Venture Capital

Venture Capital Financing

INTRODUCTION

“VENTURE CAPITAL IS THE INVESTMENT OF LONG TERM EQUITY FINANCE WHERE VENTURE CAPITALIST EARN IN FORM OF CAPITAL GAINS.”

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.

REGULATION •SEBI GUIDELINES REGULATE VCFs IN INDIA. •VCFs MAY BE STRUCTURED AS A COMPANY OR A TRUST TO RAISE FINANCES AS LOANS, DONATIONS, ISSUE OF SECURITIES.

Stages in Venture Financing • Early Stage Financing • Expansion Financing • Acquisition/Buyout Financing

WHAT DOES A VC LOOK IN A VENTURE? SUPERIOR BUSINESSES QUALITY AND DEPTH OF MANAGEMENT CORPORATE GOVERNANCE AND STRUCTURE APPROPRIATE INVESTMENT STRUCTURE EXIT PLAN

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Venture Capital Investment Process Deal Origination Screening Evaluation Deal Structuring Post-investment activity Exit

DEAL ORIGINATION REFERRAL SYSTEM ACTIVE SEARCH INTERMEDIARIES

EVALUATION PRELIMINARY EVALUATION DETAILED EVALUATION

EVALUATION (CONTD..) VCFs IN INDIA EXPECT ENTREPRENEUR TO HAVE: •INTEGRITY •LONG TERM VISION •URGE TO GROW •MANAGERIAL SKILLS •COMMERCIAL ORIENTATION

RISK ANALYSIS •PRODUCT RISK •MARKET RISK •TECHNOLOGY RISK •ENTREPRENEURIAL RISK

DEAL STRUCTURING AMOUNT, FORM AND PRICE. PROTECTIVE COVENANT AND EARN OUT ARRANGEMENT.

EXIT PLAN •IPO •ACQUISITION BY ANOTHER CO. •PURCHASE OF VC’s SHARE BY THE PROMOTER. •PURCHASE OF VC’s SHARE BY OUTSIDER.

Methods of Venture Financing • • • •

Equity Conditional Loan Income Note Other Financing Methods 1. 2. 3. 4. 5. 6. 7.

Participating Debentures Partially Convertible Debentures Cumulative Convertible Preference Shares Deferred Shares Convertible Loan Stock Special Ordinary Shares Preferred Ordinary Shares

Disinvestment Mechanisms • • • •

Buybacks Initial Public Offerings Secondary Stock Markets Management Buyouts

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.

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.