Topic On Venture Capital

Submitted To :Mr. Jashandeep Singh

Submitted By :Jaspreet Singh BBA-2nd year Roll no.- 4201

Multani Mal Modi College, Patiala

Preface
In India, a revolution is ushering in a new economy, wherein major investment are being made in the knowledge based industry with substantially low investments in land, building, plant and machinery .The asset/collateral-backed lending instruments adopted for the hard for the hardcore manufacturing industries, are proving to be inadequate for the knowledge based industries that very often start with just an idea. The only way to finance such industries is through Venture Capital. Venture Capital is instrumental in bringing about industrial development, for it exploits the vast and untapped potentialities and promotes the growth of the knowledge based industries worldwide. In India too, it has become popular in different parts of the country. Thus, the role of venture capitalist is very crucial, different, and distinguishable to the role of traditional finance as it deals with others money. In view of the globalization; Venture Capital has turned out to be a boon to both business and industry. There is, thus, an intense need to be exploit to the maximum its potential as a new means, This report deals with the concept of Venture Capital, with particular reference to India. The report includes all facts, rules, and regulations regarding Venture Capital and is written in very comprehensive manner.

Meaning Of Venture Capital :Venture capital (VC) is funding invested, or available for investment, in an enterprise that offers the probability of profit along with the possibility of loss. Indeed, venture capital was once known also as risk capital, but that term has fallen out of usage, probably because investors don't like to see the words "risk" and "capital" in close conjunction. Venture capitalists often don't tend to think that their investments involve an element of risk, but are assured a successful return by virtue of the investor's knowledge and business sense. Venture Capital is made up of two words:- Venture And Capital. Venture means an undertaking that involves risk and Capital means cash and goods invested in a business. So Venture Capital means Risk Capital.

Venture Capitalists generally : Finance new and rapidly growing companies. Purchase equity securities. Assist in the development of new products or services. Add value to the company through active participation.

Characteristics Of Venture Capital :1. Long Term Investment :- Venture capital financing is a long term investment. It generally takes a long period to encash the investment in securities made by the venture capitalists. 2. High Degrees of Risk :- Venture capital represents financial investment in a highly risky project with the objective of earning a high rate of return. 3. Equity Participation :- Venture capital financing. is, invariably, an actual or potential equity participation wherein the objective of venture capitalist is to make capital gain by selling the shares. 4. Achieve Social Objectives :- It is different from the development capital provided by several central and state level government bodies in that the profit objective is the motive behind the financing.But venture capital projects generate employment, and balanced regional growth indirectly due to setting up of a new business.

5. Participation in Management :- In addition to providing capital, venture capital funds take an active interest in the management of the assisted firms. Thus, the approach of venture capital firms is different from that of a traditional lender or banker.

Stages Of Financing :1. Seed Money: Venture capitalists are more often interested in providing seed finance i. e. making provision of very small amounts for finance needed to turn into a business. Research and development activities are required to be undertaken before a product is to be launched. External finance is often required by the entrepreneur during the development of the product. Low level financing needed to prove a new idea used for product development, market research etc. 2. Start-up: The most risky aspect of venture capital is the launch of a new business after the Research and development activities are over. At this stage, the entrepreneur and his products or services are as yet untried. The finance required usually falls short of his own resources. Start-ups may include new industries / businesses set up by the experienced persons in the area in which they have knowledge. Start-ups may include new industries / businesses set up by the experienced persons. 3. First-Round: Capital is provided to initiate commercial manufacturing and sales. Most first-stage companies have been in business less than three years and have a product or service in testing or pilot production. In some cases, the product may be commercially available. 4. Second-Round: It refers to the stage when product has already been launched in the market but has not earned enough profits to attract new investors. Additional funds are needed at this stage to meet the growing needs of business. Venture Capital Institutions (VCIs) provide larger funds at this stage than at other early stage financing in the form of debt. 5. Later Stage :- Capital provided after commercial manufacturing and sales but before any initial public offering. The product or service is in production and is commercially available. The company demonstrates significant revenue growth, but may or may not be showing a profit. It has usually been in business for more than three years. 6. Last Stage :- At this final stage, the risk of losing the investment still exists. However, compared with the numbers mentioned at the seed-stage it is far lower. The risk of losing the investment the final stage is a little higher at 20.9%.

This is caused by the number of times the VC firms may want to expand the financing cycle, not to mention that the VC firm is faced with the dilemma of whether to continuously invest or not. The causation of major risk by this stage of development is 33%. This is caused by the follow-up product that is introduced.

Methods Of Venture Financing :1. Equity Financing :- The act of raising money for company activities by selling common or preferred stock to individual or institutional investors. In return for the money paid, shareholders receive ownership interests in the corporation. 2. Participating debenture :- Such security carries charges in three phases - in the start-up phase, no interest is charged, next stage a low rate of interest up to a particular level of operation is charged, after that, high rate of interest is required to be paid. 3. Seed Financing :- The initial capital used to start a business. Seed capital often comes from the company founders' personal assets or from friends and family. The amount of money is usually relatively small because the business is still in the idea or conceptual stage. Such a venture is generally at a pre-revenue stage and seed capital is needed for research & development, to cover initial operating expenses until a product or service can start generating revenue, and to attract the attention of venture capitalists. 4. Mezzanine Financing :- A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies. 5. Management Buy-In :- A corporate action in which an outside manager or management team purchases an ownership stake in the first company and replaces the existing management team. This type of action can occur due to a company appearing undervalued or having a poor management team. 6. Management Buy-Out :- In most cases, the management will buy out all the outstanding shareholders and then take the company private because it feels it has the expertise to grow the business better if it controls the ownership.

Venture Capital Investment Process :1. Deal origination A continuous flow of deals is essential for the venture capital business. Deals may originate in various ways. Referral system is an important source of deals. Deals may be referred to the VCs through their parent organizations, trade partners, industry associations, friends etc. The venture capital industry in India has become quite proactive in its approach to generating the deal flow by encouraging individuals to come up with their business plans. Consultancy firms like Mckinsey and Arthur Anderson have come up with business plan competitions on an all India basis through the popular press as well as direct interaction with premier educational and research institutions to source new and innovative ideas. 2. Screening VCFs carry out initial screening of all projects on the basis of some broad criteria. For example the screening process may limit projects to areas in which the venture capitalist is familiar in terms of technology, or product, or market scope. The size of investment, geographical location and stage of financing could also be used as the broad screening criteria. 3. Evaluation or due diligence Once a proposal has passed through initial screening, it is subjected to a detailed evaluation or due diligence process. Most ventures are new and the entrepreneurs may lack operating experience. Hence a sophisticated, formal evaluation is neither possible nor desirable. The VCs thus rely on a subjective but comprehensive, evaluation. VCFs evaluate the quality of the entrepreneur before appraising the characteristics of the product, market or technology. Most venture capitalists ask for a business plan to make an assessment of the possible risk and expected return on the venture. 4. Deal structuring Once the venture has been evaluated as viable, the venture capitalist and the investment company negotiate the terms of the deal, i.e., the amount, form and price of the investment. This process is termed as dealstructuring. The agreement also includes the protective covenants and earn-out arrangements. Covenants include the venture capitalists right to control the investee company and to change its management if needed, buy back arrangements, acquisition, making initial public offerings (IPOs) etc, Earnout arrangements specify the entrepreneurs equity share and the objectives to be achieved.

5. Post-investment activities Once the deal has been structured and agreement finalized, the venture capitalist generally assumes the role of a partner and collaborator. He also gets involved in shaping of the direction of the venture. This may be done via a formal representation of the board of directors, or informal influence in improving the quality of marketing, finance and other managerial functions. The degree of the venture capitalists involvement depends on his policy. It may not, however, be desirable for a venture capitalist to get involved in the day-to-day operation of the venture. If a financial or managerial crisis occurs, the venture capitalist may intervene, and even install a new management team. 6. Exit Plan Venture Capitalists generally want to cash-out their gains in five to ten years after the initial investment. It includes : I. II. III. IV. Initial Public Offerings (IPOs). Acquisition by another company. Purchase of venture capitalists shares by the promoter. Purchase of venture capitalists shares by an outsider.

Advantages Of Venture Capital : It injects long term equity finance which provides a solid capital base for future growth. The venture capitalist is a business partner, sharing both the risks and rewards. Venture capitalists are rewarded by business success and the capital gain. The venture capitalist is able to provide practical advice and assistance to the company based on past experience. The venture capitalist may be capable of providing additional rounds of funding should it be required to finance growth. Venture capitalists are experienced in the process of preparing a company for an initial public offering (IPO) of its shares onto the stock exchanges or overseas stock exchange such as NASDAQ. The venture capitalist also has a network of contacts in many areas that can add value to the company.

Development Of Venture Capital In India :In 1972, a committee on Development of Small and Medium Enterprises highlighted the need to foster venture capital as a source of funding new entrepreneurs and technology. This resulted in a few incremental steps being taken over the next decade-and-a-half to facilitate venture capital funds into needy technology oriented small and medium Enterprises (SMEs), namely: Risk Capital Foundation, sponsored by IFCI, was set-up in 1975 to promote and support new technologies and businesses. Seed Capital Scheme and the National Equity Scheme was set up by IDBI in 1976. Programme for Advancement of Commercial Technology (PACT) Scheme was introduced by ICICI in 1985. The concept of venture capital was formally introduced in India in 1987 by IDBI. The government levied a 5 per cent cess on all know-how import payments to create the venture fund. ICICI (Industrial Credit And Investment Corporation Of India) started VC activity in the same year Later on ICICI floated a separate Venture Capital company TDICI (Technology Development And Information Company Of India Ltd.)

Venture Capital/Private Equity In India :-

Future Prospects Of VC In India : VC can help in the rehabilitation of sick units. VC can assist small ancillary units to upgrade their technologies. VCFs can play a significant role in developing countries in the service sector including tourism, publishing, health care etc. They can provide financial assistance to people coming out of universities, technical institutes, etc thus promoting entrepreneurial spirits.

Conclusion
The world is becoming increasingly competitive. Companies are required to be super efficient with respect to cost, productivity, labour efficiency, technical backup, flexibility to consumer demand, adaptability, foresightedness. There are large sectors of economy that are ripe for VC investors like IT, Pharmacy, Manufacturing, Telecom, Food Processing and many more. Most successful VC-backed firms eventually become publicly listed with an IPO. Depending on market conditions, the VC may prefer to sell its stake in the M&A market. Not surprisingly, in countries will relatively less developed equity and IPO markets the VC industry failed to flourish. In spite of existing infrastructure shortcoming in India, it has bright future for India. There is an impending demand for highly cost effective, quality products.

Bibliography www.indiavca.org www.investopedia.com www.jsonline.com www.smallbiztrends.com www.venturebeat.com www.ventureplan.com www.wikipedia.org/wiki/Venture_capital