chapter - 5 venture capital

8/14/2019 Chapter - 5 Venture Capital

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Venture capital plays a strategic role

in financing small scale enterprises or

to entrepreneur.

Entrepreneurship is akey driver ofvalue creation

in the 21st century

economy.


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Venture capital has potential to become animportant source for financing of smallscale enterprises.

Venture capital is a significant

innovation of the

twentieth century.


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Generally considered assynonym of high risk capital.

The early stage financing of new and youngenterprises seeking to grow rapidly.

An involvement of the venture capitalist inthe management of the client enterprises.

Associated with the financing of high andnew technology based opportunities ofenterprises.


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Technology /

Opportunity ValueEntrepreneurship


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The pursuit of Opportunitybeyond the Resources you

currently control


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Venture capital is the investment of long-term equity finance where the venturecapitalist earns his return primarily in theform of capital gain.

Commitment or share holdings,for the formation and

setting up of small scale

enterprises specializing in

new ideas or newtechnologies.


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Equity Participation:- Actual or Potentialequity financing.

Long-term illiquid investment:- Expectationof large profits, 5-10 years.

Participation in Management:- To protectand enhance his investment by providing hismarketing, technology, planning andmanagement skills. Thus, Venture capitalists

combines the qualities of banker, stock marketinvestor and entrepreneur


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Early stage financing: Seed financing for supporting a concept or

idea

R & D financing for product development Start-up capital for initial production &

marketing First stage financing for full-scale

production and marketing


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Expansion financing: Financing for working capital and initial

expansion

Development financing for facilitating publicissue Bridge financing for facilitating public issue


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Acquisition/ buyout financing: Acquiring another firm for further growth Management buyout financing for enabling

operating group to acquire firm or part of itsbusinessTurnaround financing for turning around a

sick unit


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Possible Financing OptionsPossible Financing Options

EntrepreneursEntrepreneurs

personalpersonal

resourcesresources

FinancialFinancial

institutionsinstitutions

Angel investorsAngel investorsUnusualUnusual

resourcesresources

FinancingFinancing

OptionsOptions

VentureVenture

capitalistscapitalists Public offeringPublic offering

BusinessBusiness

developmentdevelopmentprogrammeprogramme


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Evaluating Financing OptionsEvaluating Financing OptionsPersonal Personal PotentialControl Risk Reward

Personal Resources H H H

Financial Institutions(Debt Financing) L - M L L MVenture Capitalists(Equity-Debt Financing) L M L L MAngel Investors(Equity Financing) L M L L M

Public OfferingsEquity Financing) L L L HBusiness DevelopmentProgram L M L L MUnusual Sources L H L L- H

L Low M Medium H - High


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Basic R&D Applied R&D Pre-seed Seed Start-up Expansion

Commercial financingPre-commercial financing

Private sector

Public sector


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Deal origination Screening Evaluation (due diligence)

Deal structuring Post-investment activity Exit


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Equity Conditional Loan Income Notes Other Financing Methods: Innovative Financial Securities Participating Debentures Convertible Debentures/Preference

Shares Cumulative Convertible Preference

Shares


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Deferred Shares-USA, UK-where ordinary share rightsare deferred for a certain no.

of yrs. Convertible Loan Stock-

unsecured long term loanconvertible into ordinary

shares Special Ordinary Shares with

voting rights and a modestfixed dividend right & a right

to share in profits


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Conventional Loan Hire-purchase

finance Lease Finance Overdraft finance


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In India, the venturecapital creation processhas started taking off with

all four stages receivingattention:

Idea generation Start up Growth ramp up Exit processes


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However, much moreneeds to be done yet.

The following graphindicates the growth ofventure capital and angelinvestments in India's IT

software and servicessector:


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It must be noted that during1999, approximately 80 percentof the estimated US$ 30 billion

worth of venture capital investedin United States, went totechnology firms. India too, withits strengths in innovation and IT

technology has attracted severalVenture Capital firms.


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In 2000 alone, 20 new venturecapital funds have registeredwith SEBI, taking the totalnumber to 30. In fact, VC or

Angel investments in high techfirms in India have grown by over5,000 percent from Rs. 70 croreto projected Rs. 2,200 crorebetween 1996 and 2000. And

this figure is expected to grow toRs. 50,000 crore by 2008.


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Sources of Finance Financing Scheme Form of FinancialAssistance

1. Commercial banks Normal lending, Priority sector lending, Differential int.rate scheme

Working capital, term loans

2. Cooperative banks Lending to SSI, units organised on cooperative basis Working capital loan

3. RBI/Deposit Insurance &

Credit Guarantee Corpo

Credit guarantee scheme/ small loans Guarantee of loan

4. IDBI Refinance, rediscounting of machinery bills, Specialcapital assistance for SSI in backward areas, Seed capital,

National equity fund

Term loan, Rediscounting loan,Soft loan, Equity/loan, Equity

5. IFCI Risk capital Bridge loan

6. SFCs Term lending, Special capital scheme Term loans, Equity/soft loan

7. SIDBI Refinance Term loans

8. NSIC/SSIDCs Hire purchase facilities Hire purchase / loan


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In USA, reduction of capital gain taxresult into boost up to developmentof venture capital

In UK, investors are provided

income tax relief, if invest inqualifying, unquoted cos. or in newcos.

Removal of double taxation ondividends, lower rate of capital gaintax, allowed to set off losses on sale

off shares against income tax.Tax incentives to small 7 medium

enterprises in form of capital costallowance, deduction of R&Dexpenditure, tax relief on profits,etc.


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In India, preferential taxtreatment for VCFs.

Brought down the maximum

margin tax rate for individualsand for companies

Dividend income completelyexempted from tax

Long term capital gain tax,

taxed at a lower rate

chapter - 5 venture capital

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