VENTURE CAPITAL FINANCING

Venture Capital
The second world war made the countries of the world to understand the role of technology in achieving supremacy politically and economically.The U.S.A.understood it far better than any other country.Many new industries with research orientations sprang up in order to develop new technology and new products. At the core of all these things was knowledge and ideas.Earlier,ideas went in search of funds.Now Funds started going in search of ideas.

Venture Capital
Earlier the entrepreneurs sought bankers funding by pledging physical assets.But,the new entrepreneur had technical qualification and experience.He had no physical assets to offer,neither the new industry needed that much of physical assets. The funding can be only by evaluating the ideas.The traditional banker was new to this game.Therefore, the venture Capitalist(VC) entered the market with money,appetite for adventure through high risk and anexpectation of windfall profit.

Meaning and Definition:

William Davis defines Venture Capital as, finance for young developing firm in areas of high tehnology.the basic idea is simple:find a promising small firm,provide financial backing and share in its success. International Finance Corporation defines venture capital(VC) as, an equity or equity-featured capital seeking investment in new companies,new products,new processes or new service,that offer the potential of highreturn on investment

Meaning and Definition:

Tim hindle defines it as money put up by financial institutions to back risky commercial ventures.This can either be at the beginning of the ventures life,or it can be later in its life(to turn it around) From these definitions,it is clear that a VC invests in new idea or products in high-technology industry expecting a very high return on his investment.VCs do finance existing,loss-making companies that are about to make profit.

Features of Venture Capital

1)Form of investment 2)New companies 3)Turn around Companies 4)High Risk Return profile 5)Long-Term Association

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6)Exit Schedule 7)Participation in management 8)Peformance Benchmark 9)Taking Control 10)Dealing with Technocrats

Stages in venture Financing

1)Early stage financing Seed financing for supporting a concept or idea R&D financing or product development Start-up capital for initial production and marketing First stage financing for full-scale production and marketing.

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2)Expansion financing Second stage financing for working capital and initial expansion Development financing for facilitating public issue

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3)Acquisition/buyout financing growth: Acquisition financing for acquiring another firm for further growth Management buyout financing for enabling operating group to acquire firm or part of its business Turnaround financing for turning around a sick unit

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 must therefore convince the venture capitalists that the company(entrepreneur) and the management team have the ability to achieve the stated goals within specified time.

THE BUSINESS PLAN

The busines plan should explain the nature of the proposed ventures business,what it wants to achieve and how it is going to do it.The ventures management should prepare the plan setting challenging but achievable goals. The length of the business plan depends on the particular circumstances but, as a general rule,as a general rule,it should not be very long(not longer than 1o pages).It should use simple language and technical details should be explained without jargons.

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

What does a venture capitalist look in for in a venture?

Venture capitalists are high-risk investors and, in accepting these risks,they desire a higher return on their investment.The venture capitalist manages the risk-return ratio by only investing in business that fit their investment criteria and after having completed extensive due diligence.

What does a venture capitalist look in for in a venture?

Venture capital is not suitable for all business,as a venture capitalist typically seeks: Superior businesses Quality and depth of management Corporate governance and structure Appropriate investment stucture Exit plan

The process of venture capital financing

Deal origination Screening Evaluation(due diligence) Deal structuring Post-investment activity Exist plan

The process of venture capital financing

1)Deal origination:A continuous flow of deal is essential for the venture capital business. Deals may originate in various ways: 1)Referral system 2)Active search and 3)intermediaries

The process of venture capital financing

2)Screening: Venture capital is a service industry, and VCFs generally operate with a small staff.In order to save on time and to select the best ventures,before going or an in-dept analysis,VCFs carryout initial screening of all projects on the basis of some broad criteria.

The process of venture capital financing

3)Due diligence:Once a proposal has passed through initial screening,it is subjected to a detailed evaluation or due diligence process. The evaluation of ventures by VCFs in India includes the following steps: a)Preliminary evaluation b)Detailed evaluation: Integrity Long-term vision Urge to grow Managerial skills Commercial orientation

The process of venture capital financing

C)risk analysis:VCFs in India also make a thorough analysis of the risk of the proposed venture.They generally analyse: Product risk Market risk Technological risk Entrepreneurial risk

The process of venture capital financing

4)Deal Structuing:Once the venture has been evaluated as viable,the venture capitalist and the venture company negotiate the terms of the deal,viz.,the amount,form and price of the investment.This process is termed as deal structuring.The agreement also process is termed as deal structuring.The agreement also includes the protective covenants and earnout arrangements.

The process of venture capital financing

5)Post-investment activities: Once the deal has been structured and agreement finalised,the venture capitalist generally assumes the role of a partner and collaborator.He also gets involved in shaping the direction of the venture.

The process of venture capital financing

6)Exit plan:Venture capitalists typically aim at making medium to long-term capital gains.They generally want to cash-out their gains in five to ten years after the initial investment.A venture may exit in one of the following ways: 1.Initial public offerings 2.Acquisition by another company. 3.Purchase of the venture capitalists share by the promoter. 4.Purchase of the venture capitalists share by an outsider.

Methods of venture financing

Equity Conditional loan Income note Other financing methods Participating debenture Partially or fully convertible debentures Convertible loan stock Special ordinary shares Preferred ordinary shares

Development of venture capital in India

VCFs promoted by the central government VCFs promoted by the state government VCFs promoted by public sector banks VCFs promoted by the foreign banks and private sector companies and financial institutions

Future prospects of venture financing

The experience o developed countries and the detailed case study of venture capital in India,however,indicate that the following elements are needed for the success o venture capital in any country: Entrepreneurial tradition Unregulated economic environment Disinvestments avenues Fiscal incentives

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Broad-based education Venture capital managers Promotion efforts Institute-industry linkage R&D activities