1. Financing New Venture
Dr. M. Mohanasundari
Associate Professor
Department of Management Studies
Kongu Engineering College, Perundurai.
2. Dr. M. Mohanasundari 29
• One alternative to obtaining the needed private capital that should be considered is
bootstrap financing.
• This approach is particularly important at start-up and in the early years of the
venture when capital from debt financing (i.e., in terms of higher interest rates) or
from equity financing (i.e., in terms of loss of ownership) is more expensive,
if available at all.
• First, it usually takes between two and six months to raise outside capital or to find
out that there is no outside capital available.
• Second, outside capital often decreases a firm’s drive for sales and profits.
• Third, the availability of capital increases the impulse to spend.
• Fourth, outside capital can decrease the company’s flexibility. This can hamper the
direction, drive, and creativity of the entrepreneur.
• Finally, outside capital may cause disruption and problems in the venture.
• Bootstrap financing involves using any possible method for conserving cash.
BOOTSTRAP FINANCING
5. Dr. M. Mohanasundari 32
• Crowdfunding is a method of raising funds for a project, venture, or cause by
collecting small amounts of money from a large number of individuals, typically
through an online platform. It involves leveraging the power of the crowd to gather
financial support for a specific initiative.
• Crowdfunding can be used for various purposes, including business startups,
creative projects, charitable causes, and personal needs.
• In 2010, President Obama signed into law the Jumpstart Our Business Startups
(JOBS) Act that relaxed rules over the General Solicitation of funds in equity
offerings.
• This deregulatory measure effectively allowed companies to be more vocal about
their intent to raise money in what is often referred to as crowdfunding.
• By 2013, it was estimated that $5.1 billion was raised through crowdfunding.
CROWDFUNDING
6. Dr. M. Mohanasundari 33
• Reward Based Crowdfunding
Sites like Kick Starter and Indiegogo, Individuals pledge money to a company which might
be developing a new technology product
• Lending Crowdfunding
Sites allow borrowers to occur debt funds without going to the traditional providers of debt-
commercial banks
• Equity Crowdfunding
Sites allow individuals to invest in private companies for a percentage share of the company.
Sites include: Angelist, CircleUp, Funding Circle, Oar Crowd etc.
• Other Types Crowdfunding
Sites focus in areas as real estate and human capital. In this, sites include: Fundrise, Reality
Mogul, Crowdstreet.
Upstart provides the capital for educators and takes a percentage of individual’s life earnings
for providing the capital.
Categories of Crowdfunding
7. Dr. M. Mohanasundari 34
• Venture Capital 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/her 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’.
• Venture capitalist combines the qualities of bankers, stock market
investors and entrepreneur in one.
VENTURE CAPITAL
8. Dr. M. Mohanasundari 35
• Private venture capital firms (general partners and limited partners)
• Small Business Investment Company (SBIC)
• Industry-sponsored: Banks & Other Financial Institutions and
Non-financial Companies
• Geographically oriented
• University sponsored
• Philanthropic
Types of Venture Capital
9. Dr. M. Mohanasundari 36
Stages in Venture Financing
Early Stage Financing
(50% ROI)
Seed financing for supporting
a concept or idea
R&D financing for
product development
Start-up capital for initial
production and marketing
First stage financing for full-
scale production and
marketing
Expansion Financing
(40% ROI)
Second stage financing for
working capital and initial
expansion
Development financing for
facilitating public issue
Bridge financing for
facilitating public issue
Acquisitions and
Leveraged Buyouts
(30% ROI)
Acquisition financing for
acquiring financing or
another firm for further
growth
Management buyout
financing for enabling
operating group to acquire
firm or part of its business
Turnaround financing for
turning around a sick unit
10. Dr. M. Mohanasundari 37
• Superior businesses
• Quality and depth of management
• Corporate governance and structure
• Appropriate investment structure
• Exit plan
What does a Venture Capitalist look for in a venture?
11. Dr. M. Mohanasundari 38
Process of Venture Capital Financing
Deal Origination
Screening
Evaluation
(due diligence)
Deal Structuring
Post-Investment
Activity
Exit Plan
13. Dr. M. Mohanasundari 40
• Equity
• Conditional Loan
• Income Note
• Other Financing Methods
o Participating Debentures
o Partially Convertible Debentures
o Cumulative Convertible Preference Shares
o Deferred Shares
o Convertible Loan Stock
o Special Ordinary Shares
o Preferred Ordinary Shares
Methods of Venture Financing
14. Dr. M. Mohanasundari 41
• Buyback by Promoters
• Initial Public Offerings
• Secondary Stock Market
• Management Buyouts
Disinvestment Mechanisms
15. Dr. M. Mohanasundari 42
• 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:
❑ VCFs promoted by the central (federal) government-controlled
development finance institutions
❑ VCFs promoted by the central (federal) government-controlled
development finance industries
❑ VCFs promoted by the public sector banks
❑ VCFs promoted by the foreign banks and private sector companies
and financial institutions
DEVELOPMENT OF VENTURE CAPITAL IN INDIA
16. Dr. M. Mohanasundari 43
• 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, healthcare, etc.
FUTURE PROSPECTS VENTURE FINANCING
17. Dr. M. Mohanasundari 44
• Entrepreneurial Tradition
• Unregulated Economic Environment
• Disinvestment Avenues
• Fiscal Incentives
• Broad Based Education
• Venture Capital Managers
• Promotion Efforts
• Institute Industry Linkage
• R&D Activities
SUCCESS OF VENTURE CAPITAL
