2. LEARNING OBJECTIVES
2
• Private Equity andVenture Capital:
Introduction,Rudiments of valuing and financing a
venture,Stages of venture development and
financing,Financial analysis ofVenture capital firms
(VCCs),Structuring the deal/Financial Instrument,
Investment nurturing, valuation of VC portfolio,
Initial Public offerings of stock –Managing internal
and seasoned equity offerings.
3. VENTURE CAPITAL
3
• Venture:- Course or proceedings outcome is
uncertain.This is attended by the risk or danger
of loss.
• Capital: Resources to start the enterprise.
• In short lending capital to growing company
4. EVOLUTION
4
• Traced to USA in 19th and 20th century.
• 1946 – American Research and development
Organization was established as VC
organization.
• Real development -1958 in USA when
Business development act was passed.
• 1960 Japan followed the concept.
5. NOTION OF VENTURE CAPITAL
5
• Venture capital (VC) is a significant financial innovation of the
twentieth century.
• Venture capital is the investment of long-term equity finance
where the venture capitalist earns his return primarily in the form
of capital gains.
• The underlying assumption is that the entrepreneur and the
venture capitalist would act together in the interest of the
enterprise as ‘partners’.
• Venture capital company is defined as “ a financing company
which joins an entrepreneur, as a co-promoter in a project and
shares the risks and rewards of the enterprise”
6. DEFINITIONS
6
• James Koloski Morries- VC is defined as providing
seed , start up and first stage capital, funding
expansion to companies that has demonstrated their
business potential, but do not have access to public
securities or credit oriented institutional funding
sources. Also provide management in leveraged buy
out financing.
• 1995 finance bill- long term equity investment in novel
technology, based projects with potential for growth
and financial return.
7. FEATURES OF VENTURE CAPITAL
7
• Equity Participation.
• Long-term Investments.
• Participation in Management.
Venture capitalist combines the qualities of
bankers, stock market investors and
entrepreneur in one.
9. FEATURES
1. Generally Equity
participant
2. May be also
convertible
debenture or
long term Loan
3. Available for
commercializati
on of new Idea.
Investment in
high risk and high
growth projects
Act as Co-
Promoters
Continuous
Involvement
O nce the venture
reaches full
potential divest his
investment
Investment in
small medium
scale enterprises.
Also provide
inputs in design,
strategy
Disinvestment
Mechanism
1.Promoter’s buyback
2.Public Issue
3.Sale to other VCs
4.Sale in OTC Market
5.Management buyouts
PRO MO TER’S
BUYBACK
9
10. OBJECTIVES
10
• Encourage indigenous technology and commercial application
• Adopt and modify imported technology for indian environment
• Setting up pilot projects
• T
echnological innovations and modernization
• Develop appropriate technology
• Meeting the cost of market survey and market promotion
12. THE BUSINESS PLAN
12
• The first step for a company (or an entrepreneur)
proposing a new venture in obtaining venture capital is to
prepare a business plan for the consideration of a venture
capitalist.
• The business plan should explain the nature of the
proposed venture’s business, what it wants to achieve and
how it is going to do it.
• The length of the business plan depends on the particular
circumstances.
• It should use simple language and all technical details
should be explained without jargons.
13. ESSENTIAL ELEMENTS OF A
BUSINESS PLAN
13
1. Executive summary
2. Background on the venture
3. The product or service
4. Market analysis
5. Marketing
6. Business operations
7. The management team
8. Financial projections
9. Amount and use of finance required and exit opportunities
14. WHAT DOES A VENTURE CAPITALIST
LOOK FOR
IN A VENTURE?
14
• Superior businesses
• Quality and depth of management
• Corporate governance and structure
• Appropriate investment structure
• Exit plan
17. METHODS OF VENTURE
FINANCING
17
•
•
•
Equity- generally not exceed 49%.
Retained till the projects make profit
Conditional Loan:lower interest till the
unit makes profit.Paid back as per
predetermined schedule
Income Note:both interest and royalty
18. OTHER FINANCING METHODS
18
1. Participating Debentures: Three stages- till the venture
operates to minimum level- no interest. Then low interest
up to particular level. Once on attaining recommended
level – high interest
2. Partially Convertible Debentures:
3. Cumulative Convertible Preference Shares
4. Deferred Shares- ordinary shares right deferred for
certain number of years.
5. Convertible Loan Stock: Unsecured long term loan
converted to shares
6. Special Ordinary Shares: Voting rights but no
commitment to dividends:
7. Preferred Ordinary Shares: voting rights + modest
dividend+ right share in profit
21. CONVENTIONAL METHOD
21
• T
ake into account time at which the investee company start the
venture and time at which exit.
• Look into
– Annual revenue
– Expected future earnings
– Future market valuations
– PresentValue
– Minimum percentage of ownership-
22. FIRST CHICOGO
22
• Gives allowance to starting point and exit point.
• Considers entire earning stream
• Steps
– Alternative scenario and probability-success,sideways survival,failure
– PresentValue ofVC
– ExpectedValue ofVC
– Maximum Percentage ofownership
24. DEVELOPMENT OF VENTURE
CAPITAL IN INDIA
24
• The concept of venture capital was formally introduced in India in 1987,
when the government announced the creation of a venture fund, to be
operated by the Industrial Development Bank of India (IDBI).
• VCFs in India can be categorized into the following four groups:
1. VCFs promoted by the central (federal) government-controlled development
finance institutions
2. VCFs promoted by the central (federal) government-controlled development
finance institutions
3. VCFs promoted by the public sector banks
4. VCFs promoted by the foreign banks and private
sector companies and financial institutions
25. FUTURE PROSPECTS OF VENTURE
FINANCING
25
• Rehabilitation of sick units.
• Assist small ancillary units to upgrade their
technologies.
• Provide financial assistance to people coming out
of universities etc.
• VCFs can play a significant role in the service
sector including tourism, publishing, health care,
etc.
26. SUCCESS OF VENTURE CAPITAL
26
• Entrepreneurial Tradition
• Unregulated Economic Environment
• Disinvestment Avenues
• Fiscal Incentives
• Broad Based Education
• Venture Capital Managers
• Promotion Efforts
• Institute Industry Linkage
• R&D Activities
27. SEBI AND VENTURE
CAPITAL FUNDS
27
• Domestic VC
– Registered with SEBI- SEBI (Venture Capital
Fund ) Regulations1996.
– Not registered
• Foreign VC
– Registered with SEBI- SEBI (Foreign Venture
Capital Fund ) Regulations2000.
– Not registered
28. REGULATIONS- DOMESTIC
28
• Definition
– Fund established by trust, company, body corporate and
registered with SEBI
• Dedicated pool of fund
• Raised as specified by the regulations
• To invest in VC as specified by regulation
• Venture capital undertaking:
– Not listed
– Not in the line of negative list- real estate, NBFC, Gold
financing, activities not permitted under industrial policy
29. REGULATIONS- DOMESTIC
29
• Minimum corpus – Rs 5 crore
• Max investment in any venture not more than
25% of corpus
• Investment in associated company not
permitted
• At least 75% of investible fund to be invested
in unlisted equity shares or equity linked
instruments.
30. REGULATIONS- DOMESTIC
30
• Not more than 25% of investible funds may be
invested by way of
–Subscription of IPO of a venture capital whose
shares are proposed to be listed subject to lock in
period of one year.
–Debt or debt instrument
• Eligible as QIB in book building process.
• Investment by mutual fund can invest up to 5%
incase of open ended fund and 10% close ended
fund in VC fund to increase the resource.
31. REGULATIONS- FOREIGN
31
• Entity incorporated and established outside India
– Investment company, trust, partnership, mutual fund, pension
fund, AMC, etc incorporated outside India.
– Regulated by foreign authority, Income tax payer, or submit
certificate from banker, or promoters track record- SEBI can
consider the above for registration.
• Not more than 25% of investible funds may be invested by way of
– Subscription of IPO of a venture capital whose shares are
proposed to be listed subject to lock in period of one year.
– Debt or debt instrument
32. ANGEL FINANCE
32
• Wealthyindividuals
• Financial support in return for equity shares.Support,advice andpromote
• T
ypesfive groups
– Corporate angels- senior managementposition suchasbusiness
development.Thosetakenretirement
– Entrepreneur –own and operate
– Enthusiast –involve in dealsnormally above65years
– Micro Management-very active andnormally demandposition in board
– Professional –investors occupation suchasdoctor
,lawyer and
accountant invest incom
panythat offer product or service
33. COMPARISON
Basis of
difference
Business Angels Venture
Capitals
Personal Entrepreneur Investors
Firms funded Small Small Medium
Due diligence Minimal Extensive
Location of
Investment
Of concern Not Important
Contract Used Simple Comprehensive
Monitoring Active ,hands on Strategic
Exiting Of lesser concern Highly Important
Rate of return Of lesser Concern Highly Important
33
34. CONSTANT DIVIDEND PER SHARE
POLICY
34
Fixed rate or percentage on paid up capital as
dividend. When the company reaches new level of
earning and expect to maintain dividend is increased
