VENTURE CAPITAL FINANCING CHAPTER 23

LEARNING OBJECTIVES

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

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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’.

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Features of Venture Capital

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

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.

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Cont…

The length of the business plan depends on the particular circumstances.

It should use simple language and all technical details should be explained without jargons.

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Essential Elements of a Business plan1. 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

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What does a Venture Capitalist Look forin 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 Process

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Methods of Venture Financing

Equity Conditional Loan Income Note Other Financing Methods

1. Participating Debentures2. Partially Convertible Debentures3. Cumulative Convertible Preference Shares4. Deferred Shares5. Convertible Loan Stock6. Special Ordinary Shares7. Preferred Ordinary Shares

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Disinvestment Mechanisms

Buyback by Promoters Initial Public Offerings Secondary Stock Market Management Buyouts

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DEVELOPMENT OF VENTURE CAPITAL IN INDIA

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

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Future Prospects of Venture 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.

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Success of Venture Capital

Entrepreneurial Tradition Unregulated Economic Environment Disinvestment Avenues Fiscal Incentives Broad Based Education Venture Capital Managers Promotion Efforts Institute Industry Linkage R&D Activities

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