VENTURE CAPITAL FINANCING

PREPARED BY----SIRISH NAYAK

PGDM

3RD (B)
ROLL NO.--97

 venture capital
VC IS FORM OF RISK CAPITAL Risk capital is invested as shares (equity) rather than as a loan and the investor requires a higher "rate of return to compensate him for his risk. Venture capital financing is a type of financing by venture capital: the type of private equity capital is provided as seed funding to earlystage, high-potential, growth companies and more often after the seed funding round as growth funding round (also referred as series A round) in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. To start a new startup company or to bring a new product to the market, the venture may need to attract financial funding. There are several categories of financing possibilities. If it is a small venture, then perhaps the venture can rely on family funding, loans from friends, personal bank loans or crowd funding. For more ambitious projects, some companies need more than what mentioned above, some ventures have access to rare funding resources called angel investors. These are private investors who are using their own capital to finance a ventures need. Apart from these investors, there are also venture capitalist firms (VC firms) who are specialized in financing new ventures against a lucrative return.

History
Started in USA as an informal arrangement of finance American research and Development Corporation, a publicly

traded investment company formed in 1946 to provide finance for start ups By late 1950s such specialized investment firms increased in number, now called venture capital firms
Federal Small Business Investment Company program (SBIC) in 1958

aided the growth of such firms

Till seventies these firms concentrated on start ups and

expanding companies Exploiting breakthroughs in electronic, medical or data processing technology

Became almost synonymous with technology finance

Venture capital financing

DR. BATRA ANGEL INVESTOR ENTREPRENEUR PROFILE 1. Is qualified in a Hot area of interest 2. Has a Good reputation 3. Has show skill and competence 4. Understand Cost of capital 5. Will work towards goal 6. Sales and technical knowledge 7. Has a realistic expectation about process and outcomes

IDEA

START NEW BUSINESS

NEW PRODUCT

Venture capital financing process

1. The Seed Stage This is where the seed funding takes place. It is considered as the setup stage where a person or a venture approaches an angel investor or an investor in a VC firm for funding for their idea/product. During this stage, the person or venture has to convince the investor why the idea/product is worthwhile.

2. The Start-up Stage If the idea/product/process is qualified for further investigation and/or investment, the process will go to the second stage; this is also called the start-up stage. At this point many exciting things happen. A business planes presented by the attendant of the venture to the VC firm.

3. The Second Stage At this stage, we presume that the idea has been transformed into a product and is being produced and sold. This is the first encounter with the rest of the market, the competitors. The venture is trying to squeeze between the rest and it tries to get some market share from the competitors. This is one of the main goals at this stage.

Conti..
4. The Third Stage
This stage is seen as the expansion/maturity phase of the

previous stage. The venture tries to expand the market share they gained in the previous stage. This can be done by selling more amount of the product and having a good marketing campaign. Also, the venture will have to see whether it is possible to cut down their production cost or restructure the internal process. This can become more visible by doing a SWOT analysis.
5.

The Bridge/Pre-public Stage

In general this stage is the last stage of the venture capital financing process. The main goal of this stage is to achieve an exit vehicle for the investors and for the venture to go public. At this stage the venture achieves a certain amount of the

As mentioned in the first paragraph, a VC firm is not only about funding and lucrative returns, but it offers also the non-funding issues like knowledge as well as for internal as for external issues. Also what we see here the further the process goes, the less risk of losing investment the VC firm is risking.
Stage at which investment made Risk of loss Causation of major risk by stage of development

RISK

The Seed-stage

66.2%

72.0%

The Start-up Stage

The Second Stage

53.0%
33.7%

75.8%
53.0%

The Third Stage

The Bridge/Pre-public Stage

20.1%
20.9%

37.0%
33.0%

Exit route for VC

Initial Public offer: most preferred. Goes to public

through stock exchange

Trade sale: sells its stake to a strategic buyer which

has similar/complementary plans to enter target industry

Promoters Buy back: promoter buys back VCs

stake at a pre determined price

Company buy back: Company buys back VCs stake

at a pre determined price

Management buy out: operating management

acquires the business by buying equity held by promoters

Methods of Venture Capital financing

1. Equity Financing - All VCFs in India provided equity. Generally , their contribution may not exceed 49 percent of the total equity capital. Thus the effective control and majority ownership of the firm may remain with the entrepreneur. 2. Conditional Loan- A conditional loan is repayable in the form of a royalty after the venture is able to generate sales. No interest is paid on such loans.

3. Income Note- A unique way of venture financing in India was income note. It was a hybrid security which combined the features of both conventional loan and conditional loan. 4. Participating Debenture- A few venture capitalist , particularly in private sector , introduced innovative financial securities. The Participating debenture is an example of innovative venture financial.

Venture capital in India

By the end of the 1980s, venture capital returns were

relatively low, particularly in comparison with their emerging leveraged buyout cousins, due in part to the competition for hot startups, excess supply of IPOs and the inexperience of many venture capital fund managers. Growth in the venture capital industry remained limited throughout the 1980s and the first half of the 1990s increasing from $3 billion in 1983 to just over $4 billion more than a decade later in 1994. Venture Capital in India In India the Venture Capital plays a vital role in the development and growth of innovative entrepreneurships. Venture Capital activity in the past was possibly done by the developmental financial institutions like IDBI, ICICI and State Financial Corporations. In India,

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.

Conclusion
The world is becoming increasingly competitive.

Companies are required to be super efficient with respect of cost, productivity, labor efficiency, technical back up, flexibility to consumer demands etc. There is impending demand for highly cost effective and quality products. There are large sectors that are ripe for VCs like I.T, infrastructure, telecom, pharmacy and many more . In spite of existing infrastructure, shortcoming in India, it has bright future for India.

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