Venture Capital: Rajendran Ananda Krishnan

VENTURE CAPITAL
Rajendran Ananda Krishnan
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SYLLABUS Informal risk capital market Venture capital Nature and overview, venture capital process Locating venture capitalists Approaching venture capitalists.
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FINANCING THE BUSINESS Early stage financing : refers to financial assistance required by the business during beginning of business operations. Two types are financing are available during this stage they are seed capital and start up capital. Development financing : refers to an established business which for purpose of development moves in for expansion of business. Finance required at this stage is know as development or expansion financing.
Acquisition
financing : it refers to finance required by the company for the purpose of acquiring other organizations. Risk capital market refers to market providing debt and equity to non secure financing institution. Informal risk capital markets consist of virtually invisible group of wealthy investors called as business angels. Public equity market : risk capital market consisting of publically owned stock of companies.
ANGEL INVESTORS Angles are early stage investors to business. Angle investors provide capital and valuable guidance to entrepreneurs. These investors along with financial capitals also provide intellectual capital to entrepreneurs.
FEATURES OF ANGEL INVESTOR Angel investors prior to entrepreneurs understand the needs of business and entrepreneurs and are able to provide useful expertise and assistance An angel investor is generally an independent wealthy person who takes risk on investment Angels take vested interest in the business start up in which they invest and become actively involved in the company to assist in other than financial aspects of business
Angel
investors help entrepreneurs create their business by supplying the funding, office infrastructure, sufficing management with required expertise to assist entrepreneurs in running the business.
Venture capital Venture capital is early stage financing of new and young enterprises seeking to grow rapidly. Venture capitalist finances high and new technology based enterprises where the banks or financial institution generally support proven technology with established markets. Venture capital is also described as unsecured risk financing. Venture capitalist directly purchases equity shares of entrepreneur and participates in the management of entrepreneur business.
FEATURES OF VENTURE CAPITAL Investment by venture capital firms are made in high tech areas using new technology or producing innovative goods by using new technology. Venture capitalist invest in long term start up costs to high risk, high reward project. Technology used in the projects undertaken by the venture capitalist in new and unproven projects. Return on venture capital investment is illiquid. Return period may vary from seven to ten years. Investment of venture capitalist is neither repayable, return is possible only when share of company is sold at market price.
Venture
capitalist not only invest in equity shares of company but also participate in management affairs of business. So venture capitalist not only participate in business but also build business. Venture capitalist use their wide contact with the experts in technology and management areas and provide strategic input to entrepreneurial team in order to reduce uncertainties. Venture capitalist firm encourages, nurture and help the entrepreneur grow because he has limited resources, high level of risk. Venture capitalist also help entrepreneurs to market company products.
Investment
by VCF are predominantly made in equity as shares because the dividends can be delayed till the company starts making profit. VCF act as co partner in in entrepreneur business , share success and failure proportionate to equity investment by venture capitalist.
VENTURE CAPITAL PROCESS

Deal origination Screening Evaluation Deal structuring Post investment activities Exit
IPO Promoters buyback Buy back of equity by Trade salehttps://www.facebook.com/ialw aysthinkprettythingscompany
VENTURE CAPITAL PROCESS Deal origination : there are various VCF which have originated from India as well as foreign countries. It is essential for venture capital firm to have continuous source of deals in order to survive and grow in market. Screening : VC firm carry out initial screening of all the project on the basis of some broad criteria. VCF usually prefer investing in technology related industry which involves development at large scale. E.g. Software industry, information technology, pharmaceuticals, bio technology, agriculture and allied industries. They ensure success rate of project before investing on the same.
Evaluation
: as VCF investment huge amount of money in entrepreneurs business and bare high risk and as entrepreneur is new entrant to the business, venture capitalist go in for detailed evaluation of entrepreneurs business in for of screening business plan, evaluating management team of company, understanding credibility of entrepreneur of business. Deal structuring : once the venture capitalist has evaluated the proposal and found it to be viable, then VC and entrepreneur enter into contract which is known as deal structuring. Which includes details relating to a) VC right to control business b) board members c) right to replace management in case of poor performance d) buyback agreement and acquisition e) earn out agreements etc.
Post
investment activities : success of VC activity largely depends on envisaging efficient mechanism from investment and successful implementation of disinvestment. VC are supposed to plan exit from venture at the time of investment. The proposed exit plan have least plan and confirm to statutory compliance. Initial public offer : benefits of disinvestment through IPO results in improved marketability, improved liquidity, better prospectus for capital gains and widely known status of the VC as well as market control through public share participation.
Promoters buy back : the promoters buy back VC stake at predetermined price and keep the ownership control with him. VC consider it as an exit option only when promoters are in position to mobilise funds for buy back of equity held by the venture investors. Trade sale : VC may also disinvest his holdings through offer for sale to public. In this trade sale VC sells his stake to the strategic buyer who already owns a business or has plans to enter target industry.
Buy
back of equity by company : as per the companies amendment act companies have been allowed to buy back their own equity shares. Even though the VC may not intent to exit through this route, he may consider as the venture has been failed to achieve high growth , below average performance of company.
LOCATING VENTURE CAPITALIST EXIM bank : was set up in 1982 for the purpose of financing, facilitating and promoting international trade of India is the principal institution in the country for coordinating working of institution engaged in financing exports and imports. EXIM bank has made has made an entry into VCF by investing in VC firm which is the Indian technology venture unit scheme promoted by UTI. VC fund size is 150 crore other co investors apart from UTI include LIC, technology development board etc.
IDBI
: VCF was started in 1986 with initial capital of 10 crore and is part of technology department of IDBI. It assist high technology, small and medium sized projects requiring fund from 0.5 to 25 million. It is meant primarily to assist projects which promote commercial application for company which adopt imported technology for wider application in area of business. Financial support is provided from pilot stage and covers 90 percent of total cost with promoters stake to be at least 10 percent for the venture.
ICICI venture fund management company limited : ICICI venture was founded in 1988 as a joint venture with unit trust of India. Then ICICI bought out UTI stake in 1988 and ICICI venture became a fully owned subsidiary of ICICI. ICICI with corpus of $ 650 million is largely a private equity along with the same it provides venture capital service. IFCI venture capital funds Ltd : was originally set up by IFCI as a society by the name of risk capital foundation in 1975. its objective was to provide institutional support to first generation professionals and technocrats setting up their own venture in medium sized scale sector. The scheme was known as RCS ( risk capital scheme ). In 1988, RCF was converted into a company, risk capital and technology finance corporation Ltd.
Gujarat
venture finance limited ( GVFL ) : comes under the venture capital sponsored by state level financial institution. GVFL has primarily focused on financing companies in SME group. GVFL is a company focusing on high risk and start up ventures. The company funds entrepreneurs at the first stage of funding when the venture is taking off. GVFL mainly finances companies in IT and bio technology sector.
SIDBI
venture fund : small scale industrial development bank of India launched SME growth fund a new venture capital fund on October 25th 2004 with large corpus of 500 crore which was earlier 100 crore. This 8 year life fund was established with objective to meet the long term risk capital requirement of innovative technology and technology oriented units in this sector. It is unique initiative sponsored by SIDBI jointly with major public sector banks. The fund identifies unlisted SME entities in various growing sectors such as life sciences, retailing, light engineering, food processing, information technology etc.
UTI
venture fund management company : the VC and private equity ( PE ) arm of unit trust of India an ITI group started as pure VC company. Its ITVUS a venture capital fund finance companies which are into technology, life sciences and outsourcing sectors. ITVUS has made investment in Glen mark labs, subsex system and foursoft. The ascent India fund of UTI is worth 700 crores for investing in mid market companies from sectors like auto ancillary, pharmacy, textiles, BPO etc.
Can
bank venture capital fund : it has recently launched Bharat Nirman Fund which has corpus of Rs 55 crore. This bank aims to fund start ups in manufacturing and service sectors. It also has three other funds which were launched in 1989. it is in the process of exiting the first fund while the other two are operational with the corpus almost tied up for investment in start ups. Intel capital : part of Intel, it is a corporate venture group, and invest out of company balance sheet. The fund in India, has invested in companies like Tejas networks, persistent systems and Nipuna.
Punjab
InfoTech venture fund : is worth 200 million 10 year old, close ended capital venture capital fund, conceptualised and funded by Punjab by state industrial development corporation ( PSIDC ) Punjab state financial corporation ( PSFC ), Punjab state electronics development and production corporation limited (PSED & PC ) and small industrial development bank of India. VCF of commercial banks : among the Indian banks and other subsidiaries of SBI and canara bank have floated VCF. These banks provide VCF either in form of equity or conditional loans. Canara bank has set up a VF through subsidiaries can bank financial services.
Private
sector VCF : ANZ grind lays bank has set up India's first private sector VCF namely india investment fund with an initial capital of rs 10 crore subscribed by NRI. The fund provides assistance to high risk projects, to promoters, fresh issue of established companies with good performance record. The objective of the fund is to issue high capital growth for its investors by participating in fast growing companies or high technology companies with potential for high growth.
National
venture fund for software and information technology industry : NFSIT was launched on December 10 1999. it is close ended venture capital fund of 10 years old with initial corpus of Rs 100 crore. The fund has been contributed by SIDBI ministry of communication and information technology, government of India ( GOI ) and industrial development bank of India.
GENERAL VALUATION APPROACH OF COMPANY General valuation : in this method all the set of companies in same set of industries are compared with each other depending on the evaluation credibility of business idea or business is valuated. Present value of future cash flow : in this method future sale and profits of company is predicted based on the same capital is provided in present date to company. For purpose of prediction past performance of data is taken as basis.
Replacement
value : in this method valuation of the assets is based on the amount of money it would take to replace assets or system of the venture. Book value : the book value approach uses the adjusted book value or net tangible asset value to determine the firms worth. Adjusted book value is obtained by making the necessary adjustment to the stated book value by taking into account any depreciation of plant.
Earnings
approach : the earning approach is the most widely used method of valuating company as it provides potential investors with the estimate of the probable return on investment. The potential earnings are calculated by weighting the most recent years earnings. Factor approach : in this method three major factors are used to determine value : earnings, dividend paying capacity and book value. Appropriate weight for particular company being valued are developed and multiplied by capitalized value , resulting in overall weightage valuation. Liquidation value : refers to sale value of company / liquidation value of company.
APPROACHING VENTURE CAPITALIST venture capitalist may be introduced through quality introduction which refers to contacting VC through lawyer, banker, accountant. This procedure of approach is required as VC may not take interest in new project of unknown person. Entrepreneur before approaching VC should be very well aware about his own business. He should contact VC who suits entrepreneurs business which includes VC who deals in similar product or idea. After choosing VCF to finance the business, entrepreneur is required to send his business plan to entrepreneur, after evaluating business plan, understanding its plans potential and credibility VC chooses to invest in the business.
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VENTURE CAPITAL

Rajendran Ananda Krishnan

VENTURE CAPITAL PROCESS

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