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Venture Capital is a form of "risk capital". In other words, capital that is invested in a business where there is a substantial element of risk relating to the future creation of profits and cash flows. Risk capital is invested as shares (equity) rather than as a loan and the investor requires a higher "rate of return" to compensate him for his risk.
Venture Capital provides long-term, committed share capital, to help unquoted companies grow and succeed. If an entrepreneur is looking to start-up, expand, buy-into a business, buy-out a business in which he works, turnaround or revitalize a company, venture capital could help do this
Obtaining venture capital is substantially different from raising debt or a loan from a lender. Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of a business. As a shareholder, the venture capitalist's return is dependent on the growth and profitability of the business. This return is generally earned when the venture capitalist "exits" by selling its shareholding in the business.
History of Venture Capital in India dates back to early 70's when Govt of India appointed a committee laid by Late Shri R.S.Bhatt to find out the ways to meet a void in conventional financing for funding start-up companies based on absolutely new innovative technologies. Such companies either did not get any financial support or the funding was inadequate which resulted into their early mortality. The committee recommended starting of Venture Capital industry in India. In mid 80's three all India financial institutions viz IDBI, ICICI, IFCI started investing into the equity of small technological companies.
In Nov 1988, Govt of India decided to institutionalize Venture Capital Industry and announce guidelines in the parliament. Controller of Capital issues implemented these guidelines known as CCI for VC. These guidelines were very restrictive and following a very narrow definition of VC. They required Venture Capital to be invested in companies based on innovative technologies started by first generation entrepreneur. This made VC investment highly risky and unattractive. Nonetheless many private initiatives were taken. At the same time World Bank selected 6 institutions to start VC investment in India. This included TDICICI (ICICI), GVFL, Canbank Venture Capital Fund, APIDC, RCTC (now known as IFCI Venture Capital Funds Ltd.) and ILF (now known as Pathfinder).
In 1995, Govt of India permitted Foreign Finance companies to make investments in India and many foreign VC private equity firms entered India. In 1996, government announced guidelines to regulate the VC industry. Though there were many shortcomings these guidelines were the starting point.
In 1997, IT boom in India made VC industry more significant. Due to symbiotic relationship between VC and IT industry, VC got more prominence as a major source of funding for the rapidly growing IT industry. Indian VC's which were so far investing in all the sectors changed their focus to IT and telecom industry.
The recession during 1999 - 2001 took the wind out of VC industry. Most of the VC either closed down or wound-up their operations. Almost all of them changed their focus to existing successful firms for their growth and expansion. VC firms also got engaged into funding buyouts, privatisation and restructuring. Currently, just a few firms are taking the risk of investing into the start-up technology based companies.