Venture Capital Financing.ppt - Ignite...

27
Venture Capital Financing - A fund based financial service Nishant Dhruv, Atmiya College

Transcript of Venture Capital Financing.ppt - Ignite...

Page 1: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

Venture Capital Financing

- A fund based financial service

Nishant Dhruv, Atmiya College

Page 2: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

Contents

� Features

� Stages of Investments

� Financial Analysis

� Investment Nurturing

� Which are exiting route for VCI ?

2Nishant Dhruv, Atmiya College

Page 3: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

Introduction

VCIs, emerged to fill gaps of conventional financial system by conventional financial system by focusing on entrepreneurs & commercialization of new

technologies

3Nishant Dhruv, Atmiya College

Page 4: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

Defining Venture Capital

� Venture capital can be described as separate asset class, often called as private equity.

� Private equity investment sits at the furthest end of risk-reward spectrum

4Nishant Dhruv, Atmiya College

Page 5: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

Features

� Venture capital investor provides finance and business skills to exploit market opportunities and to obtain capital gain.

� Venture capital is basically equity finance in � Venture capital is basically equity finance in relatively new companies.

� It’s basically long-term investment. It’s new & long-term capital that is injected to enable the business to grow rapidly.

5Nishant Dhruv, Atmiya College

Page 6: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

� Substantial degree of active involvement of VCI with VCU

� “Hands-on” approach/management

� Venture capital financing involves high risk-return spectrum

� Venture Capital is much more than financing new and high-technology oriented companies.

6Nishant Dhruv, Atmiya College

Page 7: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

Venture Capital Institution/Fund

� VCI is financial intermediary between investor and entrepreneurs

7Nishant Dhruv, Atmiya College

Page 8: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

Selection of Investment

� Criteria

� Stages of Financing :

1. Early Stage

2. Later Stage

8Nishant Dhruv, Atmiya College

Page 9: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

� Stages of Financing :

1. Early Stage Financing:

Seed Capital

Start-up

Second Round Financing

When product is comm. for first time

Product has already been launched

9Nishant Dhruv, Atmiya College

Page 10: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

2. Later Stage of Financing:

� This stage includes –

� Mezzanine Capital� Mezzanine Capital

� Bridge/Expansion (Last round of financing)

� Buyouts (implies transfer of mgt. control)

� Mgt. Buyouts (MBO): Funds to existing mgt.

� Mgt. Buyins (MBIs): Funds provided to an outside group to buy an ongoing company)

� Turnarounds : buying control of sick comp.

10Nishant Dhruv, Atmiya College

Page 11: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

Conclusion

� In the early stage investment, the technology is often untried at commercial level of operation

� In later stage investment, the technology has already been tried out commercially and product has been introduced in the market.

11Nishant Dhruv, Atmiya College

Page 12: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

Financial Analysis

� Conventional Valuation Method

� The First Chicago Method

� Revenue Multiplier Method

12Nishant Dhruv, Atmiya College

Page 13: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

1. Conventional Valuation Method

� A method of valuation in which Venture Capital Undertaking is being evaluated Capital Undertaking is being evaluated by Starting time of investment and Exit time.

13Nishant Dhruv, Atmiya College

Page 14: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

� Steps in valuation of VCU:

1. Compute annual revenue at the time of liquidationof liquidation

2. Compute expected earning level

3. Compute future market valuation

4. Obtain the present value of ICs/VCU using a suitable discount factor

14Nishant Dhruv, Atmiya College

Page 15: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

� The minimum % of ownership required is 2/5th or 40%

� Weakness : � Weakness :

� Ignores the stream of earnings.

� Over-emphasis on the exit date

15Nishant Dhruv, Atmiya College

Page 16: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

2. The First Chicago Method:

This method considers nature of the path between the starting point and path between the starting point and the exit point and considers entire earning stream

16Nishant Dhruv, Atmiya College

Page 17: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

� Steps involved :

� “Success”, “Sideways survival” and “Failure” –Probability rating

� Using discount rate, the P.V. of undertaking is � Using discount rate, the P.V. of undertaking is computed.

� Discounted present value is multiplied by respective probabilities

� The minimum ownership required by VCI is 50 %

17Nishant Dhruv, Atmiya College

Page 18: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

3. Revenue Multiplier Method

A factor which will be used to estimate the value of VCU.estimate the value of VCU.

M = V (Present value of VCU)

R (Annual revenue level)

18Nishant Dhruv, Atmiya College

Page 19: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

� Where it can used ?

� Useful in early stage where earning is considered based on after-stage profits

� Weakness:

� This method requires a wealth of data which is generally not available in a country like India.

19Nishant Dhruv, Atmiya College

Page 20: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

Investment Nurturing/Aftercare

Meaning & Introduction :

� Conventional financial system and active role of VCI

� Investment nurturing differs from the investment monitoring by conventional financial system.

� So, investment nurturing is one in which VCIs plays an enduring relationship with VCU.

20Nishant Dhruv, Atmiya College

Page 21: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

� The main elements of Aftercare is –

� After stage investment decision

� Building a joint relationship to tackle the � Building a joint relationship to tackle the problem.

� Protection of interest/investment of VCI

21Nishant Dhruv, Atmiya College

Page 22: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

Styles of Investment Nurturing

1. Hands-on Nurturing:

� A continuous and constant involvement in VCU which is institutionalized in the form of representation on board of directors.representation on board of directors.

� Useful guidance for long-term business planning, marketing strategies etc.

� Essentially, helpful at the early stage of financing.

22Nishant Dhruv, Atmiya College

Page 23: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

2. Hands-off Nurturing:

� Plays a passive role while formulating policy.

� VCIs don’t have any person in the board of � VCIs don’t have any person in the board of directors.

� This type of financing is appropriate in syndicated venture capital financing.

� Hands-off approach is also suitable after the initial phase/plan is over.

23Nishant Dhruv, Atmiya College

Page 24: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

3. Hands-holding nurturing:

� A mid way between Hands-on and Hands-off nurturing.Hands-off nurturing.

� Participate only after being approach by VCU.

24Nishant Dhruv, Atmiya College

Page 25: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

Objectives of After Care

� Ensure proper utilization of assistanceprovided.

� Ensure implementation of the project with the time and costthe time and cost

� Time and cost overruns the project

� To ensure VCU doesn’t default in any statutory obligations

� To evaluate the performance of the project25Nishant Dhruv, Atmiya College

Page 26: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

Techniques of Aftercare

� Personal Discussions

� Plant visits

� Feedback through nominee directors

� Periodic Reports

� Commissioned Studies

26Nishant Dhruv, Atmiya College

Page 27: Venture Capital Financing.ppt - Ignite Academyigniteacademy.weebly.com/uploads/8/1/4/7/8147640/venture_capital_financing.pdf · Defining Venture Capital Venture capital can be described

What are the important channels for EXIT of investments in VCF ?

� Disinvestments of Equity

� Going Public

� Sale of shares to entrepreneurs/Earn out� Sale of shares to entrepreneurs/Earn out

� Trade Sales

� Takeout/Sales to a new investor

� Liquidation

� Exit of Debt Instruments

27Nishant Dhruv, Atmiya College