Venture Capital
Learning Outcomes
• Appraise the need of venture capital in start – up businesses.
• Comprehend the issues related to venture capital financing.
Case Analysis
Byju’s on boards new investors, valuation now at $11.1 bn
a) Introduced an online tutoring program Byju’s Classes to cater to
the after-school learning needs of students.
b) Learning programs in multiple vernacular languages like Hindi,
Kannada, Bengali, Malayalam and Gujarati have been
introduced during the lockdown too.
• Added over 25 million new students on its platform.
• BlackRock, Sands Capital and Alkeon Capital have joined as new
investors, as part of the ongoing $500-million fundraising round.
What Byju is doing?
Raising funds through Venture Capital
• Investment in start – up business:
a) that is perceived to have excellent growth prospectus but
b) do not have access to capital markets.
Financing of Start – up (Young)
Financing of
businesses with view to grow Risk capital
Innovation
them into large successful
businesses.
Poll – II
• Accel partners, a venture capital firm has provided the seed capital for new start – up
company ‘Cure Fit’.
Following are the statements listed for the venture capital financing
I. It involves high risk and equity participation
II. Suppliers of venture capital participate in the management of the company
III. Objective of venture capitalists is to earn a stable return
Which of the following statements are true with regard to the venture capital
financing?
a) I and II
b) II and III
c) I, II and III
d) I and III
How Funding Works in Start – ups?
Pre-Seed Seed Series A Series B Series C
Funding Funding Funding Funding Funding
Venture Capital Investment Process – Three
aspects to be considered
Three Aspects
Assessment by the
Comparison of the terms Assessment of the
entrepreneur as to
& conditions - venture Start – up proposal by
whom he should
capitalists the investor
contact ?
A.) Eligibility Criteria for Proposals
Criteria
Technically Commercially Competitive Future Legality of
Competence
Feasible Viable Advantage Prospects proposal
B.) Screening of Venture Capitalist by the Entrepreneur
Screening Aspects
Approach of Terms and Availability of Other factors
Exit Policy funds
the Capitalists Conditions
C.) Screening of Proposal by Venture Capitalists
Screening Aspects
Fundamental Financial Portfolio Divestment
Analysis Analysis Analysis Analysis
Poll – II
• First Cry, which also sells mother care products, has since 2011
• It has raised $503 million through seven funding rounds from investors including
Chiratae Ventures, NEA, Vertex Ventures, Elevation Capital etc.
• Before granting the funds, such venture capital firms have ensured that all the govt.
compliance and polices are strictly complied with.
• This is part of ________ process of screening.
a) Competitive advantage of the proposal
b) Technical integrity of the proposal
c) Commercial viability of the proposal
d) Legality of the proposal
Poll – III
• Unacademy, is providing the Interactive online classes.
• It has raised $260 million from investors including Softbank, Nexus, General Atlantic
etc.
• Before granting the funds, such venture capital firms have ensured that there shall
exists sufficient demand of the services offered by Unacademy.
• This is part of ________ process of screening.
a) Commercial viability of the proposal
b) Technical integrity of the proposal
c) Competitive advantage of the proposal
d) Legality of the proposal
Poll based on Previous Lecture
• Razor Pay, is providing the converged payments solution.
• It has raised $100 million from investors including Tiger Global, Matrix, Ribbit Capital
etc.
• Before granting the funds, such venture capital firms will check the past history,
management quality and markets it serves etc.
• This is part of ________ process of screening.
a) Fundamental Analysis
b) Financial Analysis
c) Portfolio Analysis
d) All of the above
Learning Outcomes
• Appraise the process involved in venture capital investment of the
start - ups.
• Comprehend the stages related to venture capital financing.
Venture Capital Investment Process
6.)
1.)
2.) 3.) 4.) 5.) Approvals
Business Preliminary
Introductory Due Term Sheets and
Plan Screening
meeting diligence and Funding investment
submission
completed
Poll – I
• Tiger Global, a venture capital firm is in the process of making an investment in
the new start up firm involving clean technology.
• Which of the following steps of “Venture capital investment process” will involve
itself outlining the final terms and conditions of the financial investment in such
start – up?
a) Business Plan submission
b) Term sheets & funding
c) Due diligence
d) Preliminary screening
Poll – II
• IDG India Ventures, a venture capital firm is in the process of making an
investment in the new start up firm involving Bio technology.
• Which of the following steps of “Venture capital investment process” will involve
itself in evaluating the financial projections and market size of such start – up?
a) Preliminary Screening
b) Seed funding
c) Due diligence
d) Business Plan submission
Learning Outcomes
• Appraise the various stages of venture capital financing.
• Comprehend the concept of private equity and its differences with
venture capital.
Poll based on previous lecture
• Blume Ventures, a venture capital firm is in the process of making an investment
in the new start up firm involving Bio technology.
• Which of the following steps of “Venture capital investment process” will involve
itself in assessing the risks & opportunities associated with such start – up?
a) Preliminary Screening
b) Seed funding
c) Due diligence
d) Business Plan submission
Stages of Venture Capital Financing
1.)
Seed stage
5.) 2.)
The Bridge The Start up
Stage Stage
4.)
3.)
The Expansion
The First Stage
Stage
The Seed Stage
• When the company is often little more than an idea for a product or service that has the potential to develop into
a successful business down the road.
• Entrepreneurs spend most of this stage convincing investors that their ideas represent a viable investment
opportunity.
• Funding amounts in the seed stage are generally small, and are largely used for things like marketing research,
product development, and business expansion, with the goal of creating a prototype to attract additional
investors in later funding rounds.
The Startup Stage
• In the startup stage, companies have typically completed research and development and devised a business plan,
and are now ready to begin advertising and marketing their product or service to potential customers.
• Typically, the company has a prototype to show investors, but has not yet sold any products.
• At this stage, businesses need a larger infusion of cash to fine tune their products and services, expand their
personnel, and conducting any remaining research necessary to support an official business launch.
The 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.
The Expansion Stage
• Also commonly referred to as the second or third stages, 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.
The Bridge Stage
• The final stage of venture capital financing, 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.
Poll – II
• Nexus Venture Partners , a venture capital firm is in the process of making an
investment in the new start up firm involving technological driven business.
• ____________stage of venture capital financing will provide funds to support the
M & A activities of it’s client.
a) Start up stage
b) Seed stage
c) Bridge stage
d) First stage
Poll – III
• Helion Venture Partners , a venture capital firm is in the process of making an
investment in the new start up firm involving technological driven business.
• ____________stage of venture capital financing will provide funds to support the
initial research & development activities of it’s client.
• The client is in the process of developing the product prototype.
a) Start up stage
b) Seed stage
c) Bridge stage
d) First stage
Understanding PE
You: Private Equity Firm
Target Company (Either Potential Company or
Tree:
Company in need of Restructuring).
Your friends and family who contributed funds for
Investors contributing Funds to Private Equity Firm;
the fertilizers:
Sweets Fruit which is intended to be distributed Returns from the Transaction which are distributed
amongst all: to Investors
You charging fee for taking care of the Tree on Private Equity Firm charging Management fees for
behalf of everyone: the Transaction
What is Private Equity (PE)?
Private equity firms Make Profit by selling Strategy
buy stakes in private stakes for more than “Buy low, grow fast,
companies was initially invested. sell high”.
Private Equity Vs. Venture Capital
Basis of Difference Private Equity Venture Capital
Type Investment across different industries Investment in technology driven, bio -
tech and clean - tech start ups.
% acquisition 100% through LBO Acquisition of minority stake (generally
less than 50%)
Size Large investments (more than $100 Small investments (less than $10
million) million)
Structure Equity & debt Only equity
Stage Buy Mature, public companies Early stage financing (for start – ups)
Poll – I
• The Carlyle Group invests in the start – up businesses which are on the maturity
stage.
• They aim to invest for the purpose of earning high return on equity.
• In such case, this investing firm will be classified as _________
a) Angel Investors
b) Friends & Family members
c) IPO
d) Private Equity
Buyouts & Types of Buyouts
Buyouts
LBO
MBO
Leveraged Buyout (LBO) of Tata Tea
• Tata Tea made an LBO of $100 million of Tetley with an intention
to access the technical expertise of Tetley & make the world –
wide presence.
• Committed $10 million itself and found a bank to extend a loan
for the remaining $90 million.
• Loan was structured such that Tetley will assume this debt. The
bank will secure its $90 million with Tetley’s assets.
Leveraged Buyout (LBO) of Tata Tea
• Tetley will be responsible for making all payments on
the debt that Tata Tea used to buy it.
If Tetley defaults on these obligations
• Then bank will seize its land, inventory and other
assets in lieu of payment.
A.) Leveraged Buyouts (LBO)
Process of buying Assets of the
another company using acquired co. are used
debt as collateral
Poll – I
• Tata Tea made an LBO of Tetley company.
• Which of the following capital structures appropriately define the LBO purchase
transaction?
a) Debt 50% and Equity 50%
b) Debt 10% and Equity 90%
c) Debt 40% and Equity 60%
d) Debt 90% and Equity 10%
Live Example – LBO
Patanjali’s LBO of Ruchi Soya
LBO Transaction
₹204.75 crore = Equity
₹3,233.36 crore = Debt
B.) Management Buyouts (MBO)
A transaction where a
company's management team
purchases the assets and operations
of the business they manage
Michael Dell, the founder of Dell, the computer
company, paid $25 billion of the company he
originally founded,
taking it private, so he could exert more control
over the direction of the company.
Flowchart of MBO
Poll – II
• BPCL has made a buyout of Oman Oils for Rs. 2400 crores.
• Which of the following will justify this transaction of buyout?
a) BPCL buying 51% stake in Oman Oils
b) BPCL buying 11% stake in Oman Oils
c) BPCL buying 49% stake in Oman Oils
d) BPCL buying 10% stake in Oman Oils
Learning Outcomes
• Appraise the role of Investment banker in determining the worth of
the companies.
• Review the different techniques used in ascertaining the valuation of
the companies.
Valuation techniques
Valuation
Techniques
Comparable Discounted Cash Leveraged
Company Flow Analysis Buyout analysis
Analysis
Exit Mechanisms for PE Investors
Exit Mechanisms
Taking the Secondary or
company public trade Buyback Liquidation
with IPO sale/strategic sale
Poll
• Tiger Global, a private equity firm made significant investments in the start – up
business known as Just dial.
• This venture capital firm made an exit at the time when Just dial company had
gone public.
• It can be said that the exit route followed by Tiger Global was:
a) IPO
b) Strategic sale
c) Buyback
d) Liquidation
Poll
• Sequoia Capital, a venture capital firm made significant investment in start – up
business Freecharge.
• It later on adopted the exit mode from this start – up business by giving the stake
to the third party.
• It can be said that the exit route followed by Sequoia Capital was:
a) Buyback
b) IPO
c) Strategic sale
d) Liquidation
Venture Capital Financing
Business Structure
Characteristics in
Business Model for
Financial Structure
venture capital
financing
‘Venture capital’ – not
for any type of start –
ups
‘Business Structure’ of Venture capital backed start – up
business
Business Structure
Technology Venture Product Successful
Backed by Established
/ Innovation driven at pilot stage (beta Market validation
technology revenue model
business model stage)
‘Financial Structure’ of Venture capital backed start – up
business
Financial Structure
Financing from
More focus on Less TA creation; High risk, high
seed stage to High Cash burns
equity financing More IP creation rewards
pre IPO stage
Prototype of Venture capital backed up Start –
up Company Life Cycle
