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Venture Capital

CONTENT

Sr. No.PARTICULARS

Page No.

CHAPTER I INTRODUCTION

1.1Introduction1

1.2Concept2

1.3Meaning2

1.4Informal Market4

CHAPTER II Methods of Venture Capital Financing

2.1Factors to be considered in Investment Proposal5

2.2Stages of funding 7

2.3Methods of Financing 8

2.4Benefits10

2.5Cons.11

CHAPTER III Private Equity Investing

3.1Investing12

3.2Fund operation12

3.3Global & revenue based Finance14

CHAPTER IV Venture Capitalists

4.1Meaning19

4.2Types 20

4.3Roles20

4.4Compensation

4.4Structue 21

4.5Alternative22

4.6Structure of investment funds23

5Case study27

APPENDIX

5.1Conclusion35

5.2 Bibliography

Chapter-1Venture capital

1.1 Introduction 1.2 Concept 1.3Meaning 1.4 Informal Market

1.1 IntroductionA number of technocrats are seeking to set up shop on their own and capitalize onopportunities. In the highly dynamic economic climate that surrounds us today, fewtraditional business models may survive. Countries across the globe are realizingthat it is not the conglomerates and the gigantic corporations that fuel economicgrowth any more. The essence of any economy today is the small and mediumenterprises. For example, in the US, 50% of the exports are created by companieswith less than 20 employees and only 7% are created by companies with 500 or moreemployees. This growing trend can be attributed to rapid advances in technology inthe last decade. Knowledge driven industries like InfoTech, health-care,entertainment and services have become the cynosure of bourses worldwide. In these sectors, it is innovation and technical capability that are big business-drivers. This is a paradigm shift from the earlier physical production and economies of scale model. However, starting an enterprise is never easy. There are a number of parameters that contribute to its success or downfall. Experience, integrity, prudence and a clear understanding of the market are among the sought after qualities of a promoter. However, there are other factors, which lie beyond the control of the entrepreneur. Prominent among these is the timely infusion of funds. This is where the venture capitalist comes in, with money, business sense and a lot more.

1.2 The concept of Venture CapitalThe venture capital investment helps for the growth of innovative entrepreneurships in India. Venture capital has developed as a result of the need to provide nonconventional, risky finance to new ventures based on innovative entrepreneurship. Venture capital is an investment in the form of equity, quasi-equity and sometimesdebt - straight or conditional, made in new or untried concepts, promoted by atechnically or professionally qualified entrepreneur. Venture capital means riskcapital. It refers to capital investment, both equity and debt, which carries substantialrisk and uncertainties. The risk envisaged may be very high may be so high as toresult in total loss or very less so as to result in high gainsVenture capital means many things to many people. It is in fact nearly impossible tocome across one single definition of the concept.Jane Kolinsky Morris, editor of the well known industry publication, VentureEconomics, defines venture capital as 'providing seed, start-up and first stagefinancing' and also 'funding the expansion of companies that have alreadydemonstrated their business potential but do not yet have access to the publicsecurities market or to credit oriented institutional funding sources.The European Venture Capital Association describes it as risk finance forentrepreneurial growth oriented companies. It is investment for the medium or longterm return seeking to maximize medium or long term for both parties. It is apartnership with the entrepreneur in which the investor can add value to the companybecause of his knowledge, experience and contact base.

1.3 Meaning of venture capital:Venture capital is money provided by professionals who invest alongsidemanagement in young, rapidly growing companies that have the potential to developinto significant economic contributors. Venture capital is an important source ofequity for start-up companies.Professionally managed venture capital firms generally are private partnerships orclosely-held corporations funded by private and public pension funds, endowmentfunds, foundations, corporations, wealthy individuals, foreign investors, and theventure capitalists themselves.

1.4 Informal venture capital marketMuch less well known and documented because of its invisible nature is the informal venture capitalmarket. This part of the venture capital market comprises private individuals -- often termed businessangels -- who provide equity and near equity capital directly to unquoted businesses with which theyhave no family connection. Business angels are typically self-made, high net worth individuals, mostlysuccessful entrepreneurs, although some have a background in business-related professions(e.g. accountancy, law, management consultancy) or as senior executives in large companies. They ofteninvest alone, but many invest as part of informal syndicates which typically comprise family, friends orbusiness associates. Business angels are motivated by capital gains, but non-financial considerations suchas the fun of investing in entrepreneurial companies and altruistic reasons are important secondaryconsiderations. Little is known about their exit routes, but the limited evidence available suggests thattrade sales are the most likely exit route for successful investments and buy-backs for less successfulinvestments.It is not clear the extent to which the operation of the informal venture capital market differs amongcountries. The available evidence is limited to North America and the United Kingdom, with some additional evidence for Sweden, Finland and the Netherlands. Comparisons suggest surprisingly fewdifferences in the operation of the market and the characteristics of business angels. However, thisconclusion may reflect the close cultural similarities between these countries. The informal venture capitalmarket may operate differently in culturally dissimilar countries. In the case of France, for example, itappears that private investors generally invest as part of a larger group rather than on their own.In the United States, business angels play a crucial role in providing the bulk of early stage external equityfinance. Business angels have also been identified in some European countries as playing a similar role.Indeed, business angels invest in precisely those situations where the institutional venture capital market ismost reluctant to do so. Business angels invest predominantly at the start-up and early stages, in bothtechnology and non-technology businesses, providing small amounts of risk capital to enable ideas to betranslated into commercial entities. Business angels also tend to be value-added investors, playing anactive role in the businesses in which they invest, and because of this hands-on involvement they tend toinvest in businesses located close to their home. Thus, the informal and formal venture capital marketscan be thought of as playing complementary roles. This has been conceptualised by a baseball metaphor,with the business angels acting as the farm system for the institutional venture capital industry,providing the start-up and early stage finance and hands-on assistance to enable new firms to get to thestage where they might be of interest to venture capital funds. The implication is that the institutionalventure capital industry benefits from the existence of an active informal venture capital market.The informal venture capital market is also of critical importance because of its size. It is the largestsingle source of external risk capital for small companies. It has been estimated that in the United States,business angels invest in 20 to 40 times the number of companies as the institutional venture capitalindustry and that the amount invested by business angels in the SME sector (i.e. excluding MBOs/MBIs)is five times greater than the institutional venture capital industry. Estimates for the United Kingdomsuggest that the informal venture capital market may be two to four times larger than the institutionalventure capital market in terms of the amount invested in the SME sector. Furthermore, the informalventure capital market remains largely untapped. The invisible and fragmented nature of the marketmeans that it is difficult for business angels and entrepreneurs seeking finance to find one another. Theconsequence is that most business angels say that they are unable to find sufficient investmentopportunities. In addition, there is scope for considerable expansion of the population of business angels.

Chapter-2Methods Of Venture Capital Financing 2.1 Factors To Be Consider In Investment Proposal 2.2 Stages Of Funding 2.3 Methods Of Financing 2.4 Benifits 2.5 Cons2.1 Factor to be considered by venture capitalist in selection of investment proposal:There are basically four key elements in financing of ventures which are studied indepth by the venture capitalists. These are:1. Management:The strength, expertise & unity of the key people on the board bringsignificant credibility to the company. The members are to be mature, experiencedpossessing working knowledge of business and capable of taking potentially highrisks.2. Potential for Capital Gain : An above average rate of

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