Venture Capital Fund
Also written VCF
A Category I AIF that invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings, and includes migrated venture capital funds.
In plain language
Venture capital is an activity. A Venture Capital Fund (VCF) is the SEBI-registered vehicle for it.
The SEBI (AIF) Regulations define a VCF as an AIF that invests mainly in unlisted securities. The securities are those of start-ups, emerging or early-stage venture capital undertakings. These businesses mostly work on new products, new services or technology. Others base their work on intellectual property rights, or on a new business model. The definition also includes migrated venture capital funds.
VCFs sit in Category I. This category is for sectors that the government or regulators see as good for society or the economy. The workbook links this to creating jobs. For that reason, six kinds of fund qualify as Category I. They are angel funds, VCFs, SME funds, infrastructure funds, special situation funds and social impact funds.
How it works
The defined terms inside the definition
| Term | Meaning in the workbook |
|---|---|
| Start-up | A private limited company or LLP meeting DPIIT's start-up criteria (notification G.S.R. 127(E), 19 February 2019, or later policy) |
| Venture capital undertaking | A domestic company not listed on a recognised stock exchange at the time of investment |
| Migrated VCF | A fund earlier registered under the SEBI (Venture Capital Funds) Regulations, 1996 and then registered under the AIF Regulations as a sub-category of VCF under Category I |
Why "securities" and not "equity". Being early-stage investors, VCFs may invest in unlisted equity, debt, preference capital or other convertible securities. The definition uses the word securities to give latitude in structuring. A Private Equity Fund, by contrast, must invest primarily in equity or equity-linked instruments or partnership interests, because later-stage investors are better placed to take equity risk.
Migrated VCFs — the workbook's rules
- Migration to the AIF Regulations was available till 19 July 2025 only.
- Migrated VCFs cannot launch new schemes.
- Tenure of existing schemes may be extended up to 2 years, with approval of two-thirds of unit holders by value.
- Schemes whose liquidation period had expired without winding up, and which migrated, get an additional liquidation period till 19 July 2026.
Category I risk profile (Table 2.1). Early-stage ventures face high mortality, so these funds assume higher risk for higher return, and mitigate it by investing in smaller tranches. Like all Category I and II AIFs, a VCF is close-ended.
A worked example
Illustrative figures. Nilgiri Early Ventures Fund, a VCF, reviews its Rs 80 crore pipeline:
| Proposed investment | Rs crore | Fits the VCF definition? |
|---|---|---|
| Equity in a 3-year-old health-tech Pvt Ltd (DPIIT start-up) | 20 | Yes — unlisted security of a start-up |
| Optionally convertible debentures of an unlisted ed-tech company | 15 | Yes — debt and convertibles are "securities" |
| CCPS in an unlisted drone-maker (a VCU) | 25 | Yes |
| Shares of a company listed on an SME exchange | 20 | No — a VCU must be unlisted at the time of investment |
Qualifying = 20 + 15 + 25 = Rs 60 crore
Share of pipeline = 60 ÷ 80 = 75%
With 75% going to unlisted start-up and VCU securities, the portfolio is primarily in what the definition requires.
Its risk control follows Table 2.1: instead of Rs 25 crore in one go, the drone-maker gets Rs 10 crore now and Rs 15 crore on hitting milestones — the "smaller tranches" approach to high mortality.
Why NISM asks about it
Chapter 2 (Growth of AIFs in India and Suitability of Category III AIFs) defines the VCF, start-up, venture capital undertaking and migrated VCF at 2.2.1–2.2.2, places VCFs in Category I at 2.2.12, and contrasts them with Private Equity Funds at 2.3. Chapter 5 (Regulatory Framework) lists VCFs among the examples of Category I AIFs. Expect category-identification questions and the securities-versus-equity contrast with PE funds.
Common exam traps
- VCFs are Category I; Private Equity Funds and Debt Funds are Category II.
- "Securities", not "equity" — VCFs may hold unlisted equity, debt, preference capital or convertibles.
- A venture capital undertaking is unlisted at the time of investment, and is a domestic company.
- Migrated VCFs cannot launch new schemes; tenure extension is up to 2 years with two-thirds by value.
- Dated rules. The migration window (till 19 July 2025) and the additional liquidation period (till 19 July 2026) are both in the past as of this writing. Learn the dates as the workbook states them.
- Start-up can be a private limited company or an LLP under the workbook's definition.
Check yourself
1.Which of the following funds falls under Category I AIF?
- a)Private Equity Fund
- b)Hedge Fund
- c)Angel Fund
- d)Pre-IPO Fund
Show the answer
Answer: (c) Angel Fund
Category I "shall include VENTURE CAPITAL FUNDS, SME FUNDS, SOCIAL IMPACT FUNDS, ANGEL FUNDS, INFRASTRUCTURE FUNDS, SPECIAL SITUATION FUNDS, CORPORATE DEBT MARKET DEVELOPMENT FUNDS and such other AIFs as may be specified." And an Angel Fund is expressly "A SUB-CATEGORY OF CATEGORY I AIF."
Where the distractors sit:
- ⚠️ PRIVATE EQUITY FUNDS and PRE-IPO FUNDS are CATEGORY II — "OTHER AIFs THAT INVEST IN UNLISTED SECURITIES, SUCH AS DEBT FUNDS, PRIVATE EQUITY FUNDS AND PRE-IPO FUNDS, FALL UNDER CATEGORY II AIFs"
- ⚠️ HEDGE FUNDS are CATEGORY III — "those AIFs that DEPLOY COMPLEX TRADING STRATEGIES IN SECONDARY LISTED MARKETS, DERIVATIVES AND/OR MAY ALSO USE LEVERAGE AT FUND LEVEL, SUCH AS HEDGE FUNDS, QUALIFY AS CATEGORY III AIFs"
So the question to ask is not "what does the fund invest in?" but "does the government have a reason to encourage it?" Category I is the shelf for funds the state wants more of — start-ups, SMEs, infrastructure, social ventures — and it comes with "SPECIAL INCENTIVES."
Where this is taught
- Series XIX-B · Chapter 2: Growth of Alternative Investment Funds in India and Suitability of Category III AIFsintroduced here
- Series XIX-A · Chapter 2: Alternative Investment Funds in Indiaintroduced here
- Series XIX-E · Chapter 4: Alternative Investment Funds in India and its Suitabilityintroduced here
- Series XIX-D · Chapter 3: Alternative Investment Funds in India and its Suitabilityintroduced here
- Series X-A · Chapter 13: Overview of Alternative Investment Funds (AIFs)introduced here
Related terms
- Angel FundA sub-category of Category I AIF, registered with SEBI specifically as an angel fund, which raises money from angel investors and invests it in start-ups deal by deal rather than through schemes.
- Category I AIFThe AIF category for funds the government or a regulator treats as socially or economically desirable — venture capital, angel, SME, social impact, infrastructure, special situation and CDMDF funds.
- Debt FundA Category II AIF that invests primarily in debt securities of listed or unlisted investee companies, or in securitised debt instruments, as per its stated objectives.
- Migrated Venture Capital FundA fund once registered under the SEBI (Venture Capital Funds) Regulations, 1996 that re-registered under the AIF Regulations as a Category I venture capital fund. It may not launch new schemes.
- Venture CapitalDirect investment in infant, early-stage businesses built on new products, services, technology, IP or business models — highly risky because such firms are small and prone to high mortality.
- Venture Capital UndertakingA domestic company that is not listed on a recognised stock exchange at the time the investment is made — the defined target that a venture capital fund must put at least 75% of its investable funds into.
- Liquidation PeriodThe 1-year period following expiry of an AIF scheme's tenure or extended tenure, for fully liquidating its assets and distributing the proceeds to investors.
- SME FundA Category I AIF that invests primarily in unlisted securities of Small and Medium Enterprises, or in securities of SMEs that are listed or proposed to be listed on an SME exchange or SME segment.
- DPIIT start-up definitionThe Government of India's test for a "start-up": a business not more than 10 years old, with turnover not exceeding Rs 100 crore in any financial year, engaged in innovation.
- Private EquityEquity capital raised by companies from external investors without going to the public markets — direct investment in businesses that are not listed on a stock exchange.
- Mezzanine CapitalCapital provided in a hybrid structure carrying features of both debt and equity — typically subordinated debt with an equity upside attached, such as warrants.
- Early-stage capitalThe third round of a young company's life — money to set up initial operations and basic production once it has customers, raised in Pre-Series A, Series A or Series B.
- Total Addressable MarketThe whole revenue opportunity that exists for a product if every possible buyer bought it — the outermost of the three market-size numbers a venture investor tests a start-up against.
- Serviceable Available MarketThe slice of the Total Addressable Market a company can realistically reach given its own business model and revenue targets — the market it is actually built to serve.
- Private Equity FundAn AIF investing primarily in equity or equity-linked instruments or partnership interests of investee companies — a Category II fund, and the later-stage counterpart to a venture capital fund.
- Corporate Venture CapitalA large firm taking an equity stake in a small innovative company, often adding management and marketing expertise — a strategic on-balance-sheet investment rather than a pooled fund.
- CrowdfundingRaising small amounts from a large number of individuals through a web platform for a project, venture or cause — a seed-stage and social funding route in India, but not a practical equity route.
- Customer Acquisition CostThe average cost of winning one new customer — read against customer lifetime value, it says whether a start-up is buying revenue at a profit or at a loss.
- Milestone ValuationAn investor protection under which a venture investor pegs the company's valuation to technical or commercial targets in the business plan, so missed milestones can mean a lower valuation or delayed funding.
- Alternative Investment FundA privately pooled investment vehicle registered with SEBI that raises money from select Indian or foreign investors under a defined investment policy — never from the public at large.