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VENTURE CAPITAL FUND

MEANING :

Venture capital represents financial investment in a highly risky project with

objective of earning a high rate of return . Venture capital companies provide the

necessary risk capital to the entrepreneurs so as to meet the promoters

contribution as required by the financial institutions .

DEFINIATION :

Venture capital is defined as an quity / quity related investment in a growth

oriented small medium business to enable investees to accomplish corporate

objectives , in return for monitoring share holding in the business or theirrevocable right to acquire it .

Venture Capital is a way in which investor support entrepreneurial

talent with fianc and business skill to exploit market opportunities and thus , to

obtain long term capital gains . It is the provision of risk bearing capital , usually

in the form of participation in equity to companies with high growth potential .

DEFENIATION OF VENTURE CAPITAL COMPANIES

A Financing institution which joins an entrepreneur as a co-promoter in project

and shares risk and rewards .

FEATURES OF VENTURE CAPITAL

1. Venture Capital is basically equity finance in relatively new companieswhen it is two early to go to the capital market to raise fund . However such

investment is not equity investment . It can also be mack in theform of

finance / convertible debt to ensure a running yield on the portfolio ofventure capital list .

2. It is a long term investment in grouth oriented small / medium firms .Theacquisition from outstanding shares from other share holder cannot be

considered venture capital investment . It is a new long term capital that is

injected to enable the business to grow rapidly .

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3. There is a substantial degree of active involvement of the venture capitalinstitutions with the promoters of the venture capital under takings . It

means such finance also provides business skills to the investee firm which

is terned as hand on approach / management . However Venture

Capitalist do not seek / acquire a majority interest in the investees ,

through under special , circumstances and for a limited period they might

have a controlling interest . But the objective is to provide business skills

only and not interface in management .

4. Venture capital financing involves high risk return spectrum . Some of theventures yield very high return to more than compensate for heavy losses

on others which also may have potential of profitable returns .

5. Venture Capital is not technology finance through technology finance mayform a sub set of venture capital financing .

STAGE OF VENTURE CAPITAL FUND

The venture capital financing can be broadly divided into two :

1) Early Stage venture capital2) Later Stage venture capital

EARLY STAGE FINANCING

Early stage financing covers the seed , start-up and second round stage .

Seed Capital Stage

This stage is a pre-start up stage needing funds for testing the prototype

and giving it a commercial shape .This is the primary stage associated with

research and development .Briefly , the following situations are typical of the pre-

starting stage :

1)Research and Development prior to commercial application .

2)Intial period of technology transfer, licensing stage for technology

transfer .

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3)Testing of prototype prior to commercial lisation .

4)Generating commercial awareness of the invention prior to marketing .

5)Industrial joint venture .

6)Establishment or research institution linked Science parks .

Start-up Stage

An entrepreneur may feel the need for finance when the business activity is

just starting . The start- up stage involves the launching of a new business

start up of a new business activity may have the following features :

a) New business activity could be based an the experiences of the industryexpert ,spin offs from R&D institutions R&D of big corporation ,

transfer of technology from overseas based business , or a joint venture

between an entrepreneurs and a technology expert etc.

b) New product / service from the above activity yet to be tired .c) Enterpreneures locks financial resources required from the enterprise .d) Indication of potential but untried market for the product or services .e) The enterprise which has a formal organizationl structure as a limited

company , is no longer as individual owner managed set up but needs

the support of expert .Although , the start up stage is exposed to high risk , more and

more venture capitalists , hoping for capital gains through equity

appreciation , are eager to finance such project .

Second Round Fiance

The circumstances under which second round fianc is needed by an

negative or positive :

The negative reasons are :1) Overruns in the project before completion necessitating a second

round of equity funding to avoid liqudation .

2) A period of loss after start up , necessitating equity typefunding for maintaining acceptable debtequity rate .

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3) Inability to get further equity finance from other sources ,necessitating backing by venture capitalists who have earlier

provide funding.

On positive note , if a start up is successful and

the business is growing apace , additional funding is required for

expansion .

LATER STAGE FIANCING

The refers to post early stage financing when a

project has established itself and business is spreading its wings and is

looking for higher growth . later stage funding is also known as

meggamine financing .

Venture Capitalists around the would ,

particularly in the UK and USA prefer investing in later stage projects in

order to reap capital gains , ensure immediate income on investment

through dividends and encash the investment for capital gains at a later ,

more appropriate , time with an eye on tax relief or other incentives

available .

The various sub-divisons of later stage financing are :

1)Expansion FinanceExpansion of an undertaking or enterprise may be through an organic

growth or by way of acquisition or takeover .The growth and expansion of

an enterprise , unemply large worker / factories / warehouse , new product

, new market both domestic and overseas . This may be accomplished with

the help of venture capitalists who provide farmer finance for enlarging the

workshop / factory area , processing system / strong space for products .

3) Replacement FinanceReplacement Finance aims at enhancing the equity base in an enterprise

, resulting in a change of owners / ownership pattern of the enterprise

.Venture capitalists make finance available by purchasing existing shares

from entrepreneurs or their association to reduce their holdings in the

unlisted company .

4) Turnaround

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Turnaround implies the recovery of an enterprise .A turnaround deal

resembles early stage financing where the business is not yet profitable

.The company may face mounting debts burden and slowing down of cash

inflows and need more funds from sources viz . bankers ,financial

institutions and exiting investors including venture capitalists plays an

providing more equity investments and deplaying managerial expects .

5) BuyoutsUS banks had first launched the concept of buyout in the UK during the

recessionary trend noticed in late 1960s and 1970s . Buyout are a recent

development in service areas of recent development of merchant bankers

and savings institutions , a new form of investment in venture capital .

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