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Understanding Venture Capital Basics

The document discusses venture capital including its definition, features, selection process, stages of financing, financial analysis methods, and structuring deals. Venture capital involves equity investment in growth-oriented small/medium businesses in return for shares. The selection process includes evaluating business plans, feasibility studies, and owner track records. Stages include early seed/startup financing and later expansion/buyout financing. Financial analysis methods are described. Structuring deals involves different equity and debt instruments.

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Divya Chopra
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13 views12 pages

Understanding Venture Capital Basics

The document discusses venture capital including its definition, features, selection process, stages of financing, financial analysis methods, and structuring deals. Venture capital involves equity investment in growth-oriented small/medium businesses in return for shares. The selection process includes evaluating business plans, feasibility studies, and owner track records. Stages include early seed/startup financing and later expansion/buyout financing. Financial analysis methods are described. Structuring deals involves different equity and debt instruments.

Uploaded by

Divya Chopra
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Venture capital

 It is defined as equity investment in a growth oriented


small/medium business to enable investees to
accomplish corporate objectives, in return for minority
shareholding in the business or the irrevocable right to
acquire it.

 Venture capital institution/fund- Intermediary


between investors looking for returns and
entrepreneurs who need institutional capital as they
are yet not ready to go to the public.
Venture capital
 Features

- Primarily equity finance


- Long term investment
- Substantial degree of active involvement
- High risk return spectrum
- Not only technology finance
Selection of investment
 Business plan feasability study track record of
owner etc

Stages of financing

1. Early stage – Seed capital , Start up , Second round


financing
2. Later stage – Mezzanine capital, Bridge/Expansion,
Buyouts, Turnaround
Selection of investment(stages)
1. Early stage

 Seed capital /pre start up


- Applied research phase
- Entrepreneurial skills match with the market
opportunity
- High risk
- Marketing related risk
Selection of investment(stages)
 Start up
- Includes new projects based on technology, knowledge
new projects by established companies or a new
company
- Indication about potential market
- High risk

 Second round financing


- Product launched but not profitable
- large funds
- Debt and some income
Selection of investment(stages)
2. Later stage financing
 Mezzanine /development capital
- Require additional finance but cannot resort to public
issue
- Expansion , penetration ,new management etc

 Bridge/expansion
- Low risk
- Acquisition of other firms
Selection of investment(stages)
 Buyout
- Management buyout
- Management buyins

 Turnaround
- Buying the control of sick company
Selection of investment (FA)
Financial analysis

 Various methods include


I Conventional Venture Capitalist Valuation Method
II The First Chicago Method
III The Revenue Multiplier Method
Selection of investment (FA)
I Conventional Venture Capitalist Valuation Method

- Two points of time- starting time and exit time


- Steps
✓ Compute the annual revenue at the time of liquidation
✓ Compute the expected earnings level
✓ Compute the future market valuation of VCU
✓ Obtain the PV of VCU
✓ PV= Rs 50 lakhs , Fund= Rs 20 lakhs, Ownership=
40%
Selection of investment (FA)
II The First Chicago Method
- Considers the entire earning stream
- Steps
✓ Scenarios- Success , Sideway survival, Failure and their
probability
✓ Find discounted present value under three scenarios
✓ PV * Prob
✓ Assume PV= Rs 5 cr, Fund= Rs 2.5 cr, Ownership=50%
Selection of investment (FA)
III The Revenue Multiplier Method
- Mt = (1 +r)n ap
(1+d)n
V= PV
R = annual revenue
r= expected growth rate
n=expected no of years
a= expected profit margin at the time of exit
p= expected P/E ratio
d= discount rate
Selection of investment ( Structuring)
Structuring the deal / Financial Instruments

 Refers to financial instruments through which investment is made.


 Types
1. Equity
- Ordinary
- Non voting
- Deferred
- Preferred
- Equity warrants
- Preference shares
- Cumulative convertible pref shares
- Participating pref shares
- Cumulative convertible participatory preferred ordinary
- Convertible cumulative redeemable preference shares

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