yojana

To support the micro-enterprise sector MUDRA scheme provides loans up to
ten lakhs without collaterals. Enterprises wanting to expand in fields of
technology up-gradation or other projects can also take advantage of this
scheme. 
The scheme is divided into three modules: 
 Shishu : covering loans up to Rs 50,000/-
 Kishor : covering loans above Rs 50,000/- and up to Rs 5 lakh
 Tarun : covering loans above Rs 5 lakh and upto Rs 10 lakh
 Sustainable Finance Scheme
This scheme provides financial assistance in the form of loans for sustainable
development projects that contribute to energy efficiency and cleaner
production. 
All sustainable development projects such as renewable energy projects, Bureau
of Energy Efficiency (BEE) star rating, green microfinance, green buildings and
eco-friendly labelling, etc. are applicable.