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Venture capital investment
Venture capital (VC) involves providing financial capital to early-stage, high-potential startup companies. VC funds earn returns by taking equity stakes in these companies, which are usually developing novel technologies or business models. VC differs from conventional financing in that it involves long-term investment, active participation in management, and a focus on high-risk ventures with potential for high returns. The VC process includes deal origination, screening, due diligence, investment, monitoring, and eventual exit via an IPO, acquisition, or sale of shares. Common exit strategies for VC firms include IPOs, mergers and acquisitions, sales to employees or strategic buyers, and in rare cases, liquidation.
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Venture capital involves investing in risky, high-potential startups. It bridges capital and knowledge gaps, supporting new entrepreneurs and technologies.
The venture capital process includes deal origination, screening, due diligence, structuring, post-investment support, and exit strategies across various financing stages.
Venture capitalists differ from conventional financiers in finance forms, management approaches, risk, project types, and exit strategies, emphasizing long-term investment in innovation.
Angel investors use personal funds and focus on advisory roles, while VCs manage pooled capital and seek major control, often offering larger investments.
Exit strategies for VCs include IPOs, mergers, and liquidations. VCs seek capital gains typically within a 3-5 year horizon, balancing risks and returns.
Examples of venture fund investments include significant startups across several industries, demonstrating the role of VCs in fostering innovation and growth.
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Venture capital investment
- 1. An undertaking involving arisk Or Daring to do something risky Amount invested in a business
- 2. Venture capital (VC)is financial capital provided to early-stage, high-potential, growth start-up companies. The venture capital fund earns money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology and IT.
- 3. Investment of longterm finance made in: • Ventures promoted by technically or professionally qualified but unproven entrepreneurs, or • Ventures seeking to harness commercially unproven technology, or • High risk ventures.
- 4. Features • High Degreesof Risk • Equity Participation • Long Term Investment • Participation in Management • Achieve Social Objectives • Investment is not liquid “Venture capital combines the qualities of a banker, stock market investor and entrepreneur in one.”
- 5. Need of VentureCapital • To bridge the gap b/w Capital and Knowledge • Maximum utilization of available resources ADVANTAGES OF VENTURE CAPITAL • To Ideators • To Venture Capital Undertakings • To Society/Economy
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- 8. • Deal Origination:the business plan and vision is presented to VC • Screening: assessment of future potential of the business plan • Due diligence: in-depth analysis of the firm’s history • Deal structuring: agreement is entered into and financial resources are transferred • Post-investment activity: nurturing the investment, aftercare and evaluating the investment from time to time • Exit: after appreciation of the firm, the VC sells it to some other investor.
- 9. Venture financing Stages •Seed stage: A relatively small amount of capital is provided to an inventor or entrepreneur to prove a specific concept for a potentially profitable business opportunity that still has to be developed and proven. • Start-up Stage: Financing is provided to newly formed companies for use in completing product development and in initial marketing. These companies generally have assembled key management, have prepared their initial business plan, and have conducted at least initial market studies. Now, products have to be sold commercially.
- 10. • First stage:Financing is provided to companies that have expended their initial capital and now require funds to initiate commercial-scale manufacturing and sales. • Second stage: Working capital is provided for the expansion of a company which is producing and shipping products and which needs to support growing accounts receivable and inventories. Although the company clearly has made progress, it may not yet be showing a profit at this stage.
- 11. • Third stage:Funds are provided for the major expansion of a company which has increasing sales and initial profitability but it still cannot take recourse to public issues. Funds are utilized for further plant expansion, marketing, and working capital or for development of an improved product, a new technology, or an expanded product line. It is often referred to as mezzanine financing. Mezzanine- providing funds for growth/expansion in the form of debt to the company which is later convertible to equity
- 12. • Later Stage:The firm is mature and profitable, and often still expanding. Financing is provided for a company expected to "go public" within six months to a year, also known as bridge financing. Often bridge financing is structured so that it can be repaid from the proceeds of a public offering. Bridge financing also can involve restructuring of the firm. This can be done by management buyouts/buyins. Buyout: when the current management buys the existing product line/business Buyin: when an external management team buys the company and takes over the control Funds provided to sick units with turnaround purpose are also included in this stage.
- 15. Differences between venture capitalfinancing and conventional financing
- 16. 1. Forms ofFinance Venture Capitalist • Equity /quasi equity, bridge finance. Conventional Financier • Term loan(security backed).
- 17. 2. Management Approach •Act as partner, active participation (make efforts in the direction of maximization of shareholder’s wealth). Conventional Financier • Passive participation(make efforts to keep its own money safe and secure). Venture Capitalist
- 18. 3. Return Expectation& Risk Taking Behaviour Venture Capitalist • Payments related to performance / capital appreciation, royalty on sales. • Risk taker, but not risk lover willing to accept high risk only for potential high return. Conventional Financier • Fixed Obligation ( Interest rate). • Risk Averser.
- 19. 4. Time Frame VentureCapitalist • Long-term consideration repayment schedule is undefined. Conventional Financier • Short term to long term, but time of engagements is predetermined and certain.
- 20. 5. Projects Venture Capitalist •Preference for small start- ups, innovative producers and markets, new technology, high growth sectors, generally knowledge based and non- tangible assets based. Conventional Financier • Preference for successful business, generally tangible asset based.
- 21. 6. Exit Routes VentureCapitalist • Buy back by promoters, IPO, sales to third party or any other possible way (term and conditions of exit routes are not pre- determined). Conventional Financier • Fixed repayment schedule (determined well in advance).
- 22. 7. Financing Policy VentureCapitalist • Prefer stage-wise finance in order to manage risk as well as to monitor the performance and opportunistic behaviour(dishonesty of fraud) of the promoters. Conventional Financier • One time Financing.
- 23. 8. Services Venture Capitalist •It specializes in managemen t services of which finance is a part. It participates in the whole scope of business from team building to operations and even during exit. Conventional Financier • It specializes in financial services and generally has nothing to do with management.
- 24. Conventional Vs. ConditionalLoan Conventional • Under this scheme of finance, like other traditional loan, a lower fixed rate of interest is charged till the assisted units become commercially operational, after which the loan carries normal or higher rate of interest. • The loan has to be repaid according to pre-determined schedule of repayment as per terms of loan agreement. Conditional • In this type of project financing, an interest free loan is provided during the implementation period but royalty is paid on sales. • The loan has to be repaid according to a pre-determined schedule as soon as the company is able to generate sales and income.
- 25. Differences Between AngelInvestors and Venture Capitalists
- 26. Differences Angel InvestorsVenture Capitalists Money Source Private investor- uses their own personal money to fund their investments. Professional money manager- they pool capital from other sources, such as pension funds. Investment Amount $50,000 to $500,000 $500,000 to $5+ million Amount of Control More likely to play an advisory role for company founder and management team More likely to require one or more board positions to gain control of corporate decisions Follow-on investment Rarely- angels tend to avoid follow-on investing because of the risk of losing more money if a company is not successful as predicted. Yes- they will re-invest/put in additional amounts of capital at later stages to assist with growth Industry and portfolio Found in all industries, including technology, pharmaceutical, publishing, insurance, finance, etc., and have diversified portfolios Involved in limited industries (mostly technology), and have limited portfolios Investment Consequence Angel investors believe in the entrepreneur and invest in them as a person. VC’s are less emotional and are more process involved; they mainly evaluate deals and make offers.
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- 28. Meaning • Exit isone of the most important issues from both the sides venture capitalists and entrepreneur. • The actual return for the firm come at the time of exit. • Depending upon the focus and the strategy ,it will seek to exit the investment in the portfolio co. within 3 to 5 years. • Their main focus in not on earning profit but on earning capital gains.
- 29. Disinvestment Avenues IPOs Merger and Acquisition Saleof share to employees Sale of Share to another company Disinvestment of debts Liquidation
- 30. Going Public/ IPO/Flotation • Advantages: Higher prices of security as compared to private placement. Better image Credibility with public, managers Retained shares • Disadvantages: Higher cost- cost of issuing prospectus, investment banker’s fees. Market risk. Image Less than full exit Other risks: Special rights of VC will be abolished.
- 31. Trade sale • Theentire company is sold to another company/ third party. • Most popular ways for trade sale is MBO or MBI. • Advantages: Premium Simpler : simpler and cheaper than IPO One buyer Allows Full Exit. • Disadvantages: Management Opposition Confidentiality
- 32. Sale of sharesto Entrepreneurs/ Employees/Earnout • Employee stock ownership trust. • Exit by put and calls • Important put and call formulae: Book value Method P/E ratio Percentage of sale method Multiple of cash flow method Independent valuation.
- 33. Sale to anew investor/ Takeout • It refers to selling of equity stake of VCIs to new investor or even to another VC. • Purchase by another VC may be related to original motive of existing VC, like he has invested in EARLY STAGE and for second round he wants to sell it to another VC.
- 34. LIQUIDATION • Involuntary exitforced on the VCI as a result of totally failed investment beyond recovery. DISIVESTMENT OF DEBT INSTRUMENTS • In case of term loan, Exit is possible only at the end of the period. • If the loan agreement permit whole can be converted into equity prior to that.
- 35. EXAMPLES: • An earlyto mid-stage venture fund investor. • Industries: Outsourcing, Mobile, Internet, Retail Services, Healthcare, Education and Financial Services. • Startups Funded: Yepme, MakemyTrip, NetAmbit, Komli, TAXI For Sure,PubMatic. • Typical multi-stage investor in internet technology companies • Industries: Internet and Consumer Services, Infrastructure, Cloud -Enabled Services, Mobile and Software. • Startups Funded: Flipkart, BabyOye, Freshdesk, Book My Show, Zansaar,Probe, Myntra, CommonFloor. • Specializing in startups, early stage, growth stage and expansion stage companies. • India. The firm invests between $1 Mn and $10 Mn. • Industries: Digital Consumer – Internet, Mobile, Media etc. • Startups Funded: UNBXD, Yatra.com, M yntra.com. FirstCry, Zivame,iPro f, Ozone Media.