Venture Capital

Venture )
Ventu:f J
. C a p i t ~· The 111011ey or fm1d
A project or activity
that ii1volYes risk 11eeded by busii1ess
-,
The capital il1Vested ill a project ill
,vhich there is a ele1ne11t of risk,
typically a 11ew or expai1dii1g
~ usil1ess.
VEN E
CARTALJ' I
TODA~
Features
► High Risk
► Long-time horizon
► Participation in management
► Equity participation and capital
.
gains
► Lack of liquidity
The process of venture capital financing
The venture capital activity is a sequential process
involving the following six steps:
1. Deal origination
2. Screening
3. Evaluation
4. Deal structuring
5. Post-investment activity
6. Exit Plan
I • .L7 V U:.l. C>' .l. .l. E, .l..l. :CU: 1...1. V .1..1.
In Deal Origination there is a continuous flow of deals is essential for venture capital business. Deal may
or~ e in various ways :
~~ erral System
(i1 V jctive search and
(1i1) / Intermediaries
Referral system is an important source of deals. Deals may be referred to VCF by their parent
organizations, trade partners, industry associations, friends, etc. Yet important source of deal flow is the
active search through networks, trade fairs, conferences. A third source used by venture capitalist in
developed countries like USA, is certain intermediaries who match VCF and the potential entrepreneurs
v e n tu r e s f ir s t o f a ll
a p it a li s t to c h o o s e th e b e s t
Venture c
je c ts o n t h e b a sis of
ake s r e s e a r c h o f a ll p r o
undert u c t,
o lo g y o r p r o d
a d c ri te ri a , s u c h a s te c h n
certain bro on
e n t, g e o g r a p h ic a l locati
arket scope, size o f investm
m
nd stage o f fi n a n c in g.
a
3. Evaluation
• A detailed study of project profile, track record of the entrepreneur, market
potential, technological feasibility future turnover, profitability, etc. is
undertaken.
• Besides, venture capitalists in India undertake thorough risk analysis of the

proposal to ascertain product risk, market risk, technological and
entreprenew·ial risk.
• After considering in detail vanous aspects of the proposal, venture

capitalist takes a final decision in terms of risk return spectrum.
4. Deal Negotiation
• Once the venture is found viable, the venture capitalist negotiates
the terms of the deal with the entrepreneur. This it does so as to
protect its interest. Terms of the deal include amount, form and
price of the investment.
• Terms of the deal should be mutually beneficial to both venture

capitalist and the entrepreneur. It should be flexible and its structure
should safeguard interests of both the parties.
5. Post Investment Activity
• Once the deal is financed and the venture begins working, the
venture capitalist associates himself with the enterprise as a partner
and collaborator in order to ensure that the enterprise is operating as
per the plan.
• The venture capitalists participation in the enterprise is generally
through a representation in the Board of Directors or informal
influence in improving the quality of marketing, finance and other
managerial functions.
• The venture capitalist should make exit plan, determining precise timing of exit that
would depend on factors, such as nature of the venture, the extent and type of
financial stake, the state of actual and potential competition, market conditions, etc.
• At exit stage of venture capital financing, venture capitalist decides about
disinvestments/realisation alternatives which are related to the type of investment,
equity and debt instruments.
• Thus, venture capitalize may exit through IPOs, acquisition by another company,
purchase of the venture capitalist's share by the promoter and purchase of the
venture capitalist's share by an outsider

Advanta ges of Venture Capital
• They bring wealth and expertise to the company
• Large sum of equity fmance can be provided
• The business does not stand the obligation to repay the

money
• In addition to capital, it provides valuable information,

resources, technical assistance to make a business successful
• As the investors become part owners, the autonomy
and control of the founder is lost
• It is a lengthy and complex process

• It is an uncertain form of financing
• Benefit from such financing can be realized in long

run only
EQUITY
PARTI IPATION
CONVERTIBLE LOAN
CONDITIONAL LOAN
l INCOME NOTES I
• VC can help in the rehabilitation of sick wiits.
• VC can assist small units to upgrade their te~ gies
• VCFs can play a significant role in developing cow1tries in the

service sector including tourism, publishing, health care etc.
• They can provide financial assistance to people

co1n1ng out of wuversities, tecluucal institutes, etc. thus
promoting entreprenew~al spii~ts.
Examples of venture capital funding
• Pepperfry.com, India's largest furniture e-marketplace, has raised
USD 100 million in a fresh round of funding led by Goldman Sachs.
Pepperfry will use the funds to expand its footprint in cities by
adding to its growing fleet of delivery vehicles. It will also open
new distribution centers and expand its carpenter and assembly
service network. This is the largest quantum of investment raised by
a sector focused e-commerce player in India
Future scopes ofVC in India
• VC can help in the rehabilitation of sick wiits.
• VC can assist small wllts to upgrade their te~ gies
• VCFs can play a significai~ in der ping cow1tri in the

service sector including towi.sm, publishing, health are etc.
• They can provide financial assistance to people

conung out of wuversit:ies, tech.tu~ institutes, etc. thus
promoting ent:reprenewi.al spirits. /

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Venture )

► Equity participation and capital

• Besides, venture capitalists in India undertake thorough risk analysis of the

• After considering in detail vanous aspects of the proposal, venture

• Terms of the deal should be mutually beneficial to both venture

• The venture capitalists participation in the enterprise is generally

through a representation in the Board of Directors or informal

influence in improving the quality of marketing, finance and other

• At exit stage of venture capital financing, venture capitalist decides about

disinvestments/realisation alternatives which are related to the type of investment,

equity and debt instruments.

venture capitalist's share by an outsider

• Large sum of equity fmance can be provided

• The business does not stand the obligation to repay the

• In addition to capital, it provides valuable information,

• It is a lengthy and complex process

• Benefit from such financing can be realized in long

• VC can assist small units to upgrade their te~ gies

• VCFs can play a significant role in developing cow1tries in the

• They can provide financial assistance to people

• VC can assist small wllts to upgrade their te~ gies

• VCFs can play a significai~ in der ping cow1tri in the

• They can provide financial assistance to people

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