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MEANING:Venture capitalist usually operate as financial intermediary between investors who are suppliers of capital on one hand, and

investee companies who are recipients of risk capital on another hand. --- the investment by professional investors of long-term, risk equity finance where the primary reward is the eventual gain, rather than interest income or dividend yield. -- Wright & Robbie (1997) --- the concept thrives on investors desire to assume higher degree of risk in anticipation of a higher investment returns. -- Hill & Power (2001)

Methods of Venture Capital Financing:

Equity Financing: Venture Capital Finance is generally provided by way of equity share capital but it is such that it doesnt exceed 49% of venture capital undertaking. Conditional Loan: Another way is through conditional loan which is repayable in the form of royalty after the firm is able to generate sales. Income Note: It is a hybrid security which combines the feature of both conventional loan and conditional loan. The Entrepreneur has to pay both royalty as well as interest but at low rates. Participating Debentures: Such security carries charges in three phases-in the start up phase, no interest is charged , next phase a small rate of interest is charged and after that a high level of interest is required to be paid.

Venture capital investment process

Venture capital process refers to the investment process of a given VC company. It starts from the fund raising stage to the points where investments are harvested. This subsection would be mainly used for providing brief explanation on the investment process of the VC. A standard venture capital process (see Figure 3.1) usually follows a sequential five (5) step approach (Tyebjee and Bruno, 1984; Isaksson, 2006). These are: FUND ESTABLISHMENT represent a stage where the venture capitalist set out the firms investment objectives with clear-cut potential investment activity path and finally gather the needed funds to see through those objectives. DEAL FLOW also represents a stage where VC firms uses various prospecting tools to identify and select firms with higher growth potential.

INVESTMENT DECISION STAGE consists of activities such as evaluations of investment deals received through screening, valuation, contracting issues and financial structuring. According to Tyebjee and Bruno, (1984), activities at this stage require more time and industry experience to reduce the risk associated with VC investments. MONITORING AND VALUR ADDING STAGE relates to activities and programs that ensure that the investee firms business operations are run in line with the investment objective and the activity path set out by the VC firm. CRAFTING AND EXECUTION OF EXIT STRATEGIES are done at the final stage to ensure that venture capitalists conveniently utilize available exit options such as issuing of initial public offering (IPOs) to harvest their investment in the investee firm(see figure 3-2). Crafting and executing successful exit strategies requires meticulous investment planning before exit date.

Four key elements in financing of ventures which are studied in depth by the venture capitalists. These are :
1. Management: The strength, expertise & unity of the key people on the board bring significant credibility to the company. The members are to be mature, experienced possessing working knowledge of business and capable of taking potentially high risks. 2. Potential for Capital Gain: An above average rate of return of about 30 - 40% is required by venture capitalists. The rate of return also depends upon the stage of the business cycle where funds are being deployed. Earlier the stage, higher is the risk and hence the return. 3. Realistic Financial Requirement and Projections: The venture capitalist requires a realistic view about the present health of the organization as well as future projections regarding scope, nature and performance of the company in terms of scale of operations, operating profit and further costs related to product development through Research & Development. 4. Owner's Financial Stake: The financial resources owned & committed by the entrepreneur/ owner in the business including the funds invested by family, friends and relatives play a very important role in increasing the viability of the business.

Sources of Venture Capital Financing

If any entrepreneur seeks to finance his project/industry through venture capital, he has the following institutions available to him for providing finance. (i) Venture capital funds sponsored by All India financial institutions word their subsidiaries e.g. venture capital scheme of IDBI, ICICI. (ii) Venture capital funds sponsored by state level financial institutions e.g. Gujarat Venture Finance Limited (GVFL). (iii) Venture capital funds sponsored by public sector banks or their subsidiaries e.g. Confine venture Fund. (iv) Venture capital funds set up by private sector institutions, Indian or 1 Foreign e.g. Indus venture capital Fund, Twentieth Century Finance Company (TCFC), Infrastructural Leasing and Financial Services Limited

Five common phases of Venture Capital financing

Seed stage: - conceptualizes and develops vision, no actual business production. Start up stage: - includes prototype testing; assemble of management team, and the development of the business vision conceived at the seed stage. Expansion stage(2nd stage): - more working capital is needed, no profits but effective cost minimization operations to brake-even occur. Rapid growth stage(3rd stage): - tremendous growth in sale values, huge profit margins, ventures default risk reduced. Prepublic or Bridge stage: - ventures exit timing is known, funding at this stage is assumed to ensure successful exiting, after known time venture capitalists finally liquidate their investments.

Prospects of Venture Capital Financing

Existence of a globally competitive high technology Globally competitive human resource capital Second largest English speaking, scientific & technical manpower in the world Vast pool of existing and ongoing scientific & technical research Government initiatives to promote Entrepreneurs & Investors SEBI initiatives to develop a strong & vibrant capital market giving adequate liquidity and flexibility.

How do you see the VC industry shaping up in the future in India?

There are various challenges that the VC Funds are likely to face going forward. On the Fund raising side, the Investors are increasingly asking harder questions on the track records and performance of Funds. Funds that have not shown positive performance are finding it extremely difficult to raise their next Funds. Overall, there are not too many successful examples due to that fact that Venture Capital Funds take 5 to 6 years to exit from each portfolio company and the industry itself is now getting more organized now. As we see more exits in the next four to five years, the confidence levels of Investors will increase further and one will see more infusion of Funds at early stage companies.

On the investing side, entrepreneurs are increasingly becoming savvier and would want to share value only if they see real value from the VC funds more than just the money itself. Therefore, the Funds bringing additional value would be able to generate better returns for their investors. On the regulatory side, SEBI has recently come up with new guidelines for the domestic Venture Capital Funds. These guidelines pose new challenges as well offer opportunities to many existing and new Funds in the market. The real benefits of these guidelines are yet to be seen by the Funds.

Problems of Venture Capital Financing

1. Requirement of an experienced management team. 2. Requirement of an above average rate of return. 3. Longer Payback Period 4. Uncertainty regarding the success of the product 5. The Size of the market 6. Skills & training required and the cost of training 7. The category of potential customers 8. Financial considerations like return on capital employed, cost of the project, internal rate of return of the project etc

What is a VCs biggest challenge in India?

In addition to the challenge of raising Funds in tough market situations, the biggest challenge for a VC in India is to find the right set of passionate resources for each of their portfolio companies to support their growth at early stages. The reason many companies fail at early stages is not only because they are not able to mobilize Funds at initial stages, but because they are not able to attract the right talent to work with them and to guide them. Those VCs who are able to bring the right resources along with their Funding are the ones that will succeed in the long Term.

The world is becoming increasingly competitive. Companies are required to be super efficient with respect to cost, productivity, labor efficiency, technical back up, flexibility to consumer demand, adaptability and foresightedness. There is an impending demand for highly cost effective, quality products and hence the need for right access to valuable human expertise to guide and monitor along with the necessary funds for financing the new projects. The Government of India in an attempt to bring the nation at par and above the developed nations has been promoting venture capital financing to new, innovative concepts & ideas, liberalizing taxation norms providing tax incentives to venture firms, giving a Philip to the creation of local pools of capital and holding training sessions for the emerging VC investors. There are large sectors of the economy that are ripe for VC investors, like, I.T, Pharmacy, Manufacturing. Telecom, Retail franchises, food processing and many more. The nation awaits for the burgeoning VC business in India in spite of the existing shortcomings in the Indian infrastructure.


Venture Capital Financing

Scope: Prospects, Sources & Problems

1. Establish fund Determine investment objectives Raise capital for investment

2. Deal flow Opportunity creating activities (venture base) Recognize and Identify entrepreneurial opportunities

3. Investment decision Screen and evaluate deals Select/ deselect deals Valuate and negotiate structure deals

4. Monitoring/ value adding Strategy development Active board membership Outside expertise Other stake holders, management Contact and access to info, people, institutions Staging and syndicating investment

5. Craft and executing exit strategies

Figure 3-1 Venture capital Investment process.