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VENTURE

VENTURE CAPITAL
CAPITAL
INTRODUCTION

Venture- A project or activity that involves risk


Capital- The money or fund needed business
Venture Capital- The capital invested in a project in which
there is a substantial element of risk, typically a new or
expanding business.
CONCEPT OF VENTURE CAPITAL

 Venture capital is a type of private equity


capital typically provided by professional,
outside investors to new, growth
businesses .

It is emerging as a potent source of risk


financing to new ventures.

 It also provides managerial as well as


technical expertise to the potential
entrepreneurs.
 An Idea

 Start Up

 Fledgling and

 Establishment
PROCESS OF VENTURE
CAPITAL FINANCING
Deal
Screening

Detailed Evaluation & Structuring


Investment

Monitoring
Exit
PROCESS OF VENTURE CAPITAL
FINANCING CONT.
 Deal Origin : It is essential for venture capital
firm to have continuous source of deals in order to
survive and grow in market.
 Screening : VC firm carry out initial screening of
all the project on the basis of some broad criteria.
VCF usually prefer investing in technology related
industry which involves development at large
scale. E.g. Software industry, IT, pharmaceuticals,
bio technology, agriculture and allied industries.
They ensure success rate of project before
investing on the same.
PROCESS OF VENTURE
CAPITAL FINANCING CONT.
 Evaluation : VCF go in for detailed evaluation of
entrepreneurs business for screening business plan,
evaluating management team of company, understanding
credibility of entrepreneur of business as they invest huge
amount of money and bare high risk.
 Deal structuring : Once the proposal is found it to be
viable, then VC and entrepreneur enter into contract which
is known as deal structuring which includes
a) VC right to control business
b) board members
c) right to replace management in case of poor
performance
d) buyback agreement and acquisition
e) earn out agreements etc.
Repurchase
V.C. Investment
Involmentry Exit
repurchases by
Companies usually
management
fail and going to
liquidation
Trade Sale
Company sold to
commercial buyer
Venture
Capital Exit
Routes

Stock Market Refinancing


Floatation Purchase of the
Through issuing IPO venture capital
share by a long term
financial institution
GENERAL VALUATION APPROACH OF
COMPANY

 General valuation : all companies in same


set of industries are compared with each
other depending on the evaluation credibility
of business idea
 Present value of future cash flow : future
sale and profits of company is predicted
based on the same capital is provided in
present date to company. For purpose of
 prediction past performance of data is taken
as
 basis.
 Long-time horizon: VC undertakings take
minimum 5-10 years to become commercially
successful and hence to be patient.
 Lack of liquidity: Project is expected to run at
start-up stage for several years.
 High risk: The risk of the project is associated
with management, product and operations.
 Equity participation and capital gains: VC
invests his money in terms of equity, capital
gain comes when the project succeeds.
 Participation in management: Venture
capitalist can provide managerial expertise to
entrepreneurs besides money.
 Finance - The venture capitalist injects long-term equity
finance, which provides a solid capital base for future
growth.
 Business Partner - The venture capitalist is a business
partner, sharing the risks and rewards.
 Mentoring – The venture capitalist is able to provide
practical advice to the company based on past experience
with other companies which were in similar situations.
 Alliances - The venture capitalist also has a network of
contacts in many areas that can add value to the company
 The VC may be capable of providing additional rounds of
funding should it be required to finance growth.
 IPO - Venture capitalists are experienced in the process of
preparing a company for an IPO
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.
5. Third-Round: Also called Mezzanine financing, this is
expansion money for a newly profitable company
6. Fourth-Round:
 Also called bridge financing, it finance the "going public
process”
 For market research and product development
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
FUNCTION OF VENTURE CAPITAL
VENTURE CAPITAL FUND IN INDIA
The concept of venture capital was formally introduced in
India in 1987 by IDBI.
VCFs in India can be categorized into five groups:
1) Those promoted by the Central Government
controlled development finance institutions. For
example:
- ICICI Venture Funds Ltd.
- IFCI Venture Capital Funds Ltd (IVCF)
- SIDBI Venture Capital Ltd (SVCL)
2) Those promoted by State Government controlled
development finance institutions. For example:
- Punjab Infotech Venture Fund
- Gujarat Venture Finance Ltd (GVFL)
- Kerala Venture Capital Fund Pvt Ltd.
3) Those promoted by public banks.For example:
- Canara bank Venture Capital Fund
- SBI Capital Market Ltd
4)Those promoted by private sector
companies. For example:
- IL&FS Trust Company Ltd
- Infinity Venture India Fund
5)Those established as an overseas venture
capital fund. For example:
- Walden International Investment Group
- HSBC Private Equity
management Mauritius Ltd
 AS PER SEBI
 AS PER INCOME TAX ACT,1961
 Top Cities attracting Venture Capital Investments
 Help in the rehabilitation of sick units.
 Assisting small ancillary units to upgrade their
technologies
 Developing tourism, publishing, health care etc.
 Financial assistance to people coming out of
universities, technical institutes, etc
NEDFI

 Joint initiative of NEDFI &


M-Doner
 Started operation from 2017
 6 Venture till now
 Venture capital firms typically source the
majority of their funding from large investment
institutions.

 Investment institutions expect very high ROI

 VC’s invest in companies with high potential


where they are able to exit through either an
IPO or a merger/acquisition.

 Their primary ROI comes from capital gains


although they also receive some return through
dividend.