What is Venture Capital Funds (VCFs)?

Startups are occupying the prime imagination of the world now. Providing financial support to start ups and other new business ventures in different fields is a risky business. At the same time, it provides high growth opportunities for the investors who provide money for the startups.

The risk of startup financing is that bringing a new business entity into a competitive level is a time taking process. Similarly, the possibility of failure is also substantial. Despite these difficulties, many seed financiers or startup financing firms like Sequoia and Softbank have earned big money from their relatively small initial investment in Whatsapp and Alibaba respectively.

Now there are different verities of investors who are specialized in financing startup ventures including the popular group- angel investors.

But the most important one is institutions dedicated for financing new ventures. These institutions are called Venture Capital Funds (VCFs).

VCF is an investment fund that manages money from different investors seeking to provide capital in startup and small- and medium-size enterprises that have strong growth potential.

According to SEBI, VCF is a fund established in the form of a trust/company including a body corporate and registered with SEBI. The VCF will have dedicated pool of capital, raised in the specified manner and invested by following regulations of SEBI.

The objective of the venture capital financing is to invest in high-risk projects with the anticipation of high returns. Following are the main features of VCFs:

  • They finance new and quickly growing business ventures or entities
  • VCFs takes higher risks with the expectation of higher rewards while making investment
  • The VCFs often purchase equity securities of the entities they invests money
  • VCFs help the development of new products or services and acquire technologies
  • The VCFs take active participation in the companies they invest and thus helps the growth
  • The VCF investment is long term in nature in the investing entity.

The money provided by VCFs is termed as venture capital. In India, the VCFs are regulated by the SEBI.

For the VCFs, they get money from a variety of sources, including private and public pension funds, corporations and wealthy individuals, both domestic and foreign etc.

Small money investing individuals called angel investors are also well engaged in startup financing. Recent regulation by SEBI in India places angel investors as a subcategory of VCFs.