VENTURE CAPITAL

Venture Capital- Basics

Starting and growing a business always require capital.
There are a number of alternative methods to fund growth.
These include the owner or proprietors own capital,
arranging debt finance, or seeking an equity partner, as is the
case with private equity and venture capital.
Finance may be required for the start-up,
development/expansion or purchase of a company.
New companies or ventures that have a limited operating
history and hence may find it difficult to raise funds through
an equity or debt offering.
In such a scenario, VC investors play a pivot role in investing
in unfinanced areas to promote new ventures.





Venture Capital- Basics
Venture capital is most attractive for new
companies with limited operating history that
are too small to raise capital in the public
markets and have not reached the point
where they are able to secure a bank loan or
complete a debt offering.

What is Venture Capital
Venture capital is a means of equity financing for rapidly-
growing private companies.
Venture Capital firms invest funds on a professional basis,
often focusing on a limited sector of specialization (eg. IT,Bio
Technology, infrastructure, health/life sciences, clean
technology, etc.).
The venture capital investment helps for the growth of
innovative entrepreneurships.
Venture capital is an investment in the form of equity, quasi-
equity and sometimes debt - straight or conditional, made in
new or untried concepts, promoted by a technically or
professionally qualified entrepreneur.
Venture capital means risk capital.







What is VC
It is developed as a result of the need to provide non-
conventional, risky finance to new ventures based on
innovative entrepreneurship.
It refers to capital investment, both equity and debt, which
carries substantial risk and uncertainties.
The risk envisaged may be very high.
Venture capital typically comes from institutional investors
and high net worth individuals and is pooled together by
dedicated investment firms
Provider of seed money for start-ups, midstage firms on the
brink of success but needing additional capital, or successful
firms capable of expansion to a regional or nationwide
platform.
VC also can include managerial and technical expertise.


VC- Definition
Venture capital is a type of private equity capital typically
provided for early-stage, high-potential, growth companies in
the interest of generating a return through an eventual
realization event such as an IPO or trade sale of the company.
A pool of risk capital, typically contributed by large investors,
from which allocations are made available to young, small
companies that have good growth prospects but are short of
funds.
It is developed as a result of the need to provide non-
conventional, risky finance to new ventures based on
innovative entrepreneurship.
Venture capital means risk capital.



VC- Definition
Venture capital is an investment in the form of
equity, quasi-equity and sometimes debt - straight or
conditional, made in new or untried concepts,
promoted by a technically or professionally qualified
entrepreneur.
It refers to capital investment, both equity and debt,
which carries substantial risk and uncertainties. The
risk envisaged may be very high may be so high as to
result in total loss or very less so as to result in high
gains

VC- Definition
Venture capital means many things to many people.
It is in fact nearly impossible to come across one single
definition of the concept.
Jane Koloski Morris, editor of the well known industry
publication, Venture Economics, defines venture capital as:
'providing seed, start-up and first stage financing' and also
'funding the expansion of companies that have already
demonstrated their business potential but do not yet have
access to the public securities market or to credit oriented
institutional funding sources.
SEBI Venture Capital Funds (VCFs) Regulations,
1996
Definition:
A Venture Capital Fund means a fund established in the form
of a trust/company; including a body corporate, and
registered with SEBI which
(i) has a dedicated pool of capital raised in a manner specified
in the regulations and
(ii) invests in venture capital undertakings (VCUs) in
accordance with these regulations.
All VCFs must be registered with SEBI and pay Rs.25,000 as
application fee and Rs. 5,00,000 as registration fee for grant
of certificate.

The Origin of Venture Capital

In the 1920's & 30's, the wealthy families and individual
investors provided the start up money for companies that had
ability to become famous.
General Doriot, a professor at Harvard Business School, in
1946 set up the American Research and Development
Corporation (ARD), the first firm to finance the commercial
promotion of advanced technology developed in the US
Universities.
Among the early VC funds set up was the one by the
Rockfeller Family which started a special fund called
VENROCK in 1950, to finance new technology companies.
While in its early years VC may have been associated with
high technology, over the years the concept has undergone a
change and as it stands today it implies pooled investment in
unlisted companies.

The Origin of Venture Capital 20
th
Century

With few exceptions, private equity in the first half of the
20th century was the domain of wealthy individuals and
families.
Before World War-II, venture capital investments (originally
known as "development capital") were primarily the domain
of wealthy individuals and families.
After World War II true private equity investments began to
emerge marked by the founding of the first two venture
capital firms in 1946:
- American research and Development Corporation
- J H Whitney & Company


The Origin of Venture Capital- 20
th
century

During the 1960s and 1970s, venture capital firms focused
their investment activity primarily on starting and expanding
companies in electronic, medical or data-processing
technology.
As a result, venture capital came to be almost synonymous
with technology finance.
The public successes of the venture capital industry in the
1970s and early 1980s gave rise to a major proliferation of
venture capital investment firms.
90s witnessed world wide economic progress, wherein new
ventures started expanding with that the scope for VC funds.
Venture Capital in India

In India, the Venture Capital plays a vital role in the
development and growth of innovative entrepreneurships.
Venture Capital activity in the past was done by the
developmental financial institutions like IDBI, ICICI and State
Financial Corporations.
These institutions promoted entities in the private sector with
debt as an instrument of funding.
With the minimum paid up capital requirements raised for
listing at the stock exchanges, it became difficult for smaller
firms with viable projects to raise funds from public.
The need for Venture Capital was recognised in the 7th five
year plan and long term fiscal policy of GOI.
VC was recognised with the appointment of Bhatt committee
for development of small & medium enterprises.

Venture Capital in India

The 1
st
VC was started in 1975,viz. Risk Capital Foundation
(RFC) se up by Industrial Finance Corporation of India(IFCI).
VC existence really started in India in 1988 with the formation
of Technology Development and Information Company of
India Ltd. (TDICI) - promoted by ICICI and UTI.
At the same time Gujarat Venture Finance Ltd. and APIDC
Venture Capital Ltd. were started by state level financial
institutions.
Sources for these funds were the financial institutions, foreign
institutional investors or pension funds and high net-worth
individuals.
VC- Advantages
The Venture capital sector is the most vibrant industry in the
financial market today.
Venture capital is money provided by professionals who
invest alongside management in young, rapidly growing
companies that have the potential to develop into significant
economic contributors.
Venture capital is an important source of equity for start-up
companies.
Venture capital can be visualized as your ideas and our
money concept.of developing business.

VC- Advantages
Venture capitalists are people who pool financial resources
from high networth individuals, corporates, pension funds,
insurance companies, etc. to invest in high risk - high return
ventures that are unable to source funds from regular
channels like banks and capital markets.
The venture capital industry in India has really taken off.
Venture capitalists not only provide monetary resources but
also help the entrepreneur with guidance in formalizing his
ideas into a viable business venture.
It injects long term equity finance which provides a solid
capital base for future growth.

ADVANTAGES OF VC
The venture capitalist is able to provide practical advice and
assistance to the company based on past experience with
other companies which were in similar situations.
The venture capitalist also has a network of contacts in many
areas that can add value to the company, such as in recruiting
key personnel, providing contacts in international markets,
introductions to strategic partners, and if needed co-
investments with other venture capital firms when additional
rounds of financing are required.
The venture capitalist may be capable of providing additional
rounds of funding should it be required to finance growth.

Advantages of VC
Equity finance offers the significant advantage of having no
interest charges.
It is "patient" capital that seeks a return through long-term
capital gain rather than immediate and regular interest
payments, as in the case of debt financing.
The venture capitalist is a business partner, sharing both the
risks and rewards.
Venture capitalists are rewarded by business success and the
capital gain.



Advantages of VC
In exchange for the high risk that venture capitalists
assume by investing in smaller and less mature
companies, venture capitalists usually get significant
control over company decisions, in addition to a
significant portion of the company's ownership (and
consequently value).
Young companies wishing to raise venture capital
require a combination of extremely rare yet sought
after qualities, such as innovative technology,
potential for rapid growth, a well-developed
business model, and an impressive management
team.
Advantages of VC
Venture capital provides the funding that a company needs to
expand its business. It also offers a number of value added
services.
Mentoring - Venture capitalists provide companies with
ongoing strategic, operational and financial advice.
They will typically have nominee directors appointed to the
companys board and often become intimately involved with
the strategic direction of the company.
Alliances - Venture capitalists can introduce the company to
an extensive network of strategic partners both domestically
and internationally and may also identify potential acquisition
targets for the business and facilitate the acquisition.
Facilitate exit - Venture capitalists are experienced in the
process of preparing a company for an initial public offering
(IPO) of its shares onto the Stock Exchange both in domestic
and international market.
Advantages of VC
Investment executives working with Venture Capital Funds
attempt to identify the best projects in order to minimize
their investment risk.
Research has shown that Venture Capital backed companies
grow faster than other types of companies, employ more
people and are more profitable when benchmarked against
their peers.
This is made possible by a combination of capital, Venture
Capitalists identifying and investing in the best investment
opportunities and input from Non-Executive and Executive
Directors introduced by the VC investor (a key differentiator
from other forms of finance)

Types of VC in India
Development Financial Institutions: Set up by DFIs, viz.
IFCI,etc

State Financial Institutions: Promoted by SFCs.

Banks: Sponsored by banks viz. SBI, Canara Bank, BOB etc.

Private funds: Sponsored by private entrepreneurs in
collaboration with banks,etc.
VC- Stages of Finance
Seed Capital
Start up capital
Early stage financing
Follow on financing
Expansion financing
Replacement financing
Turnaround financing
Buyouts
VC- SEBI Regulations
SEBI has made regulations for protecting the interest of the
investors.
VCFs regulation was passed in 1996.
In 2000, Chandrasekar committee was appointed to identify
the problems of VC industry in India and to suggest methods
for their growth.
SEBI regulation is a must to carry on the activities.


ANGEL INVESTORS
An Angel investor or Angel is an affluent individual who
provides capital for a business start ups usually in exchange
for convertible debt or equity.
A small but increasing number of angel investors organize
themselves into angel groups or angel networks to share
research and pool their investment capital.
Angels typically invest their own funds, unlike venture
capitalists, who manage the pooled money of others in a
professionally-managed fund.
Angel capital fills the gap in start-up financing between
"friends and family" (sometimes humorously given the
acronym FFF, which stands for "friends, family and fools")
who provide seed funding, and venture capital.