VENTURE CAPITAL
SAMYAK ANAND
MBA B&F
A50050220004
MEANING
Venture capital means funds made available for startup firms and small
businesses with exceptional growth potential.
Venture capital is money provided by professionals who alongside
management invest in young, rapidly growing companies that have the
potential to develop into significant economic contributors.
ROLE
Venture Capitalists generally:
Finance new and rapidly growing companies
Purchase equity securities
Assist in the development of new products or services
Add value to the company through active participation.
DEFINITION GIVEN BY SEBI
The SEBI has defined Venture Capital Fund in its
Regulation 1996 as ‘a fund established in the form
of a company or trust which raises money through
loans, donations, issue of securities or units as the
case may be and makes or proposes to make
investments in accordance with the regulations’.
CHARACTERISTICS
Long time horizon
Lack of liquidity
High risk
Equity participation
Participation in management
ADVANTAGES
It injects long term equity finance which provides a solid capital base for
future growth.
The venture capitalist is a business partner, sharing both the risks and
rewards. Venture capitalists are rewarded by business success and the
capital gain.
The venture capitalist is able to provide practical advice and assistance to
the company based on past experience with other companies which were
in similar situations.
ADVANTAGES
The venture capitalist also has a network of contacts in many areas that
can add value to the company.
The venture capitalist may be capable of providing additional rounds of
funding should it be required to finance growth.
Venture capitalists are experienced in the process of preparing a
company for an initial public offering (IPO) of its shares onto the stock
exchanges or overseas stock exchange such as NASDAQ.
They can also facilitate a trade sale.
STAGES OF FINANCING
1. Seed Money:
Low level financing needed to prove a new idea.
2. Start-up:
Early stage firms that need funding for expenses associated with
marketing and product development.
3. First-Round:
Early sales and manufacturing funds.
4. Second-Round:
Working capital for early stage companies that are selling product, but not
yet turning a profit .
STAGES OF FINANCING
5. Third-Round:
Also called Mezzanine financing, this is expansion money for a newly
profitable company
6. Fourth-Round:
Also called bridge financing, it is intended to finance the "going public"
process
RISKS IN EACH STAGE
Financial Stage Period (Funds Risk Perception Activity to be
locked in years) financed
For supporting a
Seed Money 7-10 Extreme concept or idea or
R&D for product
development
Initializing
Start Up 5-9 Very High operations or
developing
prototypes
Start commercials
First Stage 3-7 High production and
marketing
Financial Stage Period (Funds Risk Perception Activity to be
locked in years) financed
Expand market and
Second Stage 3-5 Sufficiently high growing working
capital need
Market expansion,
acquisition &
Third Stage 1-3 Medium product
development for
profit making
company
Fourth Stage 1-3 Low Facilitating public
issue
VENTURE CAPITAL INVESTMENT PROCESS
DEAL ORIGINATION
SCREENING
DUE DILIGENCE
DEAL STRUCTURING
POST INVESTMENT ACTIVITY
EXIT PLAN
METHODS OF VENTURE FINANCING
The financing pattern of the deal is the most important element. Following
are the various methods of venture financing:
Equity
Conditional loan
Income note
Participating debentures
Quasi equity
EXIT ROUTE
Initial public offer(IPOs)
Trade sale
Promoter buy back
Acquisition by another company
CRITICAL FACTORS IN SUCCESS OF
VENTURE CAPITAL
The regulatory, tax and legal environment should play an enabling role as internationally
venture funds have evolved in an atmosphere of structural flexibility, fiscal neutrality and
operational adaptability.
Resource raising, investment, management and exit should be as simple and flexible as
needed and driven by global trends.
Venture capital should become an institutionalized industry that protects investors and
investee firms, operating in an environment suitable for raising the large amounts of risk
capital needed and for spurring innovation through start-up firms in a wide range of high
growth areas.
In view of increasing global integration and mobility of capital it is important that Indian
venture capital funds as well as venture finance enterprises are able to have global
exposure and investment opportunities
THANK YOU