Venture Capital – An Introduction

Arvind Kohli
Company Secretary E.mail: arvindkohli@gmail.com Mobile: 9811026619

Sources of Funding

Banks & Financial Institutions
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Project Financing
Term Loans / C.C. Limit

Debt Borrowings  Equity

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Promoters Friends, Relatives & Business Associates

Private Equity
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Venture Capital Angel Investors Bootstrapping

Venture Capital
A type of Private Equity Capital typically provided by professionals, institutionally backed outside investors to new growth business. Venture Capital is the process by which investor’s fund the early stage, more risk oriented business endeavours. A venture Capital funding arrangement will typically entail relinquishing same level of ownership and control of the business. Generally made as cash in exchange of shares in the investee Company.

Structure of Venture Capital Fund
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Generally a partnership firm. Pooled funds in the form of commitment for a common objective / area. Generally for 10 years with a clause of extension. Average exposure 3 to 7 years. Beyond 5 years Venture Capitalist looks for change in portfolio to cut exposure to Management & Marketing risk of an individual / product. Investors have a fixed commitment in the fund which is “called down” by Venture Capitalist over time as the fund makes the investment. Substantial penalties to limited partners for not honouring a capital call.

Venture Capital Fund Operations
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General Partners / Venture Capitalist Limited Partners / Investors Venture Partners / Entrepreneurs in Residence (EIR) Angel Investors Bootstrapping

Six Factors for Investing
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Size and Risk of Opportunity. Quality of Entrepreneur. Uniqueness of Technology. Condition of Market. Strength and speed of Competitors . Equity Portfolio Mix.

Questions in Venture Capitalist’s Mind
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Is this the Right Team ? What’s the Entrepreneur’s motivation ? Is this a billion dollar opportunity ? Is it a Game changer ? How Competitive is the space ? How defensible is the product ? How much is this thing going to take ? How long to maximise value and exit ?

Why Venture Capitalist’s says 'NO'

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Lack of an experienced and complete management team. The company did not fit their investment criteria. The size of the market, the company is in, is too small. No competitive Advantage / Non compelling technology. Strategic Weaknesses. The industry has no barriers to entry for competitors. The risk is too high relative to projected returns.

Qualities of recipient of Venture Capital
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Strong Management Team. Attractive market opportunity. Ability to be first in the market place. A Proprietary technology. A well thought out business plan.

Where Venture Capitalist’s are Hunting
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U.S., China, India & Israel. Start-up Venture Capital Hot Zones :
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Wireless / Internet / Biotech / Pharma / Telecom / Software / Reality


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Universities.
Entrepreneur Networks – SME R&D Centres

Recent Trends

Through 3rd Quarter of 2006 $ 19.20 billion was invested by Venture Capitalist’s in 2533 deals in US. China – dedicated funds raised $ 4 million in committed capital by 2005. Venture Capitalist’s invested $ 508 million across 92 deals in India in 2006 up from $ 268 million in 44 deals in 2005. In 2005 capital raised in European region was more than € 60 million of which € 12.6 million was specifically for Venture Capital investment

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