Documentos de Académico
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Capital is always required for a business to start and grow.
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Sources of capital
1. Debt or equity financing
2. Internal or external funds
3. Personal funds
4. Family and friends
7. Government grants
8. Private placement
9. Bootstrap financing
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Informal risk capital:
It consist of a virtually invisible group of wealthy investors often
called as business angels.
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Venture capital
Venture capital is a new financial service, towards
developing strategies to help a new class of new
entrepreneurs to translate their business into ideas
into realities.
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The SEBI has defined Venture Capital Fund in its Regulation 1996 as
‘a fund established in the form of a company or trust which raises money through
loans, donations, issue of securities or units as the case may be and makes or proposes
to make investments in accordance with the regulations’.
Risk capital is invested as shares (equity) rather than as a loan and the investor
requires a higher "rate of return" to compensate him for his risk.
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Venture Capital provides long-term, committed share capital, to help unquoted
companies grow and succeed.
This return is generally earned when the venture capitalist "exits" by selling its
shareholding in the business
The goal of venture capital is to build companies so that the shares become liquid
(through IPO or acquisition) and provide a rate of return to the investors (in the
form of cash or shares) that is consistent with the level of risk taken
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Vision of Venture Capital
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Venture Capitalists generally:
Characteristics
• Lack of liquidity
• High risk
• Equity participation
• Participation in management
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What kind of businesses are attractive to venture capitalists:
Rather, it is more about the investment's aspirations and potential for growth, rather
by current size.
Venture capital investors are interested in companies with high growth prospects,
which are managed by experienced and ambitious teams who are capable of turning
their business plan into reality.
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Stages of financing
1. Seed Money:
Low level financing needed to prove a new idea.
2. Start-up:
Early stage firms that need funding for expenses associated with marketing and
product development.
3. First-Round:
Early sales and manufacturing funds.
4. Second-Round:
Working capital for early stage companies that are selling product, but not yet
turning a profit .
5. Third-Round:
This is expansion money for a newly profitable company
6. Fourth-Round:
Also called bridge financing, it is intended to finance the "going public" process
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INVESTMENT PROCESS
The investment process begins with the venture capitalist conducting an initial review
of the proposal to determine if it fits with the firm's investment criteria.
Preliminary Screening
Negotiating Investment
Approvals and Investment Completed
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Preliminary Screening
The initial meeting provides an opportunity for the venture capitalist to meet with the
entrepreneur and key members of the management team to review the business plan
and conduct initial due diligence on the project.
The venture capitalist will look carefully at the team's functional skills and
backgrounds.
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Negotiating Investment
This involves an agreement between the venture capitalist and management of the
terms of the term sheet, often called memorandum of understanding (MoU).
The venture capitalist will then proceed to study the viability of the market to
estimate its potential.
Often they use market forecasts which have been independently prepared by
industry experts who specialize in estimating the size and growth rates of markets and
market segments
The venture capitalist also studies the industry carefully to obtain information about
competitors, entry barriers, potential to exploit substantial niches, product life
cycles, and distribution channels.
The due diligence may continue with reports from other consultants.
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Approvals and Investment Completed
The process involves due diligence and disclosure of all relevant business
information.
Final terms can then be negotiated and an investment proposal is typically submitted
to the venture capital fund’s board of directors.
The investment process can take up to two months, and sometimes longer. It is
important therefore not to expect a speedy response.
It is advisable to plan the business financial needs early on to allow appropriate time to
secure the required funding.
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VC INVESTMENT PROCESS
Deal origination
Screening
Deal structuring
Exit plan
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Methods of Venture Financing
Equity
Conditional loan
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Exit route
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Valuing your company:
A problem confronting the entrepreneur in obtaining outside
equity funds, whether from the informal investor market (
business angels) or from the venture capital industry , is
determining the value of the company.
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Factors in valuation :
Nature and history of business
Financial data of the venture
Book value of the stock of the company
Future earning capacity of the firm
Dividend paying capacity of the venture
Assessment of goodwill and other intangibles of the venture
Previous sale of stock
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Ratio analysis:
1. Liquidity ratios
2. Activity ratio
3. Leverage ratio
4. Profitability ratio
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1. Liquidity ratio:
A. Current ratio = C.A / C.L
This ratio is commonly used to measure the short-term solvency
of the venture or its ability to meet its short-term debts.
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B. Acid test ratio:
Formula: (C.A – inventories ) / current liabilities
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2. Activity ratio
a. Average collection period = account receivable / average
daily sales
This ratio indicates the average number of days it takes to
convert account receivables into cash.
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3. Leverage ratios:
a. Debt ratio: total liabilities / total assets
The debt ratio helps the entrepreneur to assess the firms
ability to meet all its obligations.
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4. Profitability ratio:
a. Net profit ratio= net profit / net sales
It represents the ventures ability tp translate sales into profit.
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General valuation approaches:
The following are various methods for determining the value of the
company :
1. Present value of future cash flow
2. Replacement value
3. Book value
4. Earning approach
5. Factor approach
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If You Cannot Do Great Things,
Do Small Things In A Great Way.
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