VENTURE CAPITAL DEFINITION Venture capital is an investment
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VENTURE CAPITAL
DEFINITION • Venture capital is an investment in the form of equity, quasi-equity and sometimes debt –straight or conditional( ie interest and principal payable when the venture starts generating sales) made in new or untried technology, or high risk venture, promoted by a technically or professionally qualified entrepreneur where the venture capitalist • Expects the enterprise to have a very high growth rate • Provides management and business skills to the enterprise • Expects medium to long term gains, and • Does not expect any collateral to cover the capital provided
DEFINITION Venture capital as“ Providing seed, start-up and first stage financing” Funding the Expansion of companies that have already demonstrated their business potential but do not have access to the public securities market or to credit oriented institutional funding sources”
FEATURES • EQUITY PARTICIPATION • LONG TERM INVESTMENT • PARTICIPATION IN MANAGEMENT
Structure of venture capital industry • All India DFI sponsored VCF Technology development and information company (TDICI) by ICICI Risk capital and technology Finance corporation Limited (RCTFC) by IFCI Risk capital fund by IDBI SFC sponsored VCF Gujarat venture capital limited by GIIC Andhra Pradesh venture capital limited by APSFC Bank sponsored VCFs : Canfina and SBI Caps Private VCFs : Indus venture capital fund, credit capital venture fund and grind lay's india development fund
VENTURE CAPITAL AND ALTERNATIVE FINANCE COMPARED HIGH Management Information VENTURE CAPITAL PARENT COMPANY FINANCE COMMERCIAL LOAN DEVELOPMENT FINANCE LOW ownership HIGH
Value added services • • • Act as a sounding board for the investee company Helps in building network Provides advice Helps to raise subsequent finances Financing strategic planning Recruitment of key personnel Obtaining bank and other financing Access to international market & technology Introduction to strategic partners and acquisition targets Regional expansion of manufacturing and marketing operations Negotiation and execution of mergers and acquisition Obtaining public listing
Strategic role of venture capital • Technology financing: ü The notion of technology has both quantitative and qualitative aspects of technology; ü High technology characters are: ü Criticality of R&D ü Continuity of innovation ü High obsolescence and short product life cycle ü High risk due to rapid changes and unstable environment ü Large potential markets and high competition in the future
Factors influencing technology transfer • Technology is a constantly replenish able national resource • It generates wealth –key to economic, political, social • Prime factor for domestic productivity and international competitiveness • It is driver for newer alliances among academia, business and government • It requires new managerial philosophy and practice.
CHARACTERISTICS OF VENTURE CAPITAL ØEQUITY or EQUITY FEATURED INSTRUMENT OF INVESTMENT ØStart up companies ØIndustry products or services that hold potential of better than normal or average revenue growth rates. ØCompanies with better than normal or average profitability ØProducts /services in the early stages of their life cycle. ØHigher than average risk levels that do not lend themselves to systematic quantification through conventional technique and tools. ØTurnaround Companies ØLong term and active involvement with investee.
V C AND THE ENVIRONMENT Ø INDIRECT BENEFIT Ø PREFERENCE TO KNOWLEDGE BASED COMPANIES
Enabling environment for V. C ØENTERPRISE CULTURE ØTAX POLICY ØCAPITAL MARKETS ØFREE MARKET FORCES. ØCOMPLEMENTARY FINANCIAL INSTITUTIONS ØPROFESSIONAL ENTREPRENEURSHIP
INVESTMENT OBJECTIVE OF SOME INDIAN V. CFIRM VENTURE CAPITAL COMPANIES 1. FUNDS PROMOTED BY ALL INDIA DFIs /STATE LEVEL DFIs 2. FUNDS PROMOTED BY COMMERCIAL BANKS AND 3. FUNDS PROMOTED BY PRIVATE SECTOR FINANCIAL SERVICES COMPANIES
INDIAN VENTURE CAPITAL FIRM ØINDUS BENTURE MANAGEMENT ØIDBI ØA P INDUSTRIAL DEVELOPMENT CORPORATION
Objectives of Indus venture management Indus plans to invest certain specific areas of business IDBI Adapting imported technology to wider domestic applications and Encouraging commercial application of indigenously developed technology All matters connected with or incidental to the above
DIMENSIONS OF VENTURE CAPITAL • • EQUITY PARTICIPATION CONVENTIONAL LOAN CONDITIONAL LOAN INCOME NOTES
CONTD. . • EQUITY PARTICIPATION: The venture capital finances up to 49% of the equity capital and the ownership remains with the entrepreneur. • CONVENTIONAL LOAN: A lower fixed rate of interest is charged to the unit till its commercial operation. After normal rate of interest is charged to the unit till its commercial operations. After a normal rate of interest is paid loan is to be repaid as per the agreement.
Contd. . • Income notes: The income note combines the features of conventional and conditional loans in a way that the entrepreneur has to pay both interest and royalty on sales at low rates.
Stages in venture financing • Seed capital : This is the first stage of project financing , a small amount of capital is provided to the entrepreneurs for concept testing or translating an idea into business • START-UP FINANCE: The second stage sees the provision of start-up finance to the unit by the venture capitalist to manufacture a product. • Additional Finance: Third stage when the firm is not able to generate adequate funds to meet working capital needs additional fund is needed to meet initial expenses.
Contd. . • Establishment finance: Funds are provided for major growth plans, generally used for capacity expansion, marketing and working capital
Venture capital finance in India • OBJECTIVE: • Encourage the indigenous technology and its commercial applications. • Adopt and modify the applications of imported technology in such a manner that it will be appropriate to the Indian environment • Setting up of pilot projects • Technology innovations and modernizations • Developing appropriate technology • Meeting the cost of market surveys and market promotion programmes
Importance Successful launch of the project Rapid growth of technology Solves sickness of the company Venture capitalist are ready to lend their expertise and standing to the entrepreneur. • helpful to a large number of smaller units under which they are able to upgrade their technology to meet the demands of the major industrial units. • Playing a significant role in tapping the potentiality of service sector. • •
Advantages of venture capital Helps in the industrialization of the country. Helps in the technological development of the country. Generates employment. Helps in developing entrepreneurial skills Benefits to the investor as they contribute their capital only after the company starts earning profit. • Profit to venture capital funds • Helps small and medium first generation entrepreneurs to translate their ideas into reality. • Promotes entrepreneurship and fosters entrepreneurism in the country • • •
Regulatory structure The SEBI act 1992 announced the regulation for the venture capital funds in 1996. with the primary objective of protecting the interest of corpus in one undertaking Investors and providing enough flexibility to the fund managers to make suitable investment decisions. Venture capital fund appoints a fund manager to manage the portfolio Venture investing firm should register with sebi VC fund can invest up to 20%of the fund in one undertaking 80% of the funds raised by VCF company whose shares are not listed on recognized stock exchange VC investments are restricted to domestic companies engaged in business of software, IT, biotechnology agriculture and allied sectors.
Venture capital industry in India • Risk capital and technology finance corporation (RCTFC) • IDBI venture capital fund • Technology Development and information company of India limited(TDIC) • Indus venture capital fund • Small Industrial Development bank of India • Gujarat venture finance limited • Credit capital venture fund • Andhra Pradesh industrial development corporation (APIDC) • 20 th Century Venture capital fund • State bank , Canara bank, and grind lays bank venture capital funds.
Venture investment process Generating a Dead flow Due Diligence Investment valuation Pricing and structuring the Deal value addition & monitoring EXIT
INVESTMENT VALUATION Valuation Process üEvaluate Future revenue and profitability üForecast likely future value of the firm based on expected market ücapitalisation or expected acquisition proceeds depending upon the anticipated exit from investment üTarget on ownership position in the investee firm so as to achieve desired appreciation on the proposed investment. The appreciation desired should yield a hurdle rate of return on a discounted cash flow basis. NPV=[(Cash)/(Post)]*[(PAT*PER)]*K
Factors Determining Venture capital valuation 1. Overall Economic Condition 2. Demand Supply of capital 3. Specifics of the deal 4. The Degree of popularity 5. The standing of the individual Venture capital 6. Investors Considerations 7. Valuation offered on comparable deals
STRUCTURING THE DEAL Investor concern Reasonable reward for the given level of risk Sufficient influence on the management of the minimization of taxes. Ease in achieving future liquidity on the investment ENTREPRENEUR CONCERN The creation of the business that he conceptualised Financial rewards for creating the business Adequate resources needed for creating business Voting Control COMMON CONSIDERATION Flexibilty of structure Balance sheet Retention of key employees through adequate equity participation
Venture capital investment process and evaluation • • • Deal origination Screening Evaluation or due diligence Deal structuring Post investment activities and exit
Deal origination • Referral system • Networks, trade fairs, conferences, seminars • Intermediaries
Screening • 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.
Evaluation or due diligence • Business plan • Characteristics of the product • Market or technology
DEAL STRUCTURING • NEGOTIATES TO ENSURE PROTECTION OF THEIR INTEREST • A RETURN COMMENSURATE WITH RISK • INFLUENCE OVER THE FIRM THROUGH BOARD MEMBERSHIP • MINIMISING RATES • ASSURING INVESTMENT LIQUIDITY • THE RIGHT TO REPLACE MANAGEMENT IN CASE OF CONSISTENT POOR MANAGERIAL PERFORMANCE
POST INVESTMENT ACTIVITIES AND EXIT Assumes the role of partner or collaborator Exit in four ways: IPO Acquisition by another company Repurchase of the venture capitalist share by the investee company Purchase of the venture capitalist share by a third party.
Factors influencing investment decision of VC • • • Market attractiveness Product differentiation Managerial capabilities Environmental threat resistance Cash out potential
Risk categories • • • Competitive risk Bailout risk Investment risk Management risk Implementation risk Leadership risk
Contd. . Venture capitalist attributes Purposeful risk managers • Determined eclectics • Parachutist
Types of venture capitalist and criteria used Purposeful Eclectics parachutist Attend to detail Articulate Sustained effort Demonstrate leadership Product patentable Attend to detail Product protectable Prototype developed Product protectable Market acceptance High growth Product stimulates existing dd Prototype developed Low threat of early of competition Low threat of early competition Stimulating market Venture capitalist familiar Low threat of early entry Highly liquid investment VC familiar with the industry
Evaluation criteria used by VCF in India • Irrelevant • Desirable • Important • Essential
Overall evaluation criteria • • • Characteristics of entrepreneur. Characteristics of the product Characteristics of the market Financial considerations Characteristics of the management team
Essential criteria and self image of VC • • • • • Qualification experience past development Record, integrity sincerity versatility and tenancy Killer instinct to cash in the opportunities Long-term vision Product and market familiarity Sharp business sense Dispassionate product selection Ability to manage people Integrity Urge to grow Ability to stand ahead of competition Balanced management team Invention led growth capable of comprehending commercial risk Seeking growth thro widely held financial participation Successful in the past Articulate about the business plan Fire in the belly Experience/balance Compatible expectation drive
BUSINESS PLAN • ASK YOURSELF THESE QUESTIONS • WHO ARE YOU? • HOW MUCH DO YOU NEED , OVER WHAT PERIOD AND HOW WILL THE MONEY BE USED/ • WHEN AND HOW WILL YOU PAYBACK THE MONEY
BUSINESS PLAN FRAME WORK • • • • Executive summary Business background Product/service Market analysis Sales and marketing strategy Production/operations Management Risk factors Funds requested Return on Investment and exist Use of proceeds Financial summaries appendices
Comparison of investment pattern particulars VC Bought out deal Conventional loan financing Participation High as the in CVF/VCC has management a equity stake Low equity held by sponsors Nil lender does not have the expertise Return to the High investor High Moderate Time period Very long Not very long May be set as per choice regulations Not High Moderate
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