Venture

Capitalism
Presented by: Tuba
Tariq
Student ID :12777

What is Venture Capital?

Also known as Private Equity
They partner with investors like
- Pension Fund
- Insurance Companies
- Family Offices
Goal : To improve the companies they buy over time
and then sell them at a profit to generate good
investment returns for these investors. They usually get
a return after 5-10 years.
How does the investor reap profits?
- Initial Public Offering (IPO)
- Selling the company to a strategic investor

History of Venture Capitalism:

J.P Morgans acquisition of the Carnegie steel company in 1901
is the earliest recorded buy out.
Modern venture capitalism took place after WW II, 1946
5 Venture pioneers of 1946:
a) J.H Whitney Company
b) Rockefeller Brothers
c) American Research and Development (ARD)
d) Industrial Capital Corp.
e) Pacific Coast Enterprises
Father of Venture Capitalism : Georges Doriot of ARD
Aim: To encourage private sector investments in businesses run
by soldiers who were returning from World War II
How was it different from others? : Raised capital from sources
other than wealthy families
Success story of 1957: Investment of $70,000 in Digital
Equipment Corporation (DEC) would be valued at over $355
million after the company's initial public offering in 1968.

Types of firms Venture Capitalists buy

1) The Promising Enterprise: These are poised for growth and

expansion
Example, an innovative software company has a bright future but its
still a small company. It needs
Growth Capital
The right strategy
Experienced Managers
Venture capitalist firm will provide the growth capital to make strategic
business decisions to fuel its expansion along with the knowledge of
the experienced managers. This will help manage the growing pains of
the software firm that holds other companies back.
2) The Fixer Upper: Think of a local company that has been shedding
jobs, is falling behind its competitors and struggling with rising energy
cost. It still makes a great product but needs
Change in strategy
A capital infusion
Venture capitalist firm will provide working capital needed to help the
company grow better than its competitors.

Venture Capital: The process

1) Find out what type of VC funding your company needs.

Seed financing the initial capital used to start a business. Funding
while you research and develop a project or concept until you are ready to
launch a company.
Start-up financing - to help you develop a product and market it for the
first time. VC investors join your company to help bring the product to
market.
Expansion and development - investment is used to increase
production capacity and sales activity.
2) Provide details to the investor
audited accounts for the past two years
evidence of current performance
profit-and-loss forecast for next year
business bank statements for the past six months
profiles of each partner or director in your business
3) Data Confidentiality: a letter of confidentiality is issued. This
should be signed both by your business and the potential investors before
you send them your full business plan.

Pros of Venture Capitalism

Dynamic growing companies
More jobs
Better products
Venture capital funding is committed and long
term
You retain management control of your business
No need for collateral (personal assets)
No repayments or interest on the VC funding (not
a loan but investment)

Cons of Venture Capitalism

Control You may lose it, depending on how much
cash you accept and how early on in the process
you acquire the venture capital.
Profit Share The very nature of taking money
from outside sources means you will see a drastic
cut in the percentage of the profits your company
will keep for itself if it does succeed.
Stipulations and restrictions in composition of the
start-up's management team, employee salary
and other factors.

Cases of VC in USA
1) Apple Inc.
The first venture investors were Venrock Associates
and Markkulla
12th December 1980 IPO when Apple sold 4.6 million
shares to the public at $22 a share.
Today it is valued at approximately $627 billion dollars

2) Radian6
Social media monitoring tools, social media
engagement software
Hummer Venture Partners acquired Radian6 in 2011
Initial investment of $9-million and later worth more
than $300-million.

Why is VC funding successful in USA?

USA has a long and thorough process of identifying and qualifying

prospective investors
USA is combative so they are much stricter about intellectual
property and employment agreements.
US venture capital market is well developed. Operating since the
1940s
The National Venture Capital Association (NVCA) is an efficient
government regulatory body
A vibrant market where its young new companies can exit via
initial public offerings (IPOs).
US stock markets are eager to trade the shares of new companies
Investment comes through pension funds and insurance
companies, doesnt just rely on commercial banks
retention of highly qualified employees in VC funding
stable taxes on capital gains and personal protection in case of
bankruptcy
Cultural reason: Americans are risk takers

Cases of VC in Pakistan
1) US Seeding Venture Capital and Private Equity in Pakistan
US is providing $80 million to create multiple VC and PE funds in
Pakistan
The funds will focus on investing in small and medium entrepreneurial
companies
Hoffman, Pincus and Kraus invested in Monis Rahman, a PakistaniAmerican who left Intel for entrepreneurship. Rahman had successfully
launched and sold a start-up in the Bay Area, eDaycare.com.
2) TMT Ventures
TMT Ventures was created in 2000 stands for Technology, Media and
Telecommunication
TMT started as a private owned division within AKD Securities and has
grown to a company managing Rs. 250 million Incubation Fund.
Y-Evolve, a web development company, became the first ever VC
backed company in 2000 when TMT provided a very small amount of
Rs. 400,000. TMT Ventures took on by committing to provide funds of
about Rs. 3 million

 In 2001, AKD Securities and TMT Ventures helped the

SECP to frame the rules for VC
Rs 25 million investment of propriety AKD capital was
raised to a Rs 250 million institutional fund
3) The Resource Group (TRG)
manages the call centre business.
the firm has operations in Africa, Europe and North
America
The company is the venture of Pakistani entrepreneur
Zia Chishti.

Tax Status of Venture

firms in Pakistan
The profits and gains generated by Venture capital
companies registered under The Private Equity and
Venture Capital Fund Regulations, 2008 with SECP
as NBFC are exempted from income tax under the
clause 101 of Part 1 of the Income Tax Ordinance,
2001 up to June 30th, 2014

Challenges of VC funding in Pakistan

Inadequate deal flow of venture investments: In order
to hedge their bets, investors typically look for a market
where there is a large pool of good companies to select
from. Pakistani developing markets lack this
Shrinking risk appetite for investors: Pakistans 10
years return of VC funds averaged - 4.6%. All this has
resulted in VCs flocking to safer markets.
Security and geo-political risks (some real and most
perceived) associated with developing countries like
Pakistan tend to ward off investors
Lack of global awareness about Pakistani startups:
Investment is mostly taken up by Indian and Middle
eastern markets
General lack of trust and perception of inadequate
legislation for protection of intellectual property

 In grained fear of failure. The education system and

culture in developing nations like Pakistan
generallydoesntencourage failure.
Lack of local expertise to value technological ventures
Bureaucratic Barriers to Entry for Foreign Investment
Lack of Trust in Local Judicial Processes for Dispute
Resolution
inadequate Structure/Precedence for Structuring
Venture Investments
Lack of Local Success Stories and Big Hits
Venture capital firms or Fund Management companies
are required to renew their license from SECP on
annual basis

Recommendations
Pakistan needs to assess the venture capital structure
and policies of the countries where venture capital
firms are operating successfully
The regulatory restrictions by SECP on the insurance
companies and pension funds refraining them from
investing in venture capital firms should be relaxed.
The Government should stringently monitor the
Intellectual Property Protection (IPP) rights across the
industry
SECP and SBP should work on to improve the loan
recovery procedure in the country. Pakistan Venture
Capital Limited exited from the industry as it was
faced with serious issue of default risks

 There is a need to identify more areas on the

demand side along with the IT, Media and Telecom
sector where there exists potential for venture
capital investments
Co-financing investments with international
venture firms and investors
Pakistan SBIC Program (Small Business
Investment Company as in USA) would aim to
improve the availability of risk capital to start-ups
facing the equity gap, by bringing more
entrepreneurial investors' into the management of
funds

Thank You