VENTURE CAPITAL

Venture capital investments are generally made as

cash in exchange for shares in the invested
company.
Venture capital includes development, expansion
and buyout financing for those enterprises which are
unable to raise funds from normal financing
channels.
A Venture capitalist also provides management
support and acts as a partner and advisor to the
entrepreneur.

FEATURES
Equity participation through direct purchase of
shares, options or convertible securities.
Long term Investment is illiquid in nature, not
repayable on demand and requires long period
of 5 to 10 yrs to make profits.
Participation in Management helps to protect
and enhance investment by supporting the
entrepreneur.

Forms of Venture Capital

Venture Capital is available in 3 forms in
India
Equity
Conditional loan
Income Notes
Income Notes are hybrid securities combining
the features of both Conventional and
Conditional loans.

Venture Capital Financing in Developed

Countries
Venture Capital activity in developed countries
are encouraged due to
- large number of Tax incentives available,
- well developed avenues or buying and selling
shares of small scale enterprises,
- favourable social climate and governmental
policy for encouraging entrepreneurial
activities.

Venture Capital Financing in India

About 10 to 12 organisations are working in
India started by the Central and State level
financial institutions and commercial banks.
Few Private sector Venture Capital Funds have
also been established.
Main focus is on Debt Financing.
India lacks sufficient Tax incentives as there is
need to separate Tax concessions for
developing Venture Capital in India.

Stages in Venture Capital Financing

1. Early Stage Financing
- Seed Financing for new concept or idea
- R&D Financing for Product development
- 1st Stage Financing for full scale Production & Marketing.
2. Expansion Financing
- 2nd Stage Financing for Working Capital & initial expansion,
- Developmental Financing for public issue,
- Bridge Financing for public issue.
3. Acquisition/ Buyout Financing
- Acquire another firm for future growth,
- Management Buyout Financing to enable operating group to
acquire full or part of business,
- Turnaround Financing for turning around a Sick unit.

Process of Venture Capital Financing

The process of Venture Capital Financing are described into 6
steps which are as follows;
1. Deal Origination - deals originate through Referral System,
Active search and Intermediaries.
2. Screening - for in-depth analysis, initial screening is carried out
on basis of available criteria.
3. Due Diligence - after initial screening a detailed evaluation is
subjected which includes Preliminary and Detailed Evaluation of
the Venture Capital Firms.

4. Deal Structuring - The Venture Capitalist and the Venture

Company negotiate the terms of the deal including the
amount, form and the price of the investment, this process is
called Deal Structuring.
5. Post Investment Activities - once the deal is structured and
finalised, the Venture Capitalist assumes the role of a Partner
and Collaborator and gets involved in directing the venture
through formal representation on BOD and improving the
quality of Marketing, Finance functions etc.
6. Exit Plan aimed at making medium to long term capital
gains to cash out their gains in 5 to 10 yrs after initial
investment. A venture may exit through IPOs, Acquisitions,
purchase of Venture Capitalists share by Promoter/ Outsider.