Financing for venture capital is a hot topic in India, but many entrepreneurs and start- ups are confused about how venture capital financing works in India. Even most traditional Indian entrepreneurs do not know the venture capital or Angel Investor funding. They always search for banks or other financing sources.
WHAT IS VENTURE CAPITAL?
Venture capital is money given to start- up companies and small businesses with perceived long- term growth potential by investors. This is a very important source of financing for companies that have no access to capital markets. It typically involves a high risk for the investor, but it has an over- average return potential.
WHO’S BEHIND VENTURE CAPITAL FUNDING?
These people are entrepreneurs; financial wizards and the like establishing venture capital funds that the SEBI in India recognizes. There are two categories of persons in a venture capital fund–
- General Partners (GP): GPs serve to manage the fund and carry out capital investments to return that capital to the LPs.
- Limited Partners (LP): Different domains of expertise investors will come and commit their money to the venture capital fund in India on the basis of GP proposals.
In other words, LPs invest in the risk capital fund and the GP manages the risk capital fund. The fund invests in the portfolio companies. The venture capital fund is governed by a GP- LP contract known as the Limited Partnership Agreement (LPA). The LPA lays down all the terms and conditions for the management of the risk capital fund. The fund also has a contract to manage the fund with the general partner.
HOW VENTURE CAPITAL FUNDS MAKES MONEY IN INDIA?
VC companies make money by two terms, i.e. the management fee earned by the GP’s and Carried Interest earned by both GP’s and LP’s.
Management fee: Management fees are usually defined as the cost of professional management of your assets. VC funds typically pay the fund’s management company an annual management fee as a salary and a means of covering organizational and fund expenditure.
Carried interest or carry: – As with Wikipedia, a carry represents the share of profits paid to fund managers when an investment is successful. As per startupxplore Carried is generally 20 to 25 percent interested in Venture Capital, which means that while 20 percent of profits go to the general partners, 80 percent belong to the limited partners.
STAGES OF VENTURE CAPITAL FUNDING:
From seed funding to series A or higher, VC companies can invest. You are looking for a highly growing business in which you can easily exit via IPO or acquisition.
HOW THESE FIRMS EXIT IN INDIA?
They have plenty of exit options from a start-up.
Mergers and acquisitions: the most common way to exit enterprises is through fusions and acquisitions (M&A).
IPOs: In some cases, it is better for a company to become publicly owned and traded on the stock market than to undergo a private acquisition. In these cases, the company has an initial public offer (IPO) for the first time when it sells its public stock.
Stock buybacks: the company buys stock back from the angel or VC investors in a stock buyback. In this exit, VCs receive their money directly from the company rather than from new investors in an IPO or another M&A company.
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