VENTURE CAPITAL FINANCING CHAPTER 23

LEARNING OBJECTIVES  Highlight the true notion of venture capital  Focus on the development of venture capital in India  Discuss the steps in a venture capital investment process  Explain the methods of venture capital financing  Emphasize the need for and methods of disinvestment (exit) related to venture capital activity 2

NOTION OF VENTURE CAPITAL  Venture capital (VC) is a significant financial innovation of the twentieth century.  Venture capital is the investment of long-term equity finance where the venture capitalist earns his return primarily in the form of capital gains.  The underlying assumption is that the entrepreneur and the venture capitalist would act together in the interest of the enterprise as ‘partners’. 3

Features of Venture Capital  Equity Participation.  Long-term Investments.  Participation in Management. Venture capitalist combines the qualities of bankers, stock market investors and entrepreneur in one. 4

5 Stages in Venture Financing

THE BUSINESS PLAN  The first step for a company (or an entrepreneur) proposing a new venture in obtaining venture capital is to prepare a business plan for the consideration of a venture capitalist.  The business plan should explain the nature of the proposed venture’s business, what it wants to achieve and how it is going to do it. 6

Cont…  The length of the business plan depends on the particular circumstances.  It should use simple language and all technical details should be explained without jargons. 7

Essential Elements of a Business plan 1. Executive summary 2. Background on the venture 3. The product or service 4. Market analysis 5. Marketing 6. Business operations 7. The management team 8. Financial projections 9. Amount and use of finance required and exit opportunities 8

What does a Venture Capitalist Look for in a Venture?  Superior businesses  Quality and depth of management  Corporate governance and structure  Appropriate investment structure  Exit plan 9

10 Exit plan Post-investment activity Deal structuring Evaluation (due diligence) Screening Deal origination THE PROCESS OF VENTURE CAPITAL FINANCING

Venture Capital Investment Process 11

Methods of Venture Financing  Equity  Conditional Loan  Income Note  Other Financing Methods 1. Participating Debentures 2. Partially Convertible Debentures 3. Cumulative Convertible Preference Shares 4. Deferred Shares 5. Convertible Loan Stock 6. Special Ordinary Shares 7. Preferred Ordinary Shares 12

Disinvestment Mechanisms  Buyback by Promoters  Initial Public Offerings  Secondary Stock Market  Management Buyouts 13

DEVELOPMENT OF VENTURE CAPITAL IN INDIA  The concept of venture capital was formally introduced in India in 1987, when the government announced the creation of a venture fund, to be operated by the Industrial Development Bank of India (IDBI).  VCFs in India can be categorized into the following four groups: 1. VCFs promoted by the central (federal) government-controlled development finance institutions 2. VCFs promoted by the central (federal) government-controlled development finance institutions 3. VCFs promoted by the public sector banks 4. VCFs promoted by the foreign banks and private sector companies and financial institutions 14

Future Prospects of Venture Financing  Rehabilitation of sick units.  Assist small ancillary units to upgrade their technologies.  Provide financial assistance to people coming out of universities etc.  VCFs can play a significant role in the service sector including tourism, publishing, health care, etc. 15

Success of Venture Capital  Entrepreneurial Tradition  Unregulated Economic Environment  Disinvestment Avenues  Fiscal Incentives  Broad Based Education  Venture Capital Managers  Promotion Efforts  Institute Industry Linkage  R&D Activities 16