Sources of Capital

for

Idea & Creativity

Sources of Capital
1. Self
2. Family and friends
3. Suppliers and trade credit
4. Commercial banks
5. Asset-based lenders
6. Institutions and insurance cos
7. Venture capital
8. Private equity placements
9. Public equity offerings
10. Government programs
Overview of the Venture capital Industry
The role of venture capital was instrumental in promoting
entrepreneurship and industrialisation of the United States.
Before World War II, venture investment activity was a
monopoly of wealthy individuals, investment banking
syndicates and few family organisations with a professional
manager.
The first step toward institutionalising the venture capital
industry was in 1946 with the formation of the American R&D
Corpn.in Boston with a small pool of capital from individuals
and institutions put together by General Georges Doriot to
make active investments in selected emerging businesses
such as Digital Equipment Corpn.
The next major development, the Small business Investment
Company Act of 1958, married private capital with government
funds to be used by professionally managed small business
investment companies(SBIC firms) to infuse capital into start-
up and growing small businesses.
With tax advantages, government funds for leverage, and a
private capital company, SBIC’s were the start of the now
formal venture capital industry.
Another type of venture capital firm also developed during the
time was the venture capital division of major corporations,
usually associated with banks and insurance companies,
although companies such as 3M, Monsento and Xerox also
have one.
Venture Capital
• Innovative and highly technical ventures
• High growth and high risk ventures
• Sunrise or Emerging ventures
• Phased disbursements
• Management support
• Multi skill support
The main features of Venture capital financing
• Long term source of investment
• Equity participation thro’ direct purchase of shares or
convertible securities
• Participation in the management of entrepreneur’s business
• Also provide services of marketing, technology,
organisational structure
• Enters when access of funds from conventional sources
become difficult
• The business must have high potential of growth, not averse
to the risk
• contd ……
The main features of Venture capital financing
Contd ……

• Flow of funds in a phased manner and can be in a form of

debt also in initial stage
• Not a permanent equity holder
• Ensures the exit route in the appropriate manner - ensuring
the interest of the entrepreneur as well
Venture Capital Process
• The preliminary screening
• Due dilligence
• Negotiations
• Signing of MOU
• Flow of funds
• Exit
Guidelines for dealing with Venture Capitalists
• Select the venture capitalist carefully
• Do not work several deals in parallel
• Approach venture capitalist thro’ an intermediary
• Avoid professional help from lawyers, accountants in the
initial stage
• Be very careful of what is projected or promised. The
Business plan should reflect all. SWOT
• Ensure and negotiate for smooth entry and exit route
• Establish a high degree of trust
• Synergy – Win / Win situation
THANK YOU