In recent years, India has become a hot destination for startups. With India’s rank in ease of doing business improving to 77, this is a clear indicator of a conducive business environment which has led to incorporation of many startups. But for any startup, scaling and running operations requires capital which comes in form of funding. This is where venture capital firms come into the picture. They back the promising startups which have the potential to make it into a big company by providing them with adequate funding. Venture capital firms usually come after angel investors i.e. post the seed stage.

What is a venture capital firm?

A venture capital firm, is an enterprise whose ultimate goal is to earn profits for its shareholders (investors) and its management (investment team). They are basically investment vehicles. These firms seek ownership in high growth potential startups in exchange of investment. They only invest in those businesses which shows potential to grow significantly over a period of time.

But such investments come at a high risk. Because if the startup fails then the investment hold no value, and as most of the startups don’t have fixed assets, this means these investments are highly illiquid in nature. But if everything goes right then the ROI can be huge as well. So owning a venture capital firm has its own perks.

How to set up a venture capital firm?

• Build a track record

The first and foremost step is to build a proven track record. Nobody would give you funds to invest if you have never made few good investments. It’s always a good idea to work at venture capital firm first and make some high value investments there.

If you already have built a decent track record then there are two different paths which you can follow-

1. The first is to start small. Become an angel investor, make some good investments. After establishing yourself as an angel investor, try raising a small fund. Target HNIs to raise the fund, it can be anywhere from $1mn to $20mn.
2. The second option is to get into a partnership with someone who is already an experienced venture capitalist. They usually are the ones who invests and act as the one handling operations.

• Get a license

In order to set up a venture capital firm, you need to be eligible first. You need to get a license from the Securities and Exchange Board of India (SEBI), they are the sole authority for handing out the license.

• Criteria for eligibility

Following is the main eligibility criteria for setting up a venture capital firm under SEBI (Venture Capital Funds) Regulations, 1996:

For a Company

1. Memorandum of association should have carrying on of its activity as a venture capital fund;
2. It is prohibited by its memorandum and articles of association from making an invitation to the public to subscribe to its securities;
3. Its director or principal officer or employee is not involved in any litigation connected with the securities market which may have an adverse bearing on the business of the applicant;
4. Its director, principal officer or employee has not at any time been convicted of any offence involving moral turpitude or any economic offence;
5. It is a fit and proper person.

Once all the compliances are finished, SEBI will ask for a registration fees of Rs. 5, 00,000, within 21 days of application. Finally, Certificate of Registration is issued by SEBI on successful compliance of all terms.

(Source: www.sebi.gov.in)

Building a VC firm takes time and networking. Focus on building a strong network of team and the rest of the path will become easy. If you like to know more about the whole process of setting up VC firm then you have arrived at the right place.

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