venture capital

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  • 1. VENTURE CAPITALPresented by:Rajesh KumarMBA(Finance), ACS, AIII

2. Venture capital basicsStarting and growing a business always require capital.There are a number of alternative methods to fund growth. Theseinclude the owner or proprietors own capital, arranging debt finance,or seeking an equity partner, as is the case with private equity andventure capital.Finance may be required for the start-up, development/expansion orpurchase of a company.New companies or ventures that have a limited operating history andhence may find it difficult to raise funds through an equity or debtoffering.In such a scenario, VC investors play a pivot role in investing inunfinanced areas to promote new ventures. 3. Venture capital is most attractive for new companieswith limited operating history that are too small to raisecapital in the public markets and have not reached thepoint where they are able to secure a bank loan orcomplete a debt offering. 4. What is Venture Capital Venture capital is a means of equity financing for rapidly-growing privatecompanies. Venture Capital firms invest funds on a professional basis, often focusing on alimited sector of specialization (eg. IT,Bio Technology, infrastructure,health/life sciences, clean technology, etc.). The venture capital investment helps for the growth of innovativeentrepreneurships. Venture capital is an investment in the form of equity, quasi-equity andsometimes debt - straight or conditional, made in new or untried concepts,promoted by a technically or professionally qualified entrepreneur. Venture capital means risk capital. 5. What is VCIt is developed as a result of the need to provide non-conventional,risky finance to new ventures based on innovativeentrepreneurship.It refers to capital investment, both equity and debt, whichcarries substantial risk and uncertainties.The risk envisaged may be very high.Venture capital typically comes from institutional investors andhigh net worth individuals and is pooled together by dedicatedinvestment firmsProvider of seed money for start-ups, midstage firms on thebrink of success but needing additional capital, or successfulfirms capable of expansion to a regional or nationwide platform.VC also can include managerial and technical expertise. 6. VC- DefinitionVenture capital is a type of private equity capital typicallyprovided for early-stage, high-potential, growth companies inthe interest of generating a return through an eventualrealization event such as an IPO or trade sale of the company.A pool of risk capital, typically contributed by large investors,from which allocations are made available to young, smallcompanies that have good growth prospects but are short offunds.It is developed as a result of the need to provide non-conventional,risky finance to new ventures based on innovativeentrepreneurship.Venture capital means risk capital. 7. VC- DefinitionVenture capital means many things to many people.It is in fact nearly impossible to come across one singledefinition of the concept.Jane Koloski Morris, editor of the well known industrypublication, Venture Economics, defines venture capital as:'providing seed, start-up and first stage financing' and also'funding the expansion of companies that have alreadydemonstrated their business potential but do not yet haveaccess to the public securities market or to credit orientedinstitutional funding sources. 8. SEBI Venture Capital Funds (VCFs) Regulations,Definition: 1996A Venture Capital Fund means a fund established in the formof a trust/company; including a body corporate, and registeredwith SEBI which(i) has a dedicated pool of capital raised in a manner specifiedin the regulations and(ii) invests in venture capital undertakings (VCUs) inaccordance with these regulations.All VCFs must be registered with SEBI and pay Rs.25,000 asapplication fee and Rs. 5,00,000 as registration fee for grant ofcertificate. 9. The Origin of Venture Capital In the 1920's & 30's, the wealthy families and individual investors providedthe start up money for companies that had ability to become famous. General Doriot, a professor at Harvard Business School, in 1946 set up theAmerican Research and Development Corporation (ARD), the first firm tofinance the commercial promotion of advanced technology developed inthe US Universities. Among the early VC funds set up was the one by the Rockfeller Familywhich started a special fund called VENROCK in 1950, to finance newtechnology companies. While in its early years VC may have been associated with high technology,over the years the concept has undergone a change and as it stands todayit implies pooled investment in unlisted companies. 10. The Origin of Venture Capital- 20th centuryDuring the 1960s and 1970s, venture capital firms focused theirinvestment activity primarily on starting and expandingcompanies in electronic, medical or data-processing technology.As a result, venture capital came to be almost synonymous withtechnology finance.The public successes of the venture capital industry in the 1970sand early 1980s gave rise to a major proliferation of venturecapital investment firms.90s witnessed world wide economic progress, wherein newventures started expanding with that the scope for VC funds. 11. Venture Capitalists generally:Finance new and rapidly growing companiesPurchase equity securitiesAssist in the development of new products or servicesAdd value to the company through active participation. 12. CharacteristicsLong time horizonLack of liquidityHigh riskEquity participationParticipation in management 13. Structure ofVenture Ca13pital FirmsVenture capital firms are typically structured as partnership;This comprises both high net worth individuals andinstitutions with large amounts of available capital, such asstate and private pension funds, university financialendowments, foundations, insurance companies, andpooled investment vehicles, called fund of funds or mutualfunds VC firms in the United States may also be structured aslimited liability companies, in which case the firm'smanagers are known as managing members. 14. AdvantagesIt injects long term equity finance which provides a solidcapital base for future growth.The venture capitalist is a business partner, sharing boththe risks and rewards. Venture capitalists are rewardedby business success and the capital gain.The venture capitalist is able to provide practical adviceand assistance to the company based on past experiencewith other companies which were in similar situations. 15. Advantages (Cont.) The venture capitalist also has a network of contacts inmany areas that can add value to the company. The venture capitalist may be capable of providingadditional rounds of funding should it be required tofinance growth. Venture capitalists are experienced in the process ofpreparing a company for an initial public offering (IPO) ofits shares onto the stock exchanges or overseas stockexchange such as NASDAQ.They can also facilitate a trade sale. 16. Venture Capitalists andBusiness Angels 16Venture Capitalists are investment firms thatmakes venture investment, providing capital forstart-up or expansion.They are looking for higher rate of return, bringingtheir managerial abilities to small businesses withgreat potential growth.Business Angels are private investor with hugepersonal capital, looking forward to invest theirmoney in business which are not helped by financialinstitutions because are too risky. 17. Stages of financing1. Seed Money:Low level financing needed to prove a new idea.2. Start-up:Early stage firms that need funding for expensesassociated with marketing and product development.3. First-Round:Early sales and manufacturing funds.4. Second-Round:Working capital for early stage companies that areselling product, but not yet turning a profit . 18. 5. Third-Round:Also called Mezzanine financing, this is expansionmoney for a newly profitable company6. Fourth-Round:Also called bridge financing, it is intended tofinance the "going public" process 19. Risk in each stageFinancial Stage Period (Fundslocked in years)Risk Perception Activity to befinancedSeed Money 7-10 ExtremeFor supporting aconcept or idea orR&D for productdevelopmentStart Up 5-9 Very HighInitializingoperations ordevelopingprototypesFirst Stage 3-7 HighStart commercialsproduction andmarketing 20. Financial Stage Period (Fundslocked in years)Risk Perception Activity to befinancedSecond Stage 3-5 Sufficiently highExpand marketand growingworking capitalneedThird Stage 1-3 MediumMarketexpansion,acquisition &productdevelopment forprofit makingcompanyFourth Stage 1-3 Low Facilitating publicissue 21. VC investment processDeal originationScreeningDue diligence(Evaluation)Deal structuringPost investmentactivityExit plan 22. THE FUNDING PROCESS1.Business Plan Submission 1. a description of the opportunity and market size; 2. resumes of your management team; 3. a review of the competitive landscape and solutions; 4. detailed financial projections; and 5. a capitalization table.2.Introductory Conversation/Meeting If your firm has the potential to fit with the VCs investmentpreferences, you will be contacted in order to discuss your businessin more depth. 23. 3: Due Diligence: The due diligence phase will vary depending uponthe nature of your business proposal. The process may last fromthree weeks to three months.4: Term Sheets and Funding : If the due diligence phase issatisfactory, the VC will offer you a term sheet. This is a non-bindingdocument that spells out the basic terms and conditions of theinvestment agreement. The term sheet is generally negotiable andmust be agreed upon by all parties, after which you should expect await of roughly three to four weeks for completion of legal documentsand legal due diligence before funds are made available. 24. WHAT DO VCs LOOK FOR? Venture capitalists look for businesses that have the potential togrow quickly to a


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