Venture capital

 It is defined as equity investment in a growth oriented

small/medium business to enable investees to
accomplish corporate objectives, in return for minority
shareholding in the business or the irrevocable right to
acquire it.

 Venture capital institution/fund- Intermediary

between investors looking for returns and
entrepreneurs who need institutional capital as they
are yet not ready to go to the public.
Venture capital
 Features

- Primarily equity finance

- Long term investment
- Substantial degree of active involvement
- High risk return spectrum
- Not only technology finance
Selection of investment
 Business plan feasability study track record of
owner etc

Stages of financing

1. Early stage – Seed capital , Start up , Second round

financing
2. Later stage – Mezzanine capital, Bridge/Expansion,
Buyouts, Turnaround
Selection of investment(stages)
1. Early stage

 Seed capital /pre start up

- Applied research phase
- Entrepreneurial skills match with the market
opportunity
- High risk
- Marketing related risk
Selection of investment(stages)
 Start up
- Includes new projects based on technology, knowledge
new projects by established companies or a new
company
- Indication about potential market
- High risk

 Second round financing

- Product launched but not profitable
- large funds
- Debt and some income
Selection of investment(stages)
2. Later stage financing
 Mezzanine /development capital
- Require additional finance but cannot resort to public
issue
- Expansion , penetration ,new management etc

 Bridge/expansion
- Low risk
- Acquisition of other firms
Selection of investment(stages)
 Buyout
- Management buyout
- Management buyins

 Turnaround
- Buying the control of sick company
Selection of investment (FA)
Financial analysis

 Various methods include

I Conventional Venture Capitalist Valuation Method
II The First Chicago Method
III The Revenue Multiplier Method
Selection of investment (FA)
I Conventional Venture Capitalist Valuation Method

- Two points of time- starting time and exit time

- Steps
✓ Compute the annual revenue at the time of liquidation
✓ Compute the expected earnings level
✓ Compute the future market valuation of VCU
✓ Obtain the PV of VCU
✓ PV= Rs 50 lakhs , Fund= Rs 20 lakhs, Ownership=
40%
Selection of investment (FA)
II The First Chicago Method
- Considers the entire earning stream
- Steps
✓ Scenarios- Success , Sideway survival, Failure and their
probability
✓ Find discounted present value under three scenarios
✓ PV * Prob
✓ Assume PV= Rs 5 cr, Fund= Rs 2.5 cr, Ownership=50%
Selection of investment (FA)
III The Revenue Multiplier Method
- Mt = (1 +r)n ap
(1+d)n
V= PV
R = annual revenue
r= expected growth rate
n=expected no of years
a= expected profit margin at the time of exit
p= expected P/E ratio
d= discount rate
Selection of investment ( Structuring)
Structuring the deal / Financial Instruments

 Refers to financial instruments through which investment is made.

 Types
1. Equity
- Ordinary
- Non voting
- Deferred
- Preferred
- Equity warrants
- Preference shares
- Cumulative convertible pref shares
- Participating pref shares
- Cumulative convertible participatory preferred ordinary
- Convertible cumulative redeemable preference shares