Venture Capital Vs Development Funds
Venture capital differs from Development funds as latter means putting up of industries without much consideration of use of new technology or new entrepreneurial venture but having a focus on underdeveloped areas (locations). In majority of cases it is in the form of loan capital and proportion of equity is very thin. Development finance is security oriented and liquidity prone. The criteria for investment are proven track record of company and its promoters, and sufficient cash generation to provide for returns (principal and interest). The development bank safeguards its interest through collateral.
They have no say in working of the enterprise except safeguarding their interest by having a nominee director. They do not play any active role in the enterprise except ensuring flow of information and proper management information system, regular board meetings, adherence to statutory requirements for effective management control where as Venture capitalist remain interested if the overall management of the project o account of high risk involved in the project till its completion, entering into production and making available proper exit route for liquidation of the investment. As against this fixed payments in the form of installment of principal and interest are to be made to development banks.
Venture Capital Vs Seed Capital & Risk Capital
It is difficult to make a distinction between venture capital, seed capital, and risk capital as the latter two form part of broader meaning of Venture capital. Difference between them arises on account of application of funds and terms and conditions applicable. The seed capital and risk funds in India are being provided basically to arrange promoter’s contribution to the project. The objective is to provide finance and encourage professionals to become promoters of industrial projects. The seed capital is provided to conventional projects on the consideration of low risk and security and use conventional techniques for appraisal. Seed capital is normally in the form of low interest deferred loan as against equity investment by Venture capital. Unlike Venture capital, Seed capital providers neither provide any value addition nor participate in the management of the project. Unlike Venture capital Seed capital provider is satisfied with low risk-normal returns and lacks any flexibility in its approach.
Risk capital is also provided to established companies for adapting new technologies. Herein the approach is not business oriented but developmental. As a result on one hand the success rate of units assisted by Seed capital/Risk
Finance has been lower than those provided with venture capital. On the other hand the return to the seed/risk capital financier had been very low as compared to venture capitalist.
Difference between Seed Capital Scheme and Venture capital Scheme:
| Seed Capital Scheme | Venture capital Scheme | |
| Basis | Income or aid | Commercial viability |
| Beneficiaries | Very small entrepreneurs | Medium and large entrepreneurs are also covered |
| Size of assistance | Rs. 15 Lac (Max) | Up to 40 percent of promoters’ equity |
| Appraisal process | Normal | Skilled and specialized |
| Estimates returns | 20 percent | 30 percent plus |
| Flexibility | Nil | Highly flexible |
| Value addition | Nil | Multiple ways |
| Exit option | Sell back to promoters | Several ,including Public offer |
| Funding sources | Owner funds | Outside contribution allowed |
| Syndication | Not done | Possible |
| Tax concession | Nil | Exempted |
| Success rate | Not good | Very satisfactory |
Venture Capital Vs Bought Out Deals
The important difference between the Venture capital and bought out deals is that bought-outs are not based upon high risk- high reward principal. Further unlike Venture capital they do not provide equity finance at different stages of the enterprise. However both have a common expectation of capital gains yet their objectives and intents are totally different.