Venture Capital

Financing
By- Rahul Jain
 What Is Venture Capital?
 High Risk Capital Seeking 50%+
Annual Rates of Return
 Active Investors Who Will Step In and
Make Changes to Protect Their
Investment
 Experienced Investors Who Know
How to Build Large Companies

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 Some Statistics
 99%+ of All Startups Do Not Require
Institutional Venture Capital
 VCs average initial investment is
$3M+
 Average Dilution from Initial VC
Investment is 40%+
 VCs look at over 100 business plans
for every one they finance

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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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 When Is VC Good
 Heavy R&D Component of the
business
 Semi conductors
 Biotech
 Datacomm Equipment
 Very Large Opportunity Requiring A
Lot of Working Capital
 Federal Express
 Amazon.com

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 When is VC Wrong For You
 Too Early – You Don’t Have Enough to
Show Yet (Revenues, Product, Team)
 Too Small – You Only Need A Couple
Million to Get Profitable
 Not Proprietary – Your Business Has
No Barriers to Entry. It is Just An
Execution Game.

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 When Is VC Wrong For You
[continued]
 You Need to Move Fast
 Raising VC takes 3-6 months minimum
 You Are Dilution Sensitive
 You Need To Be In Control
 You Don’t Need It

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Stages in Venture Financing
 Early Stage Financing
 Expansion Financing
 Acquisition/Buyout Financing

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 Venture Capital Investment
Process
 Deal Origination
 Screening
 Evaluation
 Deal Structuring
 Post-investment activity
 Exit

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Methods of Venture Financing
 Equity
 Conditional Loan
 Income Note
 Other Financing Methods
1. Participating Debentures
2. Partially Convertible Debentures
3. Cumulative Convertible Preference Shares
4. Deferred Shares
5. Convertible Loan Stock
6. Special Ordinary Shares
7. Preferred Ordinary Shares

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 Disinvestment Mechanisms
 Buybacks
 Initial Public Offerings
 Secondary Stock Markets

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 Entrepreneurs’ Role
 Entrepreneurs are drivers of innovations, of job creation
and of economic development.
 Entrepreneurship should be advocated and supported by
the entire business world.
 Entrepreneurs in developed economies consider the
primary contribution of the venture capitalists to be
other than financial.
 Assistance with recruitment, financial planning, strategic
partnering and complex negotiations are important
contributions of VCs.

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Entrepreneurial Requirement
 To build entrepreneurial companies,
there is need
 To develop service infrastructure.
 To reduce bureaucracy with regard to the
creation of small businesses.
 To provide adequate incentives for
entrepreneurs by reforming tax treatment of
stock options and capital gains.
 To reform labour laws that takes into
account the needs and limitations of small
businesses.

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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.

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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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 References
 Financial Management by I.M. Pandey

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