Venturecapital Unit 5

VENTURE
CAPITAL
Rajendran Ananda Krishnan
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SYLLABUS
 Informal risk capital market
 Venture capital
 Nature and overview, venture capital process
 Locating venture capitalists
 Approaching venture capitalists.
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FINANCING THE BUSINESS
 Early stage financing : refers to financial
assistance required by the business during
beginning of business operations. Two types
are financing are available during this stage
they are seed capital and start up capital.
 Development financing : refers to an
established business which for purpose of
development moves in for expansion of
business. Finance required at this stage is
know as development or expansion
financing.
 Acquisition financing : it refers to finance
required by the company for the purpose of
acquiring other organizations.
 Risk capital market refers to market
providing debt and equity to non secure
financing institution.
 Informal risk capital markets consist of
virtually invisible group of wealthy investors
called as business angels.
 Public equity market : risk capital market
consisting of publically owned stock of
companies.
ANGEL INVESTORS
 Angles are early stage investors to
business. Angle investors provide capital
and valuable guidance to entrepreneurs.
These investors along with financial capitals
also provide intellectual capital to
entrepreneurs.
FEATURES OF ANGEL INVESTOR
 Angel investors prior to entrepreneurs
understand the needs of business and
entrepreneurs and are able to provide
useful expertise and assistance
 An angel investor is generally an
independent wealthy person who takes risk
on investment
 Angels take vested interest in the business
start up in which they invest and become
actively involved in the company to assist in
other than financial aspects of business
 Angel investors help entrepreneurs create
their business by supplying the funding,
office infrastructure, sufficing management
with required expertise to assist
entrepreneurs in running the business.
Venture capital
 Venture capital is early stage financing of
new and young enterprises seeking to grow
rapidly. Venture capitalist finances high and
new technology based enterprises where the
banks or financial institution generally
support proven technology with established
markets.
 Venture capital is also described as
unsecured risk financing. Venture capitalist
directly purchases equity shares of
entrepreneur and participates in the
management of entrepreneur business.
FEATURES OF VENTURE CAPITAL
 Investment by venture capital firms are made in
high tech areas using new technology or
producing innovative goods by using new
technology.
 Venture capitalist invest in long term start up
costs to high risk, high reward project.
Technology used in the projects undertaken by
the venture capitalist in new and unproven
projects.
 Return on venture capital investment is illiquid.
Return period may vary from seven to ten
years. Investment of venture capitalist is neither
repayable, return is possible only when share of
company is sold at market price.
 Venture capitalist not only invest in equity
shares of company but also participate in
management affairs of business. So venture
capitalist not only participate in business but
also build business.
 Venture capitalist use their wide contact with
the experts in technology and management
areas and provide strategic input to
entrepreneurial team in order to reduce
uncertainties.
 Venture capitalist firm encourages, nurture
and help the entrepreneur grow because he
has limited resources, high level of risk.
Venture capitalist also help entrepreneurs to
market company products.
 Investment by VCF are predominantly made
in equity as shares because the dividends
can be delayed till the company starts
making profit.
 VCF act as co partner in in entrepreneur
business , share success and failure
proportionate to equity investment by
venture capitalist.
VENTURE CAPITAL PROCESS
Deal origination
Screening
Evaluation
Deal structuring
Post investment activities
Exit
Buy back of equity by
IPO Promoters buyback Trade salehttps://www.facebook.com/ialw
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VENTURE CAPITAL PROCESS
 Deal origination : there are various VCF which
have originated from India as well as foreign
countries. 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, information technology,
pharmaceuticals, bio technology, agriculture and
allied industries. They ensure success rate of
project before investing on the same.
 Evaluation : as VCF investment huge amount
of money in entrepreneurs business and bare
high risk and as entrepreneur is new entrant to
the business, venture capitalist go in for detailed
evaluation of entrepreneurs business in for of
screening business plan, evaluating
management team of company, understanding
credibility of entrepreneur of business.
 Deal structuring : once the venture capitalist
has evaluated the proposal and found it to be
viable, then VC and entrepreneur enter into
contract which is known as deal structuring.
Which includes details relating to 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.
 Post investment activities : success of VC
activity largely depends on envisaging
efficient mechanism from investment and
successful implementation of disinvestment.
VC are supposed to plan exit from venture at
the time of investment. The proposed exit
plan have least plan and confirm to statutory
compliance.
• Initial public offer : benefits of
disinvestment through IPO results in
improved marketability, improved liquidity,
better prospectus for capital gains and
widely known status of the VC as well as
market control through public share
participation.
• Promoters buy back : the promoters buy
back VC stake at predetermined price and
keep the ownership control with him. VC
consider it as an exit option only when
promoters are in position to mobilise funds
for buy back of equity held by the venture
investors.
• Trade sale : VC may also disinvest his
holdings through offer for sale to public. In
this trade sale VC sells his stake to the
strategic buyer who already owns a business
or has plans to enter target industry.
 Buy back of equity by company : as per
the companies amendment act companies
have been allowed to buy back their own
equity shares. Even though the VC may not
intent to exit through this route, he may
consider as the venture has been failed to
achieve high growth , below average
performance of company.
LOCATING VENTURE CAPITALIST
 EXIM bank : was set up in 1982 for the
purpose of financing, facilitating and
promoting international trade of India is the
principal institution in the country for
coordinating working of institution engaged
in financing exports and imports. EXIM bank
has made has made an entry into VCF by
investing in VC firm which is the Indian
technology venture unit scheme promoted
by UTI. VC fund size is 150 crore other co
investors apart from UTI include LIC,
technology development board etc.
 IDBI : VCF was started in 1986 with initial
capital of 10 crore and is part of technology
department of IDBI. It assist high
technology, small and medium sized projects
requiring fund from 0.5 to 25 million. It is
meant primarily to assist projects which
promote commercial application for company
which adopt imported technology for wider
application in area of business. Financial
support is provided from pilot stage and
covers 90 percent of total cost with
promoters stake to be at least 10 percent for
the venture.
 ICICI venture fund management company
limited : ICICI venture was founded in 1988 as a
joint venture with unit trust of India. Then ICICI
bought out UTI stake in 1988 and ICICI venture
became a fully owned subsidiary of ICICI. ICICI with
corpus of $ 650 million is largely a private equity
along with the same it provides venture capital
service.
 IFCI venture capital funds Ltd : was originally
set up by IFCI as a society by the name of risk
capital foundation in 1975. its objective was to
provide institutional support to first generation
professionals and technocrats setting up their own
venture in medium sized scale sector. The scheme
was known as RCS ( risk capital scheme ). In 1988,
RCF was converted into a company, risk capital and
technology finance corporation Ltd.
 Gujarat venture finance limited ( GVFL )
: comes under the venture capital sponsored
by state level financial institution. GVFL has
primarily focused on financing companies in
SME group. GVFL is a company focusing on
high risk and start up ventures. The
company funds entrepreneurs at the first
stage of funding when the venture is taking
off. GVFL mainly finances companies in IT
and bio technology sector.
 SIDBI venture fund : small scale industrial
development bank of India launched SME
growth fund a new venture capital fund on
October 25th 2004 with large corpus of 500
crore which was earlier 100 crore. This 8
year life fund was established with objective
to meet the long term risk capital
requirement of innovative technology and
technology oriented units in this sector. It is
unique initiative sponsored by SIDBI jointly
with major public sector banks. The fund
identifies unlisted SME entities in various
growing sectors such as life sciences,
retailing, light engineering, food processing,
information technology etc. https://www.facebook.com/ialw
 UTI venture fund management
company : the VC and private equity ( PE )
arm of unit trust of India an ITI group
started as pure VC company. Its ITVUS a
venture capital fund finance companies
which are into technology, life sciences and
outsourcing sectors. ITVUS has made
investment in Glen mark labs, subsex
system and foursoft. The ascent India fund
of UTI is worth 700 crores for investing in
mid market companies from sectors like
auto ancillary, pharmacy, textiles, BPO etc.
 Can bank venture capital fund : it has
recently launched Bharat Nirman Fund which
has corpus of Rs 55 crore. This bank aims to
fund start ups in manufacturing and service
sectors. It also has three other funds which
were launched in 1989. it is in the process of
exiting the first fund while the other two are
operational with the corpus almost tied up for
investment in start ups.
 Intel capital : part of Intel, it is a corporate
venture group, and invest out of company
balance sheet. The fund in India, has invested
in companies like Tejas networks, persistent
systems and Nipuna.
 Punjab InfoTech venture fund : is worth 200
million 10 year old, close ended capital venture
capital fund, conceptualised and funded by
Punjab by state industrial development
corporation ( PSIDC ) Punjab state financial
corporation ( PSFC ), Punjab state electronics
development and production corporation limited
(PSED & PC ) and small industrial development
bank of India.
 VCF of commercial banks : among the Indian
banks and other subsidiaries of SBI and canara
bank have floated VCF. These banks provide
VCF either in form of equity or conditional
loans. Canara bank has set up a VF through
subsidiaries can bank financial services.
 Private sector VCF : ANZ grind lays bank
has set up India's first private sector VCF
namely india investment fund with an initial
capital of rs 10 crore subscribed by NRI. The
fund provides assistance to high risk
projects, to promoters, fresh issue of
established companies with good
performance record. The objective of the
fund is to issue high capital growth for its
investors by participating in fast growing
companies or high technology companies
with potential for high growth.
 National venture fund for software and
information technology industry : NFSIT
was launched on December 10 1999. it is
close ended venture capital fund of 10 years
old with initial corpus of Rs 100 crore. The
fund has been contributed by SIDBI ministry
of communication and information
technology, government of India ( GOI )
and industrial development bank of India.
GENERAL VALUATION APPROACH OF
COMPANY
 General valuation : in this method all the set
of companies in same set of industries are
compared with each other depending on the
evaluation credibility of business idea or
business is valuated.
 Present value of future cash flow : in this
method 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.
 Replacement value : in this method
valuation of the assets is based on the
amount of money it would take to replace
assets or system of the venture.
 Book value : the book value approach uses
the adjusted book value or net tangible
asset value to determine the firms worth.
Adjusted book value is obtained by making
the necessary adjustment to the stated book
value by taking into account any
depreciation of plant.
 Earnings approach : the earning approach is
the most widely used method of valuating
company as it provides potential investors with
the estimate of the probable return on
investment. The potential earnings are
calculated by weighting the most recent years
earnings.
 Factor approach : in this method three major
factors are used to determine value : earnings,
dividend paying capacity and book value.
Appropriate weight for particular company
being valued are developed and multiplied by
capitalized value , resulting in overall weightage
valuation.
 Liquidation value : refers to sale value of
company / liquidation value of company.
APPROACHING VENTURE CAPITALIST
 venture capitalist may be introduced through
quality introduction which refers to contacting
VC through lawyer, banker, accountant. This
procedure of approach is required as VC may
not take interest in new project of unknown
person.
 Entrepreneur before approaching VC should be
very well aware about his own business. He
should contact VC who suits entrepreneurs
business which includes VC who deals in similar
product or idea.
 After choosing VCF to finance the business,
entrepreneur is required to send his business
plan to entrepreneur, after evaluating business
plan, understanding its plans potential and
credibility VC chooses to invest in the business.
THANK YOU

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