CHAPTE

VENTURE CAPITAL FINANCING

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 LEARNING OBJECTIVES
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 Highlight the true notion of venture capital

 Focus on the development of venture capital in India
 Discuss the steps in a venture capital investment process
 Explain the methods of venture capital financing
 Emphasize the need for and methods of disinvestment (exit)
related to venture capital activity
 NOTION OF VENTURE
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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
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plan
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
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THE PROCESS OF VENTURE

CAPITAL FINANCING
 Venture Capital Investment
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Process
 Methods of Venture Financing
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 Equity
 Conditional Loan
 Income Note
 Other Financing Methods
1. Participating Debentures
2. Partially Convertible Debentures
3. Cumulative Convertible Preference Shares
4. Deferred Shares
5. Convertible Loan Stock
6. Special Ordinary Shares
7. Preferred Ordinary Shares
 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
2. VCFs promoted by the central (federal) government-controlled
development finance institutions
3. VCFs promoted by the public sector banks
4. VCFs promoted by the foreign banks and private sector
companies and financial institutions
 Future Prospects of Venture
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Financing
 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