Informal Risk Capital & Venture

Capital
Stages of Business Development Financing

 Early stage Financing

 Development/Expansion Financing

 Acquisition Financing
Risk Capital Markets

 Informal Risk Capital Market

 Venture Capital Market

 Public – Equity Market

 Informal Risk Capital

 Business Angels
 Characteristics:
Well educated with many having graduate degree
Will finance firms anywhere within country
Have cluster of 9 to 12 other investors
One to two deals each year
Most finances are in start up or ventures less than 5
years old
Famous names include

 Vinod Dham, father of Pentium Chip, and now the

CEO of The Silicon Spice, one of the most
watched start-ups in Silicon Valley today

 Shailesh Mehta, CEO and President of Providian

Financial and man who is using technology to
reorder consumer finance
Reasons for Rejecting Proposals

Risk/return ratio not adequate

Inadequate management team
Not interested in proposed business area
Unable to agree on price
Principals not sufficiently committed
Unfamiliar with area of business
Sources of finding a Deal

 Personal Research
 Friends
 Investment bankers / Business Brokers
Venture Capital
 Definition

 Dr. Neil Cross : Venture capital investment is defined as

the provision of high risk bearing capital, usually in the
form of a participation in equity, to companies with high
growth potential. The venture company also provides
some value added service, in the form of management
advice and contribution to overall strategy.
 Guruswamy: Venture capital investment is an activity by
which investors support entrepreneurial talent with
finance and business skills to exploit market
opportunities and thus obtain long term capital gain.
Objectives of VCFs in India

 It injects long term equity finance which provides a solid

capital base for future growth
 The Venture capitalists is the business partner, sharing both
risks and rewards. Venture capitalists are rewarded by
business successes and capital gain
 Venture capitalists provide practical advise and assistance to
company based on past experiences with other companies
 Venture capitalists also has a network of contacts in many
areas that can add value to the company
Features of Venture Capital

 Participation is equity oriented

 Long term growth oriented investments
 Active involvement of venture capitalists
 High risk return capital
 Broad in its scope
 Preferred in small and medium enterprises
 Where do venture capital firm obtain their money?
 Perception of Venture Capitalists
Superior Business
Quality and Depth of Management
Appropriate Investment Process
Exit Opportunity
 Entrepreneur’s Role in assessing venture capitalists
General Valuation Approaches

 Comparable publicly held companies

 Present Value of future cash flow
 Replacement Value
 Book Value
 Earnings Approach
 Factor Approach
Techniques for obtaining information by
VCIs

 Personal Interaction
 Plant Visits
 Feedback through nominee director
 Special Studies
Structure of Venture Capital Industry in
India

 Types of Venture Funds:

– VCFs promoted by the central government: Risk
Capital and Technology Financial Corporation
Limited (RCTFC) by Industrial Financial
Corporation of India (IFCI) and Risk Capital
Fund by IDBI
– VCFs promoted by state government: Gujarat
Venture Finance Company Limited (GVCFL) by
Gujarat Industrial Investment Corporation
Cont…

– VCFs promoted by public sector banks: Cafina

by Canara bank, SBI-Cap promoted by State
Bank of India
– VCFs promoted by foreign banks: Private
sector companies and financial institutions such
as Indus Venture Fund, Credit Capital Venture
Fund and Grinlay’s India Development Fund
Venture Capital Investment Process in
India

 Deal Origination
 Screening
 Due Diligence
Preliminary evaluation
Detailed evaluation
Commercial orientation
 Deal Structuring
 Post Investment Activities

 Exit
Forms of Venture Capital in India

 Equity

 Conventional Loan

 Conditional Loan

 Income Note