FIG09104: Financial Markets and Institutions

DR. Dionis J. Ndolage

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VENTURE CAPITAL FUNDS (VCF)/ FIRMS
(1) What is venture capital
 Risk capital for growing private firms, which need both
start up capital and development capital for novel or
new ideas, technology or that have entrepreneurial
potentiality.
 Supply equity capital and sometimes debts capital or a
combination of both (ordinary shares, preferential
shares, convertible bonds, bonds with warrants &
convertible preference shares)

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 Venture capitalists supply both Funds/Risk capital and
management skills: ( technical, commercial, managerial,
financial, entrepreneurial ) for development and
nurturing of growing businesses.

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(2) MAIN FUNCTION OF VENTURE CAPITAL (VC)
(i) To provide risk capital (equity and debt) ( seed
capital, start-up capital, expansion capital & later
–stage financing) AND management skills.
(ii) Supplement owner’s fund by supplying
additional funds required to optimize the
operations and performance of the firm.
(iii)VCs assist to obtain additional finances and other
services from outside sources e.g., additional financing
from other financial institutions, trade financing,
sourcing materials and marketing services.
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(iv)VCs provides contacts and introductions to
F/Institutions, banks, customers, suppliers,
consultants etc.
(v) VCs assists growing enterprises to recruit and
employ skilled managers and staffs.

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(3) VENTURE CAPITAL INVESTMENT CYCLE
Involve three stages;
(i) Entry stage
(ii) Operating stage
(iii)Existing stage

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(3) VENTURE CAPITAL INVESTMENT CYCLE Cont…
(i) Entry Stage
 Selecting/screening/ evaluation of the proposal for
VCF to finance.
 Structuring the deal with an entrepreneur
 Negotiating;
(a) the type or composition of the capital structure and
the contribution of the VC entrepreneurs and other
sources,
(b) Pricing the deal – the required rate of return of the
VC-commensurate with the level of risk (range : 20 –
50%) depending on the stage of financing)
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(3) VCFs INVESTMENT CYCLE Cont…
(i) Entry Stage Cont…
(c) Terms of the agreements (standard and protective
covenants)
(d) Role of VC in firm and the role and interest of the
entrepreneurs in the firm.
(ii) Operating Stage
(a)Monitoring management/follow- up to minimize losses
and maximize gains.
(b)Assist entrepreneur to manage the firm professionally
 Offer expert advisory services
 Training etc.
(3) VCFs INVESTMENT CYCLE Cont…
(iii) Exist Stage
 How the VC may exist from the venture?
Class to discuss
 Issue to be considered
 Existing methods/modalities

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(3) VCFs INVESTMENT CYCLE Cont…
(iii) Exist Stage Cont…
 Issue to be Considered in Determining the Nature of the
Exit:
(a)Availability of outside parties to acquire the interest of VC
in the firm.
(b)Availability of different means of effecting sale of the
interest of the VC/exit and that of remaining
entrepreneur.
(c)Tax advantages associated with different method of sale/
exit.
(d)Nature of exit – full or partial exit (retain some equity)
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(3) VCFs INVESTMENT CYCLE Cont…
 EXIT METHOD
(a)IPOs
(b)Acquisition by another company
(c)Investee company (entrepreneur) buying VCs
shares
(d)Secondary selling of VC’s shares to a third or
other parties agreeable to the
owner/entrepreneur or selling in the
stock/exchange.
THANK YOU FOR LISTERNING

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