venturecapital financing

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  1. 1. BY DR. RATNA SINHA ASSOCIATE PROFESSOR ISBR BUSINESS SCHOOL BANGALORE VENTURECAPITAL FINANCING
  2. 2. LEARNING OBJECTIVES Private Equity andVenture Capital: Introduction, Rudiments of valuing and financing a venture, Stages of venture development and financing, Financial analysis ofVenture capital firms (VCCs), Structuring the deal/ Financial Instrument, Investment nurturing, valuation ofVC portfolio, Initial Public offerings of stock Managing internal and seasoned equity offerings. 2
  3. 3. VENTURE CAPITAL Venture: - Course or proceedings outcome is uncertain.This is attended by the risk or danger of loss. Capital: Resources to start the enterprise. In short lending capital to growing company 3
  4. 4. EVOLUTION Traced to USA in 19th and 20th century. 1946 American Research and development Organization was established as VC organization. Real development -1958 in USA when Business development act was passed. 1960 Japan followed the concept. 4
  5. 5. NOTION OF VENTURE CAPITAL Venture capital (VC) is a significant financial innovation of the twentieth century. Venture capital is the investment of long-term equity finance where the venture capitalist earns his return primarily in the form of capital gains. The underlying assumption is that the entrepreneur and the venture capitalist would act together in the interest of the enterprise as partners. Venture capital company is defined as a financing company which joins an entrepreneur, as a co-promoter in a project and shares the risks and rewards of the enterprise 5
  6. 6. DEFINITIONS James Koloski Morries- VC is defined as providing seed , start up and first stage capital, funding expansion to companies that has demonstrated their business potential, but do not have access to public securities or credit oriented institutional funding sources. Also provide management in leveraged buy out financing. 1995 finance bill- long term equity investment in novel technology, based projects with potential for growth and financial return. 6
  7. 7. FEATURES OF VENTURE CAPITAL Equity Participation. Long-term Investments. Participation in Management. Venture capitalist combines the qualities of bankers, stock market investors and entrepreneur in one. 7
  8. 8. CHARACTERISTICS 8
  9. 9. FEATURES 9 1. Generally Equity participant 2. May be also convertible debenture or long term Loan 3. Available for commercializati on of new Idea. Investment in high risk and high growth projects Act as Co- Promoters Continuous Involvement Once the venture reaches full potential divest his investment Investment in small medium scale enterprises. Also provide inputs in design, strategy Disinvestment Mechanism 1.Promoters buyback 2.Public Issue 3.Sale to other VCs 4.Sale in OTC Market 5.Management buyouts PROMOTERS BUYBACK
  10. 10. OBJECTIVES Encourage indigenous technology and commercial application Adopt and modify imported technology for indian environment Setting up pilot projects Technological innovations and modernization Develop appropriate technology Meeting the cost of market survey and market promotion 10
  11. 11. 11 STAGES IN VENTURE FINANCING
  12. 12. THE BUSINESS PLAN The first step for a company (or an entrepreneur) proposing a new venture in obtaining venture capital is to prepare a business plan for the consideration of a venture capitalist. The business plan should explain the nature of the proposed ventures business, what it wants to achieve and how it is going to do it. The length of the business plan depends on the particular circumstances. It should use simple language and all technical details should be explained without jargons. 12
  13. 13. ESSENTIAL ELEMENTS OF A BUSINESS PLAN 1. Executive summary 2. Background on the venture 3. The product or service 4. Market analysis 5. Marketing 6. Business operations 7. The management team 8. Financial projections 9. Amount and use of finance required and exit opportunities 13
  14. 14. WHAT DOES A VENTURE CAPITALIST LOOK FOR IN A VENTURE? Superior businesses Quality and depth of management Corporate governance and structure Appropriate investment structure Exit plan 14
  15. 15. THE PROCESS OF VENTURE CAPITAL FINANCING 15
  16. 16. VENTURE CAPITAL INVESTMENT PROCESS 16
  17. 17. METHODS OF VENTURE FINANCING Equity- generally not exceed 49%. Retained till the projects make profit Conditional Loan: lower interest till the unit makes profit. Paid back as per predetermined schedule Income Note: both interest and royalty 17
  18. 18. OTHER FINANCING METHODS 1. Participating Debentures: Three stages- till the venture operates to minimum level- no interest. Then low interest up to particular level. Once on attaining recommended level high interest 2. Partially Convertible Debentures: 3. Cumulative Convertible Preference Shares 4. Deferred Shares- ordinary shares right deferred for certain number of years. 5. Convertible Loan Stock: Unsecured long term loan converted to shares 6. Special Ordinary Shares: Voting rights but no commitment to dividends: 7. Preferred Ordinary Shares: voting rights + modest dividend+ right share in profit 18
  19. 19. DISINVESTMENT MECHANISMS Buyback by Promoters Initial Public Offerings Secondary Stock Market Management Buyouts 19
  20. 20. METHOD OF VALUATIONS
  21. 21. CONVENTIONAL METHOD Take into account time at which the investee company start the venture and time at which exit. Look into Annual revenue Expected future earnings Future market valuations PresentValue Minimum percentage of ownership- 21
  22. 22. FIRST CHICOGO Gives allowance to starting point and exit point. Considers entire earning stream Steps Alternative scenario and probability-success, sideways survival, failure PresentValue ofVC ExpectedValue ofVC Maximum Percentage of ownership 22
  23. 23. REVENUE MULTIPLIER Revenue multiplier is used Annual revenue x estimated revenue multiplier 23
  24. 24. DEVELOPMENT OF VENTURE CAPITAL IN INDIA The concept of venture capital was formally introduced in India in 1987, when the government announced the creation of a venture fund, to be operated by the Industrial Development Bank of India (IDBI). VCFs in India can be categorized into the following four groups: 1. VCFs promoted by the central (federal) government-controlled development finance institutions 2. VCFs promoted by the central (federal) government-controlled development finance institutions 3. VCFs promoted by the public sector banks 4. VCFs promoted by the foreign banks and private sector companies and financial institutions 24
  25. 25. FUTURE PROSPECTS OF VENTURE FINANCING Rehabilitation of sick units. Assist small ancillary units to upgrade their technologies. Provide financial assistance to people coming out of universities etc. VCFs can play a significant role in the service sector including tourism, publishing, health care, etc. 25
  26. 26. SUCCESS OF VENTURE CAPITAL Entrepreneurial Tradition Unregulated Economic Environment Disinvestment Avenues Fiscal Incentives Broad Based Education Venture Capital Managers Promotion Efforts Institute Industry Linkage R&D Activities 26
  27. 27. SEBI AND VENTURE CAPITAL FUNDS Domestic VC Registered with SEBI- SEBI (Venture Capital Fund ) Regulations1996. Not registered Foreign VC Registered with SEBI- SEBI (Foreign Venture Capital Fund ) Regulations2000. Not registered 27
  28. 28. REGULATIONS- DOMESTIC Definition Fund established by trust, company, body corporate and registered with SEBI Dedicated pool of fund Raised as specified by the regulations To invest in VC as specified by regulation Venture capital undertaking: Not listed Not in the line of negative list- real estate, NBFC, Gold financing, activities not permitted under industrial policy 28
  29. 29. REGULATIONS- DOMESTIC Minimum corpus Rs 5 crore Max investment in any venture not more than 25% of corpus Investment in associated company not permitted At least 75% of investible fund to be invested in unlisted equity shares or equity linked instruments. 29
  30. 30. REGULATIONS- DOMESTIC Not more than 25% of investible funds may be invested by way of Subscription of IPO of a venture capital whose shares are proposed to be listed subject to lock in period of one year. Debt or debt instrument Eligible as QIB in book building process. Investment by mutual fund can invest up to 5% incase of open ended fund and 10% close ended fund in VC fund to increase the resource. 30
  31. 31. REGULATIONS- FOREIGN Entity incorporated and established outside India Investment company, trust, partnership, mutual fund, pension fund, AMC, etc incorporated outside India. Regulated by foreign authority, Income tax payer, or submit certificate from banker, or promoters track record- SEBI can consider the above for registration. Not more than 25% of investible funds may be invested by way of Subscription of IPO of a venture capital whose shares are proposed to be listed subject to lock in period of one year. Debt or debt instrument 31
  32. 32. ANGEL FINANCE Wealthy individuals Financial support in return for equity shares. Support, advice and promote Types five groups Corporate angels- senior management position such as business development.Those taken retirement Entrepreneur own and operate Enthusiast involve in deals normally above 65 years Micro Management-very active and normally demand position in board Professional investors occupation such as doctor, lawyer and accountant invest in company that offer product or service 32
  33. 33. COMPARISON Basis of difference Business Angels Venture Capitals Personal Entrepreneur Investors Firms funded Small Small Medium Due diligence Minimal Extensive Location o

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