In the past few articles, we have studied various entrepreneurial environments from the perspective of entrepreneurs. In this and the next few articles, we'll look at the people on the other side of the table, the way venture capitalists work. If you want to build a mutually beneficial relationship, it is important to understand how the other person thinks and operates.
It is important to recognize that entrepreneurs and venture capitalists are on the same team and have a consistent goal - to build a successful company. All of this happens before the investment. As in all partnerships, if the relationship between venture capital and entrepreneurs is suspected and viewed in an opposing manner, then the venture capital entrepreneurs on the board will compete for the company. Having said that, let's take a look at how venture capital firms work. In this article, let's take a look at the overall VC situation.
Venture capital firms collect money from investors and then invest the money in carefully selected, fast-growing businesses. In the United States, venture capital firms are usually partnerships. In India, venture capital firms follow a more common structure with mutual fund structures [for legal and tax reasons, venture capital partnerships are not feasible in India.
For a while, India's venture capital industry has been calling for American-style structures, but this is another story. That is, there is a venture capital fund, a variety of investor investments, and an investment management company [often called an asset management company or AMC] that manages the investment of the fund.
In the United States, typical investors in venture capital firms are pension funds, university endowment funds, insurance companies, companies, and wealthy people. In India, typical investors are wealthy individuals, development and financial institutions, as well as some companies. The law does not allow for the input of pensions or insurance benefits.
Even if investment is allowed, Indian universities have no real money or donations! Therefore, it is very difficult to raise funds in India for venture capital investment. The tax treatment of Indian venture capital firms has also played a depressing role. This is why a large number of venture capital funds operating in India are actually offshore funds [located in Mauritius and other places], and overseas investors thus ensure operational flexibility, tax incentives and speed.
In contrast to venture capital activities in small countries like Singapore: for example, small countries like Singapore have invested huge sums of money [more than $100 billion in capital] from various venture capital activities around the world. These government-controlled investments are based on Singapore's economic development, strategic reasons [such as new technologies, entering new markets]. Singapore is also the source of capital for many of the largest venture capital firms in Silicon Valley. There is a lesson in India somewhere!
In India, traditional investors in venture capital firms have been development and financial institutions such as ICICI, IDBI, SIDBI. These venture capital firms have to deal with various operational constraints and are struggling to cope with high-risk investments due to the nature of the structures they must operate. Indian venture capital firms must be registered with SEBI [Indian Securities and Exchange Commission].
In the past few years, India has seen the arrival of several Silicon Valley-style independent private venture capital firms, such as Draper [founded in 1995], Walden, Chrysalis and Infinity Capital. More projects are under preparation and will introduce international-level venture capital styles and standards through a deep understanding of technology, finance and strategy. India is expected to attract about $1 billion in venture capital funds by 2008. In 1999, it attracted about $300 million.
In the context of venture capital, we will learn about the way venture capital funds/companies operate in the next article.
Originally published in Venture Katalyst, India's first e-magazine for entrepreneurs, founded by Sanjay Anandaram
Orignal From: How Vcs works - Part 1
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