Venture capital involves private funding for risky new businesses with growth potential. Venture capitalists provide funding in exchange for equity, and actively participate in management. Venture capital financing occurs in stages from early seed funding through expansion funding. It uses financial instruments like equity, debt, and conditional loans. After funding, venture capitalists provide ongoing guidance, support, and strategic input to help ensure business success and protect their investment. Their goal is to eventually exit their investment through options like an IPO, acquisition, or sale to new investors.

1. VENTURE CAPITAL
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2. Venture Capital
• It’s a private funding used to support risky new
business and speculative ventures, usually with
high growth potential.
• A typical venture capital investment usually
involves the business owner giving up equity to
venture capitalist in return for funding.

3. Features of Venture Capital
• Venture capital involves not only investing money but also active
participation in the management of the company by the person who has
made investments in the company.
• Venture capitalist divests his or her holding once the investments has
generated returns in accordance with the venture capitalist desired
return.
• Venture Capital Financing is in the form of equity participation rather
than giving it as loan or debt.
• Venture Capital Financing is usually done for companies which are
small level or medium level and also relatively newly formed companies
are the preferred choice of venture capitalist.

4. Stages of Venture Capital Financing
1. Early Stage Finance
• Seed Capital- Research phase where the concepts and ideas of
the promoters constitutes.
• Start up Capital- Product/services are commercialized for the
first time with venture capital institution.
• Second Round Capital- Stage at which product has already
been launched but business has not yet become profitable.

5. 2. Later Stage Finance
• Development Stage Capital- This is financing of
established business which have overcome the extremely high-risk early
stage, have recorded profits for a few years but they have to reach a
stage to go public.
• Bridge/Expansion-This finance by VCI involves low risk
perception and a time frame of 1 to 3 yr.
• Management Buy Out- VCI provide funds to enable the
current operating investors to acquire an existing product.
• Management Buyins- Funds provided to enable an outside
group buy an ongoing venture.

6. STRUCTURING THE FINANCIAL INSTRUMENTS
• EQUITY INSTRUMENTS
• DEBT INSTRUMENTS
• CONDITIONAL LOAN- This is a form of loan finance without any
pre-determined repayment scheduled or interest rate.
• CONVENTIONAL LOAN- These are modified to the requirement of
venture capital financing . It carries lower interest initially which
increases after production increasing.
• INCOME NOTES- These fall between conditional and conventional
loans and carry a uniform low rate of interest plus a royalty on sales.
• NON-CONVERTIBLE DEBENTURES(NCD)-These carry a
fixed/variable rate of interest are redeemable at par/premium, are
secured and can be cumulative/non-cumulative.

7. INVESTMENT NURTURING/AFTERCARE
The main elements of after care are:
• After the stage of investment decision, provision
of continuing guidance and support.
• Building of joint relationship to tackle
operational and other problem of business.
• Protection of investment of the VCI.

8. STYLES OF NURTURING
• HANDS ON NURTURING- It is a continuous and constant
involvement in the operation of the investee company by the
venture capital institution.
• HANDS OFF NURTURING-It is a passive role played by the
venture capital funds in formulating strategies/policy matters.
• HANDS HOLDING NURTURING- This is mid-way between
hands on and off.

9. OBJECTIVE OF AFTERCARE
• To ensure the proper utilization of assistance
provided.
• To ensure the implementation of the project.
• To provide the strategic input in technology,
finance, marketing etc.
• To anticipate likely problems and advice
preventive.
• Venture does not default in any statutory
obligation.

10. STURUCTURAL ASPECTS
• LIIMITED LIABLITY OF INVESTORS
• SIMPLE OPERATION OF FUNDS
• TAX TRANSPARENCY OF THE FUND
• TAX EXEMPTION OF THE CARRIED
INTEREST
• MAXIMUM TAX BENEFITS TO INVESTORS

11. MODE OF COMPENSATION
• ANNUAL MANAGEMENT FEES – This covers the
normal operating expenses such as salary and
allowances of employees, administrative expenses. It is
generally 2-3% of the net asset value.
• CARRIED INTEREST- The general partner
contributes 1% and the limited partners contributes 99%
of the capital of the fund.

12. EXIT• The last stage in venture capital financing.
• The precise timing of exit depends on nature of
the venture , the extent and type of financial
stake and potential competition , market
conditions.
• The important aspect of the exit stage of venture
capital financing is the decision regarding the
disinvestment .

13. DISINVESTMENT OF EQUITY/QUASI-
EQUITY INVESTMENT
• GOING PUBLIC
• SALE OF SHARES TO ENTREPRENURS
/EMPLOYEES.
• TRADE SALES/SALE TO ANOTHER
COMPANY.
• SELLING TO NEW INVESTORS.
• LIQUIDATION