VENTURE CAPITAL

PRESENTED BY

NAME OF MEMBERS

NAME OF MEMBERS ROLL.NO.

MANISH TIWARI 49

ADHITI PASI 50

SUMIT PATIL 51

SANDEEP MISHRA 55

NASIM SHAIKH 56

57
BIPIN SHARMA
SR NO. TOPIC

1. Introduction

2. FEATURES

3. IMPORTANCE

4. DIFFERENCE BETWEEN (FOCUS AREA , BANK LOAN ,

VENTURE CAPITAL )

5. VENTURE CAPITAL PROCESS

6. STAGES OF VENTURE CAPITAL FINANCING

7. EMPLMETHODS OF VENTURE CAPITAL FINANCINGOYEE

COMMUNICATION SOLUTION USED BY BAJAJ FINSERV

8. PROCEDURE OF VENTURE CAPITAL FINANCING

9. Disinvestment mechanisms

10. Venture capital investment process

11. Types of venture capitalists

12. Venture capital firms in india

VENTURE CAPITAL
Introduction

 Venture Capital is defined as ‘independently managed,

dedicated pools of capital that focus on equity, or equity-linked
investments in privately held, high-growth companies.’

 Venture Capital is another method of financing in form of equity

participation.

 A Venture Capitalist invests in equity or debt securities floated

by such entrepreneurs who undertake highly risky ventures with
a potential of success.

It is a private or institutional investment made into early-stage / start-up

companies (new ventures). As defined, ventures involve risk (having
uncertain outcome) in the expectation of a sizeable gain. Venture Capital is
money invested in businesses that are small; or exist only as an initiative,
but have huge potential to grow. The people who invest this money are
called venture capitalists (VCs). The venture capital investment is made
when a venture capitalist buys shares of such a company and becomes a
financial partner in the business.

Venture Capital investment is also referred to risk capital or patient risk

capital, as it includes the risk of losing the money if the venture doesn’t
succeed and takes medium to long term period for the investments to
fructify.
 Venture Capital typically comes from institutional investors and
high net worth individuals and is pooled together by dedicated investment
firms.

It is the money provided by an outside investor to finance a new,

growing, or troubled business. The venture capitalist provides the funding
knowing that there’s a significant risk associated with the company’s future
profits and cash flow. Capital is invested in exchange for an equity stake in
the business rather than given as a loan.

Venture Capital is the most suitable option for funding a costly capital
source for companies and most for businesses having large up-front capital
requirements which have no other cheap alternatives. Software and other
intellectual property are generally the most common cases whose value is
unproven. That is why; Venture capital funding is most widespread in the
fast-growing technology and biotechnology fields.

FEATURES Venture Capital

1. It is basically financing of new companies which are finding it difficult to
go to the capital market at their early stage of existence.

2. This finance can also be loan-based or in-convertible debentures so

that they carry a fixed yield for the providers of venture capital.

3. Those who provide venture capital aim at capital gain due to the
success achieved by the concern that borrows.
4. It is a long-term investment and made in companies which have high
growth potential. The provision of venture capital will bring rapid growth for
the business.

5. The venture capital provider will also take part in the business of
borrowing concern whereby, the venture capital financier not merely
confines to finance, but also provide managerial skill.

6. Not all the capitalists will experience high risk. But venture capital
financing contains risks. But the risk is compensated with a higher return.

7. Not much of technology is involved in venture capital, it involves

financing mainly small and medium size firms, which are in their early
stages. With the assistance of venture capital, these firms will stabilize and
later can go in for traditional finance.

IMPORTANCE Venture Capital

1. Promotes Entrepreneurs: Just as a scientist brings out his laboratory
findings to reality and makes it commercially successful, similarly, an
entrepreneur converts his technical know-how to a commercially viable
project with the assistance of venture capital institutions.

2. Promotes products: New products with modern technology become

commercially feasible mainly due to the financial assistance of venture
capital institutions.

3. Encourages customers: The financial institutions provide venture

capitalto their customers not as a mere financial assistance but more as a
package deal which includes assistance in management, marketing,
technical and others.

4. Brings out latent talent: While funding entrepreneurs, the venture capital
institutions give more thrust to potential talent of the borrower which helps in
the growth of the borrowing concern.

5. Promotes exports: The Venture capital institution encourages export

oriented units because of which there is more foreign exchange earnings of
the country.

6. As Catalyst: A venture capital institution acts as more as a catalyst in

improving the financial and managerial talents of the borrowing concern. The
borrowing concerns will be more keen to become self dependent and will
take necessary measures to repay the loan.
7. Creates more employment opportunities: By promoting
entrepreneurship, venture capital institutions are encouraging self
employment and this will motivate more educated unemployed to take up
new ventures which have not been attempted so far.

8. Brings financial viability: Through their assistance, the venture capital

institutions not only improve the borrowing concern but create a situation
whereby they can raise their own capital through the capital market. In the
process they strengthen the capital market also.

9. Helps technological growth: Modern technology will be put to use in the

country when financial institutions encourage business ventures with new
technology.

10. Helps sick companies: Many sick companies are able to turn around
after getting proper nursing from the venture capital institutions.
11. Helps development of Backward areas: By promoting industries in
backward areas, venture capital institutions are responsible for the
development of the backward regions and human resources.

12. Helps growth of economy: By promoting new entrepreneurs and by

reviving sick units, a fillip is given to the economic growth. There will be
increase in the production of consumer goods which improves the standard
of living of the people.
DIFFERENCE BETWEEN ( FOCUS AREA , BANK LOAN , VENTURE
CAPITAL )

FOCUS AREA BANK LOAN VENTURE CAPITAL

APPROPRIATNESS CONVENTIONAL NEW AGE HIGH

GROWTH

COST LOW HIGH

MANAGEMENT DON’T INTERFERE HIGH

INTERFERENCE

COLLATERAL HIGH NOT REQUIRED

COLLATERAL

RETURN INTEREST SHARE IN

OWNERSHIP
VENTURE CAPITAL PROCESS

Deal origination

Origination of a deal is the primary step in venture capital financing. It is not

possible to make an investment without a deal therefore a stream of deal is
necessary however the source of origination of such deals may be various.
One of the most common sources of such origination is referral system. In
referral system deals are referred to the venture capitalist by their business
partners, parent organisations, friends etc.

Screening

Screening is the process by which the venture capitalist scrutinises all the
projects in which he could invest. The projects are categorised under certain
criterion such as market scope, technology or product, size of investment,
geographical location, stage of financing etc. For the process of screening
the entrepreneurs are asked to either provide a brief profile of their venture
or invited for face-to-face discussion for seeking certain clarifications.

Evaluation
The proposal is evaluated after the screening and a detailed study is done.
Some of the documents which are studied in details are projected profile,
track record of the entrepreneur, future turnover, etc. The process of
evaluation is a thorough process which not only evaluates the project
capacity but also the capacity of the entrepreneurs to meet such claims.
Certain qualities in the entrepreneur such as entrepreneurial skills, technical
competence, manufacturing and marketing abilities and experience are put
into consideration during evaluation. After putting into consideration all the
factors, thorough risk management is done which is then followed by deal
negotiation.

Deal negotiation

After the venture capitalist finds the project beneficial he gets into deal
negotiation. Deal negotiation is a process by which the terms and conditions
of the deal are so formulated so as to make it mutually beneficial. The both
the parties put forward their demands and a way in between is sought to
settle the demands. Some of the factors which are negotiated are amount of
investment, percentage of profit held by both the parties, rights of the venture
capitalist and entrepreneur etc.

Post investment activity

Once the deal is finalised, the venture capitalist becomes a part of the
venture and takes up certain rights and duties. The capitalist however does
not take part in the day to day procedures of the firm; it only becomes
involved during the situation of financial risk. The venture capitalists
participate in the enterprise by a representation in the Board of Directors and
ensure that the enterprise is acting as per the plan.

Exit plan

The last stage of venture capital investment is to make the exit plan based
on the nature of investment, extent and type of financial stake etc. The exit
plan is made to make minimal losses and maximum profits. The venture
capitalist may exit through IPOs, acquisition by another company, purchase
of the venture capitalists share by the promoter or an outsider.

STAGES OF VENTURE CAPITAL FINANCING

Venture capital is a term that’s frequently

thrown around when the discussion turns to getting startups off the
ground. While most know that it’s a source of funding, fewer people
are familiar with exactly how venture capital financing works.
 Venture capital is a form of funding that pools together
cash from investors and lends it to emerging companies and
startups that the funds believe have the potential for long-term
growth. Venture capital investments typically involve high risk in
exchange for potentially high reward.
Because every company is different, the various stages can vary
somewhat from financing to financing. Generally speaking, though,
there are five typical stages of any venture capital financing.

The Seed Stage

Venture capital financing starts with the seed-stage when the
company is often little more than an idea for a product or service
that has the potential to develop into a successful business down
the road. Entrepreneurs spend most of this stage convincing
investors that their ideas represent a viable investment opportunity.
Funding amounts in the seed stage are generally small, and are
largely used for things like marketing research, product
development, and business expansion, with the goal of creating a
prototype to attract additional investors in later funding rounds.

The Startup Stage

In the startup stage, companies have typically completed research
and development and devised a business plan, and are now ready
to begin advertising and marketing their product or service to
potential customers. Typically, the company has a prototype to
show investors, but has not yet sold any products. At this stage,
businesses need a larger infusion of cash to fine tune their
products and services, expand their personnel, and conducting any
remaining research necessary to support an official business
launch.

The First Stage

Sometimes also called the “emerging stage,” first stage financing
typically coincides with the company’s market launch, when the
company is finally about to start seeing a profit. Funds from this
phase of a venture capital financing typically go to actual product
manufacturing and sales, as well as increased marketing. To
achieve an official launch, businesses usually need a much bigger
capital investment, so the funding amounts in this stage tend to be
much higher than in previous stages.

The Expansion Stage

Also commonly referred to as the second or third stages, the
expansion stage is when the company is seeing exponential growth
and needs additional funding to keep up with the demands.
Because the business likely already has a commercially viable
product and is starting to see some profitability, venture capital
funding in the emerging stage is largely used to grow the business
even further through market expansion and product diversification.

The Bridge Stage

The final stage of venture capital financing, the bridge stage is
when companies have reached maturity. Funding obtained here is
typically used to support activities like mergers, acquisitions, or
IPOs. The bridge state is essentially a transition to the company
being a full-fledged, viable business. At this time, many investors
choose to sell their shares and end their relationship with the
company, often receiving a significant return on their investments.
An experienced business attorney can guide you through the
different stages of venture capital financing and advise you on the
best ways to secure funding for your company in its current stage.

METHODS OF VENTURE CAPITAL FINANCING

• EQUITY
• CONDITIONAL LOAN
• CONVENTIONAL LOAN
• INCOME NOTE
• DEBENTURES

EQUITY
• All Venture Capital Firms(VCF) provide equity.
• Their contribution may not exceed 49% of the total equitycapital.
• The effective control and majority ownership of the firm mayremain with
the entrepreneur.
•The Venture capitalist becomes entitled to a share in the firm’s
profits as much as he is liable for the losses.
• The advantage to the VCF is that it can share in the high valueof the
venture and make capital gains if the venture succeeds.

CONDITIONAL LOAN

• This is a form of loan finance without any pre-determinedrepayment

schedule or interest rate.
• A conditional loan is repayable in the form of a royalty after theventure is
able to generate sales. No interest is paid on suchloans.
• In India , VCFs charge royalty ranging from 2% to 15% ,theactual rate
depends on factors of the venture such as gestationperiod, cost-flow
patterns, risk involved.
• Some VCFs give a choice to the enterprise of paying a high rateof
interest(above 20%) instead of royalty on sales once itbecomes
commercially sound.
• Some funds recover only half of the loan if the venture fails.

CONVENTIONAL LOAN

• Conventional loans carry lower interest initially which increasesafter

commercial production commences.
• A small royalty is additionally charged to cover the interestforegone during
the initial years.
• The repayment of the principal is based on a pre-stipulatedschedule,
Venture Capital Institutions usually do not insist
uponmortgage/other security.

INCOME NOTES

• Income notes are instruments which carry a uniform low rate of interest
plus a royalty on sales.
• It combines the features of both conventional and conditionalloan.
• The principle is repaid according to a stipulated schedule.
DEBENTURES

NON-CONVERTIBLE DEBENTURES

• These carry a fixed rate of interest. Redeemable at par/premium.

• Secured and can be cumulative or non-cumulative.

PARTLY CONVERTIBLE DEBENTURES

• A convertible portion – converted into equity shares at par/premium.

• A non-convertible portion – earns interest till redemption.

• COUPON BONDS/DEBENTURES

• These can be either convertible or non-convertible with zero/no

interestrate.

SECURED PREMIUM NOTES

• These are secured, redeemable at premium in lumpsome/instalments,

have zero interest and carry a warrant against which equity shares can
beacquired.
Disinvestment mechanisms

“Investment refers to the conversion of money or cash into securities,

debentures, bonds or any other claims on money. As follows, disinvestment

involves the conversion of money claims or securities into money or cash.”

Disinvestment can also be defined as the action of an organisation (or

government) selling or liquidating an asset or subsidiary. It is also referred to as

‘divestment’ or ‘divestiture.’

In most contexts, disinvestment typically refers to sale from the government,

partly or fully, of a government-owned enterprise.

company or a government organisation will typically disinvest an

asset either as a strategic move for the company, or for raising resources to meet

general/specific needs.

Disinvestment is the action of an organization or government selling

or liquidatingan asset or subsidiary. Absent the sale of an asset, disinvestment

also refers to capital expenditure reductions, which can facilitate the re-allocation

of resources to more productive areas within an organization or government-

funded project. Whether a disinvestment action results in divestiture or the

reduction of funding, the primary objective is to maximize the return on

investment (ROI) on expenditures related to capital goods, labor and infrastructure.

Types of Venture Capital funding

The various types of venture capital are classified as per their applications
at various stages of a business. The three principal types of venture capital
are early stage financing, expansion financing and acquisition/buyout
financing.

The venture capital funding procedure gets complete in six stages of

financing corresponding to the periods of a company’s development

 Seed money: Low level financing for proving and fructifying a new
idea
 Start-up: New firms needing funds for expenses related with
marketingand product development
 First-Round: Manufacturing and early sales funding
 Second-Round: Operational capital given for early stage companies
which are selling products, but not returning a profit
 Third-Round: Also known as Mezzanine financing, this is the money
for expanding a newly beneficial company
 Fourth-Round: Also calledbridge financing, 4th round is proposed for
financing the "going public" process

A) Early Stage Financing:

Early stage financing has three sub divisions seed financing, start up
financing and first stage financing.
  Seed financing is defined as a small amount that an entrepreneur
receives for the purpose of being eligible for a start up loan.
 Start up financing is given to companies for the purpose of finishing
the development of products and services.
 First Stage financing: Companies that have spent all their starting
capital and need finance for beginning business activities at the full-
scale are the major beneficiaries of the First Stage Financing.

B) Expansion Financing:

Expansion financing may be categorized into second-stage financing,

bridge financing and third stage financing or mezzanine financing.

Second-stage financing is provided to companies for the purpose of

beginning their expansion. It is also known as mezzanine financing. It is
provided for the purpose of assisting a particular company to expand in a
major way. Bridge financing may be provided as a short term interest only
finance option as well as a form of monetary assistance to companies that
employ the Initial Public Offers as a major business strategy.

C) Acquisition or Buyout Financing:

Acquisition or buyout financing is categorized into acquisition finance and

management or leveraged buyout financing. Acquisition financing assists a
company to acquire certain parts or an entire company. Management or
leveraged buyout financing helps a particular management group to obtain
a particular product of another company.
Advantages of Venture Capital

 They bring wealth and expertise to the company

 Large sum of equity finance can be provided

 The business does not stand the obligation to repay the money

 In addition to capital, it provides valuable information, resources,

technical assistance to make a business successful

Disadvantages of Venture Capital

 As the investors become part owners, the autonomy and control of

the founder is lost

 It is a lengthy and complex process

 It is an uncertain form of financing

 Benefit from such financing can be realized in long run only

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