Venture capital financing provides equity financing to high-risk startups and growing businesses. It focuses on investments that can earn a high rate of return. Venture capitalists provide seed funding, funding for early growth stages, and expansion funding. They participate in management and aim to achieve a return through an IPO or acquisition. Venture capitalists guide management decisions, introduce entrepreneurs to partners, and mentor leadership skills to help businesses succeed and provide an exit for investors.

1. Venture capital financing
NOTES
Dr kabata PhD

2. What is venture capital financing?
• Venture capital financing is a form of equity financing which focus on financing
high risk entrepreneurial businesses with the objective of earning a high rate of
return. Examples of venture capitalists include:
• They provide financial assistance:
• Startup capital to New venture. (seed capital)
• Development funds to businesses in their early growth stages
• expansion funds to rapidly growing ventures that have potential to “go public”.
• Turnaround funds for ventures that have high potential of rediscovering their
growth.

3. Sources for funding for a startup
• Self Financing
• Equity Financing (Venture Capital)
• Debt Financing
• Crowd funding
• Angel investors

4. Features of venture capital financing
• High Degrees of Risk financing
• Equity Participation
• Long Term Investment
• Participation in Management
• Achieve Social Objectives
• Investment is liquid

5. Role of venture capitalist in venture creation
• They provide advice on management and board decisions.
• Introducing entrepreneurs to suppliers and distributors
• Facilitating expansion financing or IPO underwriting
• Introducing entrepreneurs to management consultants
• Acting as guarantors on loans and leases
• Developing leadership skills through personal mentorship.
• Help in employee recruitment and development of employee agreement.

6. Types of Venture Capitalists
• Venture capital funds set up by angel investors, that is, high network individual
investors.
• Venture capital subsidiaries of corporations - these are established by major
corporations; commercial bank holding companies and other financial institutions.
E.g. Lions Den
• Private capital firms/funds-The primary institutional source of venture capital is a
venture capital firm venture capitalists take high risks by investing in an early stage
company with little or no history and they expect a higher return for their high-risk
equity investments in the venture. E.g. Shark Tanks

7. Modes of Finance by Venture Capitalists
• Equity - Most of the venture capital funds provide financial support to
entrepreneurs in the form of equity by financing 49% of the total equity.
• Conditional loan - From a venture capitalist point of view, equity is an unsecured
instrument and hence a less preferable option than a secured debt instrument. A
conditional loan usually involves either no interest at all or a coupon payment at
nominal rate.
• Convertible loans - The convertible loan is subordinate to all other loans, which may
be converted into equity if interest payments are not made within agreed time limit.

8. Selection of Venture Capitalists
• Approach adopted by VCs - Selection of VCs to a large extent depends upon the approach
adopted by VCs which can either be hands on or hands off.
• Flexibility in deals - The entrepreneurs would like to strike a deal with such venture capitalists
who are flexible and generous in their approach.
• Exit policy - The entrepreneurs should ask clearly the venture capitalists as to their exit
policies whether it is buy back or quotation or trade sale. Fund viability and liquidity - The
entrepreneurs must make sure that the VCs has adequate liquid resources and can provide
later stage financing if the need arises, also, the VC has committed backers and is not just
interested in making quick financial gains.
• Track record of the VC & its team - The scrutiny of the past performance, time since
operational, list of successful projects financed earlier etc.

9. What will guide the venture capitalist?
• Strong Management Team: expertise, commitment and motivation and track record of the entrepreneur.
• A Viable Idea. Before taking investment decision, venture capital firms consider the viability of project or the idea.
• Business Model and Plan. The business plan should concisely describe nature of the business, the qualifications of the
members of the management team, how well; the business has performed, and business projections and forecasts.
• Project Cost and Returns A. VCI would like to undertake investment in a venture only if future cash inflows are likely to be
more than the present cash outflows.
• Future Market Prospects. The marketing policies adopted , marketing strategies in relation to the competitors, market
research undertaken, market size, share and future market prospects are some of the considerations that affect the decision.
• Existing Technology.
• Miscellaneous Factors. include availability of raw material and labor, pollution control measures undertaken , government
policies, rules and regulations applicable to the business/industry, location of the industry etc.

10. Stages of Investment Financing
• Early Stage Financing e.g.
seed capital
start ups
second round financing
Later Stage Financing
• Development Capital
Expansion Finance
Replacement Capital
Turn Around
Buy Outs

11. Funding schedules

12. What is the Procedure of venture capitalist
investing in a venture?
• Receipt of proposal. A proposal is received by the venture capitalists in the form of a business plan.
• Appraisal of plan. VC appraises the business plan giving due regard to the creditworthiness of the
promoters, the nature of the product or service to be developed, the markets to be served and financing
required.
• Investment. If venture capital fund is satisfied with the future profitability of the company, it will take step
to invest his own money in the equity shares of the new company known as the assisted company.
• Provide value added services. Venture capitalists not only invest money but also provide managerial and
marketing assistance and operational advice.
• Exit. After some years, when the assisted company has reached a certain stage of profitability the VC sells
his shares in the stock market at high premium, thus earning profits as well as releasing locked up funds for
redeployment in some other venture and this cycle continues.

13. funders
• Faster Capital for both new start-ups and accelerators
• Can be introduced by representatives to their incubation centres
• Fund 50% while the entrepreneurs gets the rest from the pool of venture
capital.
• Vu partners
• Use Accelerators such as Now splint who have a pool of venture and Angel
investors.

14. References
• Hisrich R.D., Peters M.P. and Shepherds D.A. (2008). Entrepreneurship 7th ed. New
• York: McGraw-Hill/Irwin.
• 2. Holt, D. H. (2004). Entrepreneurship: New Venture Creation. New Delhi India: Prentice
• Hall.
• 3. Kuratko and Hodgetts R.M. (2007) Entrepreneurship Theory, Process 7th ed. Canada:
• Thomson South West.
• 4. Stokes D. and Wilson N. (2006) Small Business Management and Entrepreneurship,