Informal Risk Capital & Venture Capital

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Financial requirement of an Entrepreneur

Time period and amount of capital required plays an important role in deciding sources of finance for an entrepreneur Traditional small business firms are having difficulties in obtaining finance from external resources in initial period of business There are three broad finance options with an entrepreneur
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Own capital Borrowed Capital/Finance Seeking an equity partner

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2.

3.

New Enterprise and Innovation Management-Global Institute of Management-Prof.Prashant Sagar

Time period v/s Funding

In a life cycle of business enterprise, an entrepreneur requires various type of finance over a period of time which can be classified in below category Early Stage Financing Expansion/Development stage Finance Acquisition/Leveraged Buy Out (LBO)

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Time period v/s Funding

Initial/Early Stage requirement
Seed Capital Start Up Capital

Expansion/Development Stage
Working Capital requirement Expansion Ipo

Acquisition/Leveraged Buyouts
Traditional mergers & acquisition Leveraged Buy Outs Going Private

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Initial/Early Stage requirement

Initial/Early Stage requirement

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Seed Capital
Capital requires for proving concept/Testing

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Start up capital
Capital requires for starting initial marketing & starting operations, yet no commercial sale has started

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Expansion/Development Stage

Expansion/Development Stage
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Working Capital requirement

For meeting operational expenses & initial growth

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Expansion
Rapid sales with BEP achievement & positive profits

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Ipo
Bridge financing for taking company IPO

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Acquisition/Leveraged Buyouts

Acquisition/Leveraged Buyouts
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Traditional mergers & acquisition Leveraged Buy Outs

Management of the company acquires company control by buying out from present owners

Going Private (Share buy back)

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Risk Capital Markets

Three Risk capital markets providing capital to a business ventures

1. 2. 3.

Public equity market Venture Capital Market Informal Risk Capital Market

Public equity market is accessible only to high potential & proven business entities. Venture Capitalists are funding in expansion stage. by way of equity participation/investment. Rest of the segment is obtaining funding form the market consist of angle (individual) investors is known as informal risk capital market

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INFORMAL RISK-CAPITAL MARKET

The informal risk-capital market is a group of wealthy investors known as business angels Who are looking for equity investment opportunities Business angles provides funds for all market but particularly for Start up stage funding Venture capital market is a market consist of formal firms providing funds for start up/development/expansion/buy outs. The equity market is a market providing funds for highly potential /proven business.
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Venture Capital - Overview

Concept emerged in U.S in 1970,in u.k during early 80s, in Japan in mid 80s and around 1987 in India. It is important source of capital for SMEs since small investors are afraid of funding due to higher risk involved. Venture capitalist provide funding in form of equity, quasi equity, debt.
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Venture Capital - Overview

VC investments are generally made in Cash in exchange of shares invested in company/firm. VC Firms are generally established by professionals having expertise in a particular domain, generally consist of as fund of funds, financial institutions, endowments pension funds and banks. To compensate for high risk taken by the VCs they expect higher rate of return in form of capital appreciation over a period of time.
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New Enterprise and Innovation Management-Global Institute of Management-Prof.Prashant Sagar

Venture Capital - Overview

Definition:

According to International Finance Corporation (IFC), venture capital is equity or equity featured capital seeking investment in new ideas, new companies, new production, new process or new services that offer the potential of high returns on investments. As defined in Regulation 2(m)of SEBI (Venture Capital Funds) Regulation , 1996 "venture capital fund means a fund established in the form of a company or trust which raises monies through loans, donations issue of securities or units as the case may be, and makes or proposes to make investments in accordance with these regulations.
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Selecting the VC investors

The members of the Indian Private Equity and Venture Capital Association comprise a number of venture capital firms in India. The IVCA Directory of Members provides basic information about each member's investment preferences and is available from the Association. Entrepreneur must study business proposal & find out VCs whose investment criteria are matching with given venture. Once VCs firm is chosen, an entrepreneur will contact investment manager of VC Firm The venture capital firm will ask prospective investee companies for information concerning the product or service, the market analysis, how the company operates, the investment required and how it is to be used, financial projections, and importantly questions about the management team.

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Selecting the VC investors

Apart from Amount of finance and time period, other important factors while considering VC funding includes..
Industry knowledge Fund raising financial and strategic planning recruitment of key personnel mergers and acquisitions and access to international markets and technology

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What do VCs Look for?

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High risk & rewards by selective investments according to VCs preference Different approach related to location, nature of business, size of investment, industry specialization, stage of company, involvement in companies activity Rejection of proposal by VSs Quality & depth of commitment from existing management Appropriate Investment Structure As well as the requirement of being an attractive business opportunity Exit Opportunity
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What do VCs Look for?

The Business Plan
The companys management should prepare the plan and they should set challenging but achievable goals. Avoid jargon and general position statementslanguage should be understood by non technical person. Executive Summary is the most critical part of Business report.
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What do VCs Look for?

Overall the Venture capitalist looks for.. product or service stage of development legal protection realistic "SWOT analysis distribution channels. historic problems faced by the business risks affecting your business and the industry senior management & Experience detail
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What do VCs Look for?

Overall the Venture capitalist looks for..

current and potential skills gaps Financial projections with research undertaken to support these assumptions. What if? questions-Contigency plan envisioned that more than one round of financing will be required Possible exit strategies for the investors may include floating the company on a stock exchange or selling the company to a trade buyer
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New Enterprise and Innovation Management-Global Institute of Management-Prof.Prashant Sagar

Venture Capital-Advantages
Long term investment Business partner sharing risk & reward both. Provides practical advise & other assistance for nurturing the business Provides readymade network for recruitment of key personnel, international market, introduction of strategic markets, co- investment with other VSs Providing additional capital for growth & expansion in addition to initial funding. The most important difference between a venture capitalist and conventional investors and mutual funds is that he is a specialist and lends management support and also helps in:
Financial and strategic planning Recruitment of key personnel Obtain bank and other debt financing Introduction to strategic partners and acquisition targets in the region Regional expansion of manufacturing and marketing operations Obtain a public listing

Generally investment is done in Non listed companies/firms

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Disadvantages of VCs
Venture capitalists behave like sheep investing only in whatever industry happens to be the flavor of the month. Everyone else need not apply Entrepreneur is at risk of revealing business secrets to ingenuin VCs push cash short companies to the brink of bankruptcy Many a times VCs destroy the founding teams motivation and commitment with stringent norms shifts the founding teams focus away from selling to spending money
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New Enterprise and Innovation Management-Global Institute of Management-Prof.Prashant Sagar

Vcs as suitable source of funding?

Companies that have a well developed business plan for substantial rapid growth. Companies which are in need of sizeable amounts of capital that are difficult to collateralize. Companies which are preferably past the start-up phase, and are poised for quick expansion. Companies with good liquidity prospects, such as going public in the near future, or good prospects of being bought out very profitably.

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Exit Strategies of VCs

The ultimate goal of VCs is higher returns on risky funding by way of capital appreciation, over a period of time venture capitalist will follow below exit strategies IPO Mergers and Acquisitions Redemption

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Venture Capital v/s Debt Finance

Click to edit Master text styles Second level Third level Fourth level Fifth level

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Examples of Successful VCs

Example 1 On 2nd December, 2006 Reva Electric Car Company Pvt Ltd received $20-million funding from Global Environment Fund (GEF) and Draper Fisher Jurveston (DFJ). GEF is the largest private equity fund investing predominantly in cleaner energy and environment ventures. Example 2 GVFL Limited, Indias pioneer Venture Capital Company announces an investment of Rs. 110 million in Sahajanand Laser Technology Limited, Indias one of the largest manufacturers of Laser Systems for Diamond Industry. will be utilizing the funds in the expansion of their range of high end laser machines.
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Venture Capital Firms in India

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Thank You

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