Session 1 Venture Capital- An overview

Learning Agenda: Introduction Brief history Stages of VC financing Reasons New venture failure
Learning Facilitator: Ms. Sujata Kapoor Jaypee Business School, Noida Email: sujata.kapoor@jiit.ac.in

 Free enterprise is the economic basis for all entrepreneurial activity It means that any individual is free to transform an idea into a business The opportunities for potential entrepreneurs are unlimited

During the last 10 years, new ventures have emerged at the rate of 500,000 per year New entrepreneurial ventures have been blossoming (1.4 million new jobs created in the past 10 years) Entrepreneurial ventures such as Apple Computer, Compaq,Sun Microsystems Intel, Microsoft, and Google captured the economic spotlight. VC backed companies grew better than bench mark indices. 96% of the top executives felt that companies could not exist without VC support. VC support has been in the direction of financial advice,recruitment and marketing activities. Helion Ventures ,Sequoia Capital and Battery Ventures.

 Entrepreneurship is a dynamic process of vision, change, and creation. Essential ingredients include the willingness to take calculated risksin terms of time, equity, career; the ability to formulate an effective venture team; the creative skill to marshal the needed resources; the fundamental skill of building a solid business plan; and finally, the vision to recognize opportunity where others see chaos, contradiction, and confusion.

What is Venture capital?

Comprises of two words: venture and capital Acc to IFCW equity or equity featured capital seeking investment in new
ideas, new companies, new products, new processes or new services that offer the potential of high returns on investment. It may also include investment in turn around situations According to National Venture Capital Association Money provided by professionals who invest alongside management in young ,rapidly growing companies that have the potential to develop into significant economic contributors

VCCs and VCFs

VCCs provide finance through direct purchase of shares ,options or convertible securities. VCF is a fund established in form of a company or trust which raises monies through loans ,donations, issue of securities and makes investment according to the regulations.

A brief history of Venture capital

American Phenomenon Formalised after World war II (General F.Doriot , John Hay Whitney and Laurance S.Rockfeller) Venture moved forward by creation of SBICs loan programme Employment Retirement Income Security Act was clarified Began in UK in 1970s,France Europe in 1980s In Europe leveraged buyouts and management buyouts have dominated, In South East Asia VC investing has been in tourist and consumer-related business.

Characteristics of Venture capital

Long time horizon Lack of liquidity High risk (return expected is 25 to 40%) Some investments fail completely,few give returns many times the initial investment and many may be the living dead Equity participation Participation in Management Expertise in managing the funds Exit after a specified time

Advantages of venture Capital

Economy oriented Investor oriented Entrepreneur oriented Why invest in Venture capital? High returns Diversification

Stages of Venture capital financing

Early stage Financing Development Financing Buyout financing /turnaround financing

Venture capital Financing

Equity Quasi- equity: The quasi instruments are as follows Cumulative convertible preference shares Non cumulative convertible preference shares Redeemable preferential shares Partially convertible debentures Fully convertible debentures

Venture capital Investment Process

Deal origination Screening(size of investment ,stage of financing, geographical location) Evaluation Deal structuring Post investment activities and the Exit Initial public offer Trade sale Promoters buy back Management buyout

Investment determinants of a Venture capital fund

Management (backing first rate management team with a second rate product may have success) Market(barriers to the entry) Is the company leverageable? Technology Profitability Information needed for appraising a project Brief History of the company Detailed bio data of each promoter Projected financial statements Details of the project Technology details

Venture Financing Practices & Procedures

Entrepreneurs need to develop a business plan Summary plan ,a full plan or an operating plan Evaluation of business plan Analysis of management Mental and behavioral attributes (Information can be gathered through interview and personal discussions,personal references, credit reports from banks,customer ,suppliers) Analysis of Organisation patterns(Organisation chart ,Management team ,nature of employment contract)

Venture Financing Practices & Procedures

Analysis of production process Equipment ,machinery,skilled and trained production personnel,inventory levels,quality control,R&D Ratio analysis can be carried out depending on the stage of investment. Analysis of Marketing and sales Salaries and commission as % of sales,gross profit per sales man,marketing expenses as% of sales. Financial analysis and projections Analysis of reference information(Information about corporate structure,legal matters, professional reference)

Development of Venture capital in India

Formally introduced in 1987 (IDBI) Technology Development and Information Corporation started by ICICI Almost half of the venture capital investment is in IT sector Very little goes into start up stage ventures VCFs can be categorised into 4 groups Promoted by central and state government controlled financial institutions Promoted by Public sector banks Promoted by foreign banks and private sector companies (Credit capital Venture Fund)

Financing of small and Medium size enterprises

Hisk risk ventures and less profitable Lack of access to capital market Not easy to raise loans Venture capital is highly flexible system of financing SMEs.

 Independence Financial opportunities Community service Job security Family employment Challenge

 Inadequate records Expansion beyond resources Lack of information about customers Failure to diversify market Lack of marketing research Legal problems Nepotism One person management Lack of technical competence Absentee management