Venture capital concept pdf

Many of these firms are new, high technology- oriented companies. Accordingly, there will be higher liquidity where the new ventures are highly successful. Venture Capital Funding Process Obtaining capital for a project through this rout is very difficult. It involves many steps, which a prospective entrepreneur has to adopt when he approaches an investor. They are: 1 Making a Deal Deal Origination : A continuous flow of deals is essential for the venture capital business.

Deals may originate in various ways. Referral system is an important source of deals. Deals may be referred to the VCs through their parent organizations, trade partners, industry associations, friends, etc. The venture capital industry in India has become quit proactive in its approach to generating the dal flow by encouraging individuals to come up with their business plans. VCFs carry out initial screening of all projects on the basis of some broad criteria.

For example the screening process may limit projects to areas in which the venture capitalist is familiar in terms of technology, or Product, or market scope. The size of investment, geographical location and stage of financing could also be used as the broad screening criteria. Most ventures are new and the entrepreneurs may lack operating experience.

Hence a sophisticated, formal evaluation is neither possible nor desirable. The Vcs thus rely on a subjective but comprehensive evaluation. VCFs evaluate the quality of the entrepreneur before appraising the characteristics of the product, market or technology. Most venture capitalists ask for a business plan to make an assessment of the possible risk and expected return on the venture. The valuation process goes through the following steps. This process is termed as dal structuring.

The agreement also includes the protective covenants and earn-out arrangements. Venture capitalists generally negotiate deals to ensure protection of their interests. They would like a deal to provide for a return commensurate with the risk, influence over the firm through board membership, minimizing taxes, assuring investment liquidity and the right to replace management in case of consistent poor managerial performance.

He also involves in shaping of the direction of the venture. This may be done via a formal representation on the board of director, or informal influence in improving the quality of marketing, finance and other managerial functions. The degree of the venture capitalists involvement depends on his policy. It may not, however, be desirable for a venture capitalist to get involved in the day-to-day operation of the venture.

If a financial or managerial crisis occurs, the venture capitalist may intervene and even install a new management team. Venture capitalists typically aim at making medium- to long- term capital gains. They generally want to cash-out their gains in five to ten years after the initial investment.

They play a positive role in directing the company towards particular exit routes. A venture capitalist can exit in four ways. However, there are some disadvantages like high cost of issue, lower demand, etc. The advantage of this strategy is that they can negotiate the deal and results into transfer of controlling interest, the existing promoters may play defensive strategies for fear of loss of control. Sometimes the negative reputation of the acquiring company may bring down the business of the acquired company also.

However, if the company is enjoying good reputation in the market, the venture capitalists may demand a hefty amount as compensation for their exit. Here also there is a chance of loss of control to the existing promoters, who may play some defensive strategies.

However, compared to the public offer, this will be a cheaper route for exit. Structure of Venture Capital Firms and Funds Venture capital firms are typically structured as partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisors to the venture capital funds raised.

Investors in venture capital funds are known as limited partners. This constituency comprises both high net worth individuals and institutions with large amounts of available capital, such as state and private pension funds, university financial endowments, foundations, insurance companies and pooled investment vehicles, called fund of funds or mutual funds.

After normal rate of interest is paid, loan is to be repaid as per the agreement. As a supplement to this limited source, most new ventures will also resort to financial bootstrapping, i. Money from personal bank accounts and proceeds from selling other investments are likely sources of seed financing. It is quite common for founders to sell personal assets e. Although it can be risky, entrepreneurs often use personal credit cards to help finance their business, Family members and friends also provide an important secondary source of seed financing; they may make loans to the entrepreneur or purchase an equity position in the business.

It is often said that family and friends invest in the entrepreneur rather than in a product or service Such financing is usually relatively inexpensive, at least compared with more formal venture investing. While there are a few professional and business angel investors that engage in seed-stage investing, they are not a typical source of financing at this stage. Start-up financing is usually targeted at firms that have assembled a solid management team, developed a business model and plan and are beginning to generate revenues.

However, the start-up venture should begin to think about the advantages of approaching other, more formal, venture investors. Venture capital is growingly becoming popular in different parts of the world because of the crucial role it plays in fostering industrial development by exploiting vast and untapped potentialities and overcoming threats.

Venture capital provides finance as well as skills to new enterprises and new ventures of existing ones based on high technology innovations. It provides seed capital to finance innovations even in the pre-start stage.

In the development stage that follows the conceptual stage, venture capitalist develops a business plan in partnership with the entrepreneur which will detail the market opportunity, the product, the development and financial needs. In this crucial stage, the venture capitalist has to assess the intrinsic merits of the technological innovation, ensure that the innovation is directed at a clearly defined market opportunity and satisfies himself that the management team at the helm of affairs is competent enough to achieve the targets of the business plan.

Therefore, venture capitalist helps the firm to move to the exploitation stage, i. While launching the innovation the venture capitalist will seek to establish a time frame for achieving the predetermined development marketing, sales and profit targets. In each investment, as the venture capitalist assumes absolute risk, his role is not restricted to that of a mere supplier of funds but that of an active partner with total investment in the assisted project.

Thus, the venture capitalist is expected to perform not only the role of a financier but also a skilled faceted intermediary supplying a broad spectrum of specialist services- technical, commercial, managerial, financial and entrepreneurial. It acts as a trigger in launching new business and as a catalyst in stimulating existing firms to achieve optimum performance.

Venture capitalists role extends even as far as to see that the firm has proper and adequate commercial banking and receivable financing. Venture capitalist assists the entrepreneurs in locating, interviewing and employing outstanding corporate achievers to professionalize the firm. We use cookies We use cookies to personalise content and ads, to provide social media features and to analyse our traffic.

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