VENTURE CAPITAL Financing

Venture Capital

 VC: A method of financing projects especially

which are newly started.
 A new technique of financing to inject long
term capital into the small and medium
sector.
 Financing projects which may be innovative
and risky where the traditional banks and the
financial institutions, being basically risk-
averse investors, may not come forward to
finance it.
 Venture capital investors step in and finance
the projects, participate in the
management, sail through with the
entrepreneur and finally exit when they find
that the project is successful.
 Share the returns when the project turns
success and bear the risks in case of failure.
 A venture capital firm is a financial partner of an
entrepreneur in his project who sees him
through its implementation and commercial
operation.
 VC is a way in which investors support
entrepreneurial talent with finance and
business skills to exploit the market
opportunity and to obtain long term gains
Characteristics of venture capital
1. Risky projects
 Venture Capital finances new projects that are untried
and which Possess higher than average risk levels.
 Mostly, the investments are made in emerging
industries which are technology driven.
2. Early stage financing
 Every project has a life cycle and this consists of two
stages – early stages and later stages.
3. Entrepreneur centric
 Supports the business idea of the entrepreneur and
emphasize on business plan.
4. Partnering
 A venture capital financing firm is seen as a partner in the business.
 Brings in his own experience of implementing a project and works for
the success of the project.
5. Form of finance
 Venture capital assistance is mostly in the form of
participation in the equity capital of the company.
6. Long term
 Venture capital investors invest in companies for a longer
term to realize the gains on their investments.
 Investments remain illiquid until the exit time.
7. High risk-return spectrum:
 The return in such financing are essentially through capital
gain at the time of exit
 Process for Evaluation of VC
VC
Financing

Selection of Investment Valuation of Structural

Exit
Investment Nurturing portfolio aspect

Stages of
Hands off
Investment

Analysis of Hands
Investment holding

Instruments
B. Investment Nurturing/Aftercare
 There are certain methods to nurture the
investment based on the objective;
1. Hands-on Nurturing: It refers to a
continuous and constant involvement in
the operation of company by VCU. Appoint
nominee in BOD.
2. Hands-off Nurturing: Although they have
reserve right, they rarely have nominee and
play a passive role in framing strategies.
3. Hands-holding Nurturing : This is a mid
way between above two. Have right to
nominate BOD and can assist internally in
framing of strategies. It is a reactive approach.
C. Valuation of Portfolio
 The venture capital portfolio has to be valued from time to
time to monitor and evaluate the performance of
investment.
 The methods/techniques are as follows;
1. Cost method: According to this method, the value of
equity holding is computed/recorded at the historical
cost of acquisition until it is disposed of.
2. Market value based method: It can be divided into two
parts;
a) Quoted market value method: It is relevant to the
organization listed on stock exchange because it is
based on market quotations of securities.
 D. Structural Aspect
 The structure of company/VCI is important and
alternative form are as follows;
1. Limited partnership: Having limited
partnership but do not participate in the actual
operation of business.
2. Investment company: Double taxation of
income, both company & shareholders are liable
to pay tax
3. Investment trust: A company not liable to tax
on chargeable gains/dividend
4. Offshore funds: Involves offshore investment
company & enjoy tax concession.
5. Small business investment company: Invest
only in small concerns
D. Exit
 The last stage in venture capital financing is the exit to
realize the investment so as to make profit.
 It should be planned at the time of initial investment itself.
 The alternative routes for disinvestment of equity
are;
1. Going public: The most common channel of
disinvestment is through public issue of capital of VCU.
2. Sale of shares to entrepreneurs: The share of VCU
may be sold to the entrepreneur themselves who are
allowed to buy their own equity.
3. Trade sale: The entire company is sold to another
company/third party.
4. Sale to a new investor: The equity stake can be sold to
a new investor who may be a corporate body or even
another VCU.
5. Liquidation: Involuntary exit as a result of totally failed
investment.
Advantages of Venture Capital
 Emphasis is placed on the track record of
performance, venture capital focuses on the person
and the innovativeness of the project.
1. Long-term finance: Venture capital is usually in the
form of participation in the equity of the
company. Interested in the capital gain from the
sale of their stake after a long period.
2. Business partner: Venture capitalists are business
partners of the entrepreneur because risk & rewards
are share by them.
3. Additional funding: Venture capital firms do not stop
with the initial funding but provide additional rounds of
financing is done at different stages, if needed.
4. Favourable impact on the economy: Venture
capitalist catalyses innovations and the spirit of
entrepreneurship in the economy. It leads
commercialisation of technology in many sectors.
5. It concentrates on the benefit of entrepreneurs.
6. The venture capitalist bring in his expertise too to
make the project a viable commercial proposition.
7. The company is relieved of the difficulties of
searching for the sources of finance at critical
stage of development.
Venture Capital in India

 The evolution of venture capital industry dates

back to the 1970s.
 Individual investors and development financial
institutions played the role of venture
capitalists at the initial stage.
 Entrepreneurs depended upon public offerings
and lending by the financial institutions.
 Development of Small and Medium Enterprises
(RS Bhatt Committee) committee was set up
in 1973 to highlight the importance of venture
capital.
 The Technology Development and Information
Company of India (TDICI) which is an
initiative of ICICI and the UTI, came into
existence in 1988 is a pioneer of the venture
capital industry in India.
 The Government of India issued guidelines in
September 1995 for overseas venture capital
investment in India.