NOTION OF VENTURE CAPITAL

 Venture capital (VC) is a significant financial innovation of

the twentieth century.

 Venture capital is the investment of long-term equity finance

where the venture capitalist earns his return primarily in the
form of capital gains.

 The underlying assumption is that the entrepreneur and the

venture capitalist would act together in the interest of the
enterprise as ‘partners’.
 Features of Venture Capital
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 Equity Participation.
 Long-term Investments.
 Participation in Management.

Venture capitalist combines the qualities of

bankers, stock market investors and
entrepreneur in one.
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Stages in Venture
Financing
 THE BUSINESS PLAN
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 The first step for a company (or an entrepreneur) proposing a

new venture in obtaining venture capital is to prepare a
business plan for the consideration of a venture capitalist.

 The business plan should explain the nature of the proposed

venture’s business, what it wants to achieve and how it is
going to do it.
 Cont…
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 The length of the business plan depends on the particular

circumstances.

 Itshould use simple language and all technical details should

be explained without jargons.
 Essential Elements of a Business plan
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1. Executive summary
2. Background on the venture
3. The product or service
4. Market analysis
5. Marketing
6. Business operations
7. The management team
8. Financial projections
9. Amount and use of finance required and exit
opportunities
 What does a Venture Capitalist Look for
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in a Venture?
 Superior businesses
 Quality and depth of management
 Corporate governance and structure
 Appropriate investment structure
 Exit plan
 Deal origination 8

Screening

Evaluation (due diligence)

Deal structuring

Post-investment activity

Exit plan

THE PROCESS OF VENTURE CAPITAL FINANCING

 Venture Capital Investment Process
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 Methods of Venture Financing
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 Equity
 Conditional Loan
 Royalty
 Income Note
 Combines conventional loan and conditional loan
 Other Financing Methods
1. Participating Debentures – 3 stage interest (no
interest, low and high)
2. Partially Convertible Debentures
Cumulative Convertible Preference Shares
(no voting right, but if no dividend for 2 years
they will get voting right)
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 4. Deferred Shares (rights deferred for a certain years)

 5. Convertible Loan Stock (unsecured long term loan)
 6. Special Ordinary Shares (with voting rights but no
dividend)
 7. Preferred Ordinary Shares (with voting rights,
modest dividend and share in profit)
 Disinvestment Mechanisms
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 Buyback by Promoters
 Initial Public Offerings
 Secondary Stock Market
 Management Buyouts
DEVELOPMENT OF VENTURE CAPITAL IN INDIA
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 The concept of venture capital was formally introduced in India

in 1987, when the government announced the creation of a
venture fund, to be operated by the Industrial Development Bank
of India (IDBI).
 VCFs in India can be categorized into the following four groups:
1. VCFs promoted by the central (federal) government-controlled
development finance institutions
Risk capital and Technology Finance corporation Ltd, IFCI, IDBI
2. VCFs promoted by the state (federal) government-controlled
development finance institutions
Gujarat Venture Finance Company ltd (GVFCL), APVCL, APSFC
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1. VCFs promoted by the public sector banks

1. Canfina by canara bank, SBI cap by SBI
2. VCFs promoted by the foreign banks and private sector
companies and financial institutions
Indus Venture fund, Credit capital venture fund and Grinlays India
Development fund
 Future Prospects of Venture Financing
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 Rehabilitation of sick units.

 Assist small ancillary units to upgrade their
technologies.
 Provide financial assistance to people coming out
of universities etc.
 VCFs can play a significant role in the service
sector including tourism, publishing, health care,
etc.
 Success of Venture Capital
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 Entrepreneurial Tradition
 Unregulated Economic Environment
 Disinvestment Avenues
 Fiscal Incentives
 Broad Based Education
 Venture Capital Managers
 Promotion Efforts
 Institute Industry Linkage
 R&D Activities