By- Rahul JainBy- Rahul Jain

Venture Capital Venture Capital FinancingFinancing

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What Is Venture Capital?What Is Venture Capital?

High Risk Capital Seeking 50%+ High Risk Capital Seeking 50%+ Annual Rates of ReturnAnnual Rates of Return

Active Investors Who Will Step In and Active Investors Who Will Step In and Make Changes to Protect Their Make Changes to Protect Their InvestmentInvestment

Experienced Investors Who Know Experienced Investors Who Know How to Build Large CompaniesHow to Build Large Companies

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Some StatisticsSome Statistics

99%+ of All Startups Do Not Require 99%+ of All Startups Do Not Require Institutional Venture CapitalInstitutional Venture Capital

VCs average initial investment is VCs average initial investment is $3M+$3M+

Average Dilution from Average Dilution from InitialInitial VC VC Investment is 40%+Investment is 40%+

VCs look at over 100 business plans VCs look at over 100 business plans for every one they financefor every one they finance

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Features of Venture CapitalFeatures of Venture Capital

Equity Participation.Equity Participation. Long-term Investments.Long-term Investments. Participation in Management.Participation in Management.

Venture capitalist combines the Venture capitalist combines the qualities of bankers, stock qualities of bankers, stock market investors and market investors and entrepreneur in one.entrepreneur in one.

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When Is VC GoodWhen Is VC Good

Heavy R&D Component of the Heavy R&D Component of the businessbusiness Semi conductorsSemi conductors BiotechBiotech Datacomm EquipmentDatacomm Equipment

Very Large Opportunity Requiring A Very Large Opportunity Requiring A Lot of Working CapitalLot of Working Capital Federal ExpressFederal Express Amazon.comAmazon.com

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When is VC Wrong For YouWhen is VC Wrong For You

Too Early – You Don’t Have Enough to Too Early – You Don’t Have Enough to Show Yet (Revenues, Product, Team)Show Yet (Revenues, Product, Team)

Too Small – You Only Need A Couple Too Small – You Only Need A Couple Million to Get ProfitableMillion to Get Profitable

Not Proprietary – Your Business Has Not Proprietary – Your Business Has No Barriers to Entry. It is Just An No Barriers to Entry. It is Just An Execution Game.Execution Game.

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When Is VC Wrong For You When Is VC Wrong For You [continued][continued]

You Need to Move FastYou Need to Move Fast Raising VC takes 3-6 months minimumRaising VC takes 3-6 months minimum

You Are Dilution SensitiveYou Are Dilution Sensitive You Need To Be In ControlYou Need To Be In Control You Don’t Need ItYou Don’t Need It

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Stages in Venture FinancingStages in Venture Financing

Early Stage FinancingEarly Stage Financing Expansion FinancingExpansion Financing Acquisition/Buyout FinancingAcquisition/Buyout Financing

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Venture Capital Investment Venture Capital Investment ProcessProcess

Deal OriginationDeal Origination ScreeningScreening EvaluationEvaluation Deal StructuringDeal Structuring Post-investment activityPost-investment activity ExitExit

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Methods of Venture FinancingMethods of Venture Financing

EquityEquity Conditional LoanConditional Loan Income NoteIncome Note Other Financing MethodsOther Financing Methods

1.1. Participating DebenturesParticipating Debentures2.2. Partially Convertible DebenturesPartially Convertible Debentures3.3. Cumulative Convertible Preference SharesCumulative Convertible Preference Shares4.4. Deferred SharesDeferred Shares5.5. Convertible Loan StockConvertible Loan Stock6.6. Special Ordinary SharesSpecial Ordinary Shares7.7. Preferred Ordinary SharesPreferred Ordinary Shares

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Disinvestment MechanismsDisinvestment Mechanisms

BuybacksBuybacks Initial Public OfferingsInitial Public Offerings Secondary Stock MarketsSecondary Stock Markets

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Entrepreneurs’ RoleEntrepreneurs’ Role

Entrepreneurs are Entrepreneurs are drivers of innovationsdrivers of innovations, of , of job creationjob creation and of and of economic developmenteconomic development..

Entrepreneurship should be advocated and Entrepreneurship should be advocated and supported by the entire business world.supported by the entire business world.

Entrepreneurs in developed economies Entrepreneurs in developed economies consider the primary contribution of the consider the primary contribution of the venture capitalists to be other than financial.venture capitalists to be other than financial.

Assistance with recruitment, financial Assistance with recruitment, financial planning, strategic partnering and complex planning, strategic partnering and complex negotiations are important contributions of negotiations are important contributions of VCs.VCs.

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Entrepreneurial RequirementEntrepreneurial Requirement

To build entrepreneurial companies, To build entrepreneurial companies, there is needthere is need To develop To develop service infrastructure.service infrastructure. To To reduce bureaucracyreduce bureaucracy with regard to the with regard to the

creation of small businesses.creation of small businesses. To provide adequate To provide adequate incentives for incentives for

entrepreneursentrepreneurs by reforming tax treatment by reforming tax treatment of stock options and capital gains.of stock options and capital gains.

To To reform labour lawsreform labour laws that takes into that takes into account the needs and limitations of small account the needs and limitations of small businesses.businesses.

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Future Prospects of Venture Future Prospects of Venture FinancingFinancing

Rehabilitation of sick units.Rehabilitation of sick units. Assist small ancillary units to Assist small ancillary units to

upgrade their technologies.upgrade their technologies. Provide financial assistance to Provide financial assistance to

people coming out of universities people coming out of universities etc.etc.

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Success of Venture CapitalSuccess of Venture Capital

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

ReferencesReferences

Financial Management by I.M. PandeyFinancial Management by I.M. Pandey

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