Introduction

Venture Capital

 Definition - Venture capital is defined as

long-term funds in equity or debt form to
finance hi-tech projects involving high
risk and yet having strong potential of
high profitability.
Concept
 Venture capital investment firms raise
and pool together money from
institutional investors and other high net
worth individuals. These venture capital
funding firms quite often provide
managerial and technical expertise apart
from funds for the business.
Continued
 Venture capitalists are typically very
selective in deciding what to invest in; as
a rule of thumb, a fund may invest in
one of four hundred opportunities
presented to it. Funds are most
interested in ventures with exceptionally
high growth potential.
What to look for in a ptoject
 Promoter’s Integrity,
 Relevant Experience,
 Drive Level.
 Uniqueness Of their IDEA
 Focus on their IDEA
 High Entry Barriers
 Competitive Advantages
 Good Market Size & Growth
Continued
 There are typically six stages of
financing offered in Venture Capital, that
roughly correspond to these stages of a
company's development.
 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
Continued
 3. First-Round: Early sales and
manufacturing funds Capital for a
venture that has successfully passed the
initial start-up phase.
 4. Second-Round: Working capital for
early stage companies that are selling
product, but not yet turning a profit
Usually provided by venture capital firms
and (investment) banks Often used for
marketing the products.
Continued
 5. Third-Round: Also called Mezzanine
financing, this is expansion money for a
newly profitable company Sometimes
another round of financing is necessary
before being profitable.
Continued
 6. Fourth-Round: Also called bridge
financing, 4th round is intended to
finance the "going public" process
Subsidies Dependent on the laws and
regulations in a specific country, (start-
up) companies can often apply for
subsidy by the public sector
Features
 It is basically equity finance in relatively new
companies when it is too early to go to the capital
market to raise funds. However such investment is
not exclusively equity investment.
 Long term Investment in growth oriented small/
medium firms.
 Investment made in equity, investors wait for 5-7
years to reap the benefits of capital gain.
 Investments are made in innovative projects
 Investors does not interfere in day-to-day business
affairs. But substantial degree of active involvement
of the VCI (venture capital institutions).
Selecting of investment
 Stages of financing
 Financial analysis
Structuring of the deal/ financial
instrument
Equity instruments
 Ordinary equity shares
 Non-voting equity shares
 Deferred equity shares
 Preferred ordinary shares
 Equity warrents
 Preference shares
 Cumulative convertible preference shares
 Participating preference shares
Continued
Debt instrument
 Conditional loan
 Conventional loan
 Income notes
 Non convertible debentures
 Partly convertible debentures
 Zero interest coupon
 Deep discount bonds
Aftercare
Styles –
 Hands on nurturing
 Hands-0ff nurturing
 Hands holding nurturing
Objectives
Techniques
Personal discussion
Plant visit
Feedback through nominee director
Periodic reports
Valuation of portfolio
 Equity investments
1)Cost method
2)Market value based method
 Debt instruments
 Convertible debt
1)Market value method
2)Fair value method
 Non convertible debt
Exit
Disinvestment of equity/ quasi-equity
investments
 Going public/IPO
 Sale of shares to entrepreneurs/
employees
 Trade sale
 Sales to a new investor
 Liquidation
Exit of debt instrument
 It has to follow the pre-determined route.
In case of normal loan the exit is
possible at the end of the period of loan.
If the loan agreement permits whole or
part can be converted into equity prior to
that.