VENTURE CAPITAL

Meaning

* Venture capital is a form of private equity and a

type of financing that investors provide to
startup companies and small businesses that
are believed to have long-term growth
potential.
* Venture capital generally comes from well-off
investors, investment banks and any other
financial institutions.
 VENTURE CAPITALIST
* A venture capitalist (VC) is a person or investment firm that
makes venture investments
* Venture capitalists are expected to bring managerial and
technical expertise as well as capital to their investments.
* A venture capital fund refers to a pooled investment vehicle
(often an LP or LLC) that primarily invests the financial capital
of third- party investors in enterprises that are too risky for
the standard capital markets or bank loans.
lopment of a startup or an entrepreneur, there are differences between these two investment types. See the infographic for details.

Angel Investors

http://mekongwomeninbusiness.org/2017/09/difference-between-angel-investors-and-ventur
e-capitalists/
 Origin

* Georges Doriot is the "Father of

Venture Capital“ - American Research
and Development Corporation (ARDC)
– 1946
* 1958, Business Administration Act, US
* 1960s – UK – Business Expansion Act
 VC in India
* 1972 – Bhatt Committee
* 1975 – Risk Capital Foundation (RCF) was
established by IFCI
* 1976 – Seed Capital Scheme by IDBI
* 1983 – Policy Statement – Self Reliance
* April, 1986 – Venture Capital Fund (VCF)
* 1986 – ICICI Venture Capital Ltd.,
* 1988 – Technology Development Fund (TDF)
VC Deals in India 2018-19
Regulatory framework of Venture Capital in India

* Venture Capital in India governs by the SEBI Act, 1992 and SEBI
(Venture Capital Fund) Regulations, 1996. According to which,
any company or trust proposing to carry on activity of a
Venture Capital Fund shall get a grant of certificate from SEBI.
* However, registration of Foreign Venture Capital Investors
(FVCI) is not obligatory under the FVCI regulations.
* Venture Capital funds and Foreign Venture Capital Investors
are also covered by Securities Contract (Regulation) Act, 1956,
SEBI (Substantial Acquisition of Shares & Takeover)
Regulations, 1997, SEBI (Disclosure of Investor Protection)
Guidelines, 2000.
 Venture capital funds

Venture capital funds are pooled investment funds that

manage the money of investors who seek private equity
stakes in startups and small- to medium-sized
enterprises with strong growth potential
Guidelines for Venture Capital Companies
1) The financial institutions, Stat Bank of India, scheduled banks and foreign banks are
eligible to establish venture capital companies or funds subject to the approval as may be
required from the Reserve Bank of India.
2) The venture capital funds have a minimum size of Rs. 10 crore and a debt equity ratio of
1:1:5. If they desire to raise funds from the public, promoters will be required to contribute
minimum of 40% of the capital.
3) The guidelines also provide for NRI investment up to 74%
4) The venture capital funds should be independent of the parent organization.
5) The venture capital funds will be managed by professionals and can be set-up as joint
ventures even with non-institutional promoters.
6) The venture capital funds will not be allowed to undertake activities such as trading,
broking and money market operations but they will be allowed to invest in leasing to the
extent of 15% of the total funds deployed. The investment on revival of sick units will be
treated as a part of venture capital activity.
7) A person holding a position of being a full time chairman, chief executive, or managing
director of a company will not be allowed to hold the same position simultaneously in the
venture capital fund/ company.
8) The venture capital assistance should be extended to the promoters who are new, and
are professionally or technically qualified with inadequate resources.
Constitution of Venture Capital Funds
There are three layers of structured or institutional venture capital funds
* venture capital funds set up by high net worth individual investors
* venture capital subsidiaries of corporations
* private venture capital firms/ funds.

Venture funds in India can be divided on the basis of the type of promoters.

1. Venture Capital Funds promoted by the Central government controlled development financial
institutions such as TDICI, by ICICI, Risk capital and Technology Finance Corporation Limited (RCTFC)
by the Industrial Finance Corporation of India (IFCI) and Risk Capital Fund by IDBI.

2. Promoted by the state government-controlled development finance institutions such as Andhra

Pradesh Venture Capital Limited (APVCL) by Andhra Pradesh State Finance Corporation (APSFC) and
Gujarat Venture Finance Company Limited (GVCFL) by Gujarat Industrial Investment Corporation
(GIIC)

3. Also, promoted by Public Sector banks such as Canfina and SBI-Cap.

4. Venture Capital Funds promoted by the foreign banks or private sector companies and financial
institutions such as Indus Venture Fund and Grindlay's India Development Fund[12].
Eligibility and Investment Criteria for Venture
Capital Funds
* Memorandum of Association or Trust Deed must have main objective to carry on action of Venture Capital Fund including
prohibition for making an invitation to the public to subscribe to its securities.
* Further, it is required that Director or Principal Officer or Employee or Trustee is not caught up in any litigation
* in case of, body corporate, it must have been set up under Central or State legislations and applicant has not been refused
certificate by SEBI
* A Venture Capital Funds may generate investment from any investor (Indian, Foreign or Non-resident Indian) by means of
issue of units
* No Venture Capital Fund shall admit any investment from any investor which is less than five Lakhs. Employees or principal
officer or directors or trustee of the VCF or the employees of the fund manager or Asset Management Company (AMC) are
only exempted.
* It is also mandatory that VCF shall have firm commitment of at least five Crores from the Investors before the start of
functions
* Disclosure of investment strategy to SEBI before registration, no investment in associated companies and duration of the life
cycle of the fund is compulsorily being done.
* It shall not invest more than twenty five percent of the funds in one Venture Capital Undertaking.
* Also, minimum 66.67% of the investible funds shall be utilized in unlisted equity shares or equity linked instruments of Venture
Capital Undertaking.

It is also mandatory that not more than 33.33% of the investible funds may be invested by way of following as stated below
1. Subscription to IPO of a Venture Capital Undertaking (VCU)
2. Debt or debt instrument of a VCU in which VCF has already made an investment by way of equity
3. Preferential allotment of equity shares of a listed company subject to lock in period of one year
4. The equity shares or equity linked instruments of a monetarily weak company or a sick industrial company whose shares are
listed.
5. SPV (special purpose vehicles) which are created by VCF for the purpose of making possible investment.
*
Features of Venture Capital
1) For New Entrant: Venture Capital investment is generally made in new enterprises that use new technology to produce new
products, in expectation of high gains or sometimes, spectacular returns.

2) Continuous Involvement: Venture capitalists continuously involve themselves with the client’s investments, either by
providing loans or managerial skills or any other support.

3) Mode of Investment: Venture capital is basically an equity financing method, the investment being made in relatively new
companies when it is too early to go to the capital market to raise funds. In addition, financing also takes the form of loan
finance/ convertible debt to ensure a running yield on the portfolio of the venture capitalists.

4) Long-term Capital: The basic objective of a venture capitalist is to make a capital gain on equity investment at the time of exit,
and regular return on debt financing. It is a long-term investment in growth- oriented small/medium firms. It is a long-term capital
that is an injected to enable the business to grow at a rapid pace, mostly from the start-up stage.

5) Hands-On Approach: Venture capital institution take active part in providing value – added services such as providing business
skills, etc., to investee firms. They may/may not interfere in the management of the firms or do they acquire a majority /
controlling interest in the investee firms. The rationale for the extension of hands- on management is that venture capital
investments tend to be highly non- liquid.

6) High risk- return Ventures: Venture capitalists finance high risk-return ventures. Some of the ventures yield very high return in
order to compensate for the heavy risks related to the ventures. Venture capitalists usually make huge capital gains at the time of
exit.

7) Source of Finance: Venture capitalists usually finance small and medium- sized firms during the early stages of their
development, until they are established and are able to raise finance from the conventional industrial finance market. Many of
these firms are new, high technology- oriented companies.

8) Liquidity: Liquidity of venture capital investment depends on the success or otherwise of the new venture or product.
Process of VC Funding

•Deal Origination

•Evaluation

•Investment Valuation i)Projections ii) Mkt Cap iii)ROI

•iv) Pricing

•Deal Structuring

•Post-Investment

•Exit
 Stages of VC Funding

Venture Capital

Early Stage Expansion Acquisition

Financing Financing (OR)
Buyout

• Acquisition
• Seed
• Bridge • Leveraged/
• Startup
• Mezzanine Managemen
• First Stage
t Buyout
The Finance Split-up
1) Venture Financing

Lifecycle Stage Types of Financing Major Sources/Players

Entrepreneur’s assets
Development Stage Seed Financing
Family and friends

Entrepreneur’s assets
Family and friends
Business angles
Venture Capitalists
Start-up Stage Start-up Financing Venture capitalists
Suppliers and customers
Government assistance
programs
Commercial banks

Second-Round Financing Business operations

Mezzanine Financing Suppliers and customers
Rapid-Growth Stage
Liquidity–Stage Commercial banks
Financing Investment bankers

2) Seasoned Financing
Lifecycle Stage Types of Financing Major Sources/ Players

Obtaining Bank Loans Commercial banks

Maturity Stage Issuing Bonds Commercial banks
Issuing Stocks Investment bankers
 Criteria for Analysing Proposals

Criteria for analysing

VC proposals

Fundamental Financial Portfolio Divestment

Analysis Analysis Analysis Analysis

• History • Investment • Trade Sale

• Earnings Size
• Products • Take off
Growth • Stage of
• Market • Earn out
• ROI Developmen
Risks t
• Floatation
Styles of VC/ Investment Nurturing

Styles of
Nurturing

Hands-
Hands-on Hands-off
holding

Active
Assists Only
Participation Indirect
when
by way of Participation
approached
BoD
 Methods of Nurturing

* Personal Discussions
* Plant Visits
* Feedback
* Periodic Reports
* Commissioned Studies
 Compensation

* Annual Management Fee

▪ Normal Operating expenses
• Salary, Admin expenses
• Selection of Investment expenses
* Excludes Legal/Professional expenses
(reimbursed separately)
* 2 to 3% of NAV
 Methods of Exit
*Trade Sale (selling subsidiaries)
*IPO
*Write off (voluntary liquidation)
*Buyback
*Strategic Acquisitions
*Secondary Sale
 Notes

http://www.mbaexamnotes.com/venture-capital.html
https://www.patriotsoftware.com/blog/accounting/entrepreneur-exit-strat
egies-small-business-startups/