Вы находитесь на странице: 1из 31

Concept of Venture

Capital
Why companies need
financing?
► For start-ups or growing companies, as well as
those
facing a major change, financing is one of the key
business issues.
► � New capital is needed e.g. for
1. Financing of product development
2. Financing of market penetration
3. Financing of investments
4. Working capital financing to secure operative
continuity
5. Maintaining liquidity to be able to cover daily
During their start-up, growth and expansion stages,
the companies are often faced with the fact that the
incoming cash flow is not sufficient for the
operations. The company's cumulative cash flow is
negative. The time needed for turning the company's
cash flow positive varies considerably
� A long product development stage and slow
market
penetration prolong the negative cash flow period.
The company can have a negative cash flow for
years, a situation that is typical in high-tech
branches.
Operative
financing
To bridge the deficit in operative financing, the
company has the following choice of available
measures:
1. to ensure that the liquidity planning has been
appropriate
2. to make the clients pay their invoices on time by
offering, for example, discounts for rapid
payments
3. to intensify the collection of sales receivables
4. to delay the payments to suppliers within their
terms of payment
5. to maximize the sales margins to cut indirect
costs
External financing

► to acquire equity capital (e.g.


venture capital
► investors)
► � to borrow capital
► � to apply for public subsidies
What is Venture
Capital/Private
Equity?
► Venture capital is a subset of private equity and
► refers to equity investments made for the launch,early
development, or expansion of a business
► Among different countries, there are variations
► In Europe, these terms are generally used
► interchangeably and venture capital thus includes
management buy-outs and buy-ins (MBO/MBIs).
► This is in contrast to the US, where MBO/MBIs arenot
classified as venture capital
Private equity

► Private equity provides equity capital to enterprises


not quoted on a stock market
► Private equity can be used to develop new products
and technologies, to expand working capital, to
make acquisitions, or to strengthen a company's
balance sheet
► It can also resolve ownership and management
issues - a succession in family-owned companies, or
the buy-out or buy-in of a business by experienced
managers may be achieved using private equity
funding.
► VC finance is a early stage financing of new and
young enterprises seeking to grow rapidly
► VC firms may be private independent funds,
corporate subsidiaries or publicly-funded business
investment corporations.
► Private independent funds are typically organized
as limited partnnership are the larget group and a
typical fund manages about 30 million to
50million $
► Include pension funds, trusts, life insurance
companies
Features of Venture Capital
► Equity Participation
Venture financing is potential equity participation through direct
purchase of shares, options or convertible securities
Assist in the transformation of innovative technology based ideas
into products and services
► Long Term investment
VC requires long term investment attitude that necessitates the
VC firms to wait for a long period to make large profits
► Participation in Management
Ensure continues participation of the venture capitalists in the
management of entrepreneurs management
What venture capitalist
do?
► Raise pools of capital from institutional and individual investors
► Finance new and rapidly growing companies
► Complete business plan development, formulation of plan and strategy,
► Purchase preferred and equity securities and take broad positions
► Add value to the company through active participation
► Take higher risks with the expectations of higher rewards
► Have a long term orientation
► Actually VC develops venture situations in which to invest.
► Receive 20-25% of the ultimate profits of the partnership known as
carried interest.
► Collects an annual fee of 2% of capital lent or invested in equity
► includes
Development in
► Concept was introduced in 1987
India
► It was operated by Industrial development Bank of India
► Same year ICICI also started the same activity
India VC can be grouped as
1. VCFs promoted by central government controlled by developmentl
finance institutions like IFCI
2. VCFs promoted by state government controlled by development
finance institutions
3. VCFs promoted by public sector banks such as canfina (canara
finance) by canara bank, SBI-cap by SBI
4. VCFs promoted by foreign banks and private sector banks and
finance institutions/companies
Origi
n
► The origin of VC can be traced to USA in
the 19th century. After the second world
war in 1946, the American Research
and Development was formed as First
Venture Organization which financed
over 900 companies.
► A major contributor in the development
of advanced countries like UK, Japan
and several European countries
The Process of acquiring Venture
Capital financing

1. The actual venture capital investment made in a company is


preceded by a thorough and selective assessment of potential
investment targets made by the venture capital investor. At the
first stage, the assessment of the investment request is based
on a business plan made by the company.
2. This is the stage where most of the projects (about 90 %) of all
proposed projects are rejected.
3. The initial assessment is made relatively rapidly and therefore
the company should pay attention to two aspects: the business
plan should be carefully prepared and the contact targeted to
the correct investors. A well-prepared business plan summary
is the best means of attracting and convincing the investor.
► The central issues considered by the
venture capital investor at this stage are:
1. Is the company able to conduct profitable
and
growing business operations?
2. Do the company executives have the
necessary qualities to manage the
business in the various development
stages?
3. Will the investor be able to obtain the
desired return through an increase in the
company's net worth?
The process of VC
financing

1. Besides the company's business plan, the venture


capital investor will assess the compatibility of the
investment request against its own investment
strategy
2. The decisive investment strategy criteria may be
company size, development stage, branch or
geographical location.
3. Contacts directed to the correct investors at an
early
stage of the process will save time and diminish the
probability of negatives.
1. Should the investor decide that the
investment request meets his
criteria, the
following step is a meeting arranged
with the company management
� Experience has shown that about
half of the remaining companies are
discarded at the negotiation stage
The third stage, or the due diligence stage, involves a
thorough study of the target company by the venture
capital investor who assesses the company on the basis
of his own, weighted investment criteria.
� The preparedness of the company management to
launch and develop the business in question is generally
seen as the most important criterion.
� Other vital issues include the size and development of
the company's target market, the competitiveness of the
company's product and technology as well as the capital
required by the business at the actual investment stage
and the eventual additional investment needs.
1. During the second and third stage of the
assessment process, the investor
determines the value of the company. Once
the entrepreneur and the investor have
agreed on the value, the investor's future
shareof the company is determined.
2.The entry valuation of investor will depend
on factors such as investors return
expectations, proportion of the company
that the management will give up to attract
the investments and the view of the
opportunity for new concept, product or
service
� The intention is to liquidate the shareholding in
early
phase companies after 4-8 years and in companies
with follow-on funding after 1-3 years

� In the end, the investment is made in about 3 to 4


%
cases of all received investment requests. The
parties finally make a shareholder agreement to
establish practical operating rules.

� VC’s exit could be anything between liquidation and


IPO
Process pf VC
► Deal origination
► Screening
► Evaluation (due diligence)
► Deal structuring
► Post investment activity
► Exit Plan
Stages of VC
financing

1. Seed stage financing


� The venture is still in the idea formation stage and its product
or
service is not fully developed. The usually lone founder/inventor
is given a small amount of capital to come up with a working
prototype. Monies may also be spent on marketing research,
patent application, incorporation, and legal structuring for
investors.
� It's rare for a venture capital firm to fund this stage. In most
cases, the money must come from the founder's own pocket,
from the "3 Fs" (Family, Friends, and Fools), and occasionally
from angel investors.
2. Start up financing
� The venture at this point has at least one
principal working full time. The search is on
for the other key management team
members and work is being done on testing
and finalizing the prototype for production
3.First -stage financing
� The venture has finally launched and achieved
initial
traction. Sales are trending upwards. .A
management team is in place along with employees
� The funding from this stage is used to fuel sales,
reach the breakeven point., increase productivity,
cut unit costs, as well as build the corporate
infrastructure and distribution system. At this point
the company is two to three years old
4.Second -stage financing
� The company is also rapidly accumulating accounts
receivable 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 accounts
receivable.
� Venture capital firms specializing in later stage
funding enter the picture at this point
5. Mezzanine or Bridge financing
� At this point the company is a proven winner and investment
bankers have agreed to take it public within 6 months.

Mezzanine or bridge financing is a short term form of financing


used to prepare a company for its IPO. This includes cleaning
up the balance sheet to remove debt that may have accumulated,
buy out early investors and founders deemed not strong enough to
run a public company, and pay for various other costs stemming
from going public.

� The funding may come from a venture capital firm or bridge


financing specialist. They are usually paid back from the
proceeds of the IPO.
6. Initial Public Offering (IPO)
� The company finally achieves liquidity by being
allowed to have its stock bought and sold by
the
public. Founders sell off stock and often go
back to square one with another startup.
� Please note that some companies have more
financing stages than shown above and others
may have fewer. Very few reach the bridge and
IPO stages. It all depends on the individual
company.
Features of Venture Capital
► Equity Participation
Venture financing is potential equity participation through direct
purchase of shares, options or convertible securities
Assist in the transformation of innovative technology based ideas
into products and services
► Long Term investment
VC requires long term investment attitude that necessitates the
VC firms to wait for a long period to make large profits
► Participation in Management
Ensure continues participation of the venture capitalists in the
management of entrepreneurs management
What venture capitalist
do?
► Raise pools of capital from institutional and individual investors
► Finance new and rapidly growing companies
► Complete business plan development, formulation of plan and strategy,
► Purchase preferred and equity securities and take broad positions
► Add value to the company through active participation
► Take higher risks with the expectations of higher rewards
► Have a long term orientation
► Actually VC develops venture situations in which to invest.
► Receive 20-25% of the ultimate profits of the partnership known as
carried interest.
► Collects an annual fee of 2% of capital lent or invested in equity
► includes
Development in
► Concept was introduced in 1987
India
► It was operated by Industrial development Bank of India
► Same year ICICI also started the same activity
India VC can be grouped as
1. VCFs promoted by central government controlled by developmentl
finance institutions like IFCI
2. VCFs promoted by state government controlled by development
finance institutions
3. VCFs promoted by public sector banks such as canfina (canara
finance) by canara bank, SBI-cap by SBI
4. VCFs promoted by foreign banks and private sector banks and
finance institutions/companies
Origi
n
► The origin of VC can be traced to USA in
the 19th century. After the second world
war in 1946, the American Research
and Development was formed as First
Venture Organisation which financed
over 900 companies.
► A major contributor in the development
of advanced countries like UK, Japan
and several European countries
Methods of venture financing
► Equity: gets a status of an owner and becomes entitled to a
share in the firms profit as much as liable for losses
► Conditioned Loan: which is repayable in the form of royalty
after the venture is able to generate sales
► Income note: It’s a hybrid security combinations of
conventional loan and conditional loan
► Participating debentures: convertible loan, Preferred
ordinary share etc.
Flavors:
VC`s segment can be in many ways
-Sector wise like health, IT services etc
-Size- small fund or large fund
-Geography, US, India, EU
-Stage-seed, mezzanine etc

Вам также может понравиться