Venture capital is emerging as a significant source of funding for the MSMEs (Micro, Small and Medium Enterprises) in India. The SMEs in the previous times depended greatly on funds from the Banking sector for the work capital requirements and expansion of the business. However, in the recent past, the banking sector of India has refrained from funding the SMEs due to the increased risk of the NPAs (Non-Performing Assets) in this sector. The SMEs play an important role in determining the growth and development of the Indian economy and even with substantial scope for expansion and profitable projects, the MSMEs are not able to get the relevant funding for their operation and distribution.
Therefore, to provide ample funding to the MSMEs, the concept of venture capital has emerged. By venture capital, it is referred to as a way of equity funding for the expanding private companies that have been showing rapid growth and development. The venture capitalists are the professionals that are widespread in several fields. The fund provided by them to the emerging SMEs is referred to as the Venture Capital Fund which is given with an aim to yield higher returns and profits on the investment.
Benefits of Venture Capital Fund Over Other Funding Sources
The venture capital fund has several advantages and benefits over the other methods of funding to the SMEs. Here are some:
- With the help of the venture capital fund, the SMEs are able to obtain long-term equity finances which offer solid capital for the future growth of the SMEs.
- The venture capitalists are the business partners who share both the rewards as well as the risks. The rewards for the venture capitalists are in the form of the capital gain and the business success of the SMEs.
- The venture capitalists are also responsible for providing practical and rational advice to the SMEs by assisting them in the operation and distribution based on the past experiences of the particular SME.
- The venture capitalists also have a strong network of contacts in several domains and areas with the help of which the SMEs can add value to their business on various grounds like the recruitment of the key personnel, provision of contacts in the international markets, introduction to the strategic planners, and even co-investment with the other venture capital organizations when additional financing to the SMEs is required.
Several SMEs in India refrain from getting the relevant funds from the venture capitalists fearing the higher transaction costs and difficulties in exiting from such investments. However, the recent Venture Capital Funding scenario in India has changed considerably. The VCs are also expanding their reach to the different areas of the SMEs in contrast to the traditional sectors of the VC like IT (Information Technology). The Venture Capitalists have expanded their scope to the various areas of the SMEs including healthcare, clean energy, media, retail, pharmaceuticals, and several others to provide them funds at the affordable rates.