VENTURE CAPITAL FUNDING

 
WHAT IS VC FUNDING?

IS IT JUST THE STORY OF THE MAN WITH

THE IDEA AND THE MAN WITH THE
MONEY?

 
VC FUNDING IS NOT JUST ABOUT

• … FIRST GENERATION ENTREPRENEURS

• … TECHNOCRATS
• … HIGH TECHNOLOGY
• … FIRST TIME TECHNOLOGIES
• … SEED CAPITAL AT SOFT TERMS
 
 WHAT VC FUNDING IS

… IT IS THE BUSINESS OF EMPLOYING

CAPITAL ‘PATIENTLY’ TO ‘MAXIMISE
RETURNS’ WHILE MANAGING RISKS IN A
RELATIVELY HIGH-RISK VENTURE

VERSUS
 

SIMPLY ‘MINIMISING RISKS’ FOR A SURER

FIXED RETURN
Venture capital company

• A Venture capital company is defined

as “a financing institution which
joins an entrepreneur as a co-
promoter in a project and shares the
risks & rewards of the enterprise”.
Features of venture capital
• VC is usually in the for of an equity
participation. It may also take the form of
convertible debt or long term loan
• Investments is only high risk but high growth
potential projects
• VC is available only for commercialization of
new ideas or new technologies and not for
enterprises engaged in trading, booking,
financial sevices, agency, liaison work or R&D.
• Venture capitalist joins the entrepreneur as
a co- promoter in projects and share the
risks and rewards of an enterprise.
• There is continuous involvement in the
business after mak9ing an investment by
the investor.
• Once the venture has reached the full
potential the venture capitalist disinvests
his holdings either to the promoters or in
the mkt. The basic objective of investment
is not profit but capital appreciation at time
of disinvestment
Scope of venture capital
There are four successive stages of devt. Of a
project. Venture capitalists provide finance even
from first stage of idea formulation. The various
stage are as follows
• Development of an idea - Seed Finance
• Implementation stage – Start up finance
• Fledging Stage – Additional finance
• Establishment Stage – Establishment finance
SELECTION OF INVESTMENT
BY THE VC WILL SPAN ...

PROMOTERS WITH SIGNIFICANT & PROVEN

BUSINESS TRACK RECORD, WHO WILL DEVELOP
NEW TECHNOLOGIES &/OR BUILD NEW
BUSINESSES
TO
PROMOTERS WHO ARE TECHNOLOGY SAVVY,
 
HAVE DEVELOPED INNOVATIVE TECHNOLOGIES
TO A SIGNIFICANT EXTENT, BUT HAVE NO
RELEVANT BUSINESS TRACK RECORD
 IN THE POST- INVESTMENT
STAGE, VCs WILL

• ADD VALUE Vs ONLY MONITORING AND

RELYING ON COLLATERAL RECOVERY
• HELP WITH FINANCIAL, MARKETING,
TECHNICAL & PERSONNEL LINKAGES
• PROVIDE INCENTIVES FOR BETTER
PERFORMANCE Vs  PENALTIES FOR LACK OF
IT
• MONITOR CLOSELY THROUGH BOARD
REPRESENTATION PLUS CONTINUAL
CONTACT
VC WILL LOOK FOR EXITING
FROM INVESTMENT
THROUGH...

- IPO
- THIRD PARTY ACQUSITION
- BUYBACK BY ENTREPRENEUR
 
 WHAT VCs WILL LOOK FOR
IN INVESTEE COMPANIES - 1
• PROMOTER’S INTEGRITY, RELEVANT EXPERIENCE,
DRIVE LEVEL
• UNIQUENESS OF THEIR IDEA
• FOCUS ON/COMMITMENT TO THEIR IDEA
• HIGH ENTRY BARRIERS
• COMPETITIVE ADVANTAGES
• GOOD MARKET SIZE &  GROWTH RATES
• ACCEPTABLE GEOGRAPHIC LOCATION
• APPROPRIATE STAGE OF INVESTMENT
WHAT VCs WILL LOOK FOR IN
INVESTEE COMPANIES - 2

• COMPANY Vs OTHER ENTITIES

• UNLISTED Vs LISTED
• ACCEPTABLE % OF EQUITY
• ACCEPTABLE SIZE OF INVESTMENT
• NUMBER OF YEARS THAT INVESTMENT MUST
BE HELD  

• TYPE OF FINANCIAL INSTRUMENTS ALLOWED

• DESIRED RATE OF RETURN
CRITERIA INVESTEE CO SHOULD
LOOK FOR IN THE VC

• RESPONSIVENESS
• SUPPORT Vs INTERFERENCE Or
INDIFFERENCE
• UNDERSTANDING OF YOUR INDUSTRY/
SECTOR
 
• ABILITY & WILLINGNESS TO ADD VALUE
• ALIGNMENT OF THEIR EXIT OBJECTIVE
WITH YOURS
RISKS IN VENTURES

• FINANCE
• PEOPLE
• RESEARCH & DEVELOPMENT
• IMPLEMENTATION
• PRODUCTION 

• REGULATORY
• MARKETING
• EXIT
SO, WHAT DO WE DO WITH
THESE RISKS

- EXAMINE THEM CAREFULLY

- QUANTIFY THEM, WHERE POSSIBLE
- MANAGE THEM
- OFFSET BY COMMENSURATE
 

RETURNS
SOME USEFUL HINTS: 1

• THINK A GREAT DEAL ABOUT THE BUSINESS

• CONVINCE YOURSELF THAT THE BUSINESS IS RIGHT
• ENSURE COMFORT WITH
- GESTATION PERIOD
- CAPITAL REQUIREMENT
• ENSURE ABILITY TO KEEP  PACE WITH TECHNOLOGY
CHANGES
• CHANGE AVOID HERD MENTALITY
SOME USEFUL HINTS: 2

• DISPLAY A PROFESSIONAL APPROACH AT EVERY

STEP
• TEST EVERY ASSUMPTION IN THE BIZ PLAN
• LEARN FROM SIMILAR MODELS IN INDIA AND
ABROAD
• SEE HOW YOU COULD BE DIFFERENT AND BETTER
AT EVERY STEP  

• BE SURE OF SALES PROJECTIONS AND

ACHIEVEMENT OF TARGETS
SOME USEFUL HINTS: 3

• ENSURE COHERENCE AND SYNERGIES IN THE

TEAM
• CHECK THE VC TEAM BACKGROUND AND PAST
PROJECTS
• UNDERSTAND CLEARLY THE TERMS OF VC
FUNDING & THEIR IMPLICATIONS
• DO NOT SIGN THE TERM
  SHEET BLINDLY
• UNDERSTAND POST-INVESTMENT APPROACH OF
THE VC
• FOLLOW A WIN-WIN APPROACH
Importance of venture
capital
• Advantages to investing public
Advantages to investing public
1.The investing public will reduce risk
significantly against unscrupulous mgt if the
public invest in venture fund who in turn will
invest in equity of new business
2.The investors do not have any means to
ensure the affairs of business are conducted
prudently. The venture funds having
representatives on the board of directors
would over come it
Advantages to promoters
• VC provides solid capital base for future growth
by injecting long term equity financing
• The new entrepreneurs find it difficult to to
make underwriting arrangements require a
great deal of effort. Venture fund assistance
would eliminate those efforts by leaving
entrepreneur to concentrate upon bread &
butter activities of biz.
• They act as business partners who share the
rewards as well as risks.
General
• A developed VC institution reduces the time lag between a
technological innovation & its commercial exploitation
• It helps in developing new process/products in conducive
atmosphere free from dead weight of corporate bureaucracy,
which helps in exploiting full potential.
• VC acts as a cushion to support business borrowings as
bankers & investors will not lend money with inadequate
margin of equity capital
• It serves as an intermediary between investors looking for
high returns for their money & entrepreneurs in search of
needed capital for their start ups
• It also paves the way for pvt sector to share responsibility
with public sector
Methods of venture
financing
• VC is available in four forms in INDIA
• Equity Participation
• Conventional loan
• Conditional loan
• Income notes
List of venture capital
companies in INDIA
• IDBI venture capital • Gujarath Venture
fund Finance ltd (GUFL)
• The risk capital • Canara Bank
technology Finance • State bank of India
corporation (RCTC) capital markets Ltd.
• Technology devt.& (SBICAP)
information company • Indus Venture Capital
of India ltd. (TDICI) Fund
• Credit Capital Venture
fund Ltd. (CVF)
THANK YOU