VENTURE CAPITAL FINANCING

BY B.HARIHARAN

Here in the above diagram we can conclude the following

For venture to happen there should be a concept or idea There should be a person to invest

If it happens then it is called as venture

The benefits are enormous but also involve risk

The risks may pay off or sometimes may backfire

INTRODUCTION

It plays a strategic role in financing small scale enterprises, high technology and risky ventures The venture capital activity has taken route in number of developing countries. It has potential to become an important source for financing of small scale enterprises

MOTION OF VENTURE CAPITAL

DEFINITION :

Venture capital is the investment of long term equity finance where the venture capitalist earns his return primarily in the form of capital gain -according to Pratt

 Significant

financial innovation of 20th century Generally considered as synonym of risky capital Often thought as early stage financing for new &young enterprises Focuses on growth that would like to see in small scale enterprises while they develop into large enterprises Used for fostering the growth and development of enterprise Business enterprise in various sectors need venture capital for financing various stages of development

3.5
3 2.5 2 1.5 1 0.5 0 0 1 2 3 4 1 2 4 3 5 6 9

7
8

SEED FINANCING FOR SUPPORTIG OF CONCEPT OR IDEAS

R&D FINANCING FOR PRODUCT DEVELOPMENT

STARTUP CAPITAL FOR INITIAL PRODUCTION AND MARKETING 1ST STAGE FINANCING FOR FULL SCALE PRODUCTION AND MARKETING 2ND STAGE FINANCING FOR WORKING CAPITAL $INITIAL EXPANSION

DEVELOPMENT FINANCING FOR FACILITATING PUBLIC ISSUE

BRIDGE FINANCING FOR FACILITATING PUBLIC ISSUE ACQUISITION FINANCING FOR ACQUIRING ANOTHER FIRM FOR FUTURE GROWTH MANAGEMENT BUY OUT FINANCING FOR ENABLING OPERATING GROWTH WHILE ACQUIRING A FIRM COMPLETELY OR A PART OF IT

DEFINITIONS
A business

plan is a formal statement of a set of business goals, the reasons why they are believed attainable, and the plan for reaching those goals. It may also contain background information about the organization or team attempting to reach those goals process of creating the business plan which is A statement of long-range strategy and revenue, cost, and profit objectives usually accompanied by budgets, a projected balance sheet, and a cash flow statement. .

The

A written

document which describes the business, its objectives, its strategies, the market in which it operates and its financial forecasts

First step for a company or an enterprise proposing a new venture in obtaining venture capital is to prepare a business plan for the consideration of a venture capitalist(share holders) . The business plan must be so that it convinces the venture capitalist and the company entrepreneur that they have the ability to achieve the stated goals within the specified time It should explain -nature or the proposed venture plan -what it wants to achieve -how is it going to achieve -prepare or set challenging but achievable goals -Length should not be long -language should be simple & all technical details should be explained without jargons

EXECUTIVE SUMMARY BACKGROUND ON THE VENTURE

THE PRODUCT OR SERVIVE

MARKET ANALYSIS

MARKETING
BUSINESS OPERATIONS

THE MANAGE MENT TEAM

EXECUTIVE SUMMARY
It is the most important aspect of a business plan as Summarizes the business plan It is placed at the beginning It is vital to give this summary significant thought and time as it may well determine the amount of consideration the venture capital investor will give to the detailed proposal

BACKGROUND ON THE VENTURE The business plan should provide a summary of the fundamental nature of the proposed venture and its activities and should also mention an outline of its objectives THE PRODUCT OR SERVICE -The plan should explain ventures product /service in plain language -This is important if the product is technically oriented -A non specialist should also be able to understand the plan -should emphasize the product/services competitive edge or unique selling point -describe the state of development of the product /service

MARKET ANALYSIS
-The plan should convince the venture capitalist that there is a real commercial opportunity for the business and its product/service. -It should define the market for the product/service and explain in which industry or sector the venture will operate. It should answer the following questions a) What is the size of the whole market? b) What are the prospects for this market? c) How developed is the market as a whole? d) How does the company fit within the market? e) Who are the competitors? f) What is their strategic positioning? g) What are their strengths and weaknesses?

MARKETING
-Once defined who ,how, what & others it is necessary to address how the prospective business will expand these opportunities. -The plan should outline the companies sales and distribution strategy It should answer the following questions a) What is the companies planned sales force? b) What are its strategies for different markets? c) What is the companies pricing strategy? d) How is it as compared with competitors? e) What are the companies advertisement, public relations and promotion plans?

BUSINESS OPERATIONS
The plan should explain -how the business operates -how the company makes the product -what are services provided -and others It should answer the following questions a) What are the sources of raw material? b) Who are the suppliers? c) What are labor requirements? d) What is the companies approach to industrial relations? The plan should out line the companies approach towards R&D

THE MANAGEMENT TEAM

The business plan should demonstrate that the company has duality management team which is able to turn the plan into a reality. The senior management team should be experienced in complementary areas such as Marketing strategy Finance & marketing and their roles should be specified The plan should explain 1) Control 2) Performance 3) Measures and remuneration for management 4) Employees and others

FINANCIAL PROJECTIONS
The proposer should consider using an external account to verify and act as devils advocate for this part of the plan. The plan should assess sales, fixed & vc, cashflow & working capital. It should produce profit &loss statement , balance sheet and ensure that these are easy to update and adjust. The plan should demonstrate companys growth prospects over 3-5 years. It should also include the following points: What is value attribution to companys net tangible assets. What is level of gearing?(debt to shareholders fund ratio) What is cost associated with business? What are budget for each area of companys activities? The plan should be feasible and not optimistic. It should highlight challenges and how they will be met.

AMOUNT AND USE OF FINANCE REQUIRED & EXIT OPPORTUNITY

The business plan should state how much finance is required by the business and from what source i.e. management , venture capital and others and explain the purpose for which it will be applied. It should consider how the venture capital investor will exit the investment and make a return . Possible exit strategies for investors may include a) Floating the company on stock exchange b) Selling the company to trade buyers