SU Ch2 M.Sc AcFn551 FMI 2022 sem2 Depository Financial

1. M.SC.,ACCOUNTING AND FINANCE-2022
FINANCIAL MARKETS AND INSTITUTIONS
COURSE CODE-ACFN551-CREDIT-2HR
CHAPTER-THREE
NON-DEPOSITORY FINANCIAL INSTITUTIONS
PROF. DR. CHINNIAH ANBALAGAN
PROFESSOR OF M.SC., ACCOUNTING & FINANCE
COLLEGE OF BUSINESS AND ECONOMICS
SAMARA UNIVERSITY, ETHIOPIA, EAST AFRICA
EMAIL ID: DR.CHINLAKSHANBU@GMAIL.COM

2. NON DEPOSITORY FINANCIAL INSTITUTION
–Nature and Role of financial institution
–Types of Non depository Financial Institution
A. Insurance company
B. Pension fund
C. Mutual funds
D. Finance company
E. Investment Banks
F. Security Brokers and Dealers
G. Venture Capital Firms.

3. Non Depository Financial Institution
• A non-depository institution is an entity
that does not accept deposits.
• For example, an established FDIC-insured
bank may have a branch or office that only
handles commercial lending transactions,
and does not accept deposits or disburse
funds.

4. Depository Institutions And Non-depository
Institutions
• Depository institutions focus on collecting
demand deposits from their customers.
Common types include credit unions, retail
banks, and thrift banks.
• On the other hand, non-depository institutions
do not accept demand deposits.

5. Nature of Financial Institution
• The financial institutions provide loans and
advances to the customers.
• The rate of return is very high in case of
investment made in this type of institution.
• It also gives a high rated consultancy to the
customers for their beneficial investments.
• It also serve as a depository for their customers.

6. Role of Financial Institutions
• Following are the list of roles performed by Financial
Institutions
–Regulation of Monetary Supply
–Banking Services
–Insurance Services
–Capital Formation
–Investment Advice
–Brokerage services
–Pension Fund Services
–Trust Fund Services
–Financing the Small and Medium Scale Enterprises
–Act as A Government Agent for Economic Growth

7. TYPES OF NON DEPOSITORY FINANCIAL INSTITUTION
A. Insurance company
B. Pension fund
C. Mutual funds
D. Finance company
E. Investment Banks
F. Security Brokers and Dealers
G. Venture Capital Firms

8. A. INSURANCE COMPANY
• What is Insurance?
• Insurance is a contract, represented by a policy, in
which an individual or entity receives financial
protection or reimbursement against losses from
an insurance company.
• The company pools clients' risks to make
payments more affordable for the insured.
• Insurance policies are used to hedge against the
risk of financial losses, both big and small, that
may result from damage to the insured or her
property, or from liability for damage or injury
caused to a third party.

9. The First Insurance in Ethiopia
• The Bank of Abysinia (Habesha Bank) started
rendering what could be called modern
insurance service for the first time in Ethiopia
in 1905 as an agent for a foreign insurance
company.
• Mr. Muzinger, an Austrian citizen, opened a full-
fledged insurance branch in Addis Ababa as an
agent for Balois Fire Insurance Company

10. Conti..
• How Insurance Works
• There is a multitude of different types of insurance
policies available, and virtually any individual or
business can find an insurance company willing to
insure them for a price.
• The most common types of personal insurance
policies are auto, health, homeowners, and life.
• Most individuals in the United States have at least
one of these types of insurance, and car insurance
is required by law.

11. Insurance Policy Components
• There are three components of any type of insurance
(premium, policy limit, and deductible) that are crucial.
• Premium
• A policy's premium is its price, typically expressed as a
monthly cost. The premium is determined by the insurer
based on your or your business's risk profile, which may
include creditworthiness.
• Policy Limit
• The policy limit is the maximum amount an insurer will pay
under a policy for a covered loss. Maximums may be set per
period (e.g., annual or policy term), per loss or injury, or over
the life of the policy, also known as the lifetime maximum.
• Deductible
• The deductible is a specific amount the policy-holder must
pay out-of-pocket before the insurer pays a
claim. Deductibles serve as deterrents to large volumes of
small and insignificant claims.

12. Insurance companies are there in Ethiopia
• By 2016, in Ethiopia there were 17 Ethiopian
insurance companies,
• 1 is government owned,
• 9 of which are composite insurance companies,
meaning those that transact both general and
long term insurance in Ethiopia, and
• 8 deal with general insurance only.

13. Modern and Best Ethiopian Insurance Companies 2022
• 1. National Insurance Company of Ethiopia (NICE)
• 2. Nile Insurance Company Share Company (NICSC)
• 3. Oromia Insurance Company (OIC)
• 4. Ethiopian Insurance Corporation (EIC)
• 5. Nyala Insurance Share Company (NISCO)
• 6. Africa Insurance Company (AICSC)
• 7. Awash Insurance Company (AIC)
• 8. Global Insurance Company (GIC)
• 9. Lion Insurance Company (LIC)
• 10. Nib Insurance Company (NIC)
• 11. The United Insurance Company UNIC
• 12. Abay Insurance S.C. (AISC)
• 13. Berhan Insurance S.C. BISC
• 14. Tsehay Insurance S.C. (TISC)
• 15. Lucy Insurance S.C. (LISC)
• 16. Bunna Insurance S.C. (BISC)

14. Different services of insurance company
• National Insurance Company's Services
• Fire & Allied Perils
• Consequential Loss
• Householders, Comprehensive
• Workmen’s Compensation
• Fidelity Guarantee
• Personal & Group Personal Accident
• Public Liability
• Money
• Plate Glass
• All Risks
• Bonds
• Engineering
• Carrier Liability
• Emergency Travel Medical
• Burglary

15. Main Types Of Insurance
7 Types of Insurance are;
1. Life Insurance or Personal Insurance,
2. Property Insurance,
3. Marine Insurance,
4. Fire Insurance,
5. Liability Insurance,
6. Guarantee Insurance.

16. Main Types Of Insurance

17. First insurance company in Ethiopia
• Imperial Insurance Company
• Jointly owned by the Emperor, his entourage
and foreign companies, the first domestic
insurance company, namely, Imperial
Insurance Company started issuing policies in
fire, life and general accident since 1951.

18. The First Insurance In Ethiopia
• The Bank of Abysinia (Habesha Bank) started
rendering what could be called modern
insurance service for the first time in Ethiopia
in 1905 as an agent for a foreign insurance
company.
• Mr. Muzinger, an Austrian citizen, opened a
full-fledged insurance branch in Addis Ababa
as an agent for Balois Fire Insurance Company

19. B. PENSION FUND
• A pension fund represents an institutional
investor and invests large pools of money into
private and public companies.
• Pension funds are typically managed by
companies (employers).
• The main goal of a pension fund is to ensure
there will be enough money to cover the
pensions of employees after their retirement in
the future.

20. How Do Pension Funds Work?
• Most commonly, pension plans are defined
benefit plans, which means that employees will
receive pension payments equal to a certain
percentage of their average salary paid
throughout their last few years of employment.

21. Open vs. Closed Pension Funds
• Open pension funds are custodians of at least
one pension plan with no membership
restriction. Closed pension funds support pension
plans that are only open to specific employees.
• Closed pension funds can be further classified
into:
• Single-employer pension funds
• Multi-employer pension funds
• Related member pension funds
• Individual pension funds

22. Pension Fund Managers
• At present, there are eight pension fund
managers in the country.
• Aditya Birla Sun Life Pension Management
Limited.
• HDFC Pension Management Company Limited.
• UTI Retirement Solutions Limited.
• SBI Pension Funds Private Limited.
• ICICI Prudential Pension Funds Management
Company Limited.
• Reliance Pension Fund.
• Kotak Mahindra Pension Fund Limited.
• LIC Pension Fund.

23. Understanding Pension Plans
• A pension plan requires contributions by the employer and may
allow additional contributions by the employee. The employee
contributions are deducted from wages. The employer may also
match a portion of the worker’s annual contributions up to a
specific percentage or dollar amount.
• There are two main types of pension plans the defined-benefit
and the defined-contribution plans.
• The Defined-Benefit Plan
– In a defined-benefit plan, the employer guarantees that the
employee will receive a specific monthly payment after retiring
and for life, regardless of the performance of the underlying
investment pool.
– The employer is thus liable for a specific flow of pension
payments to the retiree, in a dollar amount that is typically
determined by a formula based on earnings and years of
service.

24. Defined-benefit Plan
• Defined-benefit employer-sponsored pension plans date
from the 1870s. The American Express Company established
the first pension plan in 1875. At their height in the 1980s,
they covered 38% of all private-sector workers.
• The Defined-Contribution Plan
• In a defined contribution plan, the employer commits to
making a specific contribution for each worker who is
covered by the plan. The final benefit received by the
employee depends on the plan's investment
performance. The company’s liability ends when the total
contributions are expended.
• The defined contribution plan is much less expensive for a
company to sponsor, and the long-term costs are difficult to
estimate accurately.

25. Deciding Factors
• There are other basic factors that must almost
always be taken into consideration in
any pension maximization analysis. These
variables include:
• Your age
• Your current health and projected longevity
• Your current financial situation
• The projected return for a lump-sum investment
• Your risk tolerance
• Inflation protection
• Estate planning considerations

26. C. MUTUAL FUND
• A mutual fund is a type of financial vehicle made
up of a pool of money collected from many
investors to invest in securities like stocks, bonds,
money market instruments, and other assets.
• Mutual funds are operated by professional money
managers, who allocate the fund's assets and
attempt to produce capital gains or income for the
fund's investors.
• A mutual fund's portfolio is structured and
maintained to match the investment objectives
stated in its prospectus.

27. How Mutual Funds Work
• while a mutual fund company is in the business of making
investments. Investors typically earn a return from a mutual
fund in three ways:
– Income is earned from dividends on stocks and interest on
bonds held in the fund's portfolio. A fund pays out nearly all
of the income it receives over the year to fund owners in
the form of a distribution. Funds often give investors a
choice either to receive a check for distributions or to
reinvest the earnings and get more shares.
– If the fund sells securities that have increased in price, the
fund has a capital gain. Most funds also pass on these gains
to investors in a distribution.
– If fund holdings increase in price but are not sold by the
fund manager, the fund's shares increase in price. You can
then sell your mutual fund shares for a profit in the market.3

28. Types of Mutual Funds
• Equity Funds
• The idea here is to classify funds based on both the size of
the companies invested in (their market caps) and the
growth prospects of the invested stocks. The term value
fund refers to a style of investing that looks for high-quality,
low-growth companies that are out of favor with the
market. These companies are characterized by low price-to-
earnings (P/E) ratios, low price-to-book (P/B) ratios, and
high dividend yields. Conversely, spectrums are growth
funds, which look to companies that have had (and are
expected to have) strong growth in earnings, sales, and cash
flows. These companies typically have high P/E ratios and do
not pay dividends. A compromise between strict value and
growth investment is a "blend," which simply refers to
companies that are neither value nor growth stocks and are
classified as being somewhere in the middle.

29. Conti…
• Fixed-Income Funds
• Another big group is the fixed income category.
• A fixed-income mutual fund focuses on
investments that pay a set rate of return, such as
government bonds, corporate bonds, or other debt
instruments.
• The idea is that the fund portfolio generates
interest income, which it then passes on to the
shareholders.

30. Conti…
• Index Funds
• Another group, which has become extremely
popular in the last few years, falls under the
moniker "index funds."
• Their investment strategy is based on the belief
that it is very hard, and often expensive, to try to
beat the market consistently.
• So, the index fund manager buys stocks that
correspond with a major market index such as
the S&P 500 or the Dow Jones Industrial Average
(DJIA).

31. Conti…
• Balanced Funds
• Balanced funds invest in a hybrid of asset classes,
whether stocks, bonds, money market
instruments, or alternative investments.
• The objective is to reduce the risk of exposure
across asset classes.
• This kind of fund is also known as an asset
allocation fund.
• There are two variations of such funds designed
to cater to the investors objectives.

32. Conti…
• Money Market Funds
• The money market consists of safe (risk-free), short-
term debt instruments, mostly government Treasury
bills.
• This is a safe place to park your money. You won't get
substantial returns, but you won't have to worry about
losing your principal.
• A typical return is a little more than the amount you
would earn in a regular checking or savings account
and a little less than the average certificate of deposit
(CD).
• While money market funds invest in ultra-safe assets,
during the 2008 financial crisis, some money market
funds did experience losses after the share price of
these funds, typically pegged at $1, fell below that
level and broke the buck.

33. Conti…
• Income funds
• Income funds are named for their purpose:
• to provide current income on a steady basis.
• These funds invest primarily in government and
high-quality corporate debt, holding these bonds
until maturity in order to provide interest streams.
• While fund holdings may appreciate in value, the
primary objective of these funds is to provide
steady cash flow​ to investors.
• As such, the audience for these funds consists of
conservative investors and retirees.
• Because they produce regular income, tax-conscious
investors may want to avoid these funds.

34. International/Global Funds
• An international fund (or foreign fund) invests only in
assets located outside your home country.
• Global funds, meanwhile, can invest anywhere around
the world, including within your home country. It's
tough to classify these funds as either riskier or safer
than domestic investments, but they have tended to
be more volatile and have unique country and political
risks.
• On the flip side, they can, as part of a well-balanced
portfolio, actually reduce risk by
increasing diversification, since the returns in foreign
countries may be uncorrelated with returns at home.
• Although the world's economies are becoming more
interrelated, it is still likely that another economy
somewhere is outperforming the economy of your
home country.

35. Specialty Funds
• This classification of mutual funds is more of an all-
encompassing category that consists of funds that have
proved to be popular but don't necessarily belong to
the more rigid categories we've described so far.
• These types of mutual funds forgo broad diversification
to concentrate on a certain segment of the economy or
a targeted strategy.
• Sector funds are targeted strategy funds aimed at
specific sectors of the economy, such as financial,
technology, health, and so on. Sector funds can,
therefore, be extremely volatile since the stocks in a
given sector tend to be highly correlated with each
other.
• There is a greater possibility for large gains, but a
sector may also collapse (for example, the financial
sector in 2008 and 2009).

36. Exchange Traded Funds (ETFs)
• A twist on the mutual fund is the exchange traded fund (ETF).
• These ever more popular investment vehicles pool
investments and employ strategies consistent with mutual
funds, but they are structured as investment trusts that are
traded on stock exchanges and have the added benefits of
the features of stocks.
• For example, ETFs can be bought and sold at any point
throughout the trading day. ETFs can also be sold short or
purchased on margin. ETFs also typically carry lower fees
than the equivalent mutual fund.
• Many ETFs also benefit from active options markets, where
investors can hedge or leverage their positions.
• ETFs also enjoy tax advantages from mutual funds. Compared
to mutual funds, ETFs tend to be more cost effective and
more liquid. The popularity of ETFs speaks to their versatility
and convenience.7

37. Mutual Fund Fees
• A mutual fund will classify expenses into either
annual operating fees or shareholder fees.
• Annual fund operating fees are an annual
percentage of the funds under management,
usually ranging from 1–3%.
• Annual operating fees are collectively known as
the expense ratio.
• A fund's expense ratio is the summation of the
advisory or management fee and its administrative
costs.

38. Advantages of Mutual Funds
• There are a variety of reasons that mutual
funds have been the retail investor's vehicle of
choice for decades.
• The overwhelming majority of money in
employer-sponsored retirement plans goes
into mutual funds.
• Multiple mergers have equated to mutual
funds over time.

39. Mutual fund examples
• Here are a few funds from our list of the best-
performing mutual funds:
• Pax Large Cap Fund Individual Investor (PAXLX)
• Goldman Sachs Capital Growth Inv (GSPTX)
• Payson Total Return (PBFDX)
• Pear Tree Quality Ordinary (USBOX)
• Sarofim Equity (SRFMX)

40. Mutual fund pros and cons
• Pros
• Simplicity. Once you find a mutual fund with a good record,
you have a relatively small role to play: Let the fund
managers (or the benchmark index, in the case of index
funds) do all the heavy lifting.
• Professional management. Active fund managers make
daily decisions on buying and selling the securities held in
the fund — decisions that are based on the fund's goals.
• Liquidity. Compared with other assets you own (such as
your car or home), mutual funds are easier to buy and sell.
• Diversification. This is one of the most important principles
of investing. If a single company fails, and all your money
was invested in that one company, then you have lost your
money.

41. Conti…
• Cons
• Here are the major cons of mutual funds:
• Fees. The main disadvantage to mutual funds is
that you’ll incur fees no matter how the fund
performs. However, these fees are much lower
on passively managed funds than actively
managed funds.
• Lack of control. You may not know the exact
makeup of the fund’s portfolio and have no say
over its purchases. However, this can be a relief
to some investors who simply don’t have the
time to track and manage a large portfolio.

42. Mutual funds vs. ETFs vs. stocks
Exchange-traded
funds (ETFs)
Mutual funds Stocks
Cost to invest
Varies. The median
price of the most
popular ETFs is
$59.41.
Varies. The median price
of some of Morningstar’s
top-ranked mutual funds
is $90.88.
Varies. The median share
price of companies listed
on the S&P 500 is
$117.78.
Fees
Average expense
ratio: 0.19%.
Average expense ratio:
0.50%, plus any
additional fees.
Commission fee: Often
$0, but can be as high as
$5.
How to buy
Traded during
regular market hours
and extended hours.
At the end of the trading
day after markets close.
Traded during regular
market hours and
extended hours.

43. D. FINANCE COMPANY
• finance company, specialized financial institution that
supplies credit for the purchase of consumer goods and services by
purchasing the time-sales contracts of merchants or by granting small
loans directly to consumers.
• Specialized consumer finance agencies now operate throughout
western Europe, Canada, the United States, Australia, Japan, and
some Latin American countries. Although they existed in the early
1900s, their greatest development came after World War II.
• Large-sales finance companies, which operate by purchasing unpaid
customer accounts at a discount from merchants and collecting
payments due from consumers, were a response to the need for
installment financing for the purchase of automobiles in the early
1900s.
• Ally Financial, for example, was established as the General Motors
Acceptance Corporation (GMAC) in 1919 to purchase automobile
accounts receivable from car dealers who were themselves unable to
finance time purchases.

44. What does a finance company do?
• Finance Company, specialized financial
institution that supplies credit for the
purchase of consumer goods and services by
purchasing the time-sales contracts of
merchants or by granting small loans directly
to consumers

45. List of top 10 Finance Companies in India
S.No. Finance Company
1. Bajaj Finance Limited
2. Tata Capital Financial Services Ltd
3. Aditya Birla Finance Ltd
4. L & T Finance Limited
5. Muthoot Finance Ltd
6. Mahindra & Mahindra Financial Services Limited
7. HDB Financial Services
8. Power Finance Corporation Limited
9. Shriram Transport Finance Company Limited
10. Cholamandalam Investment and Finance Company

46. Largest Finance Companies in the World by Revenue 2020
Rank Company Industry Revenue Total Assets Headquarters
1 Berkshire Hathaway Conglomerate 247.5 billion 707.8 billion United States
2 Ping An Insurance Group Insurance 163.6 billion 7,143 billion China
3 Allianz Insurance 143.9 billion 973 billion Germany
4 AXA Insurance 113.1 billion 1,008 billion France
5 JP Morgan Chase Banking 105.4 billion 2,687 billion United States
6 ICBC Banking 105.4 billion 4,027 billion China
7 China Construction Bank Banking 95 billion 3,376 billion China
8 China Life Insurance Insurance 92.7 billion 362 billion China
9 Bank of America Banking 91.2 billion 2,325 billion United States
10 Agricultural Bank of China Banking 87.6 billion 3,287 billion China

47. Types Of Loans
• Personal Loan.
• Business Loan.
• Home Loan.
• Gold Loan.
• Rental Deposit Loan.
• Loan Against Property.
• Two & Three Wheeler Loan.
• Personal Loan for Self-employed Individuals.

48. E. INVESTMENT BANK
• An investment bank is a financial services company
that acts as an intermediary in large and complex
financial transactions.
• An investment bank is usually involved when a
startup company prepares for its launch of an Initial
Public Offering (IPO) and when a corporation
merges with a competitor.
• It also has a role as a broker or financial adviser for
large institutional clients such as pension funds.
• Global investment banks include JPMorgan Chase,
Goldman Sachs, Morgan Stanley, Citigroup, Bank of
America, Credit Suisse, and Deutsche Bank.

49. Largest Full-service Investment Banks
• JPMorgan Chase
• Goldman Sachs
• BofA Securities
• Morgan Stanley
• Citigroup
• UBS
• Credit Suisse
• Deutsche Bank
• HSBC
• Barclays Investment Bank
• RBC Capital Markets
• Wells Fargo Securities
• Jefferies Group
• BNP Paribas
• Mizuho
• Lazard
• Nomura
• Evercore Partners
• BMO Capital Markets, Mitsubishi UFJ Financial Group

50. F. SECURITY BROKERS AND DEALERS
• A broker-dealer (B-D) is a person or firm in the
business of buying and selling securities for its own
account or on behalf of its customers.
• The term broker-dealer is used in U.S. securities
regulation parlance to describe stock brokerages
because most of them act as both agents and
principals.
• A brokerage acts as a broker (or agent) when it
executes orders on behalf of its clients, whereas it
acts as a dealer, or principal when it trades for its
own account.

51. Brokers
• Broker and "dealer" are U.S. regulatory terms and, as is often
the case with legal terms, they are not very intuitive to many
people.
• While the words are often seen together, they actually
represent two different entities.
• A broker executes orders on behalf of clients. To the
regulators, this means the entity through which investors
hold a brokerage account.
• To investors, it generally means the person who helps them
buy and sell securities.
• A bit of confusion occurs here, as the industry also has lots of
terms for a person who helps investors buy and sell
securities, including financial advisor, investment advisor,"
and "registered representative.
• For the moment, we’ll stick with the strict legal definitions to
provide a baseline for further exploration.

52. Dealers
• While a broker facilitates security trades on behalf of
investors, a dealer facilitates trades on behalf of itself. The
terms “principal” and “dealer” can be used interchangeably.
• So, when you hear about big financial firms trading in their
house accounts, they are acting as dealers.
• Some of these dealers, known as primary dealers, also work
closely with the U.S. Federal Reserve to help implement
monetary policy. Primary dealers are obligated to
participate in the auction of debt issued by the U.S.
government.
• By bidding on Treasury bonds and other securities, these
dealers facilitate trading by creating and maintaining liquid
markets.
• They assist in the smooth functioning of domestic securities
markets as well as transactions with foreign buyers.

53. Types of broker-dealers
• There are two types of broker-dealers:
• A wire house, or a firm that sells its own
products to customers; and
• An independent broker-dealer, or a firm that
sells products from outside sources.

54. Full-Service vs. Discount Brokers
• Brokers come in two general types: full service and
discount. Full-service brokers provide one-on-one
personal service. This includes providing specific
investment recommendations in addition to planning
and advice services that range from retirement
planning, long-term care planning, and estate
planning to the formulation of a personal investment
strategy that will help cover the cost of a child’s
education, a home purchase, or other financial goals.
• Discount brokers, on the other hand, provide trade
execution. Online brokers are perhaps the best example
of this arrangement, as investors can log on, select a
security, and purchase it without ever speaking to
another person. Discount brokers offer an inexpensive
way to purchase securities for investors who know
exactly what they want to buy.

55. Conti…
• What Is the Difference Between a Broker and a
Dealer?
• A broker is an individual or financial services company
that enables the trading of securities for other
individuals.
• A dealer is an individual or financial services company
that enables the trading of securities for themselves.
• How Does a Broker-Dealer Get Paid?
• Broker-dealers primarily get paid via brokerage fees.
Brokerage fees are charged for executing a trade.
• A broker will charge either a flat fee per transaction or
will charge a fee based on a percentage of sales.
Dealers, on the other hand, are executing trades for
themselves and making money on the bid-ask spread.
This involves buying a security and then selling it at a
higher price.

56. Security Brokers, Dealers, and Flotation Companies
• Establishments primarily engaged in providing
investment advice on a contract or fee basis to
establishments which deal in financial contracts are
classified in Industry
• Agents for mutual funds
• Bond dealers and brokers
• Distributors, security
• Floor traders, security
• Investment bankers
• Investment certificates, sale of
• Investment firm-general brokerage
• Mineral leases, dealers in

57. Conti…
• Mineral royalties, dealers in
• Mortgages, buying and selling (rediscounting)
• Mutual fund agents
• Mutual funds, selling by independent salesperson
• Note brokers
• Oil and gas lease brokers
• Oil royalties, dealers in
• Option dealers, stock
• Sale of partnership shares in real estate syndicates
• Security brokers
• Security dealers
• Security flotation companies
• Security traders
• Security underwriters
• Stock brokers and dealers
• Tax certificate dealers

58. G. VENTURE CAPITAL FIRM
• Venture capital (VC) is a form of private equity and a
type of financing that investors provide
to startup companies and small businesses that are
believed to have long-term growth potential.
• Venture capital generally comes from well-off
investors, investment banks, and any other financial
institutions.
• However, it does not always take a monetary form; it
can also be provided in the form of technical or
managerial expertise.
• Venture capital is typically allocated to small
companies with exceptional growth potential, or to
companies that have grown quickly and appear poised
to continue to expand.

59. The Venture Capital Process
• Any business looking for venture capital is to submit a
business plan, either to a venture capital firm or to an
angel investor. If interested in the proposal, the firm or
the investor must then perform due diligence, which
includes a thorough investigation of the
company's business model, products, management, and
operating history, among other things.
• Many venture capital professionals have had prior
investment experience, often as equity research
analysts; others have a Master in Business
Administration (MBA) degree.
• Venture capital professionals also tend to concentrate on
a particular industry.

60. Trends in Venture Capital
• The first venture capital funding was an attempt to
kickstart an industry.
• To that end, Georges Doriot adhered to a philosophy of
actively participating in the startup's progress. He
provided funding, counsel, and connections to
entrepreneurs.
• An amendment to the SBIC Act in 1958 led to the entry
of more novice investing in small businesses and
startups.
• The increase in funding levels for the industry was
accompanied by a corresponding increase in the
numbers for failed small businesses.
• Over time, VC industry participants have coalesced
around Doriot's original philosophy of providing counsel
and support to entrepreneurs building businesses.

61. Why Is Venture Capital Important?
• Innovation and entrepreneurship are the kernels of
a capitalist economy.
• New businesses, however, are often highly-risky
and cost-intensive ventures.
• As a result, external capital is often sought to
spread the risk of failure. In return for taking on this
risk through investment, investors in new
companies are able to obtain equity and voting
rights for cents on the potential dollar.
• Venture capital, therefore, allows startups to get off
the ground and founders to fulfill their vision.

62. How Risky Is Making a Venture Capital Investment?
• New companies often don't make it, and that
means early investors can lose all of the money
that they put into it.
• A common rule of thumb is that for every 10
startups, three or four will fail completely.
• Another three or four either lose some money or
just return the original investment, and one or
two produce substantial returns.

63. Conti…
• What Percentage of a Company Do Venture
Capitalists Take?
• Depending on the stage of the company, its
prospects, how much is being invested, and the
relationship between the investors and the
founders, VCs will typically take between 25 and
50% of a new company's ownership.
• What Is the Difference Between Venture Capital
and Private Equity?
• Venture capital is a subset of private equity. In
addition to VC, private equity also includes
leveraged buyouts, mezzanine financing, and
private placements.

64. The Largest Venture Capital Firms
Ra
nk
Firm Headquarters
10-Year
Capital
Raised ($MM)
Dry Powder
($MM)
1. Tiger Global Management New York City, NY 11968 3218
2. New Enterprise Associates Chevy Chase, MD 8230 1212
3. Sequoia Capital Menlo Park, CA 7865 2173
4. DST Global London 7195 1907
5. Kleiner Perkins Menlo Park, CA 7115 1843
6. Andreessen Horowitz Menlo Park, CA 5502 2164
7. Accel Palo Alto, CA 5454 3828
8. IDG Capital Beijing 5042 1028
9. Index Ventures London 4738 1368
10. Lightspeed Venture Partners Menlo Park, CA 4569 1844
11.
Shanghai DOBE Cultural & Creative
Industry Development
Shanghai 4207 410
12. Bessemer Venture Partners San Francisco, CA 4200 1681
13. Institutional Venture Partners Menlo Park, CA 3750 732
14. Deerfield Management New York City, NY 3650 1099

65. thanks