Unit 4: Venture Capital Financing – Notes

By Dr. Vinod Krishna, Associate Professor

Table of Contents
Venture Capital ......................................................................................................................... 3
Concept of Venture Capital Financing............................................................................................3
Characteristics ...................................................................................................................................3
Growth................................................................................................................................................5
Stages of Venture Capital .................................................................................................................7
The pre-seed stage ....................................................................................................................................... 7
The Seed Stage .............................................................................................................................................. 7
Series A.......................................................................................................................................................... 8
Series B .......................................................................................................................................................... 8
Series C and beyond (Expansion stage)......................................................................................................... 9
The mezzanine stage .................................................................................................................................... 10
Going public — the IPO .............................................................................................................................. 10
Venture Capital Process .................................................................................................................11
Regulatory framework of Venture Capital in India ....................................................................12
SEBI (Venture Capital Funds) Regulations, 1996....................................................................................... 12
Restrictions on Investments ......................................................................................................................... 13
SEBI (Foreign Venture Capital Investor) Regulations, 2000 ...................................................................... 13
Functioning Of venture capital funding agencies in India ..........................................................13
The top 10 venture capital firms in India..................................................................................................... 14
Global Top 15 Venture Capital Firms ......................................................................................................... 16
Financing Strategy: Hybrid securities ................................................................................... 19
Convertible & Non-Convertible Debentures ................................................................................19
Deep Discount Bonds ......................................................................................................................20
Secured Premium Notes..................................................................................................................21
Preference shares.............................................................................................................................22
Types ........................................................................................................................................................... 22
Convertible Preferred Shares ....................................................................................................................... 23
Option Financing .............................................................................................................................23
Warrants ..........................................................................................................................................23
Convertible.......................................................................................................................................24
Exchangeable ...................................................................................................................................24
Alternative Source of Financing & Role of Valuation ......................................................... 24
Boot – strapping ..............................................................................................................................27
Examples of Bootstrapping ......................................................................................................................... 28
Angel Funding ........................................................................................................................ 30

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 Angel Funding vs VC ......................................................................................................................30
External Commercial Borrowings (ECB) ............................................................................. 30
Challenges In Raising Capital during Expansion & Restructuring ..................................... 32

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Venture Capital
Concept of Venture Capital Financing

The funding source of choice for startups and new businesses with significant growth potential
is venture capital (VC) investment, which is the lifeblood of innovation. In contrast to
traditional lenders, venture capitalists (VCs) become partners in these projects, providing not
just funding but also access to their networks, mentorship, and strategic advice.

Venture capital (VC) represents a type of private equity that provides funding for start-ups and
small enterprises with prospects for sustained expansion. Investment banks, financial
institutions, and investors are the usual sources of venture capital. Technical or managerial
expertise could also be provided in the form of venture capital.

Harvard Business School professor Georges Doriot is generally considered the "Father of
Venture Capital." He started the American Research and Development Corporation in 1946
and raised a $3.58 million fund to invest in companies that commercialized technologies
developed during WWII. The corporation's first investment was in a company that had
ambitions to use X-ray technology for cancer treatment. The $200,000 that Doriot invested
turned into $1.8 million when the company went public in 1955.

Venture capital is a phrase used to describe a form of long-term financing given to firms with
a high potential for growth in order to accelerate their success. Venture capitalists are the
financiers who assume the disproportionate financial risk and aid entrepreneurs in achieving
their goals. In return, the investors receive a stake in the company as well as various returns if
and when the business succeeds.

Characteristics
• Investment Type: VC is a subset of private equity that focuses on unlisted businesses
with promising long-term growth.
• High Risk, High Reward: Venture capital firms make investments in businesses that
have a high risk of failure but have the potential to yield enormous profits.
• Active Investors: Venture capitalists do more than just lend money. Through their
industry connections, operational skills, and strategic counsel, they actively contribute
to the company's success.
• Venture capitalists provide backing through financing, technological expertise, or
managerial experience.
• Venture capital typically targets companies in their early stages, including seed-stage,
startup, and early growth stages.
• Venture capitalists often invest in companies that are still in the development or pre-
profit stage and require capital for research and development, product development,
marketing, and market expansion.

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• Venture capital investments are considered high risk due to the inherent uncertainty
associated with startups and early-stage companies. However, they also offer the
potential for high returns if the invested companies succeed and achieve significant
growth.

• Venture capitalists are willing to take on higher risk in exchange for the potential for
substantial returns on their investments.
• Venture capitalists typically invest in companies by acquiring an ownership stake. They
provide funding in exchange for equity or convertible debt, allowing them to participate
in the company's future success and potential financial gains.
• In addition to providing funding, venture capitalists often bring strategic value to the
companies they invest in. They provide expertise, industry knowledge, mentorship, and
access to their networks, helping the companies grow and succeed. Venture capitalists
actively support their portfolio companies and may have board representation or
advisory roles.
• Exit Strategies: Venture capitalists aim to exit their investments and realize returns
through various exit strategies, such as initial public offerings (IPOs), acquisitions, or

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 secondary market sales. The exit strategy is an essential consideration for venture
capitalists as it allows them to monetize their investments and generate returns for their
investors.

Growth

Globally, the venture capital sector has expanded enormously, with centers of innovation and
venture capital activity sprouting in places like Bangalore, India, and Silicon Valley, the US.

This expansion is fuelled by things like:

• Technological Developments: As new technology open up new business possibilities,
venture capitalists become interested.
• Enhanced Risk Appetite: Investors are growing more at ease with venture capital's
high-risk, high-reward structure.
• Government Support: To encourage venture capital activity and support homegrown
innovation ecosystems, several governments provide tax exemptions and other
incentives.

Here's a brief overview of the major milestones in the history of venture capital:

• Early Origins (1940s-1950s): The modern venture capital industry traces its roots to the
mid-20th century. In the 1940s and 1950s, venture capital firms began to emerge in the
United States, primarily focused on providing funding to startups and small businesses in
the technology and electronics sectors. Companies like American Research and
Development Corporation (ARDC) and J.H. Whitney & Company were pioneers in this
era.
• Formation of Industry Associations (1960s): In the 1960s, industry associations like the
National Venture Capital Association (NVCA) were formed to represent and advocate for
the interests of venture capitalists. These associations played a crucial role in shaping the
industry and establishing best practices and standards.
• Emergence of Silicon Valley (1970s): The 1970s marked the rise of Silicon Valley as a
hub for technology and innovation. Venture capital firms in the region, such as Kleiner
Perkins and Sequoia Capital, played a significant role in financing the growth of iconic
technology companies like Apple, Intel, and Cisco. This era saw an increase in the size and
scale of venture capital investments.
• Dot-com Boom and Bust (1990s-early 2000s): The late 1990s witnessed the dot-com
boom, where venture capital investment in internet-related startups surged. Companies like
Amazon, eBay, and Google received substantial funding during this period. However, the
dot-com bubble eventually burst in the early 2000s, leading to a significant decline in
valuations and a more cautious investment approach.
• Expansion Beyond Technology (2000s-present): In the 2000s and beyond, venture
capital expanded beyond the technology sector. Investments started flowing into areas like
biotechnology, clean energy, healthcare, fintech, and consumer products. This

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 diversification allowed venture capital to support innovation and growth in various
industries.

Global Expansion: The venture capital industry has experienced global expansion, with the
emergence of vibrant startup ecosystems in regions like Europe, Asia, and Latin America.
Countries like China, India, and Israel have seen significant growth in venture capital
investments and the development of their own startup ecosystems.

Rise of Unicorn Companies: The 2010s witnessed the rise of unicorn companies, which are
privately held startups valued at over $1 billion. Venture capital played a crucial role in funding
and supporting these high-growth companies, including Uber, Airbnb, and SpaceX.

Impact Investing and Social Entrepreneurship: In recent years, there has been a growing
focus on impact investing and social entrepreneurship within the venture capital industry.
Investors are increasingly seeking opportunities to support companies that generate positive
social and environmental impact alongside financial returns.

In 2022, there was a worldwide recalibration of venture capital investments happened after
several years of record fund inflows. Fears of a recession and rising macroeconomic
uncertainty, exemplified by a few key events, propelled a global trend of cautious investing.

• Following the pandemic, central banks tightened monetary policy by limiting access to
cheap capital, which resulted in interest rate hikes of more than 2.5 percentage points
[pps] in the US, UK, and Europe in 2022;
• Escalating geopolitical tensions (such as the conflict between Russia and Ukraine and
the decoupling of the US and China);
• Trade sanctions imposed by the US and Europe, which caused disruptions in global
supply chains; and
• Exposing irregularities in corporate governance throughout the tech-ecosystem
globally.
In accordance with the global recession, funding pace in India also slowed, with the overall
deal value falling from $38.5 billion to $25.7 billion between 2021 and 2022.

However, structural drivers of a positive economic outlook—such as large consumption

potential, inclusive growth fuelled by widespread digital adoption of the decentralized "India
Stack," effective fiscal and monetary policy discipline limiting inflationary growth, and
tailwinds from economic activity shifting away from China—enabled India to continue
demonstrating resilience to global headwinds.

Note: India Stack = Jan Dhan, Aadhaar, Mobile = JAM Trinity

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Stages of Venture Capital
The pre-seed stage
Pre-seed, or bootstrapping, is the phase that comes before obtaining venture money. During
this period, you establish your business and start developing a prototype of your good or service
to see if your idea has merit.

Currently, it is improbable that venture capitalists will offer funds in return for shares;
therefore, to establish your firm, you must rely on your own assets and relationships.

In the pre-seed phase, a lot of entrepreneurs look to founders with comparable experiences for
advice. You may start establishing a winning business model and a strategy for starting a
successful company by using the ideas in this article. Now is also the ideal moment to finalise
any contracts for partnerships, copyrights, or other legal matters that are essential to your
business. These problems can eventually become unsolvable, and no investor will give money
to a startup that has unresolved legal challenges.

The government of India launched the Startup India Seed Fund Scheme ("SISFS") to give
early-stage Indian entrepreneurs financial support. The SISFS seeks to close the funding gap
that early-stage and proof-of-concept firms encounter. Grants from SISFS are offered to
qualifying entrepreneurs via incubators located all over India.

The most common investors at this stage are:

• Startup founder
• Friends and family
• Early-stage funds (Micro VCs)

Additional Reading: https://inc42.com/resources/bridging-the-gap-the-need-for-pre-seed-vc-

funds-in-india/
Pre-Seed Funders: https://www.100x.vc/

The Seed Stage

At this point, business will be having some experience and shows promise for growing into a
thriving enterprise. To convince venture capitalists that the idea is a good fit for investment,
business need a pitch deck.
The majority of the little amounts you raise during the seed stage go towards particular
projects like:
• Market analysis Development of business plans
• Assembling a team of managers
• Creation of products
The idea is to raise enough money today to demonstrate to potential investors that you can
expand and become more established.

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Frequently, seed-stage venture capitalists will take part in multiple pitches for additional
investment rounds in order to bolster your credibility. It's likely that a representative of the
venture capital firm would sit on the board to oversee operations and make sure everything is
carried out as planned.

This may be the most expensive finance you can accept in terms of the equity you'll need to
give up to get the investment because VCs are taking on so much risk at this point.

The most common investors at this stage are:

• Startup owner
• Friends and family
• Angel investors
• Early venture capital

Series A
The first round of venture capital funding is called Series A. At this point, the company
typically has a pitch deck that emphasises product-market fit and has finished its business
strategy. Work in progress on improving the product, building a clientele, increasing marketing
and advertising, and have steady income flow.

At this stage entrepreneur need to:

• Adjust good or service.
• Increase the size of the team
• Perform any further research required to back up the launch.
• Get the money needed to carry out the concept and draw in more investors.

Business must have a long-term profit-generating plan in order to participate in the Series A
round. No matter how many ardent customers you may have, you still need to show off how
you plan to sustainably monetize your product.

The most common investors at this stage are:

• Accelerators
• Super angel investors
• Venture capitalists
• Corporate venture capital funds
• Family offices
Series B
Business in growth mode and looking for funds for expansion and activities related to product
manufacturing, marketing, and sales. At this stage, probably need to make a considerably
bigger capital expenditure than in the past in order to expand.

Funding for Series B is not like Series A. Investors in Series B want to see actual performance
and proof of a commercially viable product or service to support further financing, whereas
Series A investors will assess your potential. Investors can feel more confident that you and
your team can succeed on a bigger scale when they see performance numbers.

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Venture capitalists (VCs), corporate VCs, and family offices that offer Series B investing have
a focus on funding established firms. They are giving you the money you need to create
operational teams like marketing, sales, and customer service, as well as to open up new
markets. With Series B funding, you can:
• Grow your operations
• Meet customer demands
• Expand to new markets
• Compete more successfully

The most common investors at this stage are:

• Venture capitalists
• Corporate venture capital funds
• Family offices
• Late stage venture capitalists

Series C and beyond (Expansion stage)

Once the business reaches the Series C fundraising stage, it's time to grow. Business
succeeded, and further money will enable it to develop new goods, enter new markets, and
even buy out other firms.
Reaching this phase on a fast trajectory, when business is generating exponential growth and
steady profitability, usually takes two to three years.

To receive Series C and subsequent funding, you must be well-established with a strong
customer base. You also need:
• Stable revenue stream
• History of growth
• Desire to expand globally
Due to business track record of accomplishment, investors are willing to invest at Series C and
above because it reduces their risk. Investing at this stage is more attractive to hedge funds,
investment banks, private equity firms, and other non-traditional VC firms.

The most common investors at this stage are:

• Late-stage venture capitalists
• Private equity firms
• Hedge funds
• Banks
• Corporate venture capital funds
• Family offices

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The mezzanine stage
The last phase of venture capital is when business moves into a liquidity event, such an M&A
or going public exit. Business has grown up and now require funding to assist significant
occasions.

Reaching the mezzanine level, sometimes referred to as the pre-public or bridge stage, denotes
that company is fully formed and profitable.

It is now conceivable that many of the investors who have contributed to the success will decide
to sell their shares in order to realise a sizable return on their investment.

Late-stage investors can now enter the business in the hopes of profiting from an IPO or sale
as a result of the original investors exiting.

Going public — the IPO

An initial public offering, or IPO, is the next logical step up from venture capital. It involves
selling corporate shares for sale on the open market in order to make the privately held firm
publicly traded. This can be a very successful strategy for raising capital and compensating
early investors, such as the founder and team, for a well-established business or a burgeoning
startup with demonstrated potential.

To go public, business need to:

• Form an external public offering team of underwriters, lawyers, certified public

accountants and SEBI experts
• Compile all financial performance information and project future operations
• Have financial statements audited by a third party who’ll also generate an opinion about
the value of the public offering
• File the prospectus with the SEBI and determine a specific date for going public

Going public benefits include:

• An effective way to raise significant capital

• Secondary offerings will enable business to generate additional funds, typically used to
pay off original investors and early leadership team
• Public stock can be more attractive as a part of executive compensation and as an
employee benefit
• Mergers are easier because you can use public shares to acquire another company

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Venture Capital Process
Venture capitalists typically work for venture capital businesses that raise money from external
investors, unlike angel investors who invest their own money. High net-worth individuals,
large corporates, and investment firms like pension funds and insurance companies might be
included in this group of investors, referred to as limited partners.

Venture capitalists spend the money they raise on companies with the potential for rapid growth
or have already experienced impressive growth. The many stages of venture capital financing
correspond to the various stages of a company's development. Startups frequently go through
these phases as they develop and obtain funding from venture capital firms on various
occasions.

While some Venture capital firms specialize in a particular stage, others take a more general
approach and invest in businesses at many stages of the company's lifecycle. For instance, seed-
stage investors support the development of early-stage startups, whereas late-stage investors
support the expansion of established businesses. Numerous VC firms focus their investments
on a specific business or industry vertical.

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Businesses can frequently access substantial amounts of funding through Venture capital. They
can actively contribute to the company's success by making strategic (occasionally operational)
choices. Additionally, the proper investor brings value to the business by contributing their
knowledge, expertise, and contacts. An investor frequently requests to join the company's board
of directors as an official managing partner or board member as part of a venture capital
arrangement.

Regulatory framework of Venture Capital in India

Venture Capital in India governs by the SEBI Act, 1992 and SEBI (Venture Capital Fund)
Regulations, 1996. According to which, any company or trust proposing to carry on activity of
a Venture Capital Fund shall get a grant of certificate from SEBI.

SEBI (Venture Capital Funds) Regulations, 1996

• Definition of VCF – Section 2(m) of the Regulation, defines VCF as:
“Venture capital fund” means a fund established in the form of a trust or a company
including a body corporate and registered under these regulation which—
(i) has a dedicated pool of capital;
(ii) raised in a manner specified in the regulations; and
(iii) invests in accordance with the regulations;
• Definition of Venture Capital Undertaking – Section 2(n) of the Regulations define VCU as:
“venture capital undertaking” means a domestic company—
i. whose shares are not listed on a recognized stock exchange in India;
ii. which is engaged in the business for providing services, production or
manufacture of article or things or does not include such activities or sectors
which are specified in the negative list by the Board with the approval of the
Central Government by notification in the Official Gazette in this behalf.
• Application for grant of certificate to be made to the Board in Form A along with nonrefundable
application fees. The Board may grant the certificate of incorporation in Form B
Obligations of Venture Capital fund:
• Venture Capital fund shall not carry out any other activity than that of venture capital fund
• Venture capital shall disclose investment strategy at the time of making investments
• VCF shall disclose the duration of the life cycle of the fund
• VCF shall not get its units listed on any recognized stock exchange till the expiry of three years
from the date of issuance of units by VCF
• VCF cannot invite offers from the public for subscribing for its units and shall only receive
monies by the way of private placement of the units
• VCF shall enter into the placement memorandum and subscription agreement which contains
terms and conditions subject to which monies is proposed to be raised from the investors. A copy
of the placement memorandum and subscription agreement will be placed with the Board along
with the actual money collected
• VCF shall maintain its books of accounts, records and documents for a period of 8 years
Minimum Investment in Venture Capital:
• Venture Capital Fund may raise money from Indian, foreign, non-resident Indian, by way of
issue of units
• Investments below Rs.5 lakhs from any investor shall not be accepted other than employees,
principal officer, directors of venture capital fund or employees of fund manager or asset
management company

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• Venture capital fund shall invest minimum of Rs.5 crores in each of the schemes launched orfund set
up

Restrictions on Investments

Note: As per SEBI (Venture Capital Fund) (Amendment) Regulations, 2010, a VCF can also make
investments in the securities listed on the SME exchange
Winding up: Intimation of the winding up of a scheme should be given to the Board
Scheme of VCF can be wound up in the following circumstances:
• In case of trust
o Period of scheme mentioned in the placement memorandum is over
o In the opinion of the trustees and in the interest of the investors scheme should be wound
up
o 75% of the investors in the scheme pass a resolution that the scheme should be wound up
• In case of company: wound up in accordance with the provisions of the Companies Act, 1956
• In case of a body corporate: wound up as per the statute under which it is incorporated

SEBI (Foreign Venture Capital Investor) Regulations, 2000

Registration: Application to be made to the Board in Form A with the application fee. The
applicant should be granted the necessary permission by RBI to make investments in India. The
certificate of registration is granted in Form B by the Board
• Investment criteria:
o Investor shall disclose his investment strategy
o Can invest all his funds in one venture capital
• Obligations:
o Maintain books of account and records for a period of 8 years
o The foreign investor shall appoint a custodian for custody of the securities
Custodian shall monitor the investment
Furnish periodic reports to the Board
Furnish information as required/ called for by the Board
o enter into an agreement with a designated bank for operating the foreign currency
account

Functioning Of venture capital funding agencies in India

Venture capital firms play a crucial role in fuelling innovation, providing financial support, and
nurturing the growth of promising businesses. Indian VC firms spans a wide array of sectors.
Whether your company is at the seed stage or is currently in the growth phase, you may find
the perfect investor among these options.

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The top 10 venture capital firms in India
Highlighting their impact on the startup ecosystem and their contributions to shaping India’s
entrepreneurial future.

Peak XV Partners

Formerly known as Sequoia India & SEA, Peak XV Partners is the leading venture capital and
growth investing firm across India, South East Asia & beyond.
The company focuses on “shaping the outlier founders” and boosting startups that can
significantly impact the world.
In the last 17 years, Peak XV has expanded its portfolio to oversee $9 billion in capital
distributed across 13 funds. Peak XV has made investments in over 400 companies, from
which 40 of them have unlocked revenue milestones exceeding $100 million.
The company has partnered with over 50 unicorns including OYO, Pine Labs, Ola, Grofers,
Groww, CarDekho Go Colors etc.
Peak XV makes strategic investments at the seed level, works closely with the founders who
are at the threshold of building an enduring company and provides mentorship to startups in
the earliest stages of building their brands.

Gemba Capital
Gemba Capital is one of the venture capital firms that backs scalable post-seed, pre-seed &
seed-stage companies and startups. Primarily, this firm focuses on tapping consumer
technology, software as a service, fintech & deep tech. Gemba focuses on investing in three
things: Founder, Market and product.

Lightbox

Lightbox is the venture capital company behind Dunzo, Melorra. The company selects a
handful of entrepreneurs and engages with them to transform an initial concept into a
flourishing enterprise by sharing challenges, and successes along the way. Lightbox supports
sustainable businesses that are built on rock-solid foundations.

Matrix Partners India

Matrix Partners India is an investment firm targeting the Indian enterprise and consumer market
at the seed, early and growth stages. The company has a diverse portfolio including startups
like Ola Electric, Razorpay, and Mswipe, highlighting their interest in technology-driven
ventures.

Agility Ventures

Based out of Gurugram, Agility Ventures acts as a platform for startup investors who are
searching to invest in early-stage businesses and accumulate returns for themselves.

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Established and led by seasoned angel investors and financial management experts mission is
to simplify startup investing to the level of investing in a mutual fund.

Lightspeed India Partners

Lightspeed Venture Partners is a multi-stage venture capital firm. The company engages in both
domestic and international investments, spanning a wide range of investment stages and
industry sectors. Their investment portfolio includes technology-driven enterprises as well as
non-technology ventures in fields such as advertising, media, business services, financial
services, healthcare, education, and retail.

Ankur Capital

Ankur Capital is known to be an early-stage investor in digital and deep science tech
companies. The firm has a keen interest in backing startups based on Healthtech, and Agritech
industries and supports passionate founders using technology to push the boundaries further.
The firm invests in most of the stages such as convertible notes, early-stage ventures, seed
funding & venture capital etc.

Kae Capital
Founded in 2012, Kae Capital is a pioneer of early-stage investing in India. In terms of funding,
this company is a sector-agnostic that invests in pre-seed to pre-series A stages. Kae’s portfolio
has a blend of B2B & B2C startups such as Tata 1 MG (Health tech), Porter (Logistics Tech),
Hatica (Engineering Analytics Startup) etc.

Kalaari Capital

Kalaari Capital is an early-stage, technology-focused venture capital firm based out of

Bengaluru, India. This firm focuses on backing entrepreneurs who can create innovative
solutions that can transform everyday lives, work environments, and consumption habits.
Kalaari chooses to park investment in sectors such as Healthcare, Education, Technology
Fintech etc.

Omidyar Network India

Omidyar Network India is one of the renowned investment firms that partners with bold &
purpose-driven entrepreneurs. Their focus is on investing in ideas that have the power to
advance digital society, improve urban development, enhance education etc.

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Global Top 15 Venture Capital Firms
1. Sequoia Capital

AUM: $28B Location: Menlo Park, CA

Most famous of all the VC firms, the mere mention of Sequoia Capital as the lead investor has
a tendency to bring other investors onto the ticket. They rarely get it wrong. Famous
investments include Apple, Cisco, Google, Instagram, LinkedIn, PayPal, WhatsApp, and
Zoom.

2. Andreessen Horowitz

AUM: $35B Location: Menlo Park, CA

Despite having a name that’s associated with some of the biggest names in
technology, Andreessen Horowitz is a relatively new player on the block, having only been
founded in 2009. Big investment successes for the firm include Facebook, Groupon, Twitter,
and Zynga.

3. Kleiner Perkins

AUM: $6.8B Location: Menlo Park, CA

Kleiner Perkins celebrates 51 years in 2023, and over the past half-century has achieved some
notable successes. These have included America Online, Amazon, Electronic Arts, Google,
Netscape, Sun Microsystems, and Compaq. In total, the company has been an early investor in
close to 1,000 technology companies.

4. Khosla Ventures

AUM: $15B Location: Menlo Park, CA.

Khosla Ventures is closely associated with Kleiner Perkins, having been established in 2004
by Vinod Khosla, a former general partner at KP. In addition to providing funding for
technology firms, Khosla Ventures also invests in cleantech. Its notable investments include
Stripe, instacart, DoorDash, and Square.

5. Battery Ventures

AUM: $13B Location: Boston, MA

Founded 40 years ago in 1983, Battery Ventures is the signature VC firm for Boston. It invests
in application and infrastructure software, consumer, industrial technology, and life sciences.
Its high-profile investments include CoinBase, Databricks, Glassdoor, and Groupon.

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6. New Enterprise Associates (NEA)

AUM: $20B Location: Chevy Chase, MD

Although NEA does have a presence in Menlo Park, like most on this list, its Maryland base
makes it an outlier. That said, its age - coming up 50 years now - makes it a go-to for many
new startups. Its higher-profile deals have included Patreon, Plaid, Upstart, and UpWork.

7. Founders Fund

AUM: $11B Location: San Francisco, CA

Founders Fund is inextricably linked with the names behind it, most notably Peter Thiel and
Sean Parker, themselves the founders of firms such as Napster, OpenAI, Palantir, and PayPal.
In addition to its most notorious investment, Facebook, Founders Fund investments include
Airbnb, Deepmind, SpaceX, Stripe, Spotify, and Lyft.

8. First Round Capital

AUM: $3B Location: San Francisco, CA

First Round differentiates itself from most of the bigger VC firms on the west coast in that its
modus operandi is to invest at the seed stage. It openly states on its website that Series B and
C firms are already too old for their investments. Blue Apron, Rover, Uber, and WarbyParker.

9. Accel

AUM: $50B+ Location: Palo Alto, CA

Another high-profile VC firm founded in 1983, Accel’s success in California enabled it to

spread its wings and open offices in Europe and China. It maintains a broad scope of
investments that cover everything from consumer to infrastructure. Its high-profile investments
include Etsy, Rovio, Braintree, and Atlassian.

10. Greylock Partners

AUM: $3.5B Location: Menlo Park, CA

The oldest firm on the list is closing in on 60 years. Greylock’s ability to continuously
rejuvenate and evolve its investment strategy is a testament to its management team, which
includes Reid Hoffman, a co-founder of LinkedIn. Its high-profile investments include
Facebook, Figma, Discord, and CoinBase.

11. Tiger Global Management

AUM: $125B Location: New York, NY

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Although Tiger Global is not only a venture capital fund – it also operates in private equity,
hedge funds, and other forms of investment – it has been the most prolific of any US venture
capital fund since before the beginning of the pandemic. Its high-profile investments include
Chime, Data Bricks,

12. Index Ventures

AUM: $13B Location: San Francisco, CA

Index Ventures is more commonly known as a European VC firm, but it has two headquarters,
one of which is in San Francisco. Founded nearly 30 years ago in 1996, it invests in technology
with a focus on e-commerce, fintech, mobility, gaming, infrastructure, and security. Among its
more well-known investments are Betfair, MySQL, Facebook, and Zendesk.

13. Softbank Vision Fund

AUM: $154B Location: London, UK

There was a time, about five years ago, when it looked like any new technology-based company
with good prospects was nobody unless Softbank Vision Fund had invested in them. Several
dud investments later, the shine may have worn off somewhat, but the scale of Softbank’s
operations still makes it a venture capital fund to be reckoned with. Famous investments
include ByteDance, DoorDash, Revolut, and WeWork.

14. Lightspeed Venture Partners

AUM: $18B Location: Menlo Park, CA

Lightspeed Venture Partners was founded in 2000, just as the world of venture capital was
hurtling toward the dot-com crash. After riding out that highly turbulent period, it grew
considerably, focusing on multi-stage investments in enterprise, consumer, and health. Well-
known investments by Lightspeed include Grubhub, Flixster, Cameo, and Giphy.

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15. Spark Capital

AUM: $5B Location: San Francisco, CA

Spark Capital was founded in 2005 with a broad mandate to invest in early-stage consumer,
commerce, FinTech, software, frontier, and media companies. The company admits that it has
been effective in using project management software, like DealRoom, to provide all partners
with an overview of each deal, not just the partner assigned to the deal. Its well-known
investments include Twitter, Tumblr, Oculus, and Snap.

Financing Strategy: Hybrid securities

A hybrid security is a single financial
security that combines two or more
different financial instruments.
Hybrid securities, often referred to as
"hybrids," generally combine both
debt and equity characteristics. The
most common type of hybrid security
is a convertible bond that has features
of an ordinary bond but is heavily
influenced by the price movements of
the stock into which it is convertible.

Hybrid securities are bought and sold

on an exchange or through a brokerage. Hybrids may give investors a fixed or
floating rate of return and may pay returns as interest or as dividends. Some hybrids
return their face value to the holder when they mature and some have tax
advantages.

Convertible & Non-Convertible Debentures

One kind of long-term corporate loan that an issuer obtains from investors on the open market
is called a debenture. Debenture holders, or owners, are the issuer's creditors because the bond
is a contract between the issuer and investors.

As collateral is not required for issuance, it falls under the category of unsecured bonds. The
only factors supporting the debenture are the issuer's creditworthiness, standing, and track
record of steady cash flow. Because of this, these bonds are typically offered by reputable
issuers whose capacity to pay back creditors is undeniable.

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Additionally, by drawing investors in solely on the basis of their creditworthiness, issuers are
able to offer lower interest rates. Nevertheless, compared to other fixed-income securities such
as bank fixed deposits (FDs) and secured bonds, debentures continue to offer greater interest
rates.

Debentures may also be issued by smaller issuers or issuers with a weaker credit grade. To
offset the extra risk involved with these debt instruments, they will need to provide higher
interest rates in order to draw in investors.

Debentures with a fixed interest rate can be issued by governments as well as corporations. A
debenture, like other bonds, has fixed-period interest payments, also known as coupon
payments.

The maturity period of most debentures is five to 10 years. However, since it is “marketable”
security, holders can sell it to other parties before this period elapses. Debentures appear on
company balance sheets in the liabilities section.

A debenture is a suitable long-term funding option for companies that:

• Don’t want to issue new shares and dilute their existing equity
• Are unwilling to tie up their assets to back up the bond issue
• Don’t have collateral to obtain a traditional secured loan

Debentures can be categorised in a number of ways. The transfer mechanism is one way. A
registered debenture is one whose transfer needs to be coordinated through a clearinghouse. It
is noted in the debenture holders' registry maintained by the corporation.

In order for the issuer to pay interest to the appropriate holder, the clearing facility notifies
them of any changes in ownership. A bearer (owner) debenture, on the other hand, is not
registered with the issuer and entitles the holder to interest just by virtue of holding the bond.

Debentures can also be categorised as redeemable or irredeemable. The issuer of irredeemable

or perpetual debentures is not required to pay back the bondholder in full by a specific date.
Redeemable debentures require the issuer to pay back the entire amount owed by the bond's
maturity date.

Convertibility is a third approach of categorization. After a predetermined amount of time and

within the guidelines outlined in the debenture certificate, a convertible debenture may be
converted into equity shares of the issuer. It is not possible to convert a nonconvertible
debenture (NCD) into equity.

Deep Discount Bonds

When a bond is sold for a substantial amount less than its par value, it is said to be at deep
discount. Specifically, these bonds have a yield that is substantially higher than the going rates

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for fixed-income instruments with comparable profiles and sell at a discount of 20% or more
to par. Deep-discount bonds are typically long term, with maturities of five years or longer.

Secured Premium Notes

A firm may offer different types of securities to the public in order to raise money to meet its
short- and long-term financial demands. A business may choose to issue securities in order to
raise money for expansion, debt repayment, or startup costs. It might also require a fresh
perspective and expertise in management. A larger pool of owners can obtain these. By
purchasing securities, also known as shares, an investor makes it possible for the business to
operate stress-free with the money supplied.

Secured premium notes are one such financial instrument that a business might use to raise
financing. The articles that follow explain which notes are secured premium ones.

SPN is a type of warrant-attached non-convertible debenture (NCD). Companies are able to

issue it with a four- to seven-year lock-in period. This indicates that after the lock-in period,
an investor can redeem his SPN. After the specified lock-in period, SPN holders will receive
their principle amount plus interest on an installment basis. Nevertheless, interest is not paid
during the lock-in period.

SPNs, then, are essentially share warrants that can only be issued by listed firms with central
government approval. SPN is a hybrid security, meaning it incorporates elements of both debt
and equity instruments.

Features of a SPN

• SPN instruments are issued with a detachable warrant.

• These instruments have lock-in-period for 4 to 7 years.
• No interest is paid during the lock in period.
• After the lock-in-period, the holder may sell back the SPN to the company.
• The detachable warrants are convertible into equity shares provided the secured
premium notes are fully paid.
• The conversion of detachable warrants into equity has to be done within the specified
time.

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Preference shares
To raise money, a business issues preference shares. Preference shares, also known as
preference stock, signify ownership in the business. The money raised is included into the
capital of the preference shares. With regard to the company's capital and assets, these
shareholders have preference over common shareholders. Dividends are paid to them ahead of
equity stockholders. In addition, they are entitled to the company's assets before normal
shareholders are.

Types
1. Cumulative preference share
Cumulative preference shares entitle the shareholder to dividend payouts even when it is not
making profits. As the name suggests, the company pays due dividends to the shareholders
when it has earned profits. The payouts to preference shareholders must be made before the
common shareholders receive payouts. Sometimes an additional payout is awarded to the
holders of these preference shares.
2. Non – cumulative preference shares

These are the type of shares where the company can decide if the shareholders are to receive
dividends and not receive omitted or pending dividends. The shareholders do not have a right
to claim dividends. Profits are used to pay dividends.
3. Participating preference shares

In this case, the shareholders can demand a surplus on the dividend if the dividend paid out to
the common shareholders is greater than the predetermined amount. If the company is
liquidated the Participating preference shareholder can demand a share of the surplus profits
thus gained.
4. Non-Participating preference share
The shareholders of these preference shares will only get pre-determined dividends. They will
not get a share from surplus profits.
5. Redeemable preference shares

These shares can be redeemed by the company at a predetermined rate and time. These provide
an antidote to inflation for the companies.
6. Non-redeemable preference shares

These preference shares cannot be redeemed by the company in its lifetime. They can be
redeemed only when the company is closing down.
7. Convertible preference shares

These shares can be converted to equity shares by the shareholder after a certain period at a
fixed rate.

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8. Non-convertible preference shares

These shares that cannot be converted to equity shares are called non-convertible preference
shares. They get fixed dividends when the company exists and preferential dividend pay-out
when the company is dissolved.

Convertible Preferred Shares

Convertible preferred shares give the assurance of a fixed rate of return plus the opportunity
for capital appreciation. Convertible preferred shares are fixed-income securities.

The price of convertible preferred shares is not affected by market fluctuations. They provide
a fixed return that is established at the time of purchase, just like bonds. But unlike bonds, the
investor has the option to convert them, at a certain period of time, into shares of the company's
common stock.

This creates two benefits to investors:

• The fixed-income component offers a steady income stream and some protection of the
invested capital.
• The option to convert these securities into stock allows the investor to gain from a rise
in the share price.

Option Financing
In finance, an option is a contract which conveys to its owner, the holder, the right, but not the
obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified
strike price on or before a specified date, depending on the style of the option.

Warrants
A warrant is an agreement that gives a startup capital source the right to purchase firm stock
at a price set when the warrant is issued or in the subsequent funding round. Warrants are
used in both debt and equity financing.
A significant number of venture financing lenders demand stock warrants and anticipate that
warrants will account for around half of their total returns (with interest payments making up
the remaining half). The warrant may be quite valuable to the lender if your startup succeeds.

A warrant operates in a manner similar to an employee incentive stock option. If the price of
the company's stock rises much beyond the warrant holder's allowed purchase price, they
could soon see a significant return from their stock.

Warrant coverage, as used in venture debt transactions, refers to the contractual arrangement
between an investor and a startup that specifies the number of shares the investor may buy,
expressed as a percentage of the capital they invested, as well as the predetermined price at
which they may do so by a future date.

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In venture debt transactions, warrant coverage typically varies between 10% and 20%. The
fixed price, which is also known as the striking price or exercise price, is only good for a
finite amount of time, which can be one to fifteen years.

Convertible
Convertible loans are private financing agreements – not bond securities – entered into between
investors and the start-up, whereby investors undertake to finance the start-up and, on the other
hand, the start-up undertake to repay the financing (even partially) with accrued interest and/or
to convert it (in whole or in part) into equity, after a certain period of time or when some
circumstances are met. Unlike the bond securities, such agreements do not require specific
formalities to be executed and are not subject to a special regulation. Such financing
agreements usually include provisions on the conversion proceeding, setting the relevant terms,
conditions and modalities: for instance, parties may agree that accrued interests shall be also
converted into equity, or that the conversion will take place when new investors come in and
by applying to first investors a discount to the pre-money valuation defined with new investors.

Exchangeable
An exchangeable security is an asset that can be traded at a future date for a specified number
of shares of common stock or, in some cases, its cash equivalent. The asset is usually a debt
security.

Alternative Source of Financing & Role of Valuation

With the ever-evolving Financial Sector all over the world and continuous improvements in
FinTech (Financial Technology), there is no more relying only on traditional sources of
finances such as bank loans, invoice discounting, overdrafts, and private equity.

Many more alternatives are available through which finances can be arranged. These are called
alternate sources of Finance.

1. Venture Capital (VC):

• Description: Venture capital involves investment from
specialized firms or individuals (venture capitalists) in
exchange for equity ownership in a company. It is
common in high-growth industries such as technology
and biotechnology.
• Pros: Provides substantial capital for businesses with high
growth potential. Additionally, venture capitalists often
bring valuable expertise, mentorship, and industry
connections.
• Cons: Companies typically need to give up a significant
portion of equity, and there may be pressure to achieve
rapid growth and profitability.

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2. Angel Investors:
• Description: Angel investors are affluent individuals who
invest their personal funds in startups or small
businesses in exchange for ownership equity or
convertible debt.
• Pros: Offers funding and mentorship from experienced
individuals. Angel investors may be more flexible than
traditional lenders.
• Cons: Like venture capital, ownership dilution is a
concern. Additionally, finding the right angel investor can
be time-consuming.
3. Crowdfunding:
• Description: Crowdfunding platforms enable businesses
to raise small amounts of money from a large number of
individuals, often through online campaigns.
• Pros: Broad access to funding, validation of the product
or idea, and potential for building a community of
supporters.
• Cons: Success depends on effective marketing, and fees
charged by crowdfunding platforms may reduce the
overall amount received.
4. Peer-to-Peer (P2P) Lending:
• Description: P2P lending connects borrowers directly
with individual lenders through online platforms, cutting
out traditional financial intermediaries.
• Pros: Fast access to funds, flexible terms, and potentially
lower interest rates than traditional loans.
• Cons: Interest rates may be higher than those offered by
banks, and approval depends on individual lenders’
assessments.
5. Invoice Financing:
• Description: Businesses use their outstanding invoices as
collateral to secure a loan, receiving a percentage of the
invoice amount upfront.
• Pros: Improves cash flow by providing immediate access
to funds tied up in invoices.
• Cons: Costly compared to traditional financing, as fees
are associated with invoice financing.
6. Factoring:
• Description: Similar to invoice financing, factoring
involves selling accounts receivable to a third party

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 (factor) at a discount, transferring the responsibility of
collecting payments.
• Pros: Immediate cash flow, and the risk of non-payment
is transferred to the factor.
• Cons: Businesses receive less than the full invoice
amount, as factors charge a fee.
7. Asset-Based Lending:
• Description: Loans secured by a company’s assets, such
as inventory, equipment, or accounts receivable.
• Pros: Allows businesses to leverage assets for financing
without diluting ownership.
• Cons: The risk of losing assets if the business defaults on
the loan.
8. Grants and Subsidies:
• Description: Non-repayable funds provided by
government agencies, non-profits, or private foundations
to support specific projects or initiatives.
• Pros: No repayment required, providing financial support
without adding to debt.
• Cons: Highly competitive, with specific eligibility criteria
and often stringent reporting requirements.
9. Corporate Bonds:
• Description: Companies issue bonds to raise capital by
borrowing money from investors, who receive periodic
interest payments and the return of principal at maturity.
• Pros: Allows companies to access large amounts of
capital, and interest payments may be tax-deductible.
• Cons: Companies must make regular interest payments,
and the principal must be repaid at maturity.
10. Mezzanine Financing:
• Description: A hybrid of debt and equity financing,
providing capital with the option to convert into equity.
• Pros: Balances the benefits of debt and equity financing,
offering flexibility and potential for high returns.
• Cons: Higher interest rates and the risk of equity dilution
if the conversion option is exercised.
11. Private Placements:
• Description: Companies raise capital by selling shares
directly to institutional investors or high-net-worth
individuals, bypassing the public market.
• Pros: Access to substantial capital without the regulatory
requirements of going public.

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 •Cons: Limited liquidity for investors, and the need to
comply with securities regulations.
12. Supplier Financing:
• Description: Businesses negotiate extended payment
terms with suppliers, effectively using the supplier’s credit
as a short-term financing solution.
• Pros: Improves cash flow and allows businesses to
manage working capital effectively.
• Cons: May strain relationships with suppliers if not
handled carefully.

Role of Valuation
An objective valuation may be useful when negotiating with banks or any other potential
investors for funding. Documentation of a company's worth, and its ability to generate cash
flow, enhances credibility to lenders and equity investors.

When valuing a company as a going concern, there are three main valuation techniques used
by industry practitioners: (1) DCF analysis, (2) comparable company analysis, and (3)
precedent transactions. These are the most common methods of valuation used in investment
banking, equity research, private equity, corporate development, mergers & acquisitions
(M&A), leveraged buyouts (LBO), and most areas of finance.

As shown in the diagram above, when valuing a business or asset, there are three different
approaches one can use. The asset approach calculates the fair market value of individual
assets, often including the cost to build or cost to replace. The asset approach method is useful
in valuing real estate, such as commercial property, new construction, or special-use
properties.

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Next is the income approach, with the discounted cash flow (DCF) being the most common. A
DCF is the most detailed and thorough approach to valuation modeling.

The final approach is the market approach, which is a form of relative valuation and is
frequently used in the finance industry. It includes comparable company analysis and precedent
transactions analysis.

Boot – strapping
The term bootstrapping refers to a situation in which an entrepreneur starts a company with
little capital. When an individual bootstraps, they rely on money other than outside
investments. An individual is said to bootstrap when they attempt to establish and build a
company from personal finances or the operating revenues of the new company.
Pros

• May give an owner greater control of the company

• Cost avoidance measures help reduce business expenses
• Lower barrier of entry
• Places a heightened emphasis on business operations
Cons

• Increases financial risk as a company may not be able to cover emergency or

unexpected costs
• Requires a company to operate with limited resources
• May diminish how customers, suppliers, or investors view the company

Examples of Bootstrapping
Many companies start with humble beginnings and limited resources. One example is Jeff
Bezos' personal software development for Amazon (AMZN), which operated out of his garage
with just a handful of employees when it sold its first book in 1995.
Other founders take even more non-traditional routes to finance their companies. GoPro
founder Nick Woodman reportedly borrowed $35,000 from his mother and went as far as to
use her sewing machine to craft early designs of GoPro devices.
A more popular and sensationalized means of bootstrapping was Meta's (META) humble
beginnings. Mark Zuckerberg launched the social media site Facebook in 2004 from his
college dorm room.

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https://startuptalky.com/successful-bootstrapped-startup-india/

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Angel Funding
Angel financing refers to an investment model wherein "business angels" – essentially, high
net worth individuals – provide financial backing for small businesses in exchange for equity
in the company. Angel financing can be a one-time investment, or it can refer to ongoing
support. Generally, angel financing is high risk, high reward, as angel investors tend to seek a
more favourable return rate than would be provided via traditional investment opportunities.

Top Angel Investor Platforms in India

Hyderabad Angels, Angellist India, Indian Angel Network, Calcutta Angels, Let's Venture,
Lead Angels, Mumbai Angel Network, Chennai Angels, Venture Catalysts, Ah! Ventures are
the Top 10 Angel Investing Platforms in India.

Angel Funding vs VC
Angel investors are affluent individuals who invest their own money into startup ventures,
whereas venture capital (VC) investors are employed by a risk capital company (where they
invest other people's money).

External Commercial Borrowings (ECB)

External Commercial Borrowings are commercial loans widely used by eligible resident
entities who raise ECBs from recognised non-resident entities. ECBs should adhere to the
criteria like minimum maturity period, maximum all-in-cost ceiling, permitted and non-
permitted end-uses, etc. ECBs are governed by the Foreign Exchange Management Act
(FEMA) Notification No. 3R & 8.

Draw-down with respect to an ECB is possible only after getting a Loan Registration Number
(LRN) from the Reserve Bank. Changes in ECB specifications, in agreement with the ECB
norms, should be reported to the RBI at the earliest by way of Revised Form ECB. In any case,
the reporting should be made not later than 7 days from the changes effected. Also, the changes
should be mentioned explicitly in the communication while submitting Revised Form ECB.

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ICICI Bank has a comprehensive set up in place for Capital Account Transactions. The
experienced team at ICICI Bank offers you numerous services for smooth end-to-end
processing of your ECB transactions. Leave all hassles of pre and post-transaction with us and
watch your funds getting credited. You can raise ECB in INR or any freely convertible Foreign
Currency. ECBs can be raised under the automatic route as well as the approval route, under
the ECB framework.

An mechanism used in India to help Indian enterprises raise money outside the nation in foreign
currency is called an external commercial borrowing (ECB). The Indian government allows
Indian corporations to raise capital through the ECB for both new investment and capacity
development.

Additional external funding sources that fall under this category are FCEBs and FCCBs.
Foreign currency convertible bonds are issued to raise capital, but the term "ECB" refers to
commercial loans obtained from non-resident lenders with a minimum average maturity of
three years. These loans can include bank loans, bonds, securitized instruments, purchasers'
credit, and suppliers' credit.

ECB can be obtained automatically or through a permission-based process. The government

has approved specific eligibility standards regarding industry, amounts, end-use, etc. for the
automatic route. A corporation can raise capital without requiring prior approval if it meets all
the required standards.

Before borrowing through ECB, borrowers must obtain express approval from the government
or Reserve Bank of India (RBI) for certain pre-specified sectors. These borrowing regulations
are outlined in official circulars and recommendations published by the RBI.

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Challenges In Raising Capital during Expansion &
Restructuring
Start-ups face varied issues when raising funds, including limited resources, lack of collateral, unproven
business models, and long and complicated application processes.

1. Limited access to investors

2. Lack of traction or proven market demand
3. Valuation and negotiation
4. Lengthy due diligence process
5. Market volatility and economic conditions

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