venture capital

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Venture Capital


  • 1. By Kashika Parikh

2. What is Venture Capital?Venture Capital is equity support to fund a new concepts that involve a higher risk and at the sametime, have a high growth and profit.Venture Capital is broadly implies an investment of long term, equity finance in high risk projects withhigh rewards possibilities. 3. Features of Venture Capital The main features of venture capital are: Long-time horizon: In general, venture capital undertakings take a longer time say, 5-10 years at aminimum to come out commercially successful; one should, thus, be able to wait patiently for theoutcome of the venture. Lack of liquidity: Since the project is expected to run at start-up stage for several years, liquidity may be agreater problem. High risk: The risk of the project is associated with management, product and operations. High-tech: However, a venture capitalist looks not only for high-technology but the innovativeness throughwhich the project can succeed. Equity participation and capital gains: A venture capitalist invests his money in terms of equity. He doesnot look for any dividend or other benefits, but when the project commercially succeeds, then he canenjoy the capital gain which is his main benefit. Participation in management: Unlike the traditional financier or banker, the venture capitalist can providemanagerial expertise to entrepreneurs besides money. 4. Roles Within a Venture Capital Firm 1. Venture capital general partners: Also known in this case as "venture capitalists" or "VCs" are theexecutives in the firm. 2. Limited partners: Investors in venture capital funds are known as limited partners. 3. Venture partners: Venture partners "bring in deals" and receive income only on deals they work on. 4. Entrepreneur in residence: EIRs are experts in a particular domain and perform due diligence onpotential deals. EIRs are engaged by VC firms Some EIR's move on to roles such as Chief TechnologyOfficer (CTO) at a portfolio company 5. Types of Venture Capital There are several different types of venture capital.Early Stage Financing:Early stage financing has three sub divisions seed financing, start up financing and first stage financing. Seedfinancing is basically a small amount that an entrepreneur receives for the purpose of being eligible for a startup loan.Start up financing is given to companies for the purpose of finishing the development of products and services.However, this type of venture capital may also be used for initial marketing as well. Companies that have spentall their starting capital and need finance for beginning business activities at the full-scale are the majorbeneficiaries of the First Stage Financing. 6. Expansion Financing:Expansion financing may be categorized into second-stage financing, bridge financing and third stage financingor mezzanine financing. Second-stage financing is provided to companies for the purpose of beginning theirexpansion.Second-stage financing is also known as mezzanine financing. It is provided basically for the purpose of assistinga particular company to expand in a major way. Bridge financing is useful in many ways. It may be provided as ashort term interest only finance option as well as a form of monetary assistance to companies that employ theInitial Public Offers as a major business strategy Acquisition or Buyout Financing:Acquisition or buyout financing is categorized into acquisition finance and management or leveraged buyoutfinancing. Acquisition financing assists a company to acquire certain parts or an entire company. Managementor leveraged buyout financing helps a particular management group to obtain a particular product of anothercompany. 7. Stages in venture capital 1. Seed Money: Low level financing needed to prove a new idea. 2. Start-up: Early stage firms that need funding for expenses associated with marketing and product development. 3. First-Round: Early sales and manufacturing funds. 4. Second-Round: Working capital for early stage companies that are selling product, but not yet turning a profit. 5. Third-Round: Also called Mezzanine financing, this is expansion money for a newly profitable company 6. Fourth-Round: Also called bridge financing, it is intended to finance the "going public process 8. Advantages of Venture Capital 9. Economy Oriented- Helps in industrialization of the country Helps in the technological development of the country Generates employment Helps in developing entrepreneurial skillsInvestor oriented- Benefit to the investor is that they are invited to invest only after company starts earning profit, so the risk isless and healthy growth of capital market is entrusted. Profit to venture capital companies. Helps them to employ their idle funds into productive avenues 10. Entrepreneur oriented- Finance - The venture capitalist injects long-term equity finance, which provides a solid capitalbase 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 valueto the company 11. Methods of venture capitalEquityConditional loanIncome noteOther financing method