Activity to be financed
For supporting a concept or idea or R&D for product
Start Up 5-9 Very High
Initializing operations or developing prototypes
First Stage 3-7 High
Start commercials production and marketing
Expand market and growing working capital need
Third Stage 1-3 Medium
Market expansion, acquisition & product development for
profit making company
1-3 Low Facilitating public issue
Risk at each stage
Roadblocks to new businesses
Lack of business experience
Several ways to fail with only a few roads to
Extreme amounts of required commitment
Scarcity of capital
Public Issue Right Issue Bonus Share Private Placement
A private placement is an agreement for equity
investment in a business made directly between the
business and the investor.
PRIVATE PLACEMENTS are, in the simplest terms, a way for
businesses to raise capital by selling securities to private investors.
Rather than making shares in a company available to the general public
(as with an initial public offering).
A private placement makes shares available to only a limited
number of suitable individuals.
doesn’t require underwriters or registration with the Securities
Exchange Board of India.
While often used by small companies, private placement is equally
beneficial to companies of all sizes because they require less time and
expense than a public offering.
Things to be noted
The securities issuance in India is dominated by
Private Placement. Private placement is a sale of
securities to a relatively small number of select
investors as a way of raising capital. In other
words, it is a funding round of securities which are
sold without an initial public offering usually to a
small group of private investors. The securities
are NOT available for sale in the open market.
Private placement refers to non-public offering of
shares in a public company.
Private placement(non-public offering)is a funding round of
securities which are sold not through a private offering, but
through private offering, mostly to a small number of
They are often a cheaper source of capital than a public
PIPE(private investment n public equity)deals are one
type of Private placement.
SEDA(standby equity distribution agreement)is also
another form of Private placement.
• Traditional private placements act as long-term loans
from a separate or groups of investors. These investors receive
•their investment money back,
• plus the agreed upon additional profit percentage,
as soon as the company reaches the required
profit margin and can pay them.
• Structured private placements offer investors the
opportunity to make additional income as the stock prices
increases, while protecting them if the stock price falls. That
protection, sometimes called a reset, allows shareholders to
gain additional stock up to the value of their original investment
if the stock price falls.
Things to be noted
1. Can be used for either private (not publicly traded)
stock offerings or other ownership shares of a
2. For a formal private placement, the investor must be
an accredited investor.
3. Private placement memorandum – similar to a
prospectus, details the risks of an offering, business
officers, actual and pro forma financial standards,
and related material.
4. Subscription agreement – a contract between the
business and the investors requiring the investor to
provide the agreed upon capital.
Private placements provide several advantages over public
offerings or venture capital for both large and small
Staying private allows your company to choose its own
investors, unlike a public offering which is open to the general
It saves your company the time and money required to make a
public offering and maintain the financial records for the SEBI.
Because private investors often are more patient than public
investors, with a private placement you can take more time to
arrive at the agreed upon return.
The options for type and amount of funding give you more
flexibility and get you capital much faster than searching for
venture capitalists, or waiting for your shares to sell on the
An obvious benefit of private placements is that
they do not have to be registered with the
Securities and Exchange Board of India.
Recent legislation has been passed to make
private placements a more viable form of capital
raising and to make private capital more readily
available to owners of small businesses who might
otherwise find raising capital too difficult..
Private placement, especially when structured, can have
disadvantages in both the long and short term.
If only a few investors are interested, and don’t want to invest a
large amount of money it becomes difficult to raise the required
amount of capital.
Sometimes, private investors only buy in when the shares cost
substantially less than the projected cost of the company,
requiring you to sell more shares for the same amount of
The reset feature of structured private placement allows private
investors to gain additional shares, thereby reducing the number
of shares you can sell to new investors, especially if you decide
to go public in the future.
Nonetheless, businesses that offer private placements
must be careful to follow the many rules that continue
to govern private offerings. To ensure that the process
goes smoothly and passes legal muster, businesses
should be sure to work with an accountant and
attorney who are familiar with the legal and financial
requirements of private placements.
Process of Private Placement
Meaning – VC is long term risk capital to finance high
technology projects which involve risks but at the same
time has strong potential for growth .Venture capitalist are
professional investors , who pool their resources
including managerial abilities to assist new entrepreneurs
in early years of project.
Definition – “A financing institution which joins an
entrepreneur as a co-promoter in a project & share the
risks & rewards of enterprise.”
Indian Venture Capital Association
Association was established in 1993 and is based in New Delhi , the capital
of India. IVCA is a member based national organization that -
represents Venture capital and Private equity firms,
promotes the industry within India and throughout the world
and encourages investment in high growth companies.
History of Venture Capital in India-
1. Venture Capital functions were run by development financial institutions
such as the IDBI ICICI Bank, and State Financial corporations. Publicly raised
funds were the main source of Venture Capital
2. Year 1988 marked the establishment of the Technology Development and
Information Company of India Ltd. ,promoted by the ICICI and UTI & was
immediately followed by the Gujarat Venture Finance Ltd.
3. In the year 1996, SEBI introduced the Foreign Venture Capital and
Private Equity Funds investing in India
Some Venture Capitalists..
ICICI venture fund management company limited
IFCI venture capital funds Ltd
SIDBI venture fund
UTI venture fund management company
Punjab InfoTech venture fund
VCF of commercial banks
Private sector VCF
National venture fund for software and information technology
APPROACHING VENTURE CAPITALIST
venture capitalist may be introduced through quality
introduction which refers to contacting VC through lawyer,
banker, accountant. This procedure of approach is required as
VC may not take interest in new project of unknown person.
Entrepreneur before approaching VC should be very well
aware about his own business. He should contact VC who
suits entrepreneurs business which includes VC who deals in
similar product or idea.
After choosing VCF to finance the business, entrepreneur is
required to send his business plan to entrepreneur, after
evaluating business plan, understanding its plans potential
and credibility VC chooses to invest in the business.
Forms of Venture Capital
• Loan contract
between the business
and the venture capital
firm high interest rates
• Venture capital firm
ownership share of the
business generally in
the form of private
• The favored type of venture
capital investment provides
interest yields and seniority
to capital in the event that
the firm fails, but with an
equity interest if the firm
Sources of Venture Capital
Business owned by
to provide venture
capital for other
a cross between a
partnership and a
corporation, does not
have the restrictions on
making investments in
An investment manager
making decisions concerning
which venture capital
projects to fund
Features of Venture Capital
Investment by venture capital firms are made in high tech
areas using new technology or producing innovative
goods by using new technology.
Venture capitalist invest in long term start up costs to
high risk, high reward project. Technology used in the
projects undertaken by the venture capitalist in new and
Return on venture capital investment is illiquid. Return
period may vary from seven to ten years. Investment of
venture capitalist is neither repayable, return is possible
only when share of company is sold at market price.
Venture capitalist not only invest in equity shares of
company but also participate in management affairs of
business. So venture capitalist not only participate in
business but also build business.
Venture capitalist use their wide contact with the
experts in technology and management areas and
provide strategic input to entrepreneurial team in order
to reduce uncertainties.
Venture capitalist firm encourages, nurture and help
the entrepreneur grow because he has limited
resources, high level of risk. Venture capitalist also
help entrepreneurs to market company products.
Investment by VCF are predominantly made in equity
as shares because the dividends can be delayed till the
company starts making profit.
VCF act as co partner in entrepreneur business , share
success and failure proportionate to equity investment
by venture capitalist
Venture capitalists typically assist at four stages in the
• Idea generation
• Ramp up
VC Investment Process
Deal origination-the VC investor creates a pipeline of
deals or investment opportunities that he would consider
for investing in. Deal may originate in various ways.
referral system, active search system, and
Screening-VCFs, before going for an in-depth analysis,
carry out initial screening of all projects .
Due Diligence-Due diligence is the industry jargon for
all the activities. The venture capitalists evaluate the
quality of entrepreneur before appraising characteristics
of the product, market or technology
1. Preliminary evaluation
2. Detailed evaluation
Deal Structuring- In this process, the venture capitalist
and the venture company negotiate the terms of the deals,
that is, the amount, form and price of the investment
Post Investment Activities-
1.direction of the venture
2.day-to-day operation of the venture
3. install a new management team
1. Initial Public Offerings (IPOs)
2. Acquisition by another company
3. Purchase of the venture capitalist's
shares by the promoter, or
4. Purchase of the venture capitalist's
share by an outsider
IPO Promoters buyback Trade sale
Buy back of equity by
Post investment activities
VENTURE CAPITAL PROCESS
i. Venture capitalists generally have expertise in guiding
new firms, can help with management
ii. Venture capitalists can provide substantial funds for
iii. A venture capital firm’s investment in a business can give
the business a “stamp of legitimacy”
i. The venture capital firm often requires some control over
the business’ operations
ii. Venture capital money is expensive – the venture
capitalists expect to obtain investment returns
commensurate with their risk of loss of capital
Risks In Venture Capital Funding
Product Risk: The products concerned may have little or no track record in
the markets as they are largely untested and usually have high obsolescence
Entrepreneur risk: another of the disadvantages of venture capital funding is
that it is difficult to evaluate the new management and new business
application without any prior track record
Concentration risk: Focusing on small market, which can relate to either the
product or in geographical terms, raises exposure to sectoral downturn
Technology risk: hard to assess new technology on small set of products
Duration risk: Generally a longer long-gestation period for funding is needed.
Asset risk: Due to a high percentage of fixed assets with high obsolescence,
along with a high fraction of human capital, there is a lack of collateralizable
assets, which is one of the drawbacks in venture capital funding