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Venture Capital Financing

Chapter 5 : Fee-Based Corporate Financial Services. Venture Capital Financing. Definition.

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Venture Capital Financing

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  1. Chapter 5 : Fee-Based Corporate Financial Services Venture Capital Financing

  2. Definition • The investment in small or medium-sized unlisted companies with new idea or technology, where promoters suffer from lack of finance and financiers keep away, with the investors participating in some degree, in the management process and lifting the venture to a profitable business unit and exiting at an appropriate time on a future date.

  3. Evolution • Originated by General George Doriot of the Harvard Business School with the commencement of American Research and Development Corporation in 1946 • The venture capital industry was started in UK in 1980

  4. Venture Capital Financing • Risk Capital • Financing of New Ideas or New Technologies • Injection of capital as well as skills needed to set up a new firm • Developing managerial skills and marketing efficiency • Exiting at an appropriate time in the future date.

  5. Types of Venture Capitalists • Incubators • Angel Investors • Venture Capitalists • Private Equity Players

  6. Stages of Financing • Early Stage Financing • Seed Capital Assistance • Start -Up Financing • Second Round Financing • Later Stage Financing • Mezzanine • Bridge • Managed Buy-Ins (MBIs) • Managed Buy-Outs (MBOs) • Turnaround

  7. Incubation Process • Pre-admission and admission process • Company Development • Technology • Market • Infrastructure & people • Finance • Company Growth • Technology • Markets • Infrastructure and people • Graduation

  8. Business Plan • Executive Summary • Business Background • Product/Service • Market Analysis • Sales and Marketing strategy • Production/ Operation • Management • Risk Factors • Funds Requested • Return on Investment and exit • Use of proceeds • Financial Summaries

  9. Valuation and Analysis • To know the value of the project • To decide the required percentage of ownership by the venture capitalist • Valuation Methodologies: • Conventional Method • First Chicago Method • Revenue Multiplier Method

  10. V C Investment Process • Deal Origination • Screening • Evaluation or Due Diligence • Deal Structuring • Post-investment activities and exit

  11. Post Investment • Monitoring and Nurturing • Styles of Nurturing: • Hands-on Aftercare • Hands-off Aftercare • Hand-holding Aftercare • Importance of Nurturing

  12. Valuation of the Portfolio • Objectives of Valuation • To enable investors to accurately monitor and evaluate the performance of their investment. • To enable managers of venture capital funds to provide comparisons with their industry counterparts • To provide incentives, usually in the form of “carried interest” to the managers of VC Funds. • To enable the assessment of the quality of the management of a venture capital firm.

  13. Principles of Valuation • Disclosure of factors such as discount rate, P/E Ratio etc. • Category-wise valuation • Consistency in the basis of valuation • Standard accounting methods • Uniformity in valuation • Conservative approach • Specific point of time • Relate to future expectations • Review by someone other than the fund’s managers.

  14. EXIT • Going Public • Sale of Shares to the Entrepreneur • Sale of company to another Company • Finding a New Investor • Receivership or Liquidation

  15. Venture Capital Funds In India • TDICI - ICICI/UTI • RCTC - IFCI/UTI • IDBI-VCF - IDBI • GVFL - GIIC • AVCL - APDIC • PICUP-VCF - PICUP • CVCF - CANARA BANK • INDIA INVESTMENT FUND - GRINDLAYS BANK • CCVFC - CREDIT CAPITAL GROUP • INDUS VENTURE FUND - SHRI T THOMAS

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