VENTURE CAPITAL

AISHWARYA SHARMA
 MEANING OF VENTURE CAPITAL

 Venture capital is a growing business of recent origin in the area of industrial financing in
India. The various financial institutions set-up in India to promote industries have done
commendable work. They contend to give debt finance, mostly in the form of term loan to
the promoters and their functioning has been more akin to that of commercial banks. The
financial institutions have devised schemes such as seed capital scheme, risk capital Fund
etc... to help new entrepreneurs.
 Venture is defined as a course of processing the outcome of which is uncertain but to which is
attended the risk or danger of LOSS. Capital means resources to start an enterprise. To
indicate the risk and adventure of such a fund, the name Venture Capital was coined.
 Venture capital is long-term risk capital to finance high technology projects, which involve
risk, but at the same time has strong potential for growth. Venture capital (VC) is a form
of private equity financing that is provided by venture capital firms or funds to start-ups,
early-stage, and emerging companies that have been deemed to have high growth potential
or which have demonstrated high growth (in terms of number of employees, annual revenue,
or both).
 Venture capitalists pool their resources including managerial abilities to assist new entrepreneur in
the early years of the project. Venture capitalists take on the risk of financing risky start-ups in the
hopes that some of the firms they support will become successful. Because start-ups face high
uncertainty, these investments have high rates of failure. Venture capital firms or funds invest in
these early-stage companies in exchange for equity, or an ownership stake, in those companies.
 In a broader sense, venture capital refers to the commitment of capital as shareholding, for the
formulation and setting up of small firms specializing in new ideas or new technologies. It is not
merely an injection of funds into a new firm, it is a simultaneous input of skill needed to set up the
firm, design its marketing strategy and organize and manage it. It is an association with successive
stages of firm's development with distinctive types of financing appropriate to each stage of
development.
 ADVANTAGES OF VENTURE CAPITAL

 Opportunity for expansion of the company

 Valuable guidance and expertise
 Helpful in building networks and connections
 No obligation for repayment
 Venture capitalists are trustworthy
 Easy to locate
 Large Amounts of Capital Can Be Raised
 Help Managing Risk Is Provided
 Monthly Payments Are Not Required
 Personal Assets Don’t Need to Be Pledged
 Experienced Leadership & Advice Is Available
 DISADVANTAGES OF VENTURE CAPITAL

 Dilution of ownership and control.

 Early redemption by venture capital.
 Long and complicated process.
 Venture capital’s take a long time to decide.
 Approaching a venture capital can be tedious.
 May require high return on original investment.
 May release the funds from time to time.
 May lead to under-valuation.
 Forced Management
 Loss of Equity
 Limited Decision-Making Abilities
 Funding Problems
 NEED FOR VENTURE CAPITAL

 Venture capital plays only a minor role in funding basic Innovation. Where venture money plays
an important role is the next stage of innovation life cycle-the period in a company's life when it
begins to commercialize its innovation. It is estimated that more than 80% of the money
invested by Venture Capitalist goes into building the infrastructure required to grow the
business.
 The idea is to invest in a company's balance sheet and infrastructure until it reaches a sufficient
size and credibility so that it can be sold to a corporation or so that an institutional public equity
markets can step in and provide liquidity. In essence Venture Capital buys a stake in an
entrepreneur's idea, nurtures it for a short period of time, and then exits with a help of
Investment Banker
 The term venture capital denotes institutional investors that provide equity financing to young
businesses and play an active role advising their managements. It is also important to
understand the financial problems or barriers that prevent entrepreneurs and inventors from
innovating and commercialising their inventions. Venture capital enables entrepreneurs to
actualize scientific ideals and enables inventions.
 Venture capital investments are made in high technology areas using new technology. Not just
high technology, any high-risk ventures where the entrepreneur has conviction but little
capital gets venture finance. Venture capital is available for expansion of existing business or
diversification to a high-risk area.
 Venture capital provides value addition by managerial support, monitoring and follow up
assistance. It monitors physical and financial progress as well as market development
initiative. It helps by identifying key resource persons. Based on the experience with other
companies, a venture capitalist advises the promoters on project planning, monitoring,
financial management, including working capital and public issue.
 An entrepreneur converts his technical know-how to a commercially viable project with the
assistance of venture capital institutions.
 The financial institutions provide venture capital to their customers not as a mere financial
assistance but more as a package deal which includes assistance in management, marketing,
technical and others.
 By promoting new entrepreneurs and by reviving sick units, a fillip is given to the economic
growth. There will be increase in the production of consumer goods which improves the
standard of living of the people.
 While funding entrepreneurs, the venture capital institutions give more thrust to potential
talent of the borrower which helps in the growth of the borrowing concern.
 The Venture capital institution encourages export oriented units because of which there is more
foreign exchange earnings of the country.
 A venture capital institution acts as more as a catalyst in improving the financial and managerial
talents of the borrowing concern.
 By promoting entrepreneurship, venture capital institutions are encouraging self employment
and this will motivate more educated unemployed to take up new ventures which have not
been attempted so far.
 The venture capital institutions not only improve the borrowing concern but create a situation
whereby they can raise their own capital through the capital market. In the process they
strengthen the capital market also.
 Modern technology will be put to use in the country when financial institutions encourage
business ventures with new technology.
 Many sick companies are able to turn around after getting proper nursing from the venture
capital institutions.
 Venture capital institutions are responsible for the development of the backward regions and
human resources.
 TYPES OF VENTURE CAPITAL

The various types of venture capital are classified as per their applications at various stages
of a business. The three principal types of venture capital are early stage financing, expansion
financing and acquisition/buyout financing.
The venture capital funding procedure gets complete in six stages of financing corresponding
to the periods of a company’s development
 Seed money: Low level financing for proving and fructifying a new idea
 Start-up: New firms needing funds for expenses related with marketing and product
development
 First-Round: Manufacturing and early sales funding
 Second-Round: Operational capital given for early stage companies which are selling
products, but not returning a profit
 Third-Round: This is the money for expanding a newly beneficial company
 Fourth-Round: Also called bridge financing, 4th round is proposed for financing the "going
public" process
 A) Early Stage Financing:

 Early stage financing has three sub divisions seed financing, start up financing and first stage
financing.
 Seed financing is defined as a small amount that an entrepreneur receives for the purpose of
being eligible for a start up loan.
 Start up financing is given to companies for the purpose of finishing the development of
products and services.
 First Stage financing: Companies that have spent all their starting capital and need finance for
beginning business activities at the full-scale are the major beneficiaries of the First Stage
Financing.
 B) Expansion Financing:

 Expansion financing may be categorized into second-stage financing, bridge financing and
third stage financing or mezzanine financing.
 Second-stage financing is provided to companies for the purpose of beginning their
expansion. It is also known as mezzanine financing. It is provided for the purpose of assisting
a particular company to expand in a major way. Bridge financing may be provided as a short
term interest only finance option as well as a form of monetary assistance to companies that
employ the Initial Public Offers as a major business strategy.
 C) Acquisition or Buyout Financing:

 Acquisition or buyout financing is categorized into acquisition finance and management or

leveraged buyout financing. Acquisition financing assists a company to acquire certain parts
or an entire company. Management or leveraged buyout financing helps a particular
management group to obtain a particular product of another company.