Venture Capital- Introduction

• Starting and growing a business always require capital.

• There are a number of alternative methods to fund growth.
These include the owner or proprietor’s own capital,
arranging debt finance, or seeking an equity partner, as is
the case with private equity and venture capital.
• Finance may be required for the start-up,
development/expansion or purchase of a company.
• New companies or ventures that have a limited operating
history and hence may find it difficult to raise funds through
an equity or debt offering.
• In such a scenario, VC investors play a pivot role in investing
in unfinanced areas to promote new ventures.
 Venture Capital- Introduction
• Venture capital is most attractive for new
companies with limited operating history that
are too small to raise capital in the public
markets and have not reached the point
where they are able to secure a bank loan or
complete a debt offering.
• Venture capital is a means of equity financing for
rapidly-growing private companies.
• Venture Capital firms invest funds on a professional
basis, often focusing on a limited sector of
specialization (eg. IT,Bio Technology, infrastructure,
health/life sciences, clean technology, etc.).
• The venture capital investment helps for the growth of
innovative entrepreneurships.
• Venture capital is an investment in the form of equity,
quasi-equity and sometimes debt - straight or
conditional, made in new or untried concepts,
promoted by a technically or professionally qualified
entrepreneur.
• Venture capital means risk capital.
• It is developed as a result of the need to provide non-
conventional, risky finance to new ventures based on
innovative entrepreneurship.
• It refers to capital investment, both equity and debt,
which carries substantial risk and uncertainties.
• The risk envisaged may be very high.
• Venture capital typically comes from institutional
investors and high net worth individuals and is pooled
together by dedicated investment firms
• Provider of seed money for start-ups, midstage firms
on the brink of success but needing additional capital,
or successful firms capable of expansion to a regional
or nationwide platform.
• VC also can include managerial and technical expertise.
 Venture capital means funds made available
for startup firms and small businesses with
exceptional growth potential.

 Venture capital is money provided by

professionals who alongside management invest
in young, rapidly growing companies that have
the potential to develop into significant economic
contributors.
It’s a private funding used to support risky new
business and speculative ventures, usually with
high growth potential.
A typical venture capital investment usually
involves the business owner giving up equity to
venture capitalist in return for funding.
 Venture capital is an investment in the form of
equity, quasi-equity and sometimes debt - straight
or conditional, made in new or untried concepts,
promoted by a technically or professionally
qualified entrepreneur.
Venture Capitalists generally:

 Finance new and rapidly growing companies

 Purchase equity securities

 Assistin the development of new products or

services

 Add value to the company through active

participation.
The SEBI has defined Venture Capital
Fund in its Regulation 1996 as ‘a fund
established in the form of a company or
trust which raises money through loans,
donations, issue of securities or units as
the case may be and makes or proposes
to make investments in accordance with
the regulations’.
• In the 1920's & 30's, the wealthy families and individual
investors provided the start up money for companies
that had ability to become famous.
• General Doriot, a professor at Harvard Business School,
in 1946 set up the American Research and
Development Corporation (ARD), the first firm to
finance the commercial promotion of advanced
technology developed in the US Universities.
• Among the early VC funds set up was the one by the
Rockfeller Family which started a special fund called
VENROCK in 1950, to finance new technology
companies.
• While in its early years VC may have been associated
with high technology, over the years the concept has
undergone a change and as it stands today it implies
pooled investment in unlisted companies.
Long time horizon

Lack of liquidity

High risk

Equity participation

Participation in management
Venture capital is an important source of equity for start-up
companies.
It injects long term equity finance which provides a
solid capital base for future growth.

The venture capitalist is a business partner,

sharing both the risks and rewards. Venture
capitalists are rewarded by business success and the
capital gain.

The venture capitalist is able to provide practical

advice and assistance to the company based on past
experience with other companies which were in
similar situations.
 The venture capitalist also has a network of contacts in
many areas that can add value to the company. such as
in recruiting key personnel, providing contacts in
international markets, introductions to strategic partners,
and if needed co-investments with other venture capital
firms when additional rounds of financing are required.

 The venture capitalist may be capable of providing

additional rounds of funding should it be required to
finance growth.

 Venture capitalists are experienced in the process of

preparing a company for an initial public offering (IPO) of
its shares onto the stock exchanges or overseas stock
exchange such as NASDAQ.
They can also facilitate a trade sale.
• Venture capital can be visualized as “your ideas
and our money” concept of developing
business.

 Venture capitalists are people who pool financial

resources from high networth individuals,
corporates, pension funds, insurance companies,
etc. to invest in high risk - high return ventures
that are unable to source funds from regular
channels like banks and capital markets.

 Venture capitalists not only provide monetary

resources but also help the entrepreneur with
guidance in formalizing his ideas into a viable
business venture
• In exchange for the high risk that venture
capitalists assume by investing in smaller
and less mature companies, venture
capitalists usually get significant control
over company decisions, in addition to a
significant portion of the company's
ownership (and consequently value).

• Young companies wishing to raise venture

capital require a combination of extremely
rare yet sought after qualities, such as
innovative technology, potential for rapid
growth, a well-developed business model,
and an impressive management team.
• Venture capital provides the funding that
a company needs to expand its business.
It also offers a number of value added
services.

• Mentoring - Venture capitalists provide

companies with ongoing strategic,
operational and financial advice.

• They will typically have nominee directors

appointed to the company’s board and
often become intimately involved with the
strategic direction of the company.
• Alliances - Venture capitalists can
introduce the company to an extensive
network of strategic partners both
domestically and internationally and may
also identify potential acquisition targets
for the business and facilitate the
acquisition.

• Facilitate exit - Venture capitalists are

experienced in the process of preparing a
company for an initial public offering (IPO)
of its shares onto the Stock Exchange
both in domestic and international market
• Investment executives working with Venture
Capital Funds attempt to identify the best projects
in order to minimize their investment risk.

• Research has shown that Venture Capital backed

companies grow faster than other types of
companies, employ more people and are more
profitable when benchmarked against their peers.

• This is made possible by a combination of capital,

Venture Capitalists identifying and investing in the
best investment opportunities and input from
Non-Executive and Executive Directors introduced
by the VC investor (a key differentiator from other
forms of finance)
1. Seed Capital:
Low level financing needed to prove a new idea.
2. Start-up Capital:
Early stage firms that need funding for expenses
associated with marketing and product
development.
3. First/Early stage Financing:
Early sales and manufacturing funds.
4. Second/Follow on Financing:
Working capital for early stage companies that
are selling product, but not yet turning a profit .
5. Third/ Expansion Financing Stage:
Also called Mezzanine financing, this is
expansion money for a newly profitable
company
6. Fourth/ Turnaround Financing:
Also called bridge financing, it is intended
to finance the "going public" process
 Financial Period (Funds Risk Activity to be
Stage locked in Perception financed
years)
For supporting
Seed Money 7-10 Extreme a concept or
idea or R&D for
product
development
Initializing
Start Up 5-9 Very High operations or
developing
prototypes
First/Early Start
3-7 High commercials
stage financing production and
marketing
 Financial Period (Funds Risk Activity to be
Stage locked in Perception financed
years)
Expand market
3-5 Sufficiently high and growing
Second/ Follow working capital
on financing need
Stage
Market
Third/ expansion,
1-3 Medium acquisition &
Expansion product
financing development
Stage for profit
making
company
Fourth/ 1-3 Low Facilitating
Turnaround public issue
Financing Stage
 Deal origination

Screening

Due diligence
(Evaluation)

Deal structuring

Post investment
activity

Exit plan
 The financing pattern of the deal is the
most important element. Following are the
various methods of venture financing:
Equity
Conditional loan
Income note
Participating debentures
Quasi equity
Initial
public offer(IPOs)
Trade sale
Promoter buy back
Acquisition by another company
• An Angel investor or Angel is an affluent individual
who provides capital for a business start ups
usually in exchange for convertible debt or equity.
• A small but increasing number of angel investors
organize themselves into angel groups or angel
networks to share research and pool their
investment capital.
• Angels typically invest their own funds, unlike
venture capitalists, who manage the pooled
money of others in a professionally-managed
fund.
• Angel capital fills the gap in start-up financing
between "friends and family" (sometimes
humorously given the acronym FFF, which stands
for "friends, family and fools") who provide seed
funding, and venture capital.