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Chapter 23

Chapter 23. VENTURE CAPITAL FINANCING. LEARNING OBJECTIVES. Highlight the true notion of venture capital Focus on the development of venture capital in India Discuss the steps in a venture capital investment process Explain the methods of venture capital financing

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Chapter 23

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  1. Chapter23 VENTURE CAPITAL FINANCING

  2. LEARNING OBJECTIVES • Highlight the true notion of venture capital • Focus on the development of venture capital in India • Discuss the steps in a venture capital investment process • Explain the methods of venture capital financing • Emphasize the need for and methods of disinvestment (exit) related to venture capital activity

  3. NOTION OF VENTURE CAPITAL • Venture capital (VC) is a significant financial innovation of the twentieth century. • Venture capital is the investment of long-term equity finance where the venture capitalist earns his return primarily in the form of capital gains. • The underlying assumption is that the entrepreneur and the venture capitalist would act together in the interest of the enterprise as ‘partners’.

  4. Features of Venture Capital • Equity Participation. • Long-term Investments. • Participation in Management. Venture capitalist combines the qualities of bankers, stock market investors and entrepreneur in one.

  5. Stages in Venture Financing

  6. THE BUSINESS PLAN • The first step for a company (or an entrepreneur) proposing a new venture in obtaining venture capital is to prepare a business plan for the consideration of a venture capitalist. • The business plan should explain the nature of the proposed venture’s business, what it wants to achieve and how it is going to do it.

  7. Cont… • The length of the business plan depends on the particular circumstances. • It should use simple language and all technical details should be explained without jargons.

  8. Essential Elements of a Business plan • Executive summary • Background on the venture • The product or service • Market analysis • Marketing • Business operations • The management team • Financial projections • Amount and use of finance required and exit opportunities

  9. What does a Venture Capitalist Look forin a Venture? • Superior businesses • Quality and depth of management • Corporate governance and structure • Appropriate investment structure • Exit plan

  10. THE PROCESS OF VENTURE CAPITAL FINANCING

  11. Venture Capital Investment Process

  12. Methods of Venture Financing • Equity • Conditional Loan • Income Note • Other Financing Methods • Participating Debentures • Partially Convertible Debentures • Cumulative Convertible Preference Shares • Deferred Shares • Convertible Loan Stock • Special Ordinary Shares • Preferred Ordinary Shares

  13. Disinvestment Mechanisms • Buyback by Promoters • Initial Public Offerings • Secondary Stock Market • Management Buyouts

  14. DEVELOPMENT OF VENTURE CAPITAL IN INDIA • The concept of venture capital was formally introduced in India in 1987, when the government announced the creation of a venture fund, to be operated by the Industrial Development Bank of India (IDBI). • VCFs in India can be categorized into the following four groups: • VCFs promoted by the central (federal) government-controlled development finance institutions • VCFs promoted by the central (federal) government-controlled development finance institutions • VCFs promoted by the public sector banks • VCFs promoted by the foreign banks and private sector companies and financial institutions

  15. Future Prospects of Venture Financing • Rehabilitation of sick units. • Assist small ancillary units to upgrade their technologies. • Provide financial assistance to people coming out of universities etc. • VCFs can play a significant role in the service sector including tourism, publishing, health care, etc.

  16. Success of Venture Capital • Entrepreneurial Tradition • Unregulated Economic Environment • Disinvestment Avenues • Fiscal Incentives • Broad Based Education • Venture Capital Managers • Promotion Efforts • Institute Industry Linkage • R&D Activities

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