VENTURE CAPITAL

Submitted to: Miss Shilpi Kashyap

Introduction

Venture Capital has emerged as a new financial method of financing during 20th century. Venture capital is the capital provided by the professionals who invest in young rapidly growing or changing companies that have potential for high growth.

Meaning 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.

Features of Venture capital

Venture Capitalist

Venture Capitalists generally:

• Finance new and rapidly growing companies

• Assist in the development of new products or services

• Add value to the company through active participation.

History The concept of the venture capital was

originated in USA in 1950s Rockfeller Group financed the new technology companies. The concept become popular during 1960s and 1970s. The American Research and Development was formed as the first Venture Capital firm which financed over 100 companies and made profit over 35% of its capital

Modes of Finance

Stages of Venture Capital

1. Early stage • Seed Capital• Start ups• Second Round Finance

2. Later stage financing• Development/Expansion Finance• Turnarounds• Bridge finance

1. Early Stage finance

Seed Capital It is an idea or concept as opposed to a

business. It is the earliest stage of Venture capital investment. The new technology and innovations being attempted have equal chance of success and failure. Seed capital projects by their very nature require a relatively small amount of capital.

Early Stages Start ups It is the second stage in the venture capital cycle.

An entrepreneur often needs finance when the business is just starting. The start up stage involves starting a new business. Venture capitalist however, assesses the managerial ability and the capacity of the entrepreneur, besides the skills, suitability and competence of the managerial team are also evaluated. 

Early stage• Second round financing It is the capital provided for marketing and

meeting the growing working capital needs of an enterprise that has commenced the production but does not have positive cash flows sufficient to take care of its growing needs.

2. Later Stage financing

• Development/ Expansion stages Expansion-Stage, starts, when the company has

reached the profitability.which means that the company starts generating gains. The product is now successfully placed on the market and the focus of the company is on further for expansion. this may be for the purchase of the new equipment or launching of product into new region and so on.

Later stage financing

TURNAROUND FINANCE It is rare form later stage finance which most of the

venture capitalist avoid because of higher degree of risk. When an established enterprise becomes sick, it needs finance as well as management assistance for the profits. Such enterprises are compelled to relinquish control to new management. The venture capitalist has to carry out the recovery process using hands on management in 2 to 5 years.

Later stage financing

Bridge Finance It is the last round of financing before the planned

exit. Venture capitalist help in building a stable and experienced management team that will help the company in its initial public offer. Most of the time bridge finance helps improves the valuation of the company. Bridge finance often has a realization period of 6 months to one year and hence the risk involved is low. The bridge finance is paid back from the proceeds of the public issue.

Risk in each stageFinancial Stage Period (Funds

locked in years)Risk Perception Activity to be

financed

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

Start Up 5-9 Very High Initializing operations or developing prototypes

First Stage 3-7 High Start commercials production and marketing

Financial Stage Period (Funds locked in years)

Risk Perception Activity to be financed

Later stage finance

1-3 Medium For development and expansion

Turnarounds 2-5 high For the sick business unit

Bridge finance 6 months to 1 year

low Initial public offer

Factors Affecting investment Decision

Exit route

Huge

DEVELPOMENT OF VENTURE CAPITAL IN

INDIA

• The concept of venture capital was formally introduced in India in 1987 by IDBI.

• The government started to create the venture fund.

• ICICI started VC activity in the same year

• Later on ICICI floated a separate VC company - TDICI

Venture capital funds in India

VCFs in India can be categorized into following five groups:

1)Those promoted by the Central Government controlled development finance institutions. For example:

- ICICI Venture Funds Ltd. - IFCI Venture Capital Funds Ltd (IVCF) - SIDBI Venture Capital Ltd (SVCL)

2) Those promoted by State Government controlled development finance institutions.For example:

- Punjab InfoTech Venture Fund - Gujarat Venture Finance Ltd (GVFL) - Kerala Venture Capital Fund Pvt Ltd.3) Those promoted by public banks.

For example: - Can bank Venture Capital Fund - SBI Capital Market Ltd

4)Those promoted by private sectorcompanies.For example:

- IL&FS Trust Company Ltd - Infinity Venture India Fund5)Those established as an overseas venture capital fund.

For example:- Walden International Investment Group

- HSBC Private Equity management Mauritius Ltd

Rules by SEBI:VCF are regulated by the SEBI (Venture Capital

Fund) Regulations, 1996.The following are the various provisions: A venture capital fund may be set up by a

company or a trust, after a certificate of registration is granted by SEBI on an application made to it. On receipt of the certificate of registration, it shall be binding on the venture capital fund to abide by the provisions of the SEBI Act, 1992.

A VCF may raise money from any investor, Indian, Non-resident Indian or foreign, provided the money accepted from any investor is not less than Rs 5 lakhs. The VCF shall not issue any document or advertisement inviting offers from the public for subscription of its security or units

SEBI regulations permit investment by venture capital funds in equity or equity related instruments of unlisted companies and also in financially weak and sick industries whose shares are listed or unlisted

At least 80% of the funds should be invested in venture capital companies and no other limits are prescribed.

SEBI Regulations do not provide for any sectoral restrictions for investment except investment in companies engaged in financial services.

A VCF is not permitted to invest in the equity shares of any company or institutions providing financial services.

A Scheme of VCF set up as a trust shall be wound up when the period of the scheme if any, is over or 75% of the investors in the scheme pass a resolution for winding up or If SEBI so directs in the interest of the investors

Indian Venture Capital and Private Equity Association (IVCA)

It was established in 1993 and is based in Delhi, the capital of India It is a member based national organization that

- represents venture capital and private equity firms

- promotes the industry within India and throughout the world

- encourages investment in high growth companies and

- supports entrepreneurial activity and innovation.

Top cities attracting venture capital investments

CITIES SECTORS

MUMBAI Software services, BPO, Media, Computer graphics, Animations, Finance & Banking

BANGALORE All IT led companies, IT & ITES, Bio-technology

DELHI Software services, ITES , Telecom

CHENNAI IT , Telecom

HYDERABAD IT & ITES, Pharmaceuticals

PUNE Bio-technology, IT , BPO

Growth of VCin India

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Difficulties in India1. The restrictive legal and financial

framework

2. The scope of Vcs in India is very limited

3. No Private bank is willing to devote resources to the venture capital projects.

4. There are long procedures to follow in govt. based Vc firms

5. No tax exemption on highly risky projects

Conclusion The existing set up of venture capital in

India needs to be strengthened the entry of private sector must be encouraged. Tax exemptions must be given on the highly risky projects. Foreign investors must be attracted in the venture capital investment. Overall we can say that venture capital is necessary for the underdeveloped countries for the balanced growth.