Venture Capital

Your Idea ...

My Money ….
 Definition of Venture Capital
VC is defined as a “financing institution which joins an entrepreneur as a co-
promoter and share the risks and rewards of the enterprise.”

VC refers to
- Commitment of capital as share holding
- For formulation and setting up of business with new ideas and
technologies

From the definition we can derive that VC is

1) Long term risk capital
2) It is used to finance/invest in firms which has high risk and growth
opportunity
3) share managerial abilities
4) Exit at the right time
 Characteristics/Features of Venture Capital

• Usually in the form of an Equity Participation.

- can also take the form of convertible debt and long term loan
• Money put in high risk and high growth opportunity projects
• is available for commercialization of New ideas and new technology projects
- Not in companies who are into trading, Financial services, agency, liaison
work or R&D
• joins the company/ entrepreneur as co-promoter
- shares the risks and rewards of the company

Cont ….
 Characteristics/Features of Venture Capital

• Continuous involvement
- support in the form of managerial, technical and other aspects
• Dis-invest at the right time
- VC objective is not the profit but capital appreciation of equity value

• Not only money is invested

- but other inputs like ideas for setting business, Mkg strategy and
managerial support are provided
• Invested in small and medium scale entreprises
 Evolution of Venture Capital
• The concept of VC is said to have originated in USA

• 1948 – First two VC firms established

- American research and development corporation & J.H Whitney & Company
- Developed the concept VC after IInd World war
- ARDC started by Gen. Doroit ( Father of Venture Capitalism)
- J.H Whitney & Company started by John Hay Whitney & Benno Schmidt
- Successful Investments Digital Equipment Company & Florida Food Corp.
• Development started during the year 1958, when Business Administration act was
passed by the US congress
• Around 800 VC firms with $ 40bn capital
- Annual growth between $1bn and $5bn
• US is ranked 1st in terms of investment in VC firms and followed by UK
• During 3rd quarter of 2006, $6.6bn was invested in 797 deals
 Evolution of Venture Capital
United Kingdom VC story

• UK government allowed tab relief for individual who have invested in firms
not listed in stock exchange
• The CHARTER House Development Limited is the oldest VC company in
UK- Est in 1934
• Bank of England established it VC company in late 40’s
• Real VC growth happened only during 70’s and 80’s
• 1988 - More than 1000 VC companies
- Total investment to the tune of Rs.3700 crores to over 1500 firms

• 2005 – Around 13bn euros was raised by VC firms to invest in companies

 Evolution of Venture Capital
The Indian VC History
• Dates back to more than 150 years
– Managing agency houses acted as venture capitalist
- provide finance and management skill to risky projects
- helped Tata Iron and Steel and Empress Mills to raise equity capital
- Tatas Started Management Agency
- Started in 1937
- Named “Investment Corporation of India”
- Successful companies promoted by ICI are CEAT tyres, Associated bearings,
National Rayon ect.
• Abolished the concept Management Agency System
• Public sector term lending institution partially filled the void
- Helped for arranging seed capital and risk capital for Hi-tech
industries
- Promoted only proven and sound technology ventures
Cont…
 Evolution of Venture Capital
• 1973 – R.S Bhatt committee recommended formation of Rs.100 Crore VC
fund
• 7th five year plan emphasized the need for developing a system of funding
Venture capital
• May 1986 – Research and Development Act enacted
- Cess of 5% on all payment made for purchase of technology from
abroad
- The levy provided the source of VC fund
• 1987- On behalf of the Govt of India, United Nation Development
Programme examined the possibility of developing VC in private
sector
• 1987- Technology Policy Implementation Committee in the same year
recommended for the provision
• November 1988 – Formalized Venture Capital took roots in India
- VC guidelines were issued by comptroller of capital
issued
 Stages of Venture Capital Financing
Seed Capital:
- This is an early stage financing
- Financed primarily for R & D
Defined as “ Capital provided to an entrepreneur to prove the
feasibility of a project and qualify for start up capital”
- Very risky- No guarantee for the success of the concept,
idea and process
- Constant infusion of fund is required for successful
adaptation of the idea and to make it commercial
VC Looks for
1) Performance record, Previous experience of Entrepreuner
2) Idea, Business mgmt skills, realistic plan.
 Stages of Venture Capital Financing
Startup Financing:
- This is an early stage financing
- Financed primarily for product development, initial Mkg and
production facility
Defined as “ Capital needed to finance the product development,
initial marketing and the establishment of product facilities”
VC Looks for
1) Track Record: Promoter/ Entrepreuner/Management Team/
Skilled staff resource is analyzed to evaluate the mgmt
performance record, ability and capacity to handle the
business plan
2) Performance Assumptions: Technical performance about the
product/ process/service.
 Stages of Venture Capital Financing
3) Market potential: Market size, growth and penetration are
analyzed.
4) Cost Structures: Analysis to check the profitability projection
on realistic cost assumption and competitive price setting is
done
5) Time Schedule: Overall completion time is ascertained
Early-Stage Financing
- To fund companies that have completed the development
stage and require further funds to initiate commercial
manufacturing and sales. At this stage companies will not be
making profits
- Required for completion of the projects especially when there
is cost and time overruns or when the completed projects
starts making loss
 Stages of Venture Capital Financing
Follow-on Financing
- This is also called as second round financing
- This comes under later stage financing
- The project has passed the test of acceptability and has
proved to be successful.
- Since the project is termed to be successful, this stage is
defined as the most “attractive in terms of earning potential
and attractive stage for Venture Capital Financing.
Expansion Financing
- Finance provided to fund the expansion or growth of the
company which is breaking even or trading at a small profit
- - used for expansion, development capital, increase
production capacity, provide additional working capital.
 Stages of Venture Capital Financing
Expansion Financing
-
Expansion Financing
- Finance provided to fund the expansion or growth of the
company which is breaking even or trading at a small profit
- used for expansion, development capital, increase production
capacity, provide additional working capital.