1. VENTURE CAPITAL FINANCING

2. What is Venture Capital?
“Venture Capital can be defined as equity or equity related investment in to New Young Dynamic Growth and Ideas based industries who are not yet ready to approach capital markets for raising/generating money/capital”.
Venture capital can be summarized as “your ideas and our money” concept of developing business. Venture capitalists are people who pool financial resources from high networth individuals, corporates, pension funds, insurance companies, etc. to invest in high risk - high return ventures that are unable to raise funds from regular channels like banks and capital markets.

3. Venture Capital: Key Features
Private or institutional investment (capital) in relatively early-stage companies (ventures)
Mainly used by companies like:
Computer and network technology
Telecommunications technology
Biotechnology
Purely Growth and Idea Based Financing
High Risk and High Return

4. Difference between Venture Finance & Debt Finance
Points
Venture Finance
Debt Finance
Objective
Maximize Return
Interest payment
Holding Period
2-5 years
Short/Long term
Instruments
Eq. shares, Convertible bonds/ Debentures, Conditional loan
Loan, Factoring, Leasing
Collateral
Very Rare
Yes
Ownership No
Control
Minority shareholders, rights protection, board members
Covenants
Impact on B/S
Reduced Leverage
Increased Leverage
Exit Mechanism
Public offering, Sale to third party, Sale to entrepreneur
Loan repayment

5. Difference between a Venture Capital and Bankers/Money Managers
Asset Based Financing V/s Growth and Idea Based Financing
Banker is a manager of other people's money while the venture capitalist is basically an investor.
Venture capitalist generally invests in new ventures started by technocrats (entrepreneurs) who generally are in need of capital.
The most important difference between a venture capitalist and conventional Bank Finance is that VC not only provide finance but also offers management supports like wise…
Financial and strategic planning
Recruitment of key personnel
Obtain bank and other debt financing
Access to international markets and technology
Marketing Strategy Formulation
Helps in IPO Formalities

6. Users of Venture Finance…
Newly floated companies that do not have access to equity capital and/or other related instruments.
Firms, manufacturing products or services that have vast growth potential (HIGH-TECH FIRMS).
Firms with above average profitability.
Novel products that are in the early stages of their life cycle.
Projects involving above-average risk.
Diversified Business Ventures.

7. Venture Capital Investment Process:
Initial Evaluation:
Due diligence:
Deal structuring, Negotiation and Investment valuation:
Documentation:
Monitoring and Value addition:
Exit:

8. VC: Stages of Financing
Early-stage Financing:
Seed Financing:
Startup Financing:
Second Stage Financing:

9. VC: Stages of Financing – Contd…
Later Stage/Expansion Financing:
Bridge Financing:
Acquisition Financing:
Management by out
Management by ins

10. Methods of Venture Financing:
Equity:
All VCFs in India provide equity but generally their contribution does not exceed 49 percent of the total equity capital. Thus, the effective control and majority ownership of the firm remains with the entrepreneur. 
They buy shares of an enterprise with an intention to ultimately sell them off to make capital gains.
Conditional Loan:
It is repayable in the form of a royalty after the venture is able to generate sales.
No interest is paid on such loans.
In India, VC charge royalty ranging between 2 to 15 percent.

11. Methods of Venture Financing: Contd…
Income Notes:
It’s a hybrid security and it’s a combination of conditional loan and conventional loan.
The entrepreneur has to pay both interest and royalty on sales, but at substantially low rates.
Participating Debentures
Convertible Loan

12. Investment Nurturing Styles:
Hands-on Style: suggests supportive and direct involvement of the venture capitalist in the assisted firm through Board representation and regularly advising the entrepreneur on matters of technology, marketing and general management.
Indian venture capitalists do not generally involve themselves on a hands-on basis of nurturing.
Hands-off Style:
No Managerial advice/assistant is provided
Indian Venture Funds generally follow this pattern.
Intermediate Style/Hands Holding: Means if assisted firm demands then only managerial/advisory services are to be provided by venture capitalist.

13. Investment Nurturing: Services
Venture capitalists (VCs) continuously monitor their companies.
VCs typically serve on the company’s Board of Directors.
VCs provide mentoring and strategic advice to the company’s managers.
VCs often provide business contacts to company managers.
VCs help recruit additional managers for the company.
VCs set company performance targets. If these targets are not met, VCs may have the option of replacing the Key Personnel of their client firm.

14. Regulatory System & Policy Matters:
The venture capital operations in India are regulated by SEBI.
SEBI (venture capital funds) ‘Regulations’ 1996
Registration
All VCFs must be registered with SEBI and pay Rs.25,000 as APPLICATION FEE and Rs. 5,00,000 as REGISTRATION FEE for grant of certificate.
Recommendations of SEBI (Chandrasekhar) Committee, 2000 SEBI appointed the Chandrasekhar Committee to identify the obstacle in the growth of venture capital industry in the country and suggest suitable measures for its rapid growth.
The recommendations pertain to, 1. Harmonization of regulations 2. VCF structures 3. Resource raising 4. Investments 5. Exit 6. SEBI regulations and Company law related issues 8. Other related issues.

15. Exit Strategies: IPO Sale of shares to entrepreneurs/employees
Sale of shares to new investors
Liquidation of client’s firm

16. Problems of Venture Capital Financing:
Requirement of an experienced management team.
Requirement of an above average rate of return on investment.
Longer payback period.
Uncertainty regarding the success of the product in the market.
Questions regarding the infrastructure details of production like plant location, accessibility, relationship with the suppliers and creditors, transportation facilities, labors availability etc.
The size of the market, Major competitors and their market share.

17. Prospects of Venture Capital Financing:
Globally competitive developing economy with existence of MNCs.
Second Largest English Speaking, Scientific & Technical Manpower in the WORLD.
Vast pool of existing and ongoing scientific and technical research carried by large number of research laboratories (ATIRA/PRL/ISRO/ICAR/EDI/CDRI/NIFT/CSIR/CFTR).
Initiatives taken by the Government in formulating policies to encourage investors and entrepreneurs.
Supportive regulatory system managed/regulates by SEBI.
Govt. Stability

18. Key Players: VCFs promoted by the Central Govt:
Technology Development Fund (TDF) in the year
ICICI, IFCI AND IDBI.
Risk capital and Technology Finance Corporation Limited (RCTFC)
VCFs promoted by the State Government:
Andhra Pradesh Venture Capital Limited (APVCL)
Gujarat Venture Finance Limited (GVFL)
VCFs promoted by Public Sector banks:
SBI-Cap by State Bank of India
Canfina by Canara Bank

19. Key Players – Contd…
VCFs promoted by the Foreign Banks or Private Sector Co’s :
Indus Venture Fund
Credit Capital Venture Fund
Alliance Venture Capital Advisors Ltd.
Baring Private Equity Partners
e Ventures India
HBSC Private Equity
Indus Venture Management Ltd.
Infinity Ventures
Marigold Capital Services Ltd.