A venture capital firm from Bangalore has announced its intention to launch a venture fund for debt. The justification for the move, as stated by the firm, is that the capital structure of the fund is lopsided with hardly any debt. This asset class of the firm will accompany traditional venture equity. A venture capital is basically meant for equity financing whereas requirements of debts for business are being taken care of by banks, non-banking financial institutions and other financial institutions. The decision of a venture capital firm to tread this unusual path of debt financing may be unprecedented, if not unwanted. The firm says that this decision was taken to help the start-up businesses so that the difficulty they are facing from the usual institutions that provide debt may be addressed. The difficulties, the firm point out, include ‘uncertain exit scenarios and limited financing options.’ Thus, this would be the first case of hybrid fund in the country comprising both equity and debt financing.
THE BACKGROUND
Venture capital is basically a system of equity participation by fund providers in start-up and high-tech business ventures which have the twin possibility of high risk and high growth. Fund providers are involved in management of the ventures too and they may exit early from the business or continue for long periods. They take risks and are patient to wait for gains. Venture capital has been a major source of economic development in Germany in the last century and in the USA in near past. In Germany this function of participation in business along with providing equity funds are done by banks. The development of Silicon Valley in the USA has basically been financed by equity participation under Venture Capital. The difference between such equity financing in USA and Germany is that such financing in the former is done by private firms as against the banks in the latter. We in India adopted the USA pattern of financing because in our case too commercial banks are not permitted by banking laws to participate as partners in businesses.
THE OVERVIEW
The share of Silicon Valley in economic development of the USA is enormous as both the growth of computer hardware and software, besides many other prominent industrial establishments, were done in that region. And this development was assisted by equity funds provided from venture capital mode. So economic growth through equity participation is a time-tested method and there is no reason to dilute, if not corrupt, the practice in India by invoking debt capital in this area. Let equity reign solely in this expanse. There may not be any need of hybrid finance comprising both equity and debt when we already have a number of banks and other financial institutions to take care of the requirement of debts of the industry. The need and the dearth lie in equity financing in India because unlike that in Germany, Indian banks are kept at bay from this method.