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GUIDED BY PROF. MAYUR PARMAR.
DATE: 3/10/13
Fund/initial capital provided to businesses typically at a start-up
stage and many times for new/ untested ideas.
mutual funds that manage venture capital money.
aggregate money from several investors who want to provide
venture capital and deploy this money in venture capital
opportunities.
Typically having a higher risk/ higher return profile as compared to
normal equity funds.
whether you should invest in these would depend on your specific
risk profile and investment time-frame.
In exchange for the high risk that venture capitalists assume by
investing in smaller and less mature companies, venture capitalists
usually get significant control over company decisions, in addition
to a significant portion of the company's ownership (and
consequently value).
Associated with job creation (accounting for 2% of US GDP).
Every year, there are nearly 2 million businesses created in the
USA, and 600–800 get venture capital funding. According to
the National Venture Capital Association, 11% of private sector jobs
come from venture backed companies and venture backed revenue
accounts for 21% of US GDP.
 Venture capital is a post-war phenomenon in the business world mainly
developed as a side line activity of the rich in USA. The concept, thus,
originated in USA in 1950s.
 Before World War II, money orders (originally known as "development
capital") were primarily the domain of wealthy individuals and families.
 It was not until after World War II that what is considered today to be true
private equity investments began to emerge marked by the founding of the first
two venture capital firms in 1946:American Research and Development
Corporation (ARDC) and J.H. Whitney & Company.
 ARDC was founded by Georges Doriot, the "father of venture capitalism“
(former dean of Harvard Business School and founder of INSEAD),
 ARDC is credited with the first trick when its 1957 investment of $70,000
in Digital Equipment Corporation (DEC) would be valued at over $355 million
after the company's initial public offering in 1968 (representing a return of over
1200 times on its investment and an annualized rate of return of 101%).
 The concept became popular during 1960’s and 1970’s when several private
enterprises started financing highly risky and highly rewarding projects.
 To denote the risk and adventure and some element of investment, the generic
term “Venture Capital” was developed.
 The American Research and Development was formed as the first venture
organisation which financed over 100 companies and made profit over 35 times
its investment.
 Since then venture capital has grown’ vastly in USA, UK, Europe and Japan
and has been an important contribution in the economic development of these
countries.
 Although funding for new businesses was available from banks and
government owned development financial institutions.
 It was provided as collateral-based money on project-financing basis, which
made it difficult for most new entrepreneurs, especially those who were
technology and services based, to raise money for their ideas and businesses.
 In 1972, a committee on Development of Small and Medium Enterprises
highlighted the need to foster venture capital as a source of funding new
entrepreneurs and technology.
 This resulted in a few incremental steps being taken over the next decade-and-
a-half to facilitate venture capital funds into needy technology oriented small
and medium Enterprises (SMEs), namely:
 Risk Capital Foundation, sponsored by IFCI, was set-up in 1975 to promote
and support new technologies and businesses.
 Seed Capital Scheme and the National Equity Scheme was set up by IDBI in
1976.
 Programme for Advancement of Commercial Technology (PACT) Scheme was
introduced by ICICI in 1985.
 Setting-up of TDICI and Regional Funds: 1987-1994
 Entry of Foreign Venture Capital Funds: 1995-1998
 There are five common stages of venture capital financing:
 The Seed stage
 The Start-up stage
 The Second stage
 The Third stage
 The Bridge/Pre-public stage
 The seed funding take place in this stage.
 considered as the setup stage where a person or a venture approaches an
investor in a VC firm for funding for their idea/product.
 During this stage, the person or venture has to convince the investor why the
idea/product is worthwhile.
 The investor will investigate into the technical and the economical feasibility
(Feasibility Study) of the idea. In some cases, there is some sort of prototype of
the idea/product that is not fully developed or tested.
 If the idea is not feasible at this stage, the investor will not consider financing
the idea.
EXAMPLE:-
 A Gujarat venture named ABC Ltd. wants to develop a portal which allows
companies to order lunch. To open this portal, the venture needs some financial
resources, they also need marketers and market researchers to investigate
whether there is a market for their idea. To attract these financial and non-
financial resources, the executives of the venture decide to approach SBI Bank
to see if the bank is interested in their idea.
 After a few meetings, the executives are successful in convincing the bank to
take a look in the feasibility of the idea. SBI decides to put a few experts for
investigation. After two weeks time, the bank decides to invest. They come to
an agreement of invest a small amount of money into the venture. The bank
also decides to provide a small team of marketers and market researchers and a
supervisor. This is done to help the venture with the realization of their idea
and to monitor the activities in the venture.
RISK:-
 At this stage, the risk of losing the investment is tremendously high, because
there are so many uncertain factors.
 A business plan is presented by the attendant of the venture to the VC firm.
 A management team is being formed to run the venture. If the company has a
board of directors, a person from the VC firms will take seats at the board of
directors.
 To prove that the assumptions of the investors are correct about the investment,
the VC firm wants to see result of market research to see whether the market
size is big enough, if there are enough consumers to buy their product.
 The prototype is being developed and fully tested.
 The management-team establishes a feasible production line to produce the
product. The VC firm monitors the feasibility of the product and the capability
of the management-team from the board of directors.
 They also want to create a realistic forecast of the investment needed to push
the venture into the next stage.
 EXAMPLE:-
 Now the venture has attracted an investor, the venture needs to satisfy the investor for
further investment. To do that, the venture needs to provide the investor a clear
business plan how to realise their idea and how the venture is planning to earn back
the investment that is put into the venture, of course with a lucrative return.
 Together with the market researchers, provided by the investor, the venture has to
determine how big the market is in their region. They have to find out who are the
potential clients and if the market is big enough to realise the idea.
 From market research, the venture comes to know that there are enough potential
clients for their portal site. But there are no providers of lunches yet. To convince
these providers, the venture decided to do interviews with providers and try to
convince them to join.
 With this knowledge, the venture can finish their business plan and determine a pretty
good forecast of the revenue, the cost of developing and maintaining the site and the
profit the venture will earn in the following five years.
 After reading the business plan and consulting the person who monitors the venture
activities, the investor decides that the idea is worth for further development.
RISK:-
 At this stage, the risk of losing the investment is shrinking because the nature
of any uncertainty is becoming clearer.
 At this stage, we presume that the idea has been transformed into a product and
is being produced and sold.
 The venture is trying to squeeze between the rest and it tries to get some market
share from the competitors. This is one of the main goals at this stage.
 Another important point is the cost. The venture is trying to minimize their
losses in order to reach the break-even.
 If at this stage the management team is proven their capability of standing hold
against the competition, the VC firm will probably give a go for the next stage.
 EXAMPLE:-
 The portal site needs to be developed. Developing the site in house is not possible; the
venture does not have this knowledge in house. The venture decides to consult this with
the investor. After a few meetings, the investor decides to provide the venture a small team
of web-designers. The investor also has given the venture a deadline when the portal
should be operational. The deadline is in three months.
 In the meantime, the venture needs to produce a client portfolio, who will provide their
menu at the launch of the portal site. The venture also needs to come to an agreement on
how these providers are being promoted at the portal site and against what price.
 After three months, the investor requests the status of development. Unfortunately for the
venture, the development did not go as planned. The venture did not make the deadline.
According to the one who is monitoring the activities, this is caused by the lack of
decisiveness by the venture and the lack of skills of the designers.
 The investor decides to cut back their financial investment after a long meeting. The
venture is given another three months to come up with an operational portal site. Three
designers are being replaced by a new designer and a consultant is attracted to support the
executives’ decisions. If the venture does not make this deadline in time, they have to find
another investor.
 Luckily for the venture, with the come of the new designer and the consultant, the venture
succeeds in making the deadline. They even have two weeks left before the second
deadline ends.
 This stage is seen as the expansion/maturity phase of the previous stage.
 The venture tries to expand the market share they gained in the previous stage.
This can be done by selling more amount of the product and having a good
marketing campaign.
 The venture will have to see whether it is possible to cut down their production
cost or restructure the internal process. This can become more visible by doing
a SWOT analysis.
Example:-
 Finally the portal site is operational. The portal is getting more orders from the
working class every day. To keep this going, the venture needs to promote their
portal site. The venture decides to advertise by distributing flyers at each office
in their region to attract new clients.
 In the meanwhile, a small team is being assembled for sales, which will be
responsible for getting new lunchrooms/bakeries, any eating-places in other
cities/region to join the portal site. This way the venture also works on
expanding their market.
 Because of the delay at the previous stage, the venture did not fulfil the
expected target. From a new forecast, requested by the investor, the venture
expects to fulfil the target in the next quarter or the next half year. This is
caused by external issues the venture does not have control of it. The venture
has already suggested to stabilise the existing market the venture already owns
and to decrease the promotion by 20% of what the venture is spending at the
moment. This is approved by the investor.
 RISK:-
 At this stage, the risk to the VC firm of losing the investment drops
 In general, this is the last stage of the venture capital financing process. The main goal
of this stage is for the venture to go public so that investors can exit the venture with a
profit commensurate with the risk they have taken.
 At this stage, the venture achieves a certain amount of market share. This gives the
venture some opportunities, for example:
 Merger with other companies
 Keeping new competitors away from the market
 Eliminate competitors
 Internally, the venture has to examine where the product's market position and, if
possible, reposition it to attract new Market segmentation.
 Example:-
 Faced with the dilemma of whether to continuously invest or not.
5 WAYS
TO
GET
VENTURE
CAPITAL
FUNDING
Create Your Business Plan
Take Advantage of Online Networking
Consider Crowd funding
 Go Directly to the VC Community
Venture Capital

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Venture Capital

  • 1. GUIDED BY PROF. MAYUR PARMAR. DATE: 3/10/13
  • 2. Fund/initial capital provided to businesses typically at a start-up stage and many times for new/ untested ideas. mutual funds that manage venture capital money. aggregate money from several investors who want to provide venture capital and deploy this money in venture capital opportunities. Typically having a higher risk/ higher return profile as compared to normal equity funds. whether you should invest in these would depend on your specific risk profile and investment time-frame.
  • 3. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership (and consequently value). Associated with job creation (accounting for 2% of US GDP). Every year, there are nearly 2 million businesses created in the USA, and 600–800 get venture capital funding. According to the National Venture Capital Association, 11% of private sector jobs come from venture backed companies and venture backed revenue accounts for 21% of US GDP.
  • 4.  Venture capital is a post-war phenomenon in the business world mainly developed as a side line activity of the rich in USA. The concept, thus, originated in USA in 1950s.  Before World War II, money orders (originally known as "development capital") were primarily the domain of wealthy individuals and families.  It was not until after World War II that what is considered today to be true private equity investments began to emerge marked by the founding of the first two venture capital firms in 1946:American Research and Development Corporation (ARDC) and J.H. Whitney & Company.  ARDC was founded by Georges Doriot, the "father of venture capitalism“ (former dean of Harvard Business School and founder of INSEAD),
  • 5.  ARDC is credited with the first trick when its 1957 investment of $70,000 in Digital Equipment Corporation (DEC) would be valued at over $355 million after the company's initial public offering in 1968 (representing a return of over 1200 times on its investment and an annualized rate of return of 101%).  The concept became popular during 1960’s and 1970’s when several private enterprises started financing highly risky and highly rewarding projects.  To denote the risk and adventure and some element of investment, the generic term “Venture Capital” was developed.  The American Research and Development was formed as the first venture organisation which financed over 100 companies and made profit over 35 times its investment.  Since then venture capital has grown’ vastly in USA, UK, Europe and Japan and has been an important contribution in the economic development of these countries.
  • 6.  Although funding for new businesses was available from banks and government owned development financial institutions.  It was provided as collateral-based money on project-financing basis, which made it difficult for most new entrepreneurs, especially those who were technology and services based, to raise money for their ideas and businesses.  In 1972, a committee on Development of Small and Medium Enterprises highlighted the need to foster venture capital as a source of funding new entrepreneurs and technology.  This resulted in a few incremental steps being taken over the next decade-and- a-half to facilitate venture capital funds into needy technology oriented small and medium Enterprises (SMEs), namely:
  • 7.  Risk Capital Foundation, sponsored by IFCI, was set-up in 1975 to promote and support new technologies and businesses.  Seed Capital Scheme and the National Equity Scheme was set up by IDBI in 1976.  Programme for Advancement of Commercial Technology (PACT) Scheme was introduced by ICICI in 1985.  Setting-up of TDICI and Regional Funds: 1987-1994  Entry of Foreign Venture Capital Funds: 1995-1998
  • 8.  There are five common stages of venture capital financing:  The Seed stage  The Start-up stage  The Second stage  The Third stage  The Bridge/Pre-public stage
  • 9.  The seed funding take place in this stage.  considered as the setup stage where a person or a venture approaches an investor in a VC firm for funding for their idea/product.  During this stage, the person or venture has to convince the investor why the idea/product is worthwhile.  The investor will investigate into the technical and the economical feasibility (Feasibility Study) of the idea. In some cases, there is some sort of prototype of the idea/product that is not fully developed or tested.  If the idea is not feasible at this stage, the investor will not consider financing the idea.
  • 10. EXAMPLE:-  A Gujarat venture named ABC Ltd. wants to develop a portal which allows companies to order lunch. To open this portal, the venture needs some financial resources, they also need marketers and market researchers to investigate whether there is a market for their idea. To attract these financial and non- financial resources, the executives of the venture decide to approach SBI Bank to see if the bank is interested in their idea.  After a few meetings, the executives are successful in convincing the bank to take a look in the feasibility of the idea. SBI decides to put a few experts for investigation. After two weeks time, the bank decides to invest. They come to an agreement of invest a small amount of money into the venture. The bank also decides to provide a small team of marketers and market researchers and a supervisor. This is done to help the venture with the realization of their idea and to monitor the activities in the venture. RISK:-  At this stage, the risk of losing the investment is tremendously high, because there are so many uncertain factors.
  • 11.  A business plan is presented by the attendant of the venture to the VC firm.  A management team is being formed to run the venture. If the company has a board of directors, a person from the VC firms will take seats at the board of directors.  To prove that the assumptions of the investors are correct about the investment, the VC firm wants to see result of market research to see whether the market size is big enough, if there are enough consumers to buy their product.  The prototype is being developed and fully tested.  The management-team establishes a feasible production line to produce the product. The VC firm monitors the feasibility of the product and the capability of the management-team from the board of directors.  They also want to create a realistic forecast of the investment needed to push the venture into the next stage.
  • 12.  EXAMPLE:-  Now the venture has attracted an investor, the venture needs to satisfy the investor for further investment. To do that, the venture needs to provide the investor a clear business plan how to realise their idea and how the venture is planning to earn back the investment that is put into the venture, of course with a lucrative return.  Together with the market researchers, provided by the investor, the venture has to determine how big the market is in their region. They have to find out who are the potential clients and if the market is big enough to realise the idea.  From market research, the venture comes to know that there are enough potential clients for their portal site. But there are no providers of lunches yet. To convince these providers, the venture decided to do interviews with providers and try to convince them to join.  With this knowledge, the venture can finish their business plan and determine a pretty good forecast of the revenue, the cost of developing and maintaining the site and the profit the venture will earn in the following five years.  After reading the business plan and consulting the person who monitors the venture activities, the investor decides that the idea is worth for further development. RISK:-  At this stage, the risk of losing the investment is shrinking because the nature of any uncertainty is becoming clearer.
  • 13.  At this stage, we presume that the idea has been transformed into a product and is being produced and sold.  The venture is trying to squeeze between the rest and it tries to get some market share from the competitors. This is one of the main goals at this stage.  Another important point is the cost. The venture is trying to minimize their losses in order to reach the break-even.  If at this stage the management team is proven their capability of standing hold against the competition, the VC firm will probably give a go for the next stage.
  • 14.  EXAMPLE:-  The portal site needs to be developed. Developing the site in house is not possible; the venture does not have this knowledge in house. The venture decides to consult this with the investor. After a few meetings, the investor decides to provide the venture a small team of web-designers. The investor also has given the venture a deadline when the portal should be operational. The deadline is in three months.  In the meantime, the venture needs to produce a client portfolio, who will provide their menu at the launch of the portal site. The venture also needs to come to an agreement on how these providers are being promoted at the portal site and against what price.  After three months, the investor requests the status of development. Unfortunately for the venture, the development did not go as planned. The venture did not make the deadline. According to the one who is monitoring the activities, this is caused by the lack of decisiveness by the venture and the lack of skills of the designers.  The investor decides to cut back their financial investment after a long meeting. The venture is given another three months to come up with an operational portal site. Three designers are being replaced by a new designer and a consultant is attracted to support the executives’ decisions. If the venture does not make this deadline in time, they have to find another investor.  Luckily for the venture, with the come of the new designer and the consultant, the venture succeeds in making the deadline. They even have two weeks left before the second deadline ends.
  • 15.  This stage is seen as the expansion/maturity phase of the previous stage.  The venture tries to expand the market share they gained in the previous stage. This can be done by selling more amount of the product and having a good marketing campaign.  The venture will have to see whether it is possible to cut down their production cost or restructure the internal process. This can become more visible by doing a SWOT analysis.
  • 16. Example:-  Finally the portal site is operational. The portal is getting more orders from the working class every day. To keep this going, the venture needs to promote their portal site. The venture decides to advertise by distributing flyers at each office in their region to attract new clients.  In the meanwhile, a small team is being assembled for sales, which will be responsible for getting new lunchrooms/bakeries, any eating-places in other cities/region to join the portal site. This way the venture also works on expanding their market.  Because of the delay at the previous stage, the venture did not fulfil the expected target. From a new forecast, requested by the investor, the venture expects to fulfil the target in the next quarter or the next half year. This is caused by external issues the venture does not have control of it. The venture has already suggested to stabilise the existing market the venture already owns and to decrease the promotion by 20% of what the venture is spending at the moment. This is approved by the investor.  RISK:-  At this stage, the risk to the VC firm of losing the investment drops
  • 17.  In general, this is the last stage of the venture capital financing process. The main goal of this stage is for the venture to go public so that investors can exit the venture with a profit commensurate with the risk they have taken.  At this stage, the venture achieves a certain amount of market share. This gives the venture some opportunities, for example:  Merger with other companies  Keeping new competitors away from the market  Eliminate competitors  Internally, the venture has to examine where the product's market position and, if possible, reposition it to attract new Market segmentation.  Example:-  Faced with the dilemma of whether to continuously invest or not.
  • 19. Create Your Business Plan Take Advantage of Online Networking Consider Crowd funding  Go Directly to the VC Community