Unit 4 venture capital-fis
- 1. VENTURE CAPITAL UNIT-IV Mr. VIPULKUMAR N M ASSISTANT PROFESSOR DEPARTMENT OF COMMERCE KRISTU JAYANTI COLLEGE (AUTONOMOUS) BENGALURU
- 2. Venture Capital • It is a private or institutional investment made into early-stage / start-up companies (new ventures). As defined, ventures involve risk (having uncertain outcome) in the expectation of a sizeable gain. Venture Capital is money invested in businesses that are small; or exist only as an initiative, but have huge potential to grow. The people who invest this money are called venture capitalists (VCs). The venture capital investment is made when a venture capitalist buys shares of such a company and becomes a financial partner in the business. • Venture Capital investment is also referred to risk capital or patient risk capital, as it includes the risk of losing the money if the venture doesn’t succeed and takes medium to long term period for the investments to fructify • Venture Capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms.
- 3. History of Venture Capital • Venture capital is a subset of private equity (PE). While the roots of PE can be traced back to the 19th century, venture capital only developed as an industry after the Second World War. • Harvard Business School Professor Georges Doriot is generally considered the "Father of Venture Capital". • He started the American Research and Development Corporation (ARD) in 1946 and raised a $3.5 million fund to invest in companies that commercialized technologies developed during WWII. • ARDC's first investment was in a company that had ambitions to use x-ray technology for cancer treatment. T • he $200,000 that Doriot invested turned into $1.8 million when the company went public in 1955
- 4. Definition The SEBI defined Venture Capital fund in its regulation 1996 as ‘a fund established in the form of a company or trust which raises money through loans, donations, issue of securities or units as the case may be & makes or proposes to make investments in accordance with the regulations’.
- 5. Rules by SEBI • VCF are regulated by the SEBI (Venture Capital Fund) Regulations, 1996. The following are the various provisions: • A venture capital fund may be set up by a company or a trust, after a certificate of registration is granted by SEBI on an application made to it. On receipt of the certificate of registration, it shall be binding on the venture capital fund to abide by the provisions of the SEBI Act, 1992. • A VCF may raise money from any investor, Indian, Non-resident Indian or foreign, provided the money accepted from any investor is not less than Rs 5 lakhs. The VCF shall not issue any document or advertisement inviting offers from the public for subscription of its security or units • SEBI regulations permit investment by venture capital funds in equity or equity related instruments of unlisted companies and also in financially weak and sick industries whose shares are listed or unlisted • At least 80% of the funds should be invested in venture capital companies and no other limits are prescribed. SEBI Regulations do not provide for any sectoral restrictions for investment except investment in companies engaged in financial services.
- 6. How does Venture Capital Fund work? • Venture Capital Fund is made up of investments from wealthy individuals or companies who give their money to a VC firm to manage their investment portfolios for them and to invest in high-risk start-ups in exchange for equity. • The basic idea is to invest in a company’s balance sheet and infrastructure. • Venture Capitalist nurtures the idea of an entrepreneur for a short period of time and exits with the help of an investment banker. • In a start-up company, VC will receive an equity partnership in exchange for investments in the start-up company. • VC’s receive liquidation preference, it means in the worst-case scenario where the company fails, VCs are given the first claim to all the company’s assets and technology. It also offers voting rights over key decisions like Initial Public Offer (IPO) or even sale of the company.
- 7. Venture Capitalist VS Angel investor? While both provide money to startup companies, venture capitalists are typically professional investors who invest in a broad portfolio of new companies and provide hands-on guidance and leverage their professional networks to help the new firm. Angel investors, on the other hand, tend to be wealthy individuals who like to invest in new companies more as a hobby or side-project and may not provide the same expert guidance. Angel investors also tend to invest first and are later followed by VCs.
- 8. Features of Venture Capital investments • High Risk • Lack of Liquidity • Long term horizon • Equity participation • Capital gains/Capital Appreciation • Venture capital investments are made in innovative projects • Participation in Management
- 9. Advantages of Venture Capital • Provide large sum of equity finance. • Venture Capitalist are rewarded by business success & the capital gain. • Able to bring wealth and expertise to your company • The Venture Capitalist also has a wide network of contacts. • Providing additional funds.
- 10. Disadvantages of Venture Capital • Lengthy and complex process (needs detailed business plan, financial projections and etc.) • In the deal negotiation stage, you will have to pay for legal and accounting fees • Investors become part owners of your business - founder loss of autonomy or control
- 11. Importance of Venture Capital financing/Venture Capital 1. Promotes Entrepreneurs: Just as a scientist brings out his laboratory findings to reality and makes it commercially successful, similarly, an entrepreneur converts his technical know-how to a commercially viable project with the assistance of venture capital institutions. 2. Promotes products: New products with modern technology become commercially feasible mainly due to the financial assistance of venture capital institutions. 3. Encourages customers: 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. 4. Brings out latent talent: 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.
- 12. 5. Promotes exports: The Venture capital institution encourages export oriented units because of which there is more foreign exchange earnings of the country. 6. As Catalyst: A venture capital institution acts as more as a catalyst in improving the financial and managerial talents of the borrowing concern. The borrowing concerns will be more keen to become self dependent and will take necessary measures to repay the loan. 7. Creates more employment opportunities: 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. 8. Brings financial viability: Through their assistance, 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.
- 13. 9. Helps technological growth: Modern technology will be put to use in the country when financial institutions encourage business ventures with new technology. 10. Helps sick companies: Many sick companies are able to turn around after getting proper nursing from the venture capital institutions. 11. Helps development of Backward areas: By promoting industries in backward areas, venture capital institutions are responsible for the development of the backward regions and human resources. 12. Helps growth of economy: 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.
- 14. Scope of Venture Capital 1. Development of and Idea- Seed Capital 2. Implementation Stage – Startup Finance 3. Fledging Stage –Additional Finance 4. Establishment Stage- Establishment Finance
- 15. Type of Funding Objective & Amount of Funding 1. Pre-seed funding 1.Pre-seed funding is in the range of $100,000 – $200,000 2.Funding provided when a startup is less than a year old. 3.Supports R&D, Market Research. 4.Recruit new members. 2. Seed Capital 1.Funding will be in the range of $ 1million – $ 2 million 2.Start-up company will need a product that will be viable in the market 3. Series A funding 1.Funding will range in between $ 2 million – $ 15 million 2.The start-up company needs to have a market-proven product that will help in scaling up fast. Types of Venture Capital funding
- 16. 4. Series B funding 1.Funding can range between $ 7 million – $ 20 million. 2.This round is considered to be less risky. 3.Funding is used for Business Development, advertising. 5. Series C funding 1.Funds for developing more products and services, acquiring another company 2.Funding received is usually in the range of $ 25 million. 6. Series D funding 1.Few start-ups reach this stage. 2.Positive reasons could be the company wants to stay private for some more time or they need to go for more expansion before going for IPO. 3.The negative reason could be the company did not hit the expected growth plans. 4.This is down round funding as trust in the companies abilities has been eroded.
- 17. STAGES IN VENTURE CAPITAL FINANCING
- 18. 1. The Seed Stage Venture capital financing starts with the seed-stage when the company is often little more than an idea for a product or service that has the potential to develop into a successful business down the road. Entrepreneurs spend most of this stage convincing investors that their ideas represent a viable investment opportunity. Funding amounts in the seed stage are generally small, and are largely used for things like marketing research, product development, and business expansion, with the goal of creating a prototype to attract additional investors in later funding rounds. 2. The Startup Stage In the startup stage, companies have typically completed research and development and devised a business plan, and are now ready to begin advertising and marketing their product or service to potential customers. Typically, the company has a prototype to show investors, but has not yet sold any products. At this stage, businesses need a larger infusion of cash to fine tune their products and services, expand their personnel, and conducting any remaining research necessary to support an official business launch. 3. The First Stage Sometimes also called the “emerging stage,” first stage financing typically coincides with the company’s market launch, when the company is finally about to start seeing a profit. Funds from this phase of a venture capital financing typically go to actual product manufacturing and sales, as well as increased marketing. To achieve an official launch, businesses usually need a much bigger capital investment, so the funding amounts in this stage tend to be much higher than in previous stages.
- 19. 4. The Expansion Stage Also commonly referred to as the second or third stages, the expansion stage is when the company is seeing exponential growth and needs additional funding to keep up with the demands. Because the business likely already has a commercially viable product and is starting to see some profitability, venture capital funding in the emerging stage is largely used to grow the business even further through market expansion and product diversification. 5. The Bridge Stage The final stage of venture capital financing, the bridge stage is when companies have reached maturity. Funding obtained here is typically used to support activities like mergers, acquisitions, or IPOs. The bridge state is essentially a transition to the company being a full-fledged, viable business. At this time, many investors choose to sell their shares and end their relationship with the company, often receiving a significant return on their investments.
- 20. What Is Incubation? • Incubation is a trial process in which a fund company operates a single fund or group of funds privately with its own capital or employee capital in order to test the operating characteristics of the fund. Funds tested in incubation are known as incubated funds. Incubation Explained • Incubation is a common practice used by both mutual fund companies and hedge funds to gauge the demand and operating characteristics of a potential new fund. Incubation Strategies • Investment companies may use an incubation trial process to test a single fund or a group of funds. The fund company will base its decision to launch a fund on a number of considerations. In the case of multiple funds in incubation, it may only provide funding and resources for one new fund. • Testing funds in incubation allows a company to make a small investment that could save them money in the long term if they find the fund to be unprofitable. Incubation funds are typically open to a company’s employees and family members, with the company often investing seed capital as well