Venture Capital

VENTURE CAPITAL

INTRODUCTION 

VENTURE CAPITAL (also known as VC or Venture) is a type of private equity capital typically provided to immature, growth company in the interest of generating a return. Venture capital investment are generally made as cash in exchange for shares in the invested company. The first VC firm was American Research and Development Corporation in 1946.

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DEFINITION VENTURE CAPITAL can be defined as funds that are generally invested in the form of equity. Investments may take the form of simple shareholder’s equity (common or preferred shares), as well as convertible debentures and other vehicles. The structure of the investment generally depends on the company’s needs and its stage of development, taking into account the objectives of both entrepreneur and the investor.

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How does the Venture Capital model work Investors invest money in a fund (usually a Trust)  The fund has a fixed life (usually 5+2 years)  Asset management company manages investments for the Trust  The AMC charges the fund an annual operating cost of approx. 2.5% per annum  The fund has invests in several companies which are IPO’s/ acquired  The upside is shared between the AMC and investors approx 25:75 subject to a minimum invested return 

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OBJECTIVES Ø Venture capital helps in creating environment particularly suitable for knowledge and technology based enterprises due to the blend of risk financing and hand holding of entrepreneurs.

Ø Ø Venture capitalists provide networking, management and marketing support.

CONTD.. ØGlobal venture capital industry, investors and investee firms work together closely in an enabling environment. 1. ØIt helps entrepreneurs to focus on value creating ideas and allows venture capitalists to drive the industry through ownership. 

Features  Equity

participation:

Venture capital is actual or potential equity participation through direct purchase of shares, the objective is to make capital gain by selling-off investment becomes profitable.  Long term investment: Venture financing is a long-term illiquid investment; it is not payable on demand. It requires long term investment attitude that necessitates the venture capital firms(VCFs) to wait for a long period.  Participation in management: Venture financing ensures continuing participation of the venture capitalist in the Mgt. of the entrepreneur’s business,. More than finance, venture capitalist gives his marketing, technology planning and management skill of the new firm. 

ADVANTAGES ØThe investment is in the form of capital, the company's financial structure and financial ratios are improved accordingly, giving the entrepreneur the necessary flexibility and financial capacity to achieve his objectives; 

ØLittle or nothing to repay in the short term, so that the capital invested and funds generated internally can be used exclusively to accelerate the company's growth; ØIt helps in technological development of the country

Contd.. Ø The

venture capitalist is not there to man stimulate its growth through active strategic support and constructive involvement, by giving the entrepreneur the benefit of his own experience as well as that of his business network. Ø It helps in the industrialization of the country Ø It generates the employment Ø It develops entrepreneurial skills 

Disadvantage  The  It

lessee has a lower debt capacity.

may be difficult to offload equity stake.  The agency cost is generally high to prevent the misuse of asset.  Depreciation tax shield will be transferred to the lessor

Stages of financing 

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Seed or Concept stage financing: The venture is

still in idea formation stage and its product and service is not fully developed. The usually investor is given a small amount of capital to come up with a working prototype.

Start up financing: When the firm is set up to manufacture a product or provide a service, start up finance is provided by the venture capitalist. This is for full scale manufacturing and further business growth

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First-stage financing: The venture has finally launched & achieved initial transaction, Sales are trending upwards. The funding from this stage is used to fuel sales, reach the Breakeven point, increase productivity, cut unit costs, as well as to build the corporate infrastructure and distribution system.

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Second-stage financing: Sales at this stage starting to

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Third stage financing: At this stage future is so bright . Everything looks good, Sales are climbing, Customers are happy. Money from this financing used for increasing plant capacity, marketing, working capital, and product improvement and expansion.

snowball. The company is also rapidly accumulating account receivables and inventory. Capital from this stage is used for funding expansion in all its forms from meeting increasing marketing expenses to entering new markets to financing rapidly increasing account receivables.

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Bridge financing: At this point the company is a proven winner and investment bankers have agreed to take it public with in 6 months. Bridge financing is a short term form of financing used to prepare a company for its IPO.

Criteria to be adopted while making investment decisions  The

track record of entrepreneur and his management team.  The technical performance assumption of project.  Rapidly growing market opportunities.  Long-term competitiveness advantage in terms of price/cost.  Return opportunities.

Disinvest Mechanism 

Promoter’s buy back: It is the most popular disinvestment route in India. This is suited to Indian condition Because it keeps the ownership and control of the promoter intact.

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Public issue: The benefits of disinvestment via initial public offerings route are improved marketability and liquidity.

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Sale to other venture capital funds: Sale in OTC markets: Management buy outs: The promoters of new venture, which has taken off, may sell it to its managers.