VENTURE CAPITAL

Key point

The myth is that venture capitalists

invest in good people and good ideas.
The reality is that they invest in good
industries.
To cover…
– A brief History of VC
– Definition
– Venture capitalists
– Advantages of Venture capital
– Stages of VC/ financing
– VC contributions (economy, investors and
Entrepreneurs)
 Entrepreneurship Bridges the
Gap

ENV.Technology /
Opportunity/ Entrepreneurship Value
problem
 7

• VOIP (Voice over IP (VoIP)) service provider

• Revenues based on, advertising or some such

• No cost for PC-to-PC calls

• Initial VC investors:
– 2002,Draper Investment Company - $250,000 initial
•investment

• Sold to eBay in 2005 for $2.1B

• Initial VCs make 1300X return on their initial investment

•Now owned by Microsoft for $8.5 billion
World's Online Marketplace."
"Connecting buyers and sellers
globally."
"Whatever it is, you can get it on
eBay."
"Buy it, sell it, love it"
"Buy it New, Buy it Now"
"When it's on your mind, it's on eBay"
 Entrepreneurship

The pursuit of Opportunity

beyond the Resources you
currently control
 10

History of Venture Capital

– 1946 = first two venture capital firms:
1. ARDC
2. J.H Whitney & Company ;
– 1960/1970 = Venture Capital as
synonymous with
technology finance;
 History of Venture Capital

– 1980 = declining returns of industry and

the shift was there to fund the mature
business only.

– 1990/2000= The Venture Capital Boom

and the Internet Bubble.
 VC Meaning
Venture capital
means funds made
available
for startup firms and 
small businesses with
exceptional growth p
otential.
 VC Meaning

– 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.
 14 Venture Capitalists and
Business Angels
– Venture Capitalists are investment firms that
make venture investment, providing capital for
start-up or expansion.
– They are looking for higher rate of return,
bringing their managerial abilities to small
businesses with great potential growth.
– Business Angels are private investor with
huge personal capital, looking forward to invest
their money in business which are not helped
by financial institutions because are too risky.
 Angel Investors

Local Wealthy Individuals

234,000 active investors in US
Work in informal groups
Pool investments
300 informal “angel” groups in US
Venture Capitalists generally:

Finance new and rapidly growing

companies

Purchase equity securities

Assist in the development of new

products or services

Add value to the company through

Acquisition or buyout financing
 Stages of financing
1. Seed Money:
Low level financing needed to prove a new
idea (Idea or R&D for product development
.
2. Start-up:
Early stage firms that need funding for
expenses associated with marketing and
product development. (Initializing operations
or developing prototypes

.
3. First-Round:
Early sales and manufacturing funds.
(Start commercials production and
marketing

4. Second-Round:
Expand market and growing working capital
need
5. Third-Round:
Also called Mezzanine financing, this is
expansion money for a newly profitable
company.(acquisition & product
development for profit making
company
6. Fourth-Round:
Also called bridge financing, it is
intended to finance the "going public"
process .(Facilitating public issue
Advantages of Venture Capital
Economy Oriented-

–Helps in industrialization of the country

–Helps in the technological development of
the country  
–Generates employment
–Helps in developing entrepreneurial skills
Investor oriented-

–Benefit to the investor is that they are invited

to invest only after company starts earning
profit, so the risk is less and healthy growth of
capital market is entrusted.
–Profit to venture capital companies.
–Helps them to employ their idle funds into
productive avenues
Entrepreneur oriented-

–Finance - The venture capitalist injects long-term

equity finance, which provides a solid capital base
for future growth.
–Business Partner - The venture capitalist is a
business partner, sharing the risks and rewards.

Mentoring –
–Alliances - The venture capitalist also has a
network of contacts in many areas that can add
value to the company
 Methods of Venture Financing

The financing pattern of the deal is

the most important element.
Following are the various methods
of venture financing:
–Equity
–Conditional loan
– SEAF (Small Enterprise Assistance Fund)
–  Afghan Growth Finance
– In partnership with the Overseas Private
Investment Corporation (OPIC), SEAF established
Afghan Growth Finance (AGF) in May 2007 to
address the market gap faced by small and
medium enterprises (SMEs) in obtaining growth
capital in Afghanistan. AGF offers a broad mix of
financial products coupled with market
appropriate support services that enable Afghan
entrepreneurs to lower their overall cost of
capital and to accelerate their growth.
–  
–  
– Afghanistan Holding Group
– Projects AHG partners have developed and managed include a
USD$20 million venture capital fund (Acap Partners), a USD$50
million grant fund (the Afghanistan Investment Climate Facility
- Harakat), and the establishment of Export Promotion Agency
of Afghanistan (EPAA). Additionally, members of AHG’s
leadership have played critical roles in Afghanistan’s Ministry of
Finance, Ministry of Justice, Ministry of Women's Affairs,
Ministry of Education, Ministry of Higher Education and the
Afghanistan Investment Support Agency. AHG partners have
worked with US institutions such as Morgan Stanley, Merrill
Lynch, Arthur D. Little- developing innovative solutions such as
launching the first Islamic investment bank in the United States
(Noriba Investing)
– The Afghan Renewal Fund (a USAID project)
– ARF is a venture capital fund managed by ACAP Partners,
an independent fund management company with offices
in London and Kabul, in partnership with Afghan
Investment Partners LLC, an affiliate of Afghan
Reconstruction Companies LLC. The Fund invests in small
and medium size enterprises by providing risk capital (in
the form of debt/equity) in the range of US$500,000 to
US$5 million. The Fund's investment strategy focuses on
attractive growth sectors, including in construction
materials, agribusiness, distribution and logistics, and
financial services. The purpose of the Fund is to maximize
return for investors. In doing so, the Fund will contribute
to economic growth, reconstruction and development in
Afghanistan.
–  
–New India-Afghanistan fair promotes
innovation partnership (also a USAID
based project)
–Since 2003, combined domestic and
international investment in Afghanistan
has sky rocketed from $9million to $2
billion annually. The country’s agriculture,
health, construction, mining and
manufacturing
–sectors are absorbing the lion’s share of
the investment capital,
– Afghanistan Reconstruction Trust Fund (ARTF)
– The Afghanistan Reconstruction Trust Fund (ARTF) was
established in 2002 to provide a coordinated financing
mechanism for the Government of Afghanistan's budget and
priority national investment projects. Today, the ARTF remain
the vehicle of choice for pooled funding, with low transaction
costs, excellent transparency and high accountability, and
provides a well-functioning arena for policy debate and
consensus creation (External Evaluation 2012 "ARTF at a Cros
Roads"). It is the largest single source of on-budget financing
for Afghanistan’s development and is delivering important
results within key sectors including education, health,
agriculture, rural development, infrastructure, and
governance. The ARTF is supported by 34 donors and
administered by the World Bank.
–  
–Also local Banks provide funds…such
as
– 
–BRAC Bank Afghanistan
–AIB Bank
–Azizi Bank and etc.
 In Afghanistan

– Venture Capital
– AFC has successfully managed going into different Venture
capital (VC) deals through funding invested, or available for
investment, in various agro-based manufacturing /
processing units that offered the probability of profit along
with the possibility of loss (such as carpet weaving
businesses & cattle farms etc).
 Key point

The myth is that venture capitalists

invest in good people and good ideas.
The reality is that they invest in good
industries.
Questions Session
 Advantages
– 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.
 Risk in each stage
Financial Stage Period (Funds Risk Perception Activity to be
locked in years) financed

For supporting a
Seed Money 7-10 Extreme concept or idea or
R&D for product
development

Initializing
Start Up 5-9 Very High operations or
developing
prototypes
Start commercials
First Stage 3-7 High production and
marketing
Financial Stage Period (Funds Risk Perception Activity to be
locked in years) financed

Expand market
Second Stage 3-5 Sufficiently high and growing
working capital
need

Market expansion,
acquisition &
Third Stage 1-3 Medium product
development for
profit making
company

Fourth Stage 1-3 Low Facilitating public

issue
 Advantages
 The venture capitalist also has a network of
contacts in many areas that can add value to the
company.
 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.