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VENTURE

CAPITAL
INTRODUCTION
 VENTURE CAPITAL (also known as VC or
Venture) is a type of private equity capital
typically provided to immature, growth
company in the interest of generating a
return. Venture capital investment are
generally made as cash in exchange for
shares in the invested company. The first
VC firm was American Research and
Development Corporation in 1946.

DEFINITION
VENTURE CAPITAL can be defined as funds

that are generally invested in the form of


equity. Investments may take the form of
simple shareholder’s equity (common or
preferred shares), as well as convertible
debentures and other vehicles. The structure
of the investment generally depends on the
company’s needs and its stage of
development, taking into account the
objectives of both entrepreneur and the
investor.
How does the Venture
Capital model work
 Investors invest money in a fund (usually a
Trust)
 The fund has a fixed life (usually 5+2 years)
 Asset management company manages
investments for the Trust
 The AMC charges the fund an annual
operating cost of approx. 2.5% per annum
 The fund has invests in several companies
which are IPO’s/ acquired
 The upside is shared between the AMC and
investors approx 25:75 subject to a
minimum invested return

OBJECTIVES
Ø Venture capital helps in creating
environment particularly suitable for
knowledge and technology based
enterprises due to the blend of risk
financing and hand holding of
entrepreneurs.

Ø
Ø Venture capitalists provide networking,
management and marketing support.
CONTD..
ØGlobal venture capital industry,
investors and investee firms work
together closely in an enabling
environment.
1.
ØIt helps entrepreneurs to focus on
value creating ideas and allows
venture capitalists to drive the
industry through ownership.

Features
 Equity participation: Venture capital is actual or
potential equity participation through direct purchase of
shares, the objective is to make capital gain by selling-off
investment becomes profitable.
 Long term investment: Venture financing is a
long-term illiquid investment; it is not payable on demand.
It requires long term investment attitude that necessitates
the venture capital firms(VCFs) to wait for a long period.
 Participation in management: Venture
financing ensures continuing participation of the venture
capitalist in the Mgt. of the entrepreneur’s business,. More
than finance, venture capitalist gives his marketing,
technology planning and management skill of the new firm.

ADVANTAGES
ØThe investment is in the form of capital, the
company's financial structure and financial
ratios are improved accordingly, giving the
entrepreneur the necessary flexibility and
financial capacity to achieve his objectives;

ØLittle or nothing to repay in the short term, so


that the capital invested and funds
generated internally can be used
exclusively to accelerate the company's
growth;
ØIt helps in technological development of the
country
Contd..
Ø The venture capitalist is not there to
man stimulate its growth through
active strategic support and
constructive involvement, by giving the
entrepreneur the benefit of his own
experience as well as that of his
business network.
Ø It helps in the industrialization of the
country
Ø It generates the employment
Ø It develops entrepreneurial skills

Disadvantage
 The lessee has a lower debt capacity.

 It
may be difficult to offload equity
stake.
 The agency cost is generally high to
prevent the misuse of asset.
 Depreciation tax shield will be
transferred to the lessor
Stages of financing

 Seed or Concept stage financing: The venture is


still in idea formation stage and its product and service is
not fully developed. The usually investor is given a small
amount of capital to come up with a working prototype.

 Start up financing: When the firm is set up to manufacture
a product or provide a service, start up finance is provided
by the venture capitalist. This is for full scale
manufacturing and further business growth
.

 First-stage financing: The venture has finally launched &


achieved initial transaction, Sales are trending upwards.
The funding from this stage is used to fuel sales, reach the
Breakeven point, increase productivity, cut unit costs, as
well as to build the corporate infrastructure and distribution
system.
Contd…

 Second-stage financing: Sales at this stage starting to


snowball. The company is also rapidly accumulating account
receivables and inventory. Capital from this stage is used for
funding expansion in all its forms from meeting increasing
marketing expenses to entering new markets to financing rapidly
increasing account receivables.

 Third stage financing: At this stage future is so bright .
Everything looks good, Sales are climbing, Customers are
happy. Money from this financing used for increasing plant
capacity, marketing, working capital, and product improvement
and expansion.

 Bridge financing: At this point the company is a proven
winner and investment bankers have agreed to take it
public with in 6 months. Bridge financing is a short term
form of financing used to prepare a company for its IPO.

Criteria to be adopted
while making investment
decisions
 The track record of entrepreneur and his
management team.
 The technical performance assumption of
project.
 Rapidly growing market opportunities.
 Long-term competitiveness advantage in
terms of price/cost.
 Return opportunities.
Disinvest
Mechanism
 Promoter’s buy back: It is the most popular
disinvestment route in India. This is suited to Indian
condition Because it keeps the ownership and control
of the promoter intact.

 Public issue: The benefits of disinvestment via initial


public offerings route are improved marketability and
liquidity.

 Sale to other venture capital funds:

 Sale in OTC markets:

 Management buy outs: The promoters of new
venture, which has taken off, may sell it to its
managers.