By- Rahul Jain Venture Capital Financing

2 What Is Venture Capital? High Risk Capital Seeking 50%+ Annual Rates of Return High Risk Capital Seeking 50%+ Annual Rates of Return Active Investors Who Will Step In and Make Changes to Protect Their Investment Active Investors Who Will Step In and Make Changes to Protect Their Investment Experienced Investors Who Know How to Build Large Companies Experienced Investors Who Know How to Build Large Companies

3 Some Statistics 99%+ of All Startups Do Not Require Institutional Venture Capital 99%+ of All Startups Do Not Require Institutional Venture Capital VCs average initial investment is $3M+ VCs average initial investment is $3M+ Average Dilution from Initial VC Investment is 40%+ Average Dilution from Initial VC Investment is 40%+ VCs look at over 100 business plans for every one they finance VCs look at over 100 business plans for every one they finance

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

5 When Is VC Good Heavy R&D Component of the business Heavy R&D Component of the business Semi conductors Semi conductors Biotech Biotech Datacomm Equipment Datacomm Equipment Very Large Opportunity Requiring A Lot of Working Capital Very Large Opportunity Requiring A Lot of Working Capital Federal Express Federal Express Amazon.com Amazon.com

6 When is VC Wrong For You Too Early – You Don’t Have Enough to Show Yet (Revenues, Product, Team) Too Early – You Don’t Have Enough to Show Yet (Revenues, Product, Team) Too Small – You Only Need A Couple Million to Get Profitable Too Small – You Only Need A Couple Million to Get Profitable Not Proprietary – Your Business Has No Barriers to Entry. It is Just An Execution Game. Not Proprietary – Your Business Has No Barriers to Entry. It is Just An Execution Game.

7 When Is VC Wrong For You [continued] You Need to Move Fast You Need to Move Fast Raising VC takes 3-6 months minimum Raising VC takes 3-6 months minimum You Are Dilution Sensitive You Are Dilution Sensitive You Need To Be In Control You Need To Be In Control You Don’t Need It You Don’t Need It

8 Stages in Venture Financing Early Stage Financing Early Stage Financing Expansion Financing Expansion Financing Acquisition/Buyout Financing Acquisition/Buyout Financing

9 Venture Capital Investment Process Deal Origination Deal Origination Screening Screening Evaluation Evaluation Deal Structuring Deal Structuring Post-investment activity Post-investment activity Exit Exit

10 Methods of Venture Financing Equity Equity Conditional Loan Conditional Loan Income Note Income Note Other Financing Methods 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

11 Disinvestment Mechanisms Buybacks Buybacks Initial Public Offerings Initial Public Offerings Secondary Stock Markets Secondary Stock Markets

12 Entrepreneurs’ Role Entrepreneurs are drivers of innovations, of job creation and of economic development. Entrepreneurs are drivers of innovations, of job creation and of economic development. Entrepreneurship should be advocated and supported by the entire business world. Entrepreneurship should be advocated and supported by the entire business world. Entrepreneurs in developed economies consider the primary contribution of the venture capitalists to be other than financial. Entrepreneurs in developed economies consider the primary contribution of the venture capitalists to be other than financial. Assistance with recruitment, financial planning, strategic partnering and complex negotiations are important contributions of VCs. Assistance with recruitment, financial planning, strategic partnering and complex negotiations are important contributions of VCs.

13 Entrepreneurial Requirement To build entrepreneurial companies, there is need To build entrepreneurial companies, there is need To develop service infrastructure. To develop service infrastructure. To reduce bureaucracy with regard to the creation of small businesses. To reduce bureaucracy with regard to the creation of small businesses. To provide adequate incentives for entrepreneurs by reforming tax treatment of stock options and capital gains. To provide adequate incentives for entrepreneurs by reforming tax treatment of stock options and capital gains. To reform labour laws that takes into account the needs and limitations of small businesses. To reform labour laws that takes into account the needs and limitations of small businesses.

14 Future Prospects of Venture Financing Rehabilitation of sick units. Rehabilitation of sick units. Assist small ancillary units to upgrade their technologies. Assist small ancillary units to upgrade their technologies. Provide financial assistance to people coming out of universities etc. Provide financial assistance to people coming out of universities etc.

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

References Financial Management by I.M. Pandey Financial Management by I.M. Pandey 16