Venture Capital

VENTURE CAPITAL FUNDING

 

WHAT IS VC FUNDING? IS IT JUST THE STORY OF THE MAN WITH THE IDEA AND THE MAN WITH THE MONEY?

 

VC FUNDING IS NOT JUST ABOUT • … FIRST GENERATION ENTREPRENEURS • … TECHNOCRATS • … HIGH TECHNOLOGY • … FIRST TIME TECHNOLOGIES • … SEED CAPITAL AT SOFT TERMS  

WHAT VC FUNDING IS … IT IS THE BUSINESS OF EMPLOYING CAPITAL ‘PATIENTLY’ TO ‘MAXIMISE RETURNS’ WHILE MANAGING RISKS IN A RELATIVELY HIGH-RISK VENTURE   VERSUS

SIMPLY ‘MINIMISING RISKS’ FOR A SURER FIXED RETURN

Venture capital company • A Venture capital company is defined as “a financing institution which joins an entrepreneur as a copromoter in a project and shares the risks & rewards of the enterprise”.

Features of venture capital • VC is usually in the for of an equity

participation. It may also take the form of convertible debt or long term loan • Investments is only high risk but high growth potential projects • VC is available only for commercialization of new ideas or new technologies and not for enterprises engaged in trading, booking, financial sevices, agency, liaison work or R&D.

• Venture capitalist joins the entrepreneur as

a co- promoter in projects and share the risks and rewards of an enterprise. • There is continuous involvement in the business after mak9ing an investment by the investor. • Once the venture has reached the full potential the venture capitalist disinvests his holdings either to the promoters or in the mkt. The basic objective of investment is not profit but capital appreciation at time of disinvestment

Scope of venture capital There are four successive stages of devt. Of a project. Venture capitalists provide finance even from first stage of idea formulation. The various stage are as follows • Development of an idea - Seed Finance • Implementation stage – Start up finance • Fledging Stage – Additional finance • Establishment Stage – Establishment finance

SELECTION OF INVESTMENT BY THE VC WILL SPAN ... PROMOTERS WITH SIGNIFICANT & PROVEN BUSINESS TRACK RECORD, WHO WILL DEVELOP NEW TECHNOLOGIES &/OR BUILD NEW BUSINESSES TO

PROMOTERS WHO ARE TECHNOLOGY SAVVY,   HAVE DEVELOPED INNOVATIVE TECHNOLOGIES TO A SIGNIFICANT EXTENT, BUT HAVE NO RELEVANT BUSINESS TRACK RECORD

IN THE POST- INVESTMENT STAGE, VCs WILL • ADD VALUE Vs ONLY MONITORING AND RELYING ON COLLATERAL RECOVERY

• HELP WITH FINANCIAL, MARKETING,

TECHNICAL & PERSONNEL LINKAGES

• PROVIDE INCENTIVES FOR BETTER

PERFORMANCE Vs  PENALTIES FOR LACK OF IT

• MONITOR CLOSELY THROUGH BOARD REPRESENTATION PLUS CONTINUAL CONTACT

VC WILL LOOK FOR EXITING FROM INVESTMENT THROUGH...

- IPO - THIRD PARTY ACQUSITION - BUYBACK BY ENTREPRENEUR  

WHAT VCs WILL LOOK FOR IN INVESTEE COMPANIES - 1 • PROMOTER’S INTEGRITY, RELEVANT EXPERIENCE, DRIVE LEVEL

• UNIQUENESS OF THEIR IDEA • FOCUS ON/COMMITMENT TO THEIR IDEA • HIGH ENTRY BARRIERS • COMPETITIVE ADVANTAGES • GOOD MARKET SIZE &  GROWTH RATES • ACCEPTABLE GEOGRAPHIC LOCATION • APPROPRIATE STAGE OF INVESTMENT

WHAT VCs WILL LOOK FOR IN INVESTEE COMPANIES - 2 • COMPANY Vs OTHER ENTITIES • UNLISTED Vs LISTED • ACCEPTABLE % OF EQUITY • ACCEPTABLE SIZE OF INVESTMENT • NUMBER OF YEARS THAT INVESTMENT MUST BE HELD

 

• TYPE OF FINANCIAL INSTRUMENTS ALLOWED • DESIRED RATE OF RETURN

CRITERIA INVESTEE CO SHOULD LOOK FOR IN THE VC • RESPONSIVENESS • SUPPORT Vs INTERFERENCE Or INDIFFERENCE

• UNDERSTANDING OF YOUR INDUSTRY/ SECTOR

 

• ABILITY & WILLINGNESS TO ADD VALUE • ALIGNMENT OF THEIR EXIT OBJECTIVE WITH YOURS

RISKS IN VENTURES • FINANCE • PEOPLE • RESEARCH & DEVELOPMENT • IMPLEMENTATION • PRODUCTION • REGULATORY • MARKETING • EXIT  

SO, WHAT DO WE DO WITH THESE RISKS - EXAMINE THEM CAREFULLY - QUANTIFY THEM, WHERE POSSIBLE - MANAGE THEM   - OFFSET BY COMMENSURATE RETURNS

SOME USEFUL HINTS: 1 • THINK A GREAT DEAL ABOUT THE BUSINESS • CONVINCE YOURSELF THAT THE BUSINESS IS RIGHT • ENSURE COMFORT WITH - GESTATION PERIOD - CAPITAL REQUIREMENT

• ENSURE ABILITY TO KEEP  PACE WITH TECHNOLOGY CHANGES

• CHANGE AVOID HERD MENTALITY

SOME USEFUL HINTS: 2 • DISPLAY A PROFESSIONAL APPROACH AT EVERY STEP

• TEST EVERY ASSUMPTION IN THE BIZ PLAN • LEARN FROM SIMILAR MODELS IN INDIA AND ABROAD

• SEE HOW YOU COULD BE DIFFERENT AND BETTER AT EVERY STEP

 

• BE SURE OF SALES PROJECTIONS AND ACHIEVEMENT OF TARGETS

SOME USEFUL HINTS: 3 • ENSURE COHERENCE AND SYNERGIES IN THE TEAM

• CHECK THE VC TEAM BACKGROUND AND PAST PROJECTS

• UNDERSTAND CLEARLY THE TERMS OF VC FUNDING & THEIR IMPLICATIONS

  SHEET BLINDLY • DO NOT SIGN THE TERM • UNDERSTAND POST-INVESTMENT APPROACH OF

THE VC

• FOLLOW A WIN-WIN APPROACH

Importance of venture capital Advantages to investing public

• Advantages to investing public

1.The investing public will reduce risk significantly against unscrupulous mgt if the public invest in venture fund who in turn will invest in equity of new business 2.The investors do not have any means to ensure the affairs of business are conducted prudently. The venture funds having representatives on the board of directors would over come it

Advantages to promoters • VC provides solid capital base for future growth by injecting long term equity financing • The new entrepreneurs find it difficult to to make underwriting arrangements require a great deal of effort. Venture fund assistance would eliminate those efforts by leaving entrepreneur to concentrate upon bread & butter activities of biz. • They act as business partners who share the rewards as well as risks.

General • A developed VC institution reduces the time lag between a • • • •

technological innovation & its commercial exploitation It helps in developing new process/products in conducive atmosphere free from dead weight of corporate bureaucracy, which helps in exploiting full potential. VC acts as a cushion to support business borrowings as bankers & investors will not lend money with inadequate margin of equity capital It serves as an intermediary between investors looking for high returns for their money & entrepreneurs in search of needed capital for their start ups It also paves the way for pvt sector to share responsibility with public sector

Methods of venture financing • VC is available in four forms in INDIA • Equity Participation • Conventional loan • Conditional loan • Income notes

List of venture capital companies in INDIA • IDBI venture capital

• Gujarath Venture

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fund The risk capital technology Finance corporation (RCTC) Technology devt.& information company of India ltd. (TDICI)

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Finance ltd (GUFL) Canara Bank State bank of India capital markets Ltd. (SBICAP) Indus Venture Capital Fund Credit Capital Venture fund Ltd. (CVF)

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