This article explain what is venture capital .it covers following the information .What is venture capital and financing venture capital , Venture capital financing stages ,Methods of venture capital financing ,Problems related to venture capital and how to seek venture capital
Venture capital investments are an important engine of innovation and economic growth, but extremely risky from an individual investor's point of view. Furthermore, there are large differences in fund performance between top quartile and bottom quartile venture capital funds. The ability to consistently produce top performing investments implies that there is something unique and time-invariant about venture capital firms.
Venture capital
v Definitions:
Venture Capital Provided By Outside Investor For Financing Or Start Up Venture, Growth Venture Or Struggling Business. Venture Capital Investments Generally a High Risk Investments. At The Same Time Offer The Possibilities Of Extraordinary High Returns .Venture Capital Financing It generally involves start up financing to help technically sound, globally competitive and potential projects to compete in the international markets with the high quality and reasonable cost aspects. The growth of South East Asian economies especially Hong Kong, Singapore, South Korea, Malaysia along with India has been due to the large pool of Venture Capital funds from domestic / offshore arenas. The various stages venture capital financing Pre seed, Stage Seed Stage, Early Stage / First Stage, Second Stage, Third Stage, Bridge / Mezzanine financing or Later Stage Financing, Management, Potential for Capital Gain, Realistic Financial Requirement and Projections, Owner's Financial Stake.
v Methods Of Vc Financing In India there are Four forms1 Equity participation VC firms participate through direct purchase of sharesbut their stake does not exceed 49%. Retained the shares till the projects making profit. Sold the shares either to the promoters at negotiated price under buy back agreement or to the public in the secondary market at a profit.2 Conventional Loan A lower fixed rate of interest is charged till the assisted units become commercially operational, after which the loan carries normal or higher rate of interest . The loan has to be repaid according to a predetermined schedule as per the agreement.3 Conditional loan An interest free loan is provided during the implementation period but it has to pay royalty on sales. The loan has to be repaid as per the agreement as soon as the company is able to generate income.4.Income Notes Combination of conventional and conditional loans. Interest as well as royalty are payable at much lower rates than in case of conditional loans.
v Problems of Venture Capital Financing:
VCF is in its nascent stages in India. The emerging scenario of global competitiveness has put an immense pressure on the industrial sector to improve the quality level with minimization of cost of products by making use of latest technological skills. The implication is to obtain adequate financing along with the necessary hi-tech equipments to produce an innovative product which can succeed and grow in the present market condition. Unfortunately, our country lacks on both fronts. The necessary capital can be obtained from the venture capital firms who expect an above average rate of return on the investment. The financing firms expect a sound, experienced, mature and capable management team of the company being financed. Since the innovative project involves a higher risk, there is an expectation of higher returns from the project. The payback period is also generally high (5 - 7 years).
Stages involved in seeking VC funding:
Ø Study of VC’s Details:
Most of the organized VCs have a website. They spell out their investment objectives and philosophy on the portal. Steps to approach them and criteria for selection are also displayed.
Ø Submission of business plan:
Portals also indicate what VC would require in business plan to be submitted. Business plan should be prepared accordingly and should be submitted through the portal
Ø Scrutiny of business plan:
VC studies the business plan and forms his primary view. If he doesn’t click well with the plan at all, he rejects it in toto. There is no further consideration.
Ø Legal and other Procedures:
A shareholders’ agreement is prepared containing the rights and obligations of each party.
Ø Negotiating Investment:
This involves negotiations on terms of possible agreement between the venture capitalist and management. The venture capitalist will then study the viability of the market to estimate its potential. Often they use market forecasts that have been independently prepared by industry experts who specialized in estimating the size and growth rates of markets and market segments.
Ø Approvals:
The process involves exhaustive due diligence and disclosure of all relevant business information. Final terms can then be negotiated and an investment proposal submitted to the board of directors
Ø Preliminary Meeting: The initial meeting provides an opportunity for the venture capitalist to meet the entrepreneur and key members of the management team to review the business plan and conduct initial due diligence on the project