 Venture capital plays a strategic role

in financing small scale enterprises or

to entrepreneur.

 Entrepreneurship is a
key driver of value creation
in the 21st century
economy.
 Venture capital has potential to become an
important source for financing of small
scale enterprises.

 Venture capital is a significant

innovation of the
twentieth century.
 Generally considered as
synonym of high risk capital.
 The early stage financing of new and young

enterprises seeking to grow rapidly.

 An involvement of the venture capitalist in

the management of the client enterprises.
 Associated with the financing of high and

new technology based opportunities of

enterprises.
Technology /
Opportunity Entrepreneurship Value
The pursuit of Opportunity
beyond the Resources you
currently control
 Venture capital is the investment of long-
term equity finance where the venture
capitalist earns his return primarily in the
form of capital gain.
 Commitment or share holdings,

for the formation and

setting up of small scale
enterprises specializing in
new ideas or new
technologies.
 Equity Participation:- Actual or Potential
equity financing.
 Long-term illiquid investment:- Expectation

of large profits, 5-10 years.

 Participation in Management:- To protect

and enhance his investment by providing his

marketing, technology, planning and
management skills. Thus, Venture capitalists
combines the qualities of banker, stock market
investor and entrepreneur
 Early stage financing:
 Seed financing for supporting a concept or

idea
 R & D financing for product development
 Start-up capital for initial production &

marketing
 First stage financing for full-scale

production and marketing

 Expansion financing:
 Financing for working capital and initial

expansion
 Development financing for facilitating public

issue
 Bridge financing for facilitating public issue
 Acquisition/ buyout financing:
 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
 Possible Financing Options

Entrepreneur’s
Financial
personal
institutions
resources

Financing
Options
Unusual
Angel investors
resources
Business
development
programme

Venture
capitalists Public offering
 Evaluating Financing Options

Personal Personal Potential

Control Risk Reward

Personal Resources H H H
Financial Institutions
(Debt Financing) L-M L L–M
Venture Capitalists
(Equity-Debt Financing) L–M L L–M
Angel Investors
(Equity Financing) L–M L L–M
Public Offerings
Equity Financing) L L L–H
Business Development
Program L–M L L–M
Unusual Sources L–H L L- H

L – Low M – Medium H - High

Basic R&D Applied R&D Pre-seed Seed Start-up Expansion

Private sector

Public sector

Pre-commercial financing Commercial financing

 Deal origination
 Screening
 Evaluation (due diligence)
 Deal structuring
 Post-investment activity
 Exit
 Equity
 Conditional Loan
 Income Notes
 Other Financing Methods:
 Innovative Financial Securities
 Participating Debentures
 Convertible Debentures/Preference
Shares
 Cumulative Convertible Preference
Shares
 Deferred Shares-USA, UK-
where ordinary share rights
are deferred for a certain no.
of yrs.
 Convertible Loan Stock-
unsecured long term loan
convertible into ordinary
shares
 Special Ordinary Shares – with
voting rights and a modest
fixed dividend right & a right
to share in profits
 Conventional Loan
 Hire-purchase
finance
 Lease Finance
 Overdraft finance
 In India, the venture
capital creation process
has started taking off with
all four stages receiving
attention:
 Idea generation
 Start up
 Growth ramp up
 Exit processes
 However, much more
needs to be done yet.

The following graph

indicates the growth of
venture capital and angel
investments in India's IT
software and services
sector:
 It must be noted that during
1999, approximately 80 percent
of the estimated US$ 30 billion
worth of venture capital invested
in United States, went to
technology firms. India too, with
its strengths in innovation and IT
technology has attracted several
Venture Capital firms.
 In 2000 alone, 20 new venture
capital funds have registered
with SEBI, taking the total
number to 30. In fact, VC or
Angel investments in high tech
firms in India have grown by over
5,000 percent from Rs. 70 crore
to projected Rs. 2,200 crore
between 1996 and 2000. And
this figure is expected to grow to
Rs. 50,000 crore by 2008.
 Sources of Finance Financing Scheme Form of Financial
Assistance

1. Commercial banks Normal lending, Priority sector lending, Differential int. Working capital, term loans
rate scheme

2. Cooperative banks Lending to SSI, units organised on cooperative basis Working capital loan

3. RBI/Deposit Insurance & Credit guarantee scheme/ small loans ” ” Guarantee of loan
Credit Guarantee Corpo

4. IDBI Refinance, rediscounting of machinery bills, Special Term loan, Rediscounting loan,
capital assistance for SSI in backward areas, Seed capital, Soft loan, Equity/loan, Equity
National equity fund
5. IFCI Risk capital Bridge loan

6. SFCs Term lending, Special capital scheme Term loans, Equity/soft loan

7. SIDBI Refinance Term loans

8. NSIC/SSIDCs Hire purchase facilities Hire purchase / loan

 In USA, reduction of capital gain tax
result into boost up to development
of venture capital
 In UK, investors are provided
income tax relief, if invest in
qualifying, unquoted cos. or in new
cos.
 Removal of double taxation on
dividends, lower rate of capital gain
tax, allowed to set off losses on sale
off shares against income tax.
 Tax incentives to small 7 medium
enterprises in form of capital cost
allowance, deduction of R&D
expenditure, tax relief on profits,
etc.
 In India, preferential tax
treatment for VCFs.
 Brought down the maximum
margin tax rate for individuals
and for companies
 Dividend income – completely
exempted from tax
 Long term capital gain tax,
taxed at a lower rate