Venture capital funds(VCFs) are investment instruments through which individuals can park their money in newly-formed start-ups as well as small and medium-sized companies. These are types of investment funds that primarily target firms that have the potential to deliver high returns. Nonetheless, investing in these companies also involves considerable risk.

VCFs are somewhat similar to mutual funds – these constitute a pool of money collected from several investors. Here investors can refer to individuals with high net worth, companies, or even other funds. Instead of an asset management company, a VCF is managed by a venture capital firm.

How Does a Venture Capital Fund Work?

VCFs are some of the ways to avail financing for entrepreneurs and small business owners. However, a VCF will only invest in firms that project significant growth potential and the ability to generate high ROI in the long run. As investments are made in new ventures, the risk associated is also comparatively high.

That’s why VCFs invest in multiple companies at once. This is done by having confidence that at least a few among the lot will be able to produce high returns and assuage the losses, if any, incurred by the others.

What Does a Venture Capital Firm Do?

A venture capital firm identifies investment areas that can generate lucrative returns. It not only acts as the fund manager but also as an investor. Generally, a venture capital firm will also invest its own money as a form of commitment and assurance to its clients.

In lieu of investment, a venture capital firm may seek a chair amongst the directors at the company, and offer expertise and intelligence for better management.

Few crucial positions in a venture capital firm are –

Position  Roles and responsibilities 
Associates Entry-level employees whose roles are decided by the firm. They usually have experience in management consulting and investment banking and may perform contract reviews, financial analysis, and valuation.
Principals Senior-level staff who can make investment decisions but cannot make the last call. Similar to associates, their roles and responsibilities can also differ.

Principals report to venture partners (VPs).

Venture partners (VPs) Partners of the firm who manage the regular activities. They are also responsible for sourcing different opportunities for investment and may be paid as per what they bring.

Venture partners report to general partners (GPs).

General partners (GPs) Head of a venture capital firm. They invest their own funds in a company alongside their investors. GPs make the last call for investment decisions.

Types of Venture Capital Funds

VCFs are divided based on the stage they invest in. Generally, there are 3 types of venture capital funds–

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Type Definition 
Early-stage funding It is the fund invested to help a company establish itself and start manufacturing its products or delivering its services.

Early-stage funding can be further divided into three types –

  • Seed funding – A small amount offered to help a business qualify for a loan.
  • Start-up funding – Offered to help companies develop their products or services.
  • First-stage funding – Offered to companies that require funding to start their operations.
Expansion funding As the name suggests, this funding is offered to companies expanding their operations on various stages.

Expansion funding can be categorised into three types –

  • Second-stage funding – Provided to firms that are seeking to begin their expansion.
  • Bridge funding – A form of immediate financing option that helps a company address its short-term expenditures until long-term funding is availed.
  • Mezzanine funding – Offered to aid companies during mergers and acquisitions.
Acquisition funding Acquisition or buyout funding is categorised into the following –

  • Acquisition funding – Provided to help firms acquire certain areas of another business.
  • Management or leveraged buyout funding – Offered to assist companies in acquiring another company or a product.

Pros and Cons of VCFs

Pros – 

  • No obligations for repayment 

One of the primary advantages of venture capital funds is that the company does have to repay the investment sum.

Even if the company fails, entrepreneurs are not in any way obligated to repay the invested fund, which is usually severely problematic in case of bank loans.

  • Beneficial for creating networks and connections 

Venture capital firms have a widespread network, which can help a start-up get the much-needed marketing and promotion that can eventually help to establish itself.

  • Paves the way for expansion 

VCFs can help a company to expand quickly and exponentially. This may not be the case in any other type of funding.

  • Offers crucial business expertise

Not only investment but VCFs bring years of expertise to the table. This proves crucial in human resource management, financial management, and business decisions, which young entrepreneurs may lack.

Cons –

  • Securing funding can take a long time 

Venture capital firms have to assess whether investing in a company will be feasible and can help to generate favourable returns. This can take a prolonged time, which can delay funding.

  • Forfeiture of complete control and ownership 

By investing in a company, venture funds take part in a business’ decision making. Venture capital firms also hold a chair on the board.

Can be challenging to secure 

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Due to the ever-growing number of start-ups, securing a VCF may be challenging.

Top Venture Funds

The following is a venture capital funds list of top firms in India ( Not in any particular order). Please note, this list is not exhaustive.

  • Accel Partners
  • Helion Venture Partners
  • Sequoia Capital India
  • Nexus Venture Capital
  • Blume Ventures

Venture capital funds still continue to be one of the top sources of funding for start-ups irrespective of its drawbacks – the foundation of VCFs date back to 1946, in the USA. Georges Doriot, Ralph Flanders, and Karl Compton established the company American Research and Development Corporation (ARDC), which influenced private-sector investment in companies that were being established by soldiers returning from WW2. Georges Doriot is called the father of venture capitalism.