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Venture Capital Financing

Venture capital involves long-term equity investments in startups and small businesses with high growth potential. The venture capital process includes an entrepreneur preparing a business plan, a venture capitalist evaluating the plan and deciding on funding, and eventually exiting the investment through an IPO, acquisition, or company buyback. Venture capital developed in India in 1987 and is focused on technology, manufacturing and service sector companies. The future of venture capital in India depends on continued entrepreneurship, economic reforms, investment exits, education, and linking industries and research.

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310 views16 pages

Venture Capital Financing

Venture capital involves long-term equity investments in startups and small businesses with high growth potential. The venture capital process includes an entrepreneur preparing a business plan, a venture capitalist evaluating the plan and deciding on funding, and eventually exiting the investment through an IPO, acquisition, or company buyback. Venture capital developed in India in 1987 and is focused on technology, manufacturing and service sector companies. The future of venture capital in India depends on continued entrepreneurship, economic reforms, investment exits, education, and linking industries and research.

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himanshu_choudhary_2
Copyright
© Attribution Non-Commercial (BY-NC)
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CHAPTE

VENTURE CAPITAL FINANCING


R 23
LEARNING OBJECTIVES
2

 Highlight the true notion of venture capital


 Focus on the development of venture capital in India
 Discuss the steps in a venture capital investment process
 Explain the methods of venture capital financing
 Emphasize the need for and methods of disinvestment (exit)
related to venture capital activity
NOTION OF VENTURE
3
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’.
Features of Venture Capital
4

 Equity Participation.
 Long-term Investments.
 Participation in Management.

Venture capitalist combines the qualities of


bankers, stock market investors and
entrepreneur in one.
5

Stages in
Venture
Financing
THE BUSINESS PLAN
6

 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


venture’s business, what it wants to achieve and how it is
going to do it.
Cont…
7

 The length of the business plan depends on the particular


circumstances.

 Itshould use simple language and all technical details should


be explained without jargons.
Essential Elements of a Business
8
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
What does a Venture Capitalist
Look for
9
in a Venture?
 Superior businesses
 Quality and depth of management
 Corporate governance and structure
 Appropriate investment structure
 Exit plan
10

THE PROCESS OF VENTURE


CAPITAL FINANCING
Venture Capital Investment
11
Process
Methods of Venture Financing
12

 Equity
 Conditional Loan
 Income Note
 Other Financing Methods
1. Participating Debentures
2. Partially Convertible Debentures
3. Cumulative Convertible Preference Shares
4. Deferred Shares
5. Convertible Loan Stock
6. Special Ordinary Shares
7. Preferred Ordinary Shares
Disinvestment Mechanisms
13

 Buyback by Promoters
 Initial Public Offerings
 Secondary Stock Market
 Management Buyouts
DEVELOPMENT OF VENTURE
CAPITAL IN INDIA
14

 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
Future Prospects of Venture
15
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.
Success of Venture Capital
16

 Entrepreneurial Tradition
 Unregulated Economic Environment
 Disinvestment Avenues
 Fiscal Incentives
 Broad Based Education
 Venture Capital Managers
 Promotion Efforts
 Institute Industry Linkage
 R&D Activities

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