Bangladesh University of Business and Technology

Assignment
On
VENTURE CAPITAL

Submitted by
Group Name: Magnet

Members Name ID
Sumaiya Howladar 18191101034
(Group Leader)
Md. Kaisar Mahmud 18191101096
Md. Nasir Uddin 18191101139
Md. Sakib Hossain 18191101144

Intake: 47th
Section: 03
Program: BBA
Bangladesh University of Business and Technology

Submitted To
Mr. MD. Shafat Al Rafaee
Lecturer
Department of Management
Bangladesh University of Business and Technology
VETURE CAPITAL
Start-up companies with a potential to grow need a certain amount of investment. Wealthy
investors like to invest their capital in such businesses with a long-term growth perspective.
This capital is known as venture capital and the investors are called venture capitalists. Such
investments are risky as they are illiquid, but are capable of giving impressive returns if
invested in the right venture. The returns to the venture capitalists depend upon the growth of
the company. Venture capitalists have the power to influence major decisions of the
companies they are investing in as it is their money at stake. Venture capital is money for
new, young and/or small businesses that typically have little or no access to capital markets.

Private
Fund Returns

Firm Equity

Venture
Risk Growth
Capital

Capital Startup

Raise Business
Money

Figure: Venture Capital

In return of investments a venture capitalist

 May receive a say in the company’s management and/or representation in the board.
 Some combination of ownership, profits, preferred shares or royalties.
 Demonstrating that the business will target a large, addressable market opportunity is
important for grabbing venture capital investors’ attention.
  Investors wants to invest in great product and services with a competitive edge that is
long lasting.

Characteristics of venture capital

1. Liquidity.

2. Long term commitment.

3. Rate of return.

4. Difficulty in determining current market value.

5. Limited historical risk and return data and

limited information.
Characteristics of
Venture Capital
6. Entrepreneurial/management mismatches.

7. Fund manager incentive mismatches.

8. Knowledge of competition.

9. Vintage Cycles.

10. Extensive Operation Analysis and Advice.

Figure: Characteristics of venture capital

Venture capital funding can be of different kinds. Early stage funding could be at the stage of
ideation, initial production and marketing. Expansion funding is done during commercial
production, marketing and growth. Different funds focus on different types of funding and
sectors. There are however some unifying characteristics of venture capital.

1. Illiquidity: Easy liquidity by cashing out in the short-term is not an option for venture
capital funding. An IPO or buyout of a venture is how venture capitalists disinvest. A
premature IPO could undermine an otherwise successful company. Alternatively an
IPO released in a poor IPO market could also stall possibilities of cash out.
2. Long-term commitment: Venture capital funds need to be latched in for a period of
few years before disinvestment. Investors who do not prefer illiquidity will attach a
premium to their funds, also known as liquidity risk premium. Therefore an investor
who can wait out the time horizon will benefit from this premium. University
endowments who seek VC funds to invest in are an example of such investors.
3. Risk of return: The rate of return (ROI) of venture capital investments is very high.
It can range from 25% to 100%.
4. Difficulty in determining current market values: It is difficult to evaluate the
current market value of the portfolio of a VC.
5. Limited historical risk and return data and limited information: Venture capital
funds more often than not invest in new and cutting edge industries of a sector, where
there is little historical data or continuous trading data. It is also difficult to estimate
cash flows or the probability of success.
6. Entrepreneurial/management mismatches: Entrepreneurs may face difficulties
when there is dilution of ownership and control. Bad management choices may scuttle
a good venture. Entrepreneurs sometimes find it difficult to step up as the venture
gains size.
7. Fund manager incentive mismatches: Investors interested in well performing rather
than large sized funds need to find managers who match their investment objectives.
8. Knowledge of competition: As we discussed earlier since most business’ that are
funded are from nascent industries it is difficult to assess the competition, than say in
established industries. A complete competitive analysis is therefore difficult to
undertake for a VC fund.
9. Vintage Cycles: Economic conditions vary from year to year. During some years
venture capital funding is plenty and therefore returns for them low. In poor or
stressed market condition, even good firms find it difficult to find VC funding.
10. Extensive Operation Analysis and Advice: Venture capital funds that plan to invest
in technology companies may not have the required expertise to assess them.
Financial investment knowledge alone is not sufficient. Good fund managers
therefore require both operating and financial analysis and advising skills. A fund
manager who does not understand the business will impede rather than improve it.

So we can say that, the idea about venture capital is financial capital provided to early stage,
high potential, growth startup companies to earn the profit entrepreneur and to know the
characteristics of venture capital than an entrepreneur startup the business.
Types of financing in new business
New business finance is that business activities which is concerned with the acquisition and
conversation of capital fund in meeting financial needs and overall objectives of business
enterprises. One of the most difficult problems in the new venture creation process is
obtaining financing. There are four types of financing in a new business.

Debt Financing

Equity Financing
Types of
financing in new
business
Internal Funding

External Funding

Figure: Types of financing.

Debt Financing:
 Debt financing is a financing method involving am interest bearing instrument,
usually a loan.
 The payment of borrowing fund is indirectly related to the sales and profits of the
venture.
 Debt financing may be short term or long term in their repayment schedules.
Generally short term debt is used to finance current activities.
 For example: building and equipment.
Equity Financing:
 Equity finance doesn’t require collateral and offers the investors some form of
ownership position in the venture
 Equity financing means exchanging a portion of the ownership of the business for a
financial investment in a business.
  The equity financing have some types there are:
 Personal savings
 Private investors
 Angel investors
 Venture capitalist
 Equity offerings
Internal funding:
 Internally generated firms can come from several sources within the company. Such
as:
 Profits
 Sales of assets
 Reduction in working capital
 Inventory
 Cash and other working capital items
External funding:
 More frequently used external sources of fund are:
 Self
 Friends and family
 Commercial bank loan
 Government loan and grants
 Venture capital
 Private placement
So we can say that, the types of financing a new business is a process of financing a new
venture creation to developed the business in the financing in the success to the business to
profit in the business.

Source of short term and long term financing in a new business

Short term financing: Short-Term Financing is a need for money for a short period of time,
less than a year. It is one of the primary function of finance that manages the demand and
supply of capital for an interim period, and these funds can be secured or unsecured. To use
such funds total financing funds should be driven by the company, and the company gets
directed by the risk-return trade-off for this decision. There are some sources of short term
finance:
1. Trade Credit: Trade Credit is also known as accounts payable; it is a credit drawn
out by one seller to another when a credit purchase has been made, it helps in
supplying goods without immediate payment of cash. It provides a floating time of 28
days to manage the cash flow of the business. Thus, it is widely used by business
firms as a source of short-term finance, the amount of trade credit relies upon the
purchase units for which credit is available.
2. Commercial Bank: Corporate sector is very much dependent on the commercial
bank for fulfilling their short-term financial needs. Here loan can be provided with
either for a specific purpose known as a single loan for which the company signs a
 promissory note to avoid deficiencies and repays this loan within a specific period of
time. On the contrary, the other way of granting a loan is a line of credit which is
more common; the bank fixes a limit for the borrower to avoid the cumbersome
process of going through essential formalities every time the borrower reaches a bank
for a loan. The ways of borrowing a sum from the bank are as follows:
 Working capital loan
 Discounting of bill
 Overdraft
 Letter of credit
 Cash credit
3. Deferred Revenues: Deferred revenue refers to a part of the firm’s income that has
not been acquired, but pre-payment has already received by the customers.
4. Commercial Papers: Issuing of commercial papers is also one of the most used
sources of financing now-a-days. These are the short-term notes describing that if a
company needs money, they can issue commercial papers. It is used for financing of
trade credits, payroll and meeting additional short-term liabilities and commercial
paper ranges from 15 days to 1 year.
5. Capital Market: Capital market denotes an agreement whereby a transaction
involving the procurement and supply of long term funds takes place among
individuals and various organizations. In the capital market, the company raise funds
by issuing shares and debentures of different types.
6. Leasing companies: Manufacturing companies can secure long-term funds form
leasing companies. For this purpose a leasing agreement is made whereby plant,
machinery and fixed assets may be purchased by the leasing company and allowed to
be used by the manufacturing concern for a specified period of payment of an annual
rental.

Long-term financing: Long term financing means financing by loan or borrowing for a term
of more than one year by way of issuing equity shares, by the form of debt financing, by long
term loans, leases or bonds and it is done for usually big projects financing and expansion of
company and such long term financing is generally of high amount. There are some sources
of long term finance:
1. Equity Capital: It represents the interest-free perpetual capital of the company raised
by public or private routes. Either the company may raise funds from the market via
IPO or may opt for a private investor to take a substantial amount of stake in the
company.
 In equity financing, there is a dilution in the ownership and the controlling
stake rest with the largest equity holder.
 The equity holders have no preferential right in the dividend of the company
and carry a higher risk across all the buckets.
 The rate of return expected by the equity shareholders is higher than the debt
holders due to the excessive risk they bear in terms of repayment of their
invested capital.
2. Term Loans: They are given generally by banks or financial institutions for more
than one year. They have mostly secured loans given by banks against strong
 collaterals provided by the company in the form of land & building, machinery, and
other fixed assets.
 They are a flexible Source of finance provided by the banks to meet the long
term capital needs of the organization.
 They carry a fixed rate of interest and gives the borrower the flexibility to
structure the repayment schedule over the tenure of the loan based upon the
cash flows of the company.
 It is faster as compared to the issue of equity or preference shares in the
company as there are fewer regulations to abide and less complexity.
3. Preference Capital: Preference shareholders are those who carry preferential rights
over equity shareholders in terms of receiving dividends at a fixed rate and getting
back invested capital in the company in case if the same is wound up.
 It is a part of the Net Worth of the Company thus increasing the
creditworthiness and improving the leverage as compared to the peers.
4. Bank overdraft: Almost all businesses have an account with a bank. All the deposits
and withdrawals are dealt by the bank. All banking institutions are aware that
businesses do not always get money from sales straight away.
5. Special Financial Institutions: A large number of financial institutions have been
established in India for providing long-term financial assistance to industrial
enterprises. There are many all-India institutions like Industrial Finance Corporation
of India (IFCI); Industrial Credit and Investment Corporation of India (ICICI);
Industrial Development Bank of India (IDBI) etc.
6. Foreign Sources: International Financial Institutions:- like World Bank and
International Finance Corporation (IFC) provide long-term funds for the industrial
development all over the world.

Stages of Business Development Financing

The investors are most often individuals (friends, relations or entrepreneurs) who want to
help other entrepreneurs get their businesses off the ground and earn a high return on their
investment.
1. Seed Stage: At the seed stage, the company is only an idea for a product or service,
and the entrepreneur must convince the venture capitalist that their idea is a viable
investment opportunity. If the business shows potential for growth, the investor will
provide funding to finance early product or service development, market research,
business plan development, and setting up a management team. Seed-stage venture
capitalists participate in other investment rounds alongside other investors.
2. Early Stage: At this stage, the product or service has been developed and is being
sold in the market. This is the first opportunity the investors have to see how the
product fairs with its competitors in the market. Funding received at this stage will
often go towards manufacturing, sales and additional marketing. The amount invested
here can be significantly higher than prior stages. At this stage, the company could
also be moving toward profitability, depending on its share of the marketplace. If the
startup and its product can hold their own against the competition, the venture capital
firm will probably give a green light for the next stage.
  Startup Stage: The startup stage requires a significant cash infusion to help in
advertising and marketing of new products or services to new customers. At
this stage, the company has completed market research, has a business plan in
place, and has a prototype of its products to show investors. The company
brings in other investors at this stage to provide additional financing.
 First Stage: Sometimes also called the “emerging stage,” first stage financing
typically coincides with the company’s market launch, when the company is
finally about to start seeing a profit. Funds from this phase of a venture capital
financing typically go to actual product manufacturing and sales, as well as
increased marketing. To achieve an official launch, businesses usually need a
much bigger capital investment, so the funding amounts in this stage tend to
be much higher than in previous stages.
3. Later Stage: Capital provided after commercial manufacturing and sales but before
any initial public offering. The product of service is in production and is
commercially available. The company demonstrates significant revenue growth, but
may or may not be showing a profit. It has usually been in business for more than
three years.
 Third Stage: Capital provided for major expansion such as physical plant
expansion, product improvement and marketing.
 Expansion Stage: The expansion stage is when the company is seeing
exponential growth and needs additional funding to keep up with the demands.
Because the business likely already has a commercially viable product and is
starting to see some profitability, venture capital funding in the emerging stage
is largely used to grow the business even further through market expansion
and product diversification.
 Mezzanine Stage (Bridge): The bridge stage is when companies have reached
maturity. Funding obtained here is typically used to support activities like
mergers, acquisitions, or IPOs. The bridge state is essentially a transition to
the company being a full-fledged, viable business. At this time, many
investors choose to sell their shares and end their relationship with the
company, often receiving a significant return on their investments.

Bank lending decision for a bank manager

 They consider the following points:
1) 5cs of lending principles against entrepreneur and business:
 Character
 Capacity
 Capital
 Collateral and
 Conditions.
2) The review the first financial statement in the terms of
 Probability
 Credit
 Ratio
 Inventory
  Terms etc.
3) Future projection on:
 Market size
 Sales and probability
4) Repayment capability of entrepreneur
5) Contingency plan of entrepreneur if problem occurs
6) Feeling based on entrepreneur character and capabilities.

What is Equity Financing?

Equity financing is the process of raising capital through the sale of shares. Equity financing
is used when companies, often start-ups, have a short-term need for cash. It is typical for
companies to use equity financing several times during the process of reaching maturity.
There are two methods of equity financing: the private placement of stock with investors and
public stock offerings. Equity financing differs from debt financing: the first involves
borrowing money while the latter involves selling a portion of equity in the company.
National and local governments keep a close watch on equity financing to ensure that
everything done follows regulations.

Sources of Equity Financing

Here we are going to list down the best and important types of equity financing for small
business, startups, large companies as well as well-established companies. This would give
the greater ideas and best approaches when you are thinking towards equity finance.
1. Angel Investors:
Individuals or investors who purchase equity in startup companies or small business are
known as angel financial investors. Angel investors are rich persons who put their cash in
startups or companies that can possibly produce higher returns in future. They provide funds
to the organization by acquiring an equity stake in it. Typically such investors are
companions or colleagues of the business visionary. This types of equity financing for startup
are useful as they also bring their learning, skills and experience to the business that helps the
organization in long run. In any case, finding such investors is difficult and troublesome task.
2. Crowdfunding platforms:
Individuals are investing into the startups companies or organizations since they have faith in
their ideas and expect higher returns in near future. Crowd funding involves approaching to
various individuals and convincing them to fund into the organization with small amount of
contribution. Then it is decided that total funds / cash gathered from the individuals have
been received or not. Now days, there are various websites where people can showcase their
ideas, strategies and business plan to collect funds from individuals instead of approaching
them personally.
3. Venture capital firms:
Venture capital firms are a group of investors who invest in businesses they think will grow
at a rapid pace and will appear on stock exchanges in the future. They invest a larger sum of
money into businesses and receive a larger stake in the company compared to angel investors.
The method is also referred to as private equity financing.
4. Corporate Investors:
Many built up organizations buy equity in more innovation or startup or privately owned
businesses. These types of equity financing are also known as strategic partners, corporate
partners, corporate investors or strategic investors. Such types of investors are well known for
creating a network of businesses and organizations.
5. Institutional Investors:
Institutional investors like: insurance firms, public funds, pension funds, establishments,
mutual funds, etc. having vast amount of cash, are the significant types of equity financing
for small business or private companies. In India, before 1990s, the Development Financial
Institutions (DFIs) were recognized as a lenders of long term equity financing.
6. Initial Public Offering:
A well-established organization can acquire equity finance by launching the Initial Public
Offering (IPO) of their company. With an IPO offer, the organization can raise funds by
offering its equity stake to public. Apart from individuals, financial institutional, foreign
investors can invest into the company’s IPO. This is one of the types of equity financing for
large companies where a well-known company or a firm or a brand can easily raise the funds
from IPO. The organization uses this method of equity finance when it has effectively
utilized different types of equity finance. A drawback of an IPO is that, it’s an expensive and
tedious process of equity financing.
7. Retain Earnings:
Firms can acquire equity financing by retaining income or profits of the businesses for raising
funds for organizational growth. Along these lines the organization isn’t required to search
for different investors of equity finance to solve their cash arrangement. The business can
raise equity by issuing bonus shares to its existing shareholders.
8. Self-funding:
Often called “bootstrapping”, self-funding is often the first step in seeking finance. It
involves funding from personal finances and your business revenue. Investors and lenders
will expect some self-funding before they agree to offer you finance.
9. Financing from Family and Friends:
For entrepreneurs who have solid family ties or social networks or communities, it might be a
well approach to contacts for raising funds by offering equity stake. This form of equity
financing is moderately risky. As it is an essential for the entrepreneur to take its own
decisions rather than companion or relative. It may lead to huge loss in the middle of the path
way.

What is Debt Financing?

Debt financing occurs when a firm raises money for working capital or capital expenditures
by selling debt instruments to individuals and/or institutional investors. Debt financing is the
opposite of equity financing, which entails issuing stock to raise money. Debt financing
occurs when a firm sells fixed income products, such as bonds, bills, or notes. Unlike equity
financing where the lenders receive stock, debt financing must be paid back. Small and new
companies, especially, rely on debt financing to buy resources that will facilitate growth.
Sources of debt finance
1. Financial institutions:
Banks, building societies and credit unions offer a range of finance products – both short and
long-term. These include:
 Business loans
 Lines of credit
 Overdraft services
 Invoice financing
 Equipment leases
 Asset financing

2. Retailers:
If you need finance to buy goods like furniture, technology or equipment, many stores offer
store credit through a finance company. Generally, this is a higher interest option. It suits
businesses that can pay the loan off quickly within the interest-free period.
3. Suppliers:
Most suppliers offer trade credit. This allows your business to delay payment for goods.
Trade credit terms vary. You may only get it if your business has a good reputation with the
supplier.
4. Finance companies:
Most finance companies offer finance products through retailers. Finance companies must be
registered. So before you get finance, check the Bangladeshi Securities & amp; Investments
5. Factor companies:
Factor companies provide finance by buying a business’s outstanding invoices at a discount.
The factor company then chases up the debtors. This is a quick way to get cash, but can be
expensive compared to traditional financing options.
 6. Family or friends:
If a friend or relative offers you a loan, it’s called a debt finance arrangement. Before you
decide on this option, think carefully about how this arrangement could affect your
relationship.

The difference between debt and equity finance

Businesses typically have two options for financing to consider when they want to raise
capital for business needs: equity financing and debt financing. Debt financing involves
borrowing money; equity financing involves selling a portion of equity in the company.
While there are distinct advantages to both of these types of financing, most companies use a
combination of equity and debt financing. The most common form of debt financing is a
loan. Unlike equity financing which carries no repayment obligation, debt financing requires
a company to pay back the money it receives, plus interest. However, an advantage of a loan
(and debt financing, in general) is that it does not require a company to give up a portion of
its ownership to shareholders.
With debt financing, the lender has no control over the business's operations. Once you pay
back the loan, your relationship with the financial institution ends. (When companies elect to
raise capital by selling equity shares to investors, they have to share their profits and consult
with these investors any time they make decisions that impact the entire company.
Debt financing can also place restrictions on a company's operations so that it might not have
as much leverage to take advantage of opportunities outside of its core business. In general,
companies want to have a relatively low debt-to-equity ratio; creditors will look more
favorably on this and will allow them to access additional debt financing in the future if a
pressing need arises. Finally, interest paid on loans is tax-deductible for a company and loan
payments make forecasting for future expenses easy because the amount does not fluctuate.
When making the decision about whether to seek debt or equity financing, companies usually
consider these three factors:
 What source of funding is most easily accessible for the company?
 What is the company's cash flow?
 How important is it for principal owners to maintain complete control of the
company?

5c’s of Credit:
The 5 Cs of Credit is a system that lenders use to evaluate your business’s creditworthiness
and ability to repay a loan. Before making a decision, lenders look specifically at these five
characteristics:
1. Character:
What lenders look for: When assessing credit character, lenders will look at your credit
history. They’ll want to see if you’ve borrowed money, how much it was, if you paid it back
on time, if you’ve filed for bankruptcy, and so on. In essence, they want to know if you have
a good track record of paying your debts on time, in full, and on a consistent basis.
How lenders analyze it: To analyze your credit character, lenders will look at your personal
and your business credit scores and histories, including payment history and credit utilization.
They may also look into your reputation by reaching out to references to see how you’ve
interacted with them on a personal and business level.
How to improve character: First and foremost, make your payments on time. If you’re
behind on paying off your debts, you’ll appear a riskier borrower to lenders. Secondly, foster
a relationship with your lender – whether your bank or an alternative lender. Generating good
rapport can help you get better terms for your loan. That might mean taking a loan now with
less-than-perfect terms and using that as a way to build a good reputation with that lender.
2. Capacity:
What lenders look for: Before lending you money, lenders want to see that your cash flow
will be enough to cover future payments. In other words, when they look at your credit
capacity, lenders are checking your ability to pay back the loan.
How lenders analyze it: To assess your credit capacity lenders will refer to several
measurements including your debt-to-income ratio, your debt service coverage ratio, and
your excess cash flow. The stability of your income may also come into question (seasonal
businesses may find this factor problematic).
How to improve capacity: There are two general ways to improve your credit capacity.
First, reduce your debt. That means paying off most of your debt so you can demonstrate that
you have enough financial resources to pay off the new loan you’re applying for. Second,
increase your cash flow. Even if you can’t reduce your debts right away, you can find ways to
cut back on your costs and retain more of your gross profit.
3. Capital:
What lenders look for: In assessing your creditworthiness, lenders will want to see how
much money you’ve invested in your business along with your business’s net worth. Both of
those factors will indicate that you’ve “got skin in the game” and that you’re not such a risky
investment.
How lenders analyze it: For this factor in the 5 Cs of credit analysis, lenders will look at
how much money you’ve invested in your business, the valuable business assets you have
(equipment, real estate, etc.), and the ratio of debt to equity. If you’ve invested more, have
more valuable assets, and have a low ratio of debt to equity, then your business has got step
three of the 5 Cs of credit analysis covered.
How to improve capital: Keep detailed records of all personal investments you make and
have made in your business. Invest more, if possible. It may also be a good idea to speak with
a financial advisor about whether or not to refinance your business loans.
4. Collateral:
What lenders look for: Collateral can come in the form of business equipment, commercial
vehicles, inventory, real estate, accounts receivable, and even a borrower’s home. The bottom
line: Lenders want to know what valuable assets your business can use to repay the loan if
you fail to make repayments and move into default.
How lenders analyze it: Lenders will analyze your credit collateral by evaluating what
valuable assets you have, how much they’re worth, their depreciation rates, and so on. Putting
collateral down as security on a loan will often result in better rates, loan terms, repayment
amounts and schedules, and so on.
How to improve collateral: Consider the advantages and disadvantages of purchasing versus
leasing business equipment. If you’re leasing, you can’t use that equipment or vehicle as
collateral. Additionally, in order to protect your personal assets from seizure in the event that
you can’t repay your business loans, you can register your business under certain entity types
and be safe from that risk.
5. Conditions:
What lenders look for: Conditions refer to the external factors which can impact your ability
to repay a loan. For instance, lenders will usually take into account the current state of the
economy at large (and for your industry, in particular), survival rates for your business type,
the size of the loan you’re applying for, the interest rates, how you intend on using the funds,
and so on.
How lenders analyze it: To analyze conditions, lenders will take a close look at economic
trends, how your main competitors are doing, what sort of issues are predominant in your
industry, and how sound your proposed usage of the funds is in their opinion.
How to improve conditions: There’s an old saying “you can’t control the way the wind
blows, but you can control the way you set your sails”. In other words, nobody can control
conditions, but we can prepare ourselves and/or react effectively. One piece of advice you
may have heard from us before is to apply for a business line of credit even if you don’t
‘need’ it. It’s a great way to provide your business with a financial safety net and help build
up your credit at the same time.
 The 5C’s of Credit

Character

Capital Capacity

5C’s of Credit

Condition Collateral

Figure: The 5c’s of credit.