Difference between Venture Capital & Other Funds

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 SchemeVenture capital Scheme
BasisIncome or aidCommercial viability
BeneficiariesVery small entrepreneursMedium and large entrepreneurs are also covered
Size of assistanceRs. 15 Lac (Max)Up to 40 percent of promoters’ equity
Appraisal processNormalSkilled and specialized
Estimates returns20 percent30 percent plus
FlexibilityNilHighly flexible
Value additionNilMultiple ways
Exit optionSell back to promotersSeveral ,including Public offer
Funding sourcesOwner fundsOutside contribution allowed
SyndicationNot donePossible
Tax concessionNilExempted
Success rateNot goodVery 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.

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