Venture capital is a form of private equity and a type of financing that investors provide to start-up companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions. However, it does not always take a monetary form; it can also be provided in the form of technical or managerial expertise. Venture capital is typically allocated to small companies with exceptional growth potential, or to companies that have grown quickly and appear poised to continue to expand.
Though it can be risky for investors who put up funds, the potential for above-average returns is an attractive payoff. For new companies or ventures that have a limited operating history (under two years), venture capital funding is increasingly becoming a popular – even essential – source for raising capital, especially if they lack access to capital markets, bank loans or other debt instruments. The main downside is that the investors usually get equity in the company, and, thus, a say in company decisions.
A Brief History
Venture capital developed as an industry after the Second World War. Harvard Business School professor Georges Doriot is considered the “Father of Venture Capital”. He started the American Research and Development Corporation (ARD) in 1946 and raised a $3.5 million fund to invest in companies that commercialized technologies developed during WWII. ARDC’s first investment was in a company that had ambitions to use x-ray technology for cancer treatment. The $200,000 that Doriot invested turned into $1.8 million when the company went public in 1955.
Venture capitalism in India began in 1986 with the start of the economic liberalisation. In 1988, the Indian government formalised venture capital by issuing a set of guidelines. Initially, venture capital was limited to subsidiaries set up IDBI, ICICI and the IFC, and focused on large industrial concerns. But the turning point came when the well-established start-ups by Indians in the Silicon Valley convinced foreign investors that India had the talent and the scope for economic development and growth. Over the years, more and more private investors from India and abroad have entered the Indian venture capital market.
Process of venture capital funding:
Step 1: Idea generation and submission of the Business Plan
The initial step in approaching a Venture Capital is to submit a business plan. The plan should include the below points:
- There should be an executive summary of the business proposal
- Description of the opportunity and the market potential and size
- Review on the existing and expected competitive scenario
- Detailed financial projections
- Details of the management of the company
There is detailed analysis done of the submitted plan, by the Venture Capital to decide whether to take up the project or no.
Step 2: Introductory Meeting
Once the preliminary study is done by the VC and they find the project as per their preferences, there is a one-to-one meeting that is called for discussing the project in detail. After the meeting the VC finally decides whether or not to move forward to the due diligence stage of the process.
Step 3: Due Diligence
The due diligence phase varies depending upon the nature of the business proposal. This process involves solving of queries related to customer references, product and business strategy evaluations, management interviews, and other such exchanges of information during this time period.
Step 4: Term Sheets and Funding
If the due diligence phase is satisfactory, the VC offers a term sheet, which is a non-binding document explaining the basic terms and conditions of the investment agreement. The term sheet is generally negotiable and must be agreed upon by all parties, after which on completion of legal documents and legal due diligence, funds are made available.
Step 5: Exit route
There are various exit options for Venture Capital to cash out their investment:
- Promoter buyback
- Mergers and Acquisitions
- Sale to another strategic investor
Advantages of Venture Capital
- They bring wealth and expertise to the company
- Large sum of equity finance can be provided
- The business does not stand the obligation to repay the money
- In addition to capital, it provides valuable information, resources, technical assistance to make a business successful
Disadvantages of Venture Capital
- As the investors become part owners, the autonomy and control of the founder is lost
- It is a lengthy and complex process
- It is an uncertain form of financing
- Benefit from such financing can be realized in long run only
Venture Capital in Agriculture:
A completely new field that is attracting venture capital is agriculture. This has been fueled by the realisation that food security is a vital, long-term necessity. Studies suggest that in future, for every Rs 100 increase in GDP, Rs 41 will be spent on food.
At the recently held Global AgInvesting Conference, data released indicated that agro businesses would provide better returns of about 11%, compared to 3-5% yield from bonds and equities.
India is home to more than 500 Agritech start-ups, growing at a rate of 25% year-on-year. These start-ups raised a cumulative ~$250 Mn in venture funding in 2019, which is three times the total amount invested in the sector in 2018. It is forecasted that the sector will attract more than $500M in funding in the next couple of years. Aavishkaar, Accel, Ankur Capital, Beenext and Omnivore were the early investors in the sector. More recently, we witnessed funds like Blume, Nexus, Sequoia, Tiger Global and RTP also invest in the sector.
The Venture Capital Assistance Scheme
The Venture Capital Assistance Scheme was implemented during XIIth five-year plan (2012-2017). Venture Capital Assistance is financial support in the form of an interest free loan provided by SFAC (Small Farmers’ Agri-Business Consortium) to qualifying projects to meet shortfall in the capital requirement for implementation of the project. It helps in assisting agripreneurs to make investments in setting up agribusiness projects through financial participation and also provides financial support for preparation of bankable Detailed Project Reports (DPRs) through Project Development Facility (PDF).
Assistance under the Scheme will be available to Individuals; Farmers; Producer Groups; Partnership/Proprietary Firms; Self Help Groups; Companies; Agripreneurs; units in agriexport zones, and Agriculture graduates Individually or in groups for setting up agribusiness projects. For professional management and accountability, the groups have to preferably form into companies or producer companies under the relevant Act.
The main objectives of the Scheme are:
(a) To facilitate setting up of agribusiness ventures in close association with all banks/ financial institutions notified by the Reserve Bank of India where the ownership of the Central/State Government is more than 50% such as Nationalized banks, SBI & its subsidiaries, IDBI, SIDBI, NABARD, NCDC, NEDFi, Exim Bank, RRBs & State Financial Corporations.
(b) To catalyze private investment in setting up of agribusiness projects and thereby providing assured market to producers for increasing rural income & employment.
(c) To strengthen backward linkages of agribusiness projects with producers.
(d) To assist farmers, producer groups, and agriculture graduates to enhance their participation in value chain through Project Development Facility.
(e) To arrange training and visits, etc. of agripreneurs in setting up identified agribusiness projects.
(f) To augment and strengthen existing set up of State and Central SFAC
The investors are looking for disruptive technologies that blend traditional agricultural practices with smart solutions. They are interested in profitable ventures that witness convergence of disciplines i.e., Machine Learning (ML), Artificial Intelligence (AI), Internet-of-things (IoT) etc. They are keen on the fields of Agri Inputs, Post-harvest and Food Processing, Farm Retailing, Natural Resource Management, Farm Mechanization, Precision Farming, Agri & Agri health services, ICT in Agriculture, Dairying, Biotechnology, Sustainable Agriculture, Agri Education, Supply Chain Management, Livestock and Fisheries etc to achieve highest efficiency. They believe that with better accessibility to technology, agriculture can be redefined in a better way which is being stared as the most problematic occupation signalling farmers’ suicides, inefficient practices, food wastages etc. It creates a hope of revisiting the wealthy tradition of converging entrepreneurship with agriculture in a prosperous way.
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