VENTURE CAPITAL FINANCING

 BASIC CONCEPTS
 DEVELOPMENT IN INDIA

 NEED FOR VC

 STAGES OF VENTURE CAPITAL

FINANCING
 ADVANTAGES

 DISADVANTAGES

 PITFALLS TO BE AVOIDED

 CASE STUDY
 Venture capital is a type of private equity capital
typically provided for early-stage, high-potential,
growth companies in the interest of generating a
return through an eventual realization event such as
an IPO or trade sale of the company.
 Venture capital investments are generally made as
cash in exchange for shares in the invested company.
 Venture capital finance is often used as “the early
stage financing of new and young enterprises
seeking to grow rapidly”.
 A venture capitalist is a person or investment firm
that makes venture investments, and these venture
capitalists are expected to bring managerial and
technical expertise as well as capital to their
investments.
 A venture capital fund refers to a pooled
investment vehicle that primarily invests the
financial capital of third-party investors in
enterprises that are too risky for the standard
capital markets or bank loans.
 Venture IPO or
New trade for
company capitalists company
DEVELOPMENT IN INDIA
 This concept was introduced in India in 1987.
 It was operated by “Industrial Development bank of
India”.
 In the same year “Industrial Credit and Investment
Corporation of India” had also started venture capital
activity.
 Government started levied 5% cess on all payments
related to venture fund.
VENTURE CAPITAL FUND IN INDIA CAN
BE CATEGORISED INTO FOLLOWING
FOUR GROUPS
 VCF’s are promoted by-

State
Central Government Public Sector
GVFL(Guj
government Banks Foreign
arat
IFCI(In Venture Canfina Banks and
dustrial Capital by
Finance Finance Canara
Private
Corpora Limited)
Bank Sector
PIVF(Punja
tion of b Info tech SBI Cap Banks
India) Venture by SBI
Fund)
WHY COMPANIES NEED FINANCING?

 For start-ups or growing companies, as well as those facing a

major change, financing is one of the key business issues.
 New capital is needed e.g. for

1. Financing of product development

2. Financing of market penetration
3. Financing of investments
4. Working capital financing to secure operative continuity
5. Maintaining liquidity to be able to cover daily payments
FEATURES OF VENTURE CAPITAL

 EQUITY PARTICIPATION:
Venture financing is potential equity participation through
direct purchase of shares, options or convertible securities.
However, it can also be made in the form of convertible debt
and therefore, it is not exclusively equity investment.

 LONG-TERM INVESTMENT
Venture financing requires long-term investment attitude that
necessitates the venture capital firms to wait for a long period
say 5 to 10 yrs, to make large profits.
 PARTICIPATION IN MANAGEMENT
It ensures continuing participation of the venture
capitalist in the management of entrepreneur’s business.
It also provides business skills to the investee firms
which is termed as “hands on” approach.

 HIGH RISK RETURN

Some of the ventures yield very high profitable returns.
The returns are essentially through capital gains at the
time of exits from disinvestments in the capital market.
 PRIVATE EQUITY
Private equity can be used to develop new products and
technologies, to expand working capital, to make
acquisitions, or to strengthen a company's balance sheet.

 WIDE SCOPE
Technology finance is a sub-set of VC financing.
Besides financing high-technology oriented companies,
it also involves financing of small and medium sized
firms until they are established.
STAGES OF VENTURE CAPITAL
INVESTING
Depend upon :
 Time scale

 Risk perceptions

 Investment decision process

Divided into:
 Early stage financing

a) Seed stage/ pre-commercialization stage

b) Start up stage
 Second stage financing

 Later stage financing

 EARLY STAGE FINANCING
 Seed stage/pre-commercialization financing
 The venture is still in the idea formation stage and its
product or service is not fully developed.
 It's rare for a venture capital firm to fund this stage.
 The main risk at this stage is marketing related.
Promoters must take the advantage of market
opportunity, timing of launching of product etc.
 In most cases, the money must come from the founder's
own pocket, from the "3 Fs" (Family, Friends, and
Fools), and occasionally from angel investors.
 Risk perception is very high.
 START-UP
 In this stage, the commercial manufacturing has to
commence.VC is provided for product development and
initial marketing.
 Product/service is commercialized for the first time and
some indication of the potential market for new product
is available.
 New projects such as those based on new or high
technology or in which the entrepreneur has good
knowledge and working experience are included.
 SECOND ROUND FINANCING
 The stage at which the product has already been launched in
the market but the business has not yet become profitable
enough for public offering to attract new investors.

 Promoter has invested his own funds but more funds are
required to be infused by VCI’s than at the early stage of
financing.
LATER STAGE FINANCING

Established businesses which require additional financial

support but cannot take recourse to public issues of capital are
involved in this stage.
They need to meet increasing marketing expenses to enter new
markets to finance rapidly increasing accounts receivable.
MEZZANINE/ DEVELOPMENT
CAPITAL
At this point the company is a proven winner and investment
bankers have agreed to take it public within 6 months.
Mezzanine financing is a short term form of financing used to
prepare a company for its IPO.
 represents the bridge between the expanding company and
the IPO
Uses of such type of VCF are purchase of new plant, re-
finance of existing debt, expansion of marketing and
distribution facilities etc.
Time frame-1 to 3 years and falls in medium risk category.
The funding may come from a venture capital firm or bridge
financing specialist. They are usually paid back from the
proceeds of the IPO.
BUY-OUTS
These refer to the transfer of management control.
Two types
 Management Buy-Outs:VCIs provide funds to enable current
operating management /investors to acquire an existing
business.
 Management buy-ins:

 Funds provided to enable an outside group(of managers)to buy

an ongoing company.
 They usually bring three things together-a management team,
a target company and an investor(VCI)
 More risky than MBOs because management comes
from outside and find it difficult to assess the actual
potential of the target company.
Buy-Outs involve a time frame from investment to IPO
of 1 to 3 years with low risk perception.
TURNAROUNDS
 Subset of buy-outs and involve buying the control of a
sick company.
 Two kinds of inputs are required-money and
management. VCIs have to identify good management
and operations leadership.
 Time frame-3 to 5 years and involves medium to high
risk
 Initial Public Offering (IPO)
The company finally achieves liquidity by being allowed
to have its stock bought and sold by the public.
Some companies have more financing stages than shown
above and others may have fewer. Very few reach the
bridge and IPO stages. It all depends on the individual
company.
STAGES OF VC FINANCING
ADVANTAGES
 They allow entrepreneurs to build their company with OPM
(other people's money).
 Mentoring

 Alliances

 Facilitate exit
DISADVANTAGES
 Most venture capitalists seek to realise their investment in a
company in 3-5 years. If an entrepreneur’s business plan
contemplates a longer timetable before providing liquidity,
venture capital may not be appropriate. Entrepreneurs should
also consider: 
 Pricing

 Intrusion

 Control
PITFALLS TO AVOID IN VENTURE CAPITAL
 Don't be too technical. Investors pay more attention to
number and figures because they understand them better.
 Don't give false hopes

 Do not provide incomplete financial information.

 Sales are not the solution to all problems. Investors are

looking for businesses that have potential for long term
returns.
 Concealing problems of the business is not a good idea.
Investors also understand that all business has problems
 Low price leverage. 

 Overconfidence in your product is also not a good idea. 

CASE STUDY
VENTURE CAPITAL FIRMS INVEST $475-M IN INDIA
DURING 2009
 Venture Capital firms invested $117 million over 27 deals in
India during the six months ending June 2009, according to a
study by Venture Intelligence
 Venture Capital firms invested $475 million over 92 deals in
India during the twelve months ending December 2009,
according to a study by Venture Intelligence
 The amount invested during 2009 was lower compared to 2008
which had witnessed $836 million being invested across 153
deals. VC firms however begun to increase their pace of
investments in Q4'09, making 42 investments worth $265
million - significantly higher than that during the same period
in 2008 (23 investments worth $102 million) as well as Q3'09
(19 deals worth $74 million).
 The strong recovery in investment activity in the last quarter of
2009 as well the rising interest among global investors towards
emerging markets like India is quite encouraging for the
growth of the sector
 During 2010, we expect significant follow-on investments into
companies that raised Series A rounds in the past 2-3 years as
well as a rise in exit activity as the global economic recovery
gathers pace.