article on venture capital funding process

8/12/2019 article on venture capital funding process

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VOLUME NO.1(2011),ISSUE NO.4(AUGUST) ISSN2231-4245

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DR. A. AMRUTH PRASAD REDDY & DR. S. RAGHUNATHA REDDY

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CALL FOR MANUSCRIPTSCALL FOR MANUSCRIPTSCALL FOR MANUSCRIPTSCALL FOR MANUSCRIPTS

>einvite unpublished novel" ori#inal" e0pirical and hi#h ?uality research wor: pertainin# to recent develop0ents 8 practices in

the area of )o0puter" Business" !inance" Mar:etin#" +u0an Resource Mana#e0ent" eneral Mana#e0ent" Ban:in#" Insurance"

)orporate overnance and e0er#in# paradi#0s in allied sub1ects li:e Accountin# 6ducation@ Accountin# Infor0ation Syste0s@

Accountin# 9heory 8 Practice@ Auditin#@ Behavioral Accountin#@ Behavioral 6cono0ics@ )orporate !inance@ )ost Accountin#@

6cono0etrics@ 6cono0ic Develop0ent@ 6cono0ic +istory@ !inancial Institutions 8 Mar:ets@ !inancial Services@ !iscal Policy@

overn0ent 8 $on Profit Accountin#@ Industrial Or#ani*ation@ International 6cono0ics 8 9rade@ International !inance@ Macro

6cono0ics@ Micro 6cono0ics@ Monetary Policy@ Portfolio 8 Security Analysis@ Public Policy 6cono0ics@ Real 6state@ Re#ional

6cono0ics@ 9a7 Accountin#@ Advertisin# 8 Pro0otion Mana#e0ent@ Business 6ducation@ Business Infor0ation Syste0s ;MIS


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Mobile $u0ber ;shen listin# two or 0ore wor:s by one author" use --- ;E'77ee:ly" 5iewed on July '." E'&& httpepw%inuserviewabstract%1sp


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INVESTMENT PROCESS OF VENTURE CAPITAL: AN EPLANATORY STUDY OF ANDHRA PRADESH

INDUSTRIAL DEVELOPMENT CORPORATION VENTURE CAPITAL LIMITED APIDC-VCL.

DR. A. AMRUTH PRASAD REDDY

ASST. PROFESSOR

DEPARTMENT OF BUSINESS ADMINISTRATION

YOGI VEMANA UNIVERSITYKADAPA 516 003

DR. S. RAGHUNATHA REDDY

ASSOCIATE PROFESSOR

KANDULA SCHOOL OF MANAGEMENT

KSRMCE CAMPUS, KADAPA 516 003

ABSTRACTIt ! " #$%%'()#( *"+t t"t !$-$"% /%%"(t 0$"! t) #)' )( "(0 1)+$!!$! 0$-$%)1$0 ( %"/)"t)$! +"(()t /$ 12t (t) +)33$+"% )1$"t)( )( "++)2(t )* #"(t

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E(t$1$($2"% t$"3! t"t !211%5 /2!($!! )11)t2(t$! t) VC! "$ +$(t"% 1%"5$! ( -$(t2$ +"1t"% 1)+$!!. It ! t$ (-$!t3$(t 3"("4$ #) "3! "t

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PROCESS OF VENTURE CAPITAL IN APIDC-VCL5enture )apital is basically a relationship a0on# three 0a1or participants investors" venture capitalists ;5)s< and entrepreneurs% Investors , financial

institutions" ban:s" insurance co0panies" pension funds" an#el investors" $RIs , )ontribute to the pool of funds% !unds thus pooled fro0 various investors are

invested in business opportunities by 5)s% 6ntrepreneurial tea0s that supply business opportunities to 5)s are central players in venture capital process% It is the

invest0ent 0ana#er who ai0s at deliverin# superior returns to the investors by creatin# value in all invest0ent life sta#es deal sourcin#" deal analysis" due

dili#ence" deal structurin# and invest0ent" 0onitorin#" and e7itin#% 9he overall venture capital process of APID)-5)2 at a snapshot is depicted by the followin#

!i#ure-&

FIGURE - 1: VENTURE CAPITAL PROCESS OF APIDC-VCL

S9;


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Deals havin# been lo##ed" are considered for further processin#%

9he tea0 analyses the attractiveness of the deal" and decides whether the proposal should be ta:en-up for further processin# and eventual invest0ent%

If proposal is accepted in this sta#e" the entrepreneur is invited for further presentation or if re1ected" it is co00unicated to the entrepreneur%

AREAS OF CONCERN

Initial scrutiny of the proposals received is not syste0atically done%

Sta#e of pro#ress in processin# of proposals is not co00unicated to entrepreneurs%

9i0e li0it is not in the syste0 either for consideration or re1ection of the proposal%

DUE DILIGENCEOnce the proposal passes throu#h initial screenin#" it is sub1ected to due dili#ence process which is a ri#orous analysis" and investi#ation into" the deals received

by venture capitalists% Due dili#ence analysis e7a0ines the enterprise" entrepreneurial talent" the products or services" and the chances of 0ar:et success% It is

ti0e-consu0in# process" runnin# into several wee:s" so0eti0es 0onths% It involves verifications" references" bac:-#round chec:s on 0ana#e0ent" 0ar:et

potential of the products or services throu#h syste0atic study of suppliers" custo0ers" co0petitors% 9he process of due dili#ence is shown in fi#ure-(%

FIGURE-": DIAGRAMATIC PRESENTATION OF THE DUE DILIGENCE PROCESS

PROCEDURAL STEPS IN THE DUE DILIGENCE PROCESS ARE AS FOLLOWS

Startin# point in due di li#ence is presentations by entrepreneurs%

Subse?uent to the presentation" the entrepreneur is re?uired to sub0it a detailed business plan%

$as all information

!rovided %y the client to

the satisfaction of theanalyst & have all dou%ts

%een deared

Call for internalmeeting

Meeting & Corres!ond

ence 'ith

entre!reneur

Presentation %ythe entre!reneur

Su%mission ofdetailed %usiness

!lan

Does the analyst have

dou%ts & remar(s on anyas!ect of the %usiness

Meeting & Corres!ond

ence 'ith senior

management andex!erts

"o

#es

"o

#es

Analysis of

the !lan

#es

"o

Internal Meeting

Does the internal meeting

give a favora%le res!onseto the !ro!osal

Communicate the

reection toentre!reneur

Draft Due diligencere!ort

Issue )etter of

interest& Mo* to

entre!reneur


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.

)oncerned business analyst studies deeply the business plan so as to understand entrepreneur3s business%

Business analyst 0eetscorresponds with the entrepreneur" see:in# infor0ation till he satisfies hi0self with all aspects of business%

9o clarify his doubts on various aspects of business" business analyst also see:s #uidance fro0 the senior 0ana#e0ent and advice the0 the industrial

e7perts%

Internal assess0ent co0pleted" the senior 0ana#e0ent and business analyst tea0 ta:e a final view as to whether the proposal has any pitfalls or should

be ta:en-up for invest0ent%

On a favorable outco0e of the 0eetin#" a letter of interest is issued to the entrepreneur" and due dili#ence report is drafted by the concerned business

analyst%

AREAS OF CONCERN Proceedin#s of the 0eetin#s with the entrepreneur and his tea0 durin# the due dili#ence process are recorded in individualistic 0ethodsstyles of the

respective business analysts%

Minutes of internal 0eetin# and of 0eetin#s with e7perts and reasons for re1ection of proposal" are not properly recorded%

DEAL STRUCTURING AND INVESTMENT

5enture havin# been evaluation as viable" the venture capitalist and investee co0pany are en#a#ed in ne#otiation to stri:e the deal and deter0ine its ter0s vi*%"

the a0ount" for0 and price of the invest0ent% 9his process is shown in fi#ure-.%

FIGURE-$: DEAL STRUCTURING AND INVESTMENT IN APIDC-VCL

Source !ield Data

9a:in# into consideration the su00ary of the internal 0eetin# and the due dili#ence report" the senior 0ana#e0ent decides the ter0-sheet of the

invest0ent%

Subse?uently the co0pany presents its due dili#ence report and proposed ter0-sheet to the invest0ent co00ittee for its deliberation and approval%

Proposal havin# been cleared by the invest0ent co00ittee" it is put up to the board for its final approval%

After the board3s approval" the invest0ent is 0ade by the co0panyventure capital fund into the pro1ectenterprise under consideration%

9er0-sheet" 0inutes of invest0ent co00ittee and board are i0portant docu0ents in the process%

AREA OF CONCERN

9he pro1ect i0ple0entation schedule of the prospective portfolio enterprise does not for0 part of the deal a#ree0ents%

MONITORING OF PORTFOLIO ENTERPRISES9he purpose of this sta#e is to avoid losses by seein# red fla#s well in advance that si#nal and warn i0pendin# dan#ers% CMonitorin#3 refers to the collection and

use of specific infor0ation by 0ana#e0ent co00ittee on critical events associated with pro1ect operation" while the Cnurturin#3 is a co0prehensive ter0 that

enco0passes provision of #uidance and s:ills for the 0ana#e0ent of the venture% In fi#ure-H is shown the 0onitorin# process in APID)-5)2%

Are there any

suggested

changes &

concerns for

revie'

+oard meeting

Senior management

meeting

Investment

committee meeting

Investment!rocess

"o

#es

Draft

term

sheet

Meeting 'ith

!romoter& revie' of

Internal assessment

$as the

investment

committee

cleared the

!ro!osal

Minutes

$as the +oard

cleared the

!ro!osal

Communicate the

reection to !romoter

"o

"o

#es

Minutes

#es

Signing of

investment

agreements

,elease of funds

Investment agreement

+uy%ac( agreement

Pledge of shares

*nderta(ing from !romoters

"on-dis!osal of shares

Disinvestment agreement

Deed of hy!othecation

Accounting records

+an( records


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FIGURE-6: MONITORING PROCESS IN APIDC-VCL

S9;


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Portfolio co0pany failin# to provide e7it to the venture capital co0pany at the re?uired rates of return" the latter e7plores alternative e7it routes as per

the invest0ent a#ree0ent%

AREA OF CONCERN

Pro-active analysis of sectors the portfolio co0panies are operatin# in" is not done%

FINDINGS OF THE STUDYDEAL SOURCING

9he Source of deal #eneration is not recorded%

S:etchy deal lo#% 9here is no defined process of evaluatin# proposals in the be#innin#%

Deal sourcin# of APID)-5)2 proactively identifies both new invest0ent pro1ects and entrepreneurial tea0s throu#h its e7tensive social networ:s%

DEAL ANALYSIS

9here is no syste0atic initial scrutiny of the proposal%

2ac: of co00unication about the sta#e of pro#ress to the entrepreneur@ and

9here is no specific ti0e li0it for co00unicatin# acceptance or re1ection of the proposal%

DUE DILIGENCE

Meetin#s of the due dili#ence process are not recorded%

Recordin# of internal 0eetin#s were not ta:en place%

Reasons for re1ectin# proposals are not specified%

Industry or sector studiesreports are not available%

DEAL STRUCTURING AND INVESTMENT

Senior 0ana#e0ent 0eetin#s are not recorded%

I0ple0entation schedule of a proposal" post-invest0ent is not for0in# part of a#ree0ent and it is not 0onitored%

MONITORING PORTFOLIO ENTERPRISES Absence of syste0atic 0onitorin#%

$ot recordin# and analy*in# 0eetin#-to-0eetin# pro#ress with portfolio enterprises%

$ot collected re?uisite infor0ation fro0 portfolio enterprises%

2ac: of effective interaction between senior 0ana#e0ent and business analyst%

EIT

2ac: of pro-active analysis of sectors" the portfolio enterprise are operatin# in%

SUGGESTIONS Since 0onitorin# of portfolio enterprises is wea:" corporate #overnance practices should be instituted in APID)-5)2 to i0prove its overall nurturin# and

0onitorin# practices with re#ard to portfolio enterprises%

APID)-5)2 should adopt business analyst-initiated pro-active approach of see:in# the new ventures for venture fundin#" as a#ainst entrepreneur-initiated

re-active approach%

9here should be proper recordin# of the proceedin#s of first 0eetin# of senior 0ana#e0ent of APID)-5)2 and entrepreneurs%

APID)-5)2 should develop effective two-way co00unication syste0 between it and entrepreneurs to ensure synchroni*e their operations% Schedule of new pro1ect i0ple0entation of portfolio enterprises should be part of deal a#ree0ent between APID)-5)2 and portfolio enterprises%

APID)-5)2 should evolve 0ana#e0ent infor0ation syste0 ;MISillia0" 9i00ons A Jeffery" L56$94R6 )API9A2 A9 9+6 )ROSS ROADSF" +arvard Business School Press" Boston" &H%

% !ried" 5ance" +% and +isrich" Robert" D%" L9owards a Model of 5enture )apital Invest0ent Decision-Ma:in#3" !I$A$)IA2 MA$A6M6$9" 5ol%E ;


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article on venture capital funding process

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