VENTURE

CAPITAL
MEANING
• Venture capital is the money provided by professionals who
invest in young, rapidly growing companies that have potential to
develop into significant economic contributions.
• Imp source of equity for start up companies.
• Venture capitalists
• Finance new & growing industries
• Purchase equity securities
• Assist in development of new products & services
• Add value to the co through active participation
• Major source of financing for high growth potential business
• Vast difference between conventional financing & VC
financing.
 IMPORTANCE
• Venture money is not long term money. It is to invest in a co. till it
reaches sufficient size & credibility so that it can be sold to a corp. or
institutional public equity markets can step in to provide liquidity.

• VC’s Niche exists because of the structure and rules of capital markets

• Investment banks & public equity are both constrained by regulations &
operating practices are meant to protect the interest of the investor.

• VC fills the void between sources of funds for innovation & traditional,
lower cost sources of capital available to ongoing concerns

• Filling that void successfully requires VC industry to earn a consistently

superior return on investments in risky business
 RETURNS
• Investors in VC funds are very large institutions which expect a return of
25% & 35% per year over the life of investment

• Investment profile : venture capitalists invest in industries that are more

competitively forgiving than the market

• The flow of capital has shifted. 25% of funds are now devoted to internet.
In each case the target was growing fast.

• VC focus on the middle part of the classic industry S curve . They avoid
both the early stages & later stages.

• During adolescent it can be hard to distinguish between the winners

from losers . The challenge is to identify competent management.
IDEAL ENTREPRENEUR PROFILE
• Is qualified in a hot area of interest
• Delivers sales or technical advances with reasonable probability
• Tells a compelling story & is presentable to outside investors
• Recognizes the need for speed to an IPO for liquidity
• Has good reputation & provide references that show skills & competence
• Understands the need for team with various skills & sees why equity has
to be allocated to other people
• Works diligently towards a goal but maintains flexibility
• Gets along with the investor group
• Understands the cost of capital & deal structures
• Is sought after by many VC’s
• Has realistic expectations about process & outcome
 BASIS VENTURE CAPITAL DEBT FINANCING

Realize market investment Regular interest & principal

OBJECTIVE
return payments

HOLDING PERIOD Long term Short term

PRICING Earnings multiple Interest spread

OWNERSHIP Yes No

Minority shareholders,
CONTROL Covenants
board members

Increased leverage,
Reduced leverage, market
IMPACT borrower sourced, above
sourced, below the line
the line

EXIT MECHANISM Listing, buy back, sale Loan repayments

BROKER & CAPITALIST

Venture
Venture
capitalist
capitalist
broker Arranges capital
Puts up actual
on behalf of a
funds
client
SELECTION OF INVESTMENT
INCLUDES:

STAGES OF FINANCING

METHODS TO EVALUATE
DEALS

FINANCIAL INSTRUMENTS
 STAGES OF FINANCING
1) SEED CAPITAL

• Applied research phase

• Phases gives way to pro type product
• Testing development & then to commercialization
• Greatest risk is to ensure a match between entrepreneur’s
technological skills & market opportunities

2) START- UP

• Stage of commencement of commercial manufacturing

• VC financing required for product development & initial marketing
• Projects can be based on new/high technology, by established co
STAGES OF FINANCING
3) SECOND ROUND FINANCING

• Stage where product is launched, but not successful enough

to attract new investors
• Time frame for investment shorter than start-ups
• Financing partly in form of debt to provide some income for
VC’s

4) LATER STAGE FINANCING

• Involves businesses requiring additional financial support ,

where public issues of capital are not possible
• Includes mezzanine/development capital, bridge capital, buyouts
& turnarounds
VALUATION METHODS
1) CONVENTIONAL VENTURE CAPITALIST VALUATION METHOD

• Only starting & exit time of investment are taken into consideration
to arrive at a earnings rate
• However, stream of earnings/losses are ignored

2) FIRST CHICAGO METHOD

• Considers the stream of earnings between the start time & exit time
• Using a discount rate, a discounted present value of the VCU is
computed
• Discount rate is multiplied by respective probabilities.
• Expected PV is total of all probabilities
VALUATION METHODS
3) REVENUE MULTIPLIER METHOD

• Factor which can be used to estimate value of VCU

• M1 = V/R= (1+r)^n (a) (p)
(1+d)^n
Method popular where earnings maybe low/negative but there maybe
revenue/sales income
M= V/R a= expected PAT at the time of
V= PV exit
R= ANNUAL REVENUE LEVEL p= expected p/e ratio at the time
r= expected annual rate of growth in revenue of exit
n= expected no of years to exit d= discount rate approgo
INDIAN SCENARIO
RELEVANCE IN INDIA
• High growth potential & sophisticated information technology based
administrative systems to facilitate an investor friendly environment.
• A flourishing VC industry in India will fill the gap between the capital
requirements technology & knowledge based start up enterprises.
• Gap exists because start up companies are based on intangible
assets
• Innovative business ideas may secure finance through VC.
• Cos can secure smart advice, management support & other
skills that help entrepreneurial vision to be able to converted
into marketable securities.
FACTORS FOR SUCCESS
• Resource raising, investment, management & the exit should be
simple and flexible.

• VC should become an institutionalized industry that protect firms,

operating in an environment suitable for raising large amounts of
risk capital needed & for spurring innovation through start-up firms
in a wide range of high growth areas.

• With increasing global integration & mobility of capital, it is imp that

the Indian VC funds & also venture finance enterprises are able to
get a global exposure on investment opportunities.

• Infrastructure & R&D needs to be promoted using government

support & private management.
THANK YOU