VENTURE CAPITAL

WHAT IS VC FUNDING?

 IS IT JUST THE
STORY OF THE MAN
WITH THE IDEA AND
THE MAN WITH THE
MONEY?
DEFINITION

“VENTURE CAPITAL IS AN INVESTMENT IN THE FORM

OF EQUITY, QUASI EQUITY AND DEBT-STRAIGHT OR
CONDITIONAL (I.E. INTEREST AND PRINCIPAL PAYABLE
WHEN VENTURE STARTS GENERATING SALES) MADE
IN NEW AND UNTRIED TECHNOLOGY OR HIGH RISK
VENTURES PROMOTED BY A TECHNICALLY OR
PROFESSIONALLY QUALIFIED ENTREPRENEUR, WHERE
THE VENTURE CAPITALIST:
DEFINITION OF VENTURE CAPITAL
 EXPECTS THE ENTERPRISE TO HAVE A VERY
HIGH GROWTH RATE.
 PROVIDES MANAGEMENT AND BUSINESS
SKILLS TO THE ENTERPRISE.
 EXPECTS MEDIUM TO LONG TERM GAINS.
 DOES NOT EXPECT ANY COLLATERAL TO COVER
THE CAPITAL PROVIDED.
THE NATIONAL VENTURE CAPITAL ASSOCIATION
DEFINES IT AS
“MONEY PROVIDED BY PROFESSIONALS WHO
INVEST ALONGSIDE MANAGEMENT IN YOUNG
AND RAPIDLY GROWING COMPANIES THAT
HAVE THE POTENTIAL TO DEVELOP INTO
SIGNIFICANT ECONOMIC CONTRIBUTORS.”
FEATURES OF VENTURE CAPITAL
1. EQUITY PARTICIPANTS
 NOT NECESSARILY EQUITY AS BASIC
OBJECTIVE
2. LONG TERM INVESTMENT
 LONGER DURATION.
 HIGHLY ILLIQUID.
 NOT PAYABLE ON DEMAND.
3. PARTICIPATION IN MANAGEMENT
• ACTIVELY INVOLVED IN THE PROMOTION.
• APPROACHES OF VENTURE CAPITAL FUNDS.
4. HIGH RISK RETURN SPECTRUM
 HIGH RISK BUT HIGH RETURNS.
MODES OF VC FINANCING
A) COMPANY

 Co.’s are promoted with sole objective of VC

financing.
 Funds raised by these co.’s are invested in VC
undertakings.

INVESTMENT
SUBSCRIBER’S
VC COMPANIES IN VENTURE
CAPITAL
UNDERTAKING

FLOW OF INVESTMENT
B) TRUST

 Sponsor promotes fund corpus & seeks

subscription for high value investors & institutions
intending to invest funds.
 The legal framework for inviting public subscription
for VC financing is not available in India.
 The fund manager is entrusted with funds under
the trust deed.
B) TRUST (CONTD.)

 Fund manager operates funds by investing in

eligible venture as per investment policy.
 After the expiry of duration of fund period
realizations are distributed among subscribers.
 Sponsor of fund acts as a author of trust as fund
money is entrusted to them.
B) TRUST (CONTD.)

SPONSOR
(AUTHOR OF
TRUST)

INVESTMENT
SUBSCRIBER’S TRUST IN VENTURE
CAPITAL UNDERTAKING

FLOW OF INVESTMENT
C) LIMITED PARTNERSHIP

 Investors agree to enter into partnership for ltd.

period.
 Invested in VC undertaking.
 Legal framework for constructing this mode not
available in India.

INVESTMENT
PARTNERS VC FUNDS IN VENTURE
UNDERTAKING

FLOW OF INVESTMENT
THE COMPARATIVE ANALYSIS OF EACH MODE OF
CONSTITUTING VC FIRMS MAYBE SUMMARISED
AS UNDER
CONSTITUTION COMPANY TRUST LTD. PARTNERSHIP

OPERATION Permitted Permitted Constitution not

recognized in India

RETURN & RISK OF To company To Subscriber To Partners

INVESTMENT

MANAGEMENT OF By committee of By committee of By committee

FUNDS executives of co. fund managers represented/constit
uted by partners

TAX EXEMPTION Available to Available to fund Legal framework

companies not available for
constitution
VENTURE CAPITAL PROCESS
GENERATING DEAL FLOW

DUE DILIGENCE

INVESTMENT VALUATION

DEAL STRUCTURING

MONITORING

EXIT
1) GENERATING A DEAL FLOW

 Investment opportunities that would he

consider for investing in.
 Venture capital funds focusing on early
technology based deals would develop a
network of R&D centers working in those
areas.
2) DUE DILIGENCE

 Carrying out reference checks on the proposal

related aspects such as management team,
product, technology and market.
 Venture capital due diligence focuses on the
qualitative aspect of investment opportunities.
 To maximise the upside potential of an project
– exit at time of maximum return
3) INVESTMENT VALUATION
 Investment valuation process is an exercise aimed at
arriving at an acceptable price for the deal.
 The evaluation process goes through the following
sequence:
 Evaluate future revenue & profitability.
 Forecast likely future value of the firm or expected
acquisition proceeds.
 Target an ownership position in the invested firm so as to
achieve desired appreciation.
4) STRUCTURING A DEAL

 Refers to putting together the financing aspect

of the deal and negotiating with the
entrepreneurs.
 Was to be knowledgeable in areas of
accounting, financing, legal & taxation.
5) MONITORING

The role of VC does not stop after the

investment is made.
VC gives ongoing advice to the promoters &
monitors the project continuously.
Function as a dual capacity.
As professional in this, they may have
innovative solutions to maximize the chance
of success.
6) EXIT

 Most crucial issue is the exit route.

 Exit route varies from investment to investment.

 There are several exit routes:

 Buy back by the promoters.
 Sale to another venture capitalist.

 Sale at the time of IPO.

 Capitalist will work out the method of exit &

decide.
 EARLY STAGE FINANCING

SEED MONEY START-UP FINANCING SECOND ROUND FINANCING

LATER STAGE FINANCING

DEVELOPMENTAL EXPANSION BUY-OUTS TURNAROUND

CAPITAL

VENTURE CAPITAL WITHDRAWALS

I. EARLY STAGE FINANCING

 FINANCING IN THE INITIAL STAGES BEFORE

THEY BECOME INDEPENDENT
A) SEED CAPITAL/PRE START UP

 Called as an applied research phase.

 Here there is an idea, and a concept.

 No business plan & market research has been

assembled.
 Risk perception is high.

 Funding is mostly provided by ‘angels’.

B) START UP STAGE
 Refers to a stage when commercial
manufacturing has to commence for the first
time.
 Received venture fund is provided for product
development & initial marketing.
 Includes several types of new products such as
Greenfield.
 New business in which the enterprise has a
good knowledge and working experience.
C) FIRST STAGE
 The company is now growing concern.
 Its product has proved manufacturability & is
selling.
 Customers can confirm its products usage.
 Reach close to break even, reduce unit costs,
build the sales organization & distribution
system.
 Most preferable stage of investment.
D) SECOND STAGE

 It represents a stage where a product has

already been launched in the market.
 Promoter invests his own money but further
infusion of funds is necessary.
 Venture capital provides larger funds partly in
the form of debt.
2) LATER STAGE FINANCING

 FINANCING OF ESTABLISHED BUSINESS

A) MEZZANINE/DEVELOPMENT CAP.

 Recorded a huge profit for a few years but are yet

to reach a stage to go public and raise money from
the capital market/conventional sources.
 Time frame of investment for 1-3 years.

 Capital is mostly used for the purchases of new

equipment, expansion of marketing and
distribution facilities, refinance of existing debt,
penetration into new regions, induction of new
management etc.
B) BRIDGE/EXPANSION

 Last round of financing before planned exit.

 Finance is used to expand the business by way
of growth of their own productive asset or by
acquisition of other firms.
 Involves time frame of 1-3 years.
C) BUY OUT STAGE

 Refers to transfer of management and control.

 Buyout involves a time frame from investment
of IPO of 1-3 years.
 Can be of TWO types:
i) Management Buyouts
Funds are provided to enable the current
operating management or investors to acquire an
existing product line or business.
ii) Management Buy-ins
 These funds enable an outside group of
managers to buy an ongoing company.
 3 elements are to be considered –
management team, investor and the target
company.
D) TURNAROUND STAGE

 Subsets of buyouts.
 Involve the buying of a sick company.

 Medium - high risk.

STAGES IN VCF NAME OF STAGE DESCRIPTION OF STATUS OF THE PROJECT

1 SEED CONCEPTUALIZATION/PLANNING

2 START UP OPERATIONAL/PRODUCTION

3 EXPANSION EXPANSION IN PRODUCTION/MARKETING

4 MEZZANINE LAST STAGE BEFORE PUBLIC OFFER

5 BUYOUT ACQUISITION OF A PRODUCT LINE/BUSINESS

6 TURNAROUND RE-ESTABLISHMENT OF BUSINESS

DESCRIPTION OF STAGE PERIOD INVOLVED DEGREE OF FINANCE FOR THE
WHILE FUNDS ARE RISK ACTIVITY INVOLVED
BLOCKED UP (IN
YEARS)

1. EARLY STAGE INVESTMENT

A) SEED CAP. 7-10 EXTREME MANUFACTURING &

RESEARCH BASED
B) START UP 5-10 VERY HIGH BUSINESS
COMMITMENT
C) 2ND ROUND 3-7 HIGH MARGINAL PROGRESS

2. LATER STAGE INVESTMENT

A) DEVELOPMENTAL 1-3 MEDIUM EXPANSION FINANCE

B) REPLACEMENT FINANCE 1-3 LOW PLANNED EXIT

C) BUY OUTS 1-3 LOW NEW MANAGEMENT

D) TURNAROUNDS 3-5 MEDIUM/HIG RESCUE FINANCE

H