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VENTURE CAPITAL

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Definition

Dr. Neil Cross : Venture capital investment is defined as the

provision of high risk bearing capital, usually in the form of a

participation in equity to companies with high growth

potential. The venture company also provides some valueadded service, in the form of management advice and

contribution to overall strategy.

Bank of England Quarterly Bulletin: Venture capital is anactivity by which investors support entrepreneurial talent

with finance and business skills to exploit market

opportunities and thus obtain long-term capital gains.

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MEANING OFVENTURE CAPITAL

Aformofequityfinancing , designed speciallyforfunding high riskandhigh reward projects .

Playsasignificantroleinfinancing high tech Projects & helpingResearch and Developmentprojectstoturnintocommercialproduction.

Atypicalprivateequityinvestment, inagrowth oriented small/mediumbusinesstoenabletheinvestorstoaccomplish theirgoals.

Longterminvestmentin high riskindustrialprojects, with high rewardpossibilitiesisalsocalled Venture Capital.

Theinvestmentmaytakeplaceatanystageoftheproject betweenstartupand commencementof commercialproduction.

Thusventurecapitalimplies high levelofriskimplicitintheinvestmentoffunds

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FEATURES

New Ventures

Continuousinvolvement

ModeofInvestment

Objective

Handson

Approach

High Risk-returnventures.

Liquidity

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NATURE OF THE FIRMSVENTURE CAPITAL -INDIA

Someventure Capitalfundsin Indiaare:

Risk Capital Foundation: Setup by IFCI, aimed atsupplementingpromotersequitywith aviewtoencouragingtechnologistsandprofessionalstopromotenewindustries.

Seed Capital Scheme: Established by IDBI in 1976, with thesameobjective.

PACT : ICICI undertookthe Programforapplicationofcommercialtechnologyaided by U.S. Aid , which aimsatfinancingspecificneedsofthecorporatesectorindustrialunits.

VECAUS : UTI sponsored Venture Capital Unit Schemesince 1989.TechnologyDevelopmentand InformationcompanyofIndialtd. Was

appointed asmanagers.

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VENTURE CAPITAL AND DEVELOPMENT CAPITAL:

VCC - Remainsinterested intheoverallmanagementtill

commencementtoproductionand efficientmarketingofthe

products, thusfinallymakingavailableanexitrouteforthe

liquidatingtheinvestments.

Developmentcapitalisgranted intheformofloansfor

settingupindustrialunits, and forexpansionalso. The

lendertakesspecialcaretoensuretheend useoftheloan,

and requirespromptpaymentofinterest.

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Venture capital , Seed Capital

and Risk Capital Notangible differences betweenventurecapital, seed capitaland Risk

capital. Both arecomponentsofVenture Capital.

Seed and Risk Capitalprovided byall Indiafinancialinstitutionsintheformofpromoterscontributiontotheproject.

Seed Capital- Thisisanearlystagefinancing Involvesprimarilyfor R &D Financing Seriousriskforthefinanciers, Pluscontinuousinfusionoffundsinordertosustainthe Research and Development

Theventure Capitalistsconsiderthefollowingfor safeguardingtheirinterests: Successfulperformancerecord, entrepreneurspreviousexperienceinsimilarproducts, technology , market.

Qualitiesofbusinessmanagement, technicalinnovation , clearfuture

prospectsforwhich seed capitalisrequired

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Start up Financing - Financingattheproduct

development, stage, includesprovidingfinanceforinitialmarketing, and theestablishmentofproduct

facilities.Provided toprojectswhich have beenselected for

commercialproduction, and wherethepotentialtofulfill

effective demand isthere.

Follow on Financing -Alaterstageofventurecapital

financing. Provisionofcapitaltoafirm, who haspreviously

received externalcapital, butwhosefinancialneeds have

subsequentlyexpanded. Considered to bethemostattractivestageofventurecapitalfinancing.

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Later stage financing

Expansion financing : Thefinanceprovided tofund theexpansionorgrowth ofacompanywhich is breakingevenortradingatasmallprofit. Hereventurecapitalistsprovidefundsforaddingproductioncapacity.

Replacement Financing:Alsoknownasmoneyout deal,wherebyventurecapitalistsextend financingforthepurchaseoftheexistingsharesfromanentrepreneur ortheirassociatesinordertoreducetheir holdingsintheunlisted company.

Turnaround financing : Provided byventurecapitalistsintheeventofanenterprise becomingunprofitableafterthelaunch ofcommercialproduction. Provided intheformofareliefpackagewith specialistskillstorecover.

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Management Buy Outs (MBOs) -Acquisitionofacompanyfrom

theexistingowners byateamof existingmanagement/employees.Theteamacquiringisactivelyinvolved inrunningtheventure.Theownersmayormaynot beactivelyinvolved inrunningthefirm. Theventurecapitalistsprovidefundstotheacquiringteam

Management Buy Ins - Involves bringinginmanagementteamwhoareoutsiders. Defined as Fundsprovided toenableamanagerorgroupofmanagersfromoutsidethecompanyto buy-inthecompanywith thesupportofventurecapitalinvestors

Mezzanine Finance Issupplied asalayerwhich ranks behind

secured lending but beforeordinarysharecapital. Sosuppliedeitheras debtoras high rankingequity (preferenceshares). Itisintended asa bridgefinanceand hasamaturityperiod oflessthan2 years. Whilestructuringan MBO themezzaninefinance helpsthemanagementtoretaingreatershareofthe business, thanwhattheycould otherwiseafford.

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Key appraisal factors for Venture

Capitalists - The Track record : Managementperformancerecord, capacityof

ownersto handleproposed businessplansuccessfully.

Performance :

Assumptions : Technicalperformanceassumptionsoftheproduct/service.

Thetechnicalstrength oftheprocess.

Market Potential : Marketsize, growth, potential

Cost Structure : Profitabilityprojectiononrealisticcostassumptions.

Time Schedule: Evaluationoftimeschedulegivenforcompletionofthe

planonrealistic basis

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Financial sources - Venture Capitalists in

India - Besidesusingtheir ownfunds, useothersourceslike,

Indiafinancial Institutions,

Foreign Institutional Investors,

MultilateralDevelopment Agencies,

Banks,

Foreigninvestors.

Some debtinstrumentsused are NCDs, Partlyconvertibledebentures, deep discount bonds, conditionalloansetc

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EXITMECHANISM

Venturecapitalinvestmentisusuallyliquidated after accomplishmentofthepurposeoftheventure.

Thetimeofexitis decided inadvance, sometimesevenatthetimeoffinancing. Factorsconsidered arefinancialstake, potentialcompetition,marketconditionetc.

Methodsofexitmay be

IPO method,

Saleofshares ,

Putsand Callsmethod,

Tradesalesthrough MBOsand MBIs.,Or liquidation.

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THANKS..