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Venture Capital
Venture Capital
Features of Venture Capital----- Venture capital is usually in the form of an equity participation. It may also take the form of convertible debt or long term loan. Investment is made only in high risk but high growth potentials. Venture capital is available only for commercialization of new ideas or new technologies. Venture capitalist joins the entrepreneurs as a copromoter in projects and share the risks and rewards of the enterprise.
Analyzing Venture Capital Proposal------ Fundamental Analysis History (History of the company, date of incorporation, summary of progress) Management ( Quality, experience, strategy & motivation of management, directors, shareholders) Products (Description of companys product & services) Markets (Size nature of business, location, potential competition, USPs) Manufacturing (Technology used, source of supply, manufacturing capacity) Risks (Objective analysis of fundamental risks and managements plan to cope with the same )
Investment Nurturing
The process, by which venture capital companies continue to involve themselves in the operations of concerns assisted by them, is called Investment Nurturing. The main elements of nurturing are as follows: 1. Provision of continuing guidance and support to optimize the benefits of investment to both the venture capital companies and the units concerned 2. Building a joint relationship to tackle operational and other problems of business 3. Protection of the investment / interest of the venture capitalist
Objectives of Nurturing
Ensuring proper utilization of assistance provided, any deviation from the programmed / appraisal should be with prior approval of VCI. Ensuring the implementation of the project / venture within the time and cost envisaged Assisting in finding additional / supplementary finance, in case of time and cost over-runs beyond controls of the VCU Providing strategic inputs in technology, production, finance, marketing, personnel and so on Anticipating likely problems and advise remedial / preventive measures Evaluating performance of the project and suggesting measures for improvement
Styles of Nurturing/Methods of Nurturing-------- The extent of participation by the venture capital companies in the affairs of the assisted units constitutes the style of nurturing. The style depends upon a variety of factors such as the specialization of the venture capital company, the stage of investment, financing plan, the stage of development of the venture capital industry etc. The different styles are: 1. Hands-on nurturing 2. Hands-off nurturing 3. Hands-holding nurturing
Hands-on-Nurturing
Continuous and constant involvement in the operation of the investee company by way of representation on the board of director is Hands-on-Nurturing. Venture capital company provides guidance on long term business planning, technology development, financial planning, marketing strategy etc. This style is essential in early stage of the project. The nurturing is provided either by in-house-expertise, or by a core group of external advisor in specific area.
Hands-off Nurturing
In this style the venture capitalist do not normally actively participate in formulating strategies / policy matters,inspite of the right to do so. Here the venture capitalist do not appoint nominee directors. This style is appropriate incase of syndicated /Joint/ Consortium venture financing. It may be appropriate after the initial plan of the venture is over, and the business is running smoothly.
Hands-Holding Nurturing
In this style, the venture capital companies take part in the management of the venture only when approached by the units. Venture capitalist provide either in-house assistance or arrange assistance, from outside expert.
Nurturing Methods/Techniques of Nurturing------- Personal Discussions (If the venture facing operational problem) Plant Visits (Ventures which are in implementation stage) Feedback (Collect information through nominee directors) Periodic Reports (Sent by the units to VC) Commissioned Studies (Special studies conducted to identify problem & offer solutions)
Exit Mechanism
Every venture capital investment is usually liquidated after accomplishment of the purpose of the venture investment. The time of exit is decided in advance at the time of financing the venture companies. The methods of exit are as follows: 1. IPO method 2. Sale of shares method 3. Puts and Calls method 4. Trade sales 5. Liquidation
IPO Method------ It is also known as going public or flotation method. It is the most popular exit route. The major benefit of this method: 1. It facilitates liquidity of investment through listing on stock exchange. 2. It commands higher price of securities as compared to private placement. 3. It creates better image & credibility with the public,managers,customers and financial institution.
Sale of shares method----- Under this method ,sale of shares is undertaken by the venture capitalists to entrepreneurs who have promoted the ventures. The entrepreneurs, through employees, can also acquire shares by forming an employee stock ownership trust. The sources of the trust include contribution by the employees/company and borrowings from financial institutions and banks.
Puts and calls method------- Under this method, the exit takes place through puts and calls. For this purpose, venture capital companies enter in to a formal exit agreement with the entrepreneurs at a price based on a predetermined formula. The put option is the right to sell, while the call option is the right of the entrepreneurs to buy.
Trade sale--- Under this method ,the entire investee company is sold to another company at an agreed price. This takes place through management buy-in or management buy-out. MBOs is the acquisition of a company(or the shares in that company) from the existing owners by a team of existing management /employees. Management buy-in involves bringing in a management team comprising of outsiders, who are strangers to the company, as opposed to a buy- out, where they are part of the existing team.
Liquidation---- The exit takes place in an involuntary manner. This usually happens under circumstances where the assisted unit makes an utter failure to take off due to stiff competition, technology failure/obsolescence of technology, poor management and so on.
SEBI Venture Capital Funds(Amendment )Regulation 2000-- It states that minimum investment in a venture capital fund from any investor shall not be less than 5lakh and the minimum corpus of the fund before it can start activities shall be Rs 5 crore. The investment criteria of the fund shall be: 1. Investment strategy shall be disclosed. 2. Maximum investment in a single venture capital undertaking not to exceed 25% of the corpus of the fund.
Venture Capital Funds in India----Companies Promoted by all India FIs Venture capital division of IDBI Risk Capital Technology Finance Corporation(RCTC) (Subsidiary of IFCI) Technology Development and Information Company of India Ltd(TDICI)(Promoted by ICICI & UTI)
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