VENTURE CAPITAL: Concepts
It is a types of capital,provided by the investors to the new start ups having innovative business idea's.It also provide capital to the small companies having strong growth prospects.It is a very important source of funding for the starts ups and new entrepreneurs who are unable to excess funding from the capital market.
There are various options available in Venture Capital like Seed funding,Angel investing ,Crowd funding ect. From out of these various options any small firm raise capital who not have any operating history of running a firm.New firms are unable to get bank loans because of the risk involved in these firms,so Venture capitalist invest in these firms in order to get higher returns if new concept got success,also venture capitalist have benefit of taking control of decision making in the operation of the firm.
Also,Private equity firms are also a types of Venture Capitalist,which are a job creator in the economy by hiring Fund managers and Investment Bankers have role of researching a potential investors investing in Venture capital fund and a starts ups having future business growth.
Venture Capital is transfer it's equity to the promoters or sell in the open market when company/firm listed in stock market.Also,during the time of Initial public offer(IPO) venture capitalist sell it's equity through IPO.
Venture Capital is an investments in the forms of Equity,Quasi equity and a Times debt,which have conditions of paying interest and priciple when the venture start generating sales.
Key Elements of Venture Capital:
1.The main element of Venture capital is to invest in Unquoted companies which is not listed is stock market.So unable to raise funds for there future business expansions.
2.Venture capital is Invest for medium to longterms in the companies with high growth potential.So as to generate huge returns when company grow and expands.
3.Venture Capital comprises numbers of shareholders,influence by the Venture capitalist for the huge potential of generating returns.
4.Other main element of Venture Capital is to invest in high risk projects,which also have high potential of generating high returns.
5.The high risk factor in the venture capital backed firms,forces them to make changes in there operations and sometimes business model.
6.Venture capital also have objectives is to sell there shareholding either to the promoters or to the open market through IPO's.
7.In various countries there is a variation of Venture capital and Private equity.There Venture capital means funding starts ups and Private equity means funding to the existing high potential and growth firms through Private Equity funds.
8.Venture capitalist closely follow the Technology and Market Development in the area of expertise like Computer software,Hardware,Energy,Biotechnology ect.
9.Venture Capitalist closely screen the Entreprenure and Business concepts prior to making an investment.To diversify risk,they create venture funds that is a portfolio of investment in young companies.
10.Venture capitalist are not a passive Equity investors .They structure a financing deal with great attention to creating the right incentives and compensation for the start ups firm's owners.They are also instrumental in raising additional financing during future stages of firm's lifecycle.
VENTURE CAPITAL INVESTMENT PROCESS:
1.Development of Fund Concept:-
1.1 Secure Commitment from Investors:Before the development of Venture Capital fund,Venture capitalist try to secure the commitment from the investors to get investment for the fund.
1.2 Generate Deal Flow:After got commitment from the investors,Venture Capitalist generate deal flow comprises the numbers of investors,fund managers,investment managers ect.
2.Closing of Fund(first capital call):-For 2-3 years
2.1 Screen Business Plan:The venture capitalist screen the Business plan,so that to identify the viability of the business in which the are going to invest.
2.2 Evaluate and Conduct due diligence:In this step Venture capitalist evaluate and investigate the detail historical facts and figures of the firm in which the are planning to invest funds.Financial analyst of the Venture capital firm evaluate and analyse the past year Balance sheets and others financial statement of the proposed acuquire firm and give his/her verdict related to the actual position of the firm.
2.3 Negotiate Deals and Staging: After analysing financial statement,Venture Capitalist negotiate with the promoters of the firm related to the valuations and book value of the firm.
2.4 Additional capital call:After negotiate with the venture capitalist for the deals,if there is any requirement of fund before the Venture capital deal related to the paying heavy debt,additional capital is infuse by the promoters for fullfilling VC deal requirement.
2.5 Invest fund:After deal has been finalised,Venture capitalist invest funds in Firm for the future business expansions.
3.Value Creation and Monitoring :-For another 4-5 years
3.1 Board service:Value creation and monitoring is a board service for the Venture capitalist.It is a main work after investment had done.Success and failiure of investment is depend on the proper value creation and monitoring.
3.2 Assist with external relationships:Venture capitalist assits the invested firm for the successful running it's operations and maintain good work relations in order to inrease operation efficiency of the firm.
3.3 Performance evaluation and review:Venture capitalist evaluate and review the performance of the promoters and there staff,so as to identify the operation efficiency of the firm.
3.4 Help arrange additional financing:If there is the need of additional financing to the fim then Venture capitalist arrange finance for it,so as to helps expansion and diversification of the firm.
3.5 Recruitment management:Venture Capital helps in recruite talented manpower for the invested firm and also helps to manage them in a efficient manner.
4. Harvesting Investment:- For 2-3 years
4.1 Initial Public Offer(IPO):In this step,Venture capitalist dilute it's stake through IPO's.Here company launch IPO and allow retail investors to acquire shares of the company.Afterwards,IPO listed on stock exchanges for further trading in secondary market.
4.2 Acquisition:Sometimes firms promoters acquire entire stakes of the Venture capitalist in order to keep full control of the firm with them.
4.3 Liquidation:In thi steps,promoters of the VC backed companies also liquidate there stakes in the market during the time of IPO or afterwards through right issue/Follow up public issue.
4.4 Leverage Buyout:This is a process in which firm/company acquire the another company by using borrowed money.In such case assets of the acquired company and acquring company used as collateral for loans.
5.Distributing Proceeds:-
5.1 Cash:In this steps in there is a surplus cash with the company,it reinvested back to the company for future business expansions.
5.2 Public shares:Also,if company take the buy back then there is the opportunity to the retail investors to sell there shares back to the company if the wish to do so.
Key Success Factors of Venture Capital:
1.First and important factor of Venture Capital is the knowledge about the Financial market and the industries in which they are invest funds.Also, they should have risk management skills and contact with the investors and have external expertise.
2.There should be high profit achieve by the venture capital company which shows good financial performances of the venture capital company.Also,there should be the good track record of the Venture capital companies in order to attract funds which needs for large deals.However,larger deal associate the higher risk of losses.many venture capital comany try to minimise the risk by hiring professional managers for eficient portfolio management.
Method of Financing through Venture Capital:
1.Equity:Venture Capitalist finanace start ups through selling equity of start ups to the investors of venture capital fund.
2.Preference(Redeemable/non Redeemable):Venture Capitalist also finance through preference shares,which carry fixed divident.They may have choice of redeemable or non redeemable.
3.Debt(Convertable /Non Convertable):Venture capitalist also finance by giving debt or acquire debenture of the starts ups/firms,which have a choice of convertable or non convertable.
4.Conventional loans:Venture capital finance the starups by providing conventional loans,which are a types of mortgaged loans not insured by any government schemes.
5.Conditional loans:
6.Income note loans:In this types of loans if any startups take this then it has to pay interest on loans amount plus sales of the firm.
Players in Venture capital:
1.Angels and Angel clubs:They are usually wealty individual who invest directly into the companies.Beside the money investment angel provide there personal knowledge,experiances and contact to support there investees.
2.Venture Capital funds:
2.1Small Venture capital funds:They are small venture capital companies that mostly provide seeds and startups capital.They so called boutique firms are specialized in certain industries or market segment.
2.2 Medium Venture capital funds:They finance after seeds stages and operate in all business segment.
2.3Large Venture capital funds:It operate in all business sector and provide all types of capital for the companies after seed stages.They often operate internationally and finance deal upto 500 million dollar.
3.Corporate Venture funds:These funds are set up and owned by technology companies.There aims is to widen the parent companies technology based win win secuation for both,the investor and investee.In general corporate fund invest in growing or maturing companies,often when the investee wishes to make additional investment in technology or product development .
4.Financial Service Venture fund:These are the funds set up by financial institutions.Thus they have access to resources from penson funds and from their parent companies.
Major group of Stakeholders:
1.Management/Shareholders:They are interested in stable and positive future development of their Venture capital companies.Therefor they will carefully monitor all drivers and developments.We can assume that that management and shareholders are willing and able to take immediate action and to develop new and creative strategies eg,Aliance,Merger,new product.
2.Investors:Investors are interested in higher returns beside that group of investors can have other preference as well like suport for certain industries or technologies.Due to the globalizations and development of capital markets investors have a wider choices of investments.In additions,it provides better acess to information and better tools for analysing informations.That's we expect investors to become more critical and more interested in where there money is invested.
3.Employees/Investees/External managers:These group interest focus in Venture Capital industry as an Employer and Business partner.As long as preference are fullfilled,this group have much interest in in detail stratergies .With an expected positive development of VC industry we expect it to remain an attractive partner for employees and external professionals.The VC firm can/could provide more experianced management,contact within the industry,access to markets,to knowledge and to people.The better the VC can provides these values the better he can attract investees.
Five External factors and Drivers that impact the Venture capital industry:
1.Competitive Rivalry:There is a competitive rivalry within the industry,there are various market segments.A Venture capital company invest in early seed stage does not directly compete with an other one,investing in MBO's and MBI's.So between the segments the competition is moderate.It is more within the segment,between like and like of cource all together compete for money from investors and for experianced people.At present industry still is in growth phase we assess the competition between the players in general as moderate.Highly liquid capital markets and a growing number of startups provide sufficient Business opportunity for the whole industry.
2.Threat of New enterance:In this industry there is high profit which attract new entrants.Despite money needed but it is not difficult.If you have industry contacts and good network,you can set up new Venture capital company.In today's time of liquid financial market it is not the problems to obtain funds.Thus specially people working in the industry for several years have pre requisites to setup new companies.Beside that other larger financial and non fiancial firms can take some money and setup a new VC firm as a means of diversifications or some other reason.
3.Power of Suppliers:Powere of supplier of money is not very high beacause of high liquidity in today's financial markets.It is very important for the Venture capital companies to demonstrate good track record of high profits in order to attract funds.The investment preferance is given to the investors where they put there money.Also,equally importance to venture capital firms to compete for attracting good talent.
4.Power of Buyers:Buyers are the investee companies.They are selected by the Venture capital companies according to there preference in order to minimise potential loses.Depending upon the proportion of supply and demand of Venture capital we assess the supply as moderate to high.
5.Threat of substitute:There are hardly any substitute for the Venture capital industry product,consisting equity combined with management help,contacts and guidance.
conclusions:We see that there is moderate competition in Venture capital industy because of growing industry.It is rapedly changed to mature and growth slow down.
1.Development of Fund Concept:-
1.1 Secure Commitment from Investors:Before the development of Venture Capital fund,Venture capitalist try to secure the commitment from the investors to get investment for the fund.
1.2 Generate Deal Flow:After got commitment from the investors,Venture Capitalist generate deal flow comprises the numbers of investors,fund managers,investment managers ect.
2.Closing of Fund(first capital call):-For 2-3 years
2.1 Screen Business Plan:The venture capitalist screen the Business plan,so that to identify the viability of the business in which the are going to invest.
2.2 Evaluate and Conduct due diligence:In this step Venture capitalist evaluate and investigate the detail historical facts and figures of the firm in which the are planning to invest funds.Financial analyst of the Venture capital firm evaluate and analyse the past year Balance sheets and others financial statement of the proposed acuquire firm and give his/her verdict related to the actual position of the firm.
2.3 Negotiate Deals and Staging: After analysing financial statement,Venture Capitalist negotiate with the promoters of the firm related to the valuations and book value of the firm.
2.4 Additional capital call:After negotiate with the venture capitalist for the deals,if there is any requirement of fund before the Venture capital deal related to the paying heavy debt,additional capital is infuse by the promoters for fullfilling VC deal requirement.
2.5 Invest fund:After deal has been finalised,Venture capitalist invest funds in Firm for the future business expansions.
3.Value Creation and Monitoring :-For another 4-5 years
3.1 Board service:Value creation and monitoring is a board service for the Venture capitalist.It is a main work after investment had done.Success and failiure of investment is depend on the proper value creation and monitoring.
3.2 Assist with external relationships:Venture capitalist assits the invested firm for the successful running it's operations and maintain good work relations in order to inrease operation efficiency of the firm.
3.3 Performance evaluation and review:Venture capitalist evaluate and review the performance of the promoters and there staff,so as to identify the operation efficiency of the firm.
3.4 Help arrange additional financing:If there is the need of additional financing to the fim then Venture capitalist arrange finance for it,so as to helps expansion and diversification of the firm.
3.5 Recruitment management:Venture Capital helps in recruite talented manpower for the invested firm and also helps to manage them in a efficient manner.
4. Harvesting Investment:- For 2-3 years
4.1 Initial Public Offer(IPO):In this step,Venture capitalist dilute it's stake through IPO's.Here company launch IPO and allow retail investors to acquire shares of the company.Afterwards,IPO listed on stock exchanges for further trading in secondary market.
4.2 Acquisition:Sometimes firms promoters acquire entire stakes of the Venture capitalist in order to keep full control of the firm with them.
4.3 Liquidation:In thi steps,promoters of the VC backed companies also liquidate there stakes in the market during the time of IPO or afterwards through right issue/Follow up public issue.
4.4 Leverage Buyout:This is a process in which firm/company acquire the another company by using borrowed money.In such case assets of the acquired company and acquring company used as collateral for loans.
5.Distributing Proceeds:-
5.1 Cash:In this steps in there is a surplus cash with the company,it reinvested back to the company for future business expansions.
5.2 Public shares:Also,if company take the buy back then there is the opportunity to the retail investors to sell there shares back to the company if the wish to do so.
Key Success Factors of Venture Capital:
1.First and important factor of Venture Capital is the knowledge about the Financial market and the industries in which they are invest funds.Also, they should have risk management skills and contact with the investors and have external expertise.
2.There should be high profit achieve by the venture capital company which shows good financial performances of the venture capital company.Also,there should be the good track record of the Venture capital companies in order to attract funds which needs for large deals.However,larger deal associate the higher risk of losses.many venture capital comany try to minimise the risk by hiring professional managers for eficient portfolio management.
Method of Financing through Venture Capital:
1.Equity:Venture Capitalist finanace start ups through selling equity of start ups to the investors of venture capital fund.
2.Preference(Redeemable/non Redeemable):Venture Capitalist also finance through preference shares,which carry fixed divident.They may have choice of redeemable or non redeemable.
3.Debt(Convertable /Non Convertable):Venture capitalist also finance by giving debt or acquire debenture of the starts ups/firms,which have a choice of convertable or non convertable.
4.Conventional loans:Venture capital finance the starups by providing conventional loans,which are a types of mortgaged loans not insured by any government schemes.
5.Conditional loans:
6.Income note loans:In this types of loans if any startups take this then it has to pay interest on loans amount plus sales of the firm.
Players in Venture capital:
1.Angels and Angel clubs:They are usually wealty individual who invest directly into the companies.Beside the money investment angel provide there personal knowledge,experiances and contact to support there investees.
2.Venture Capital funds:
2.1Small Venture capital funds:They are small venture capital companies that mostly provide seeds and startups capital.They so called boutique firms are specialized in certain industries or market segment.
2.2 Medium Venture capital funds:They finance after seeds stages and operate in all business segment.
2.3Large Venture capital funds:It operate in all business sector and provide all types of capital for the companies after seed stages.They often operate internationally and finance deal upto 500 million dollar.
3.Corporate Venture funds:These funds are set up and owned by technology companies.There aims is to widen the parent companies technology based win win secuation for both,the investor and investee.In general corporate fund invest in growing or maturing companies,often when the investee wishes to make additional investment in technology or product development .
4.Financial Service Venture fund:These are the funds set up by financial institutions.Thus they have access to resources from penson funds and from their parent companies.
Major group of Stakeholders:
1.Management/Shareholders:They are interested in stable and positive future development of their Venture capital companies.Therefor they will carefully monitor all drivers and developments.We can assume that that management and shareholders are willing and able to take immediate action and to develop new and creative strategies eg,Aliance,Merger,new product.
2.Investors:Investors are interested in higher returns beside that group of investors can have other preference as well like suport for certain industries or technologies.Due to the globalizations and development of capital markets investors have a wider choices of investments.In additions,it provides better acess to information and better tools for analysing informations.That's we expect investors to become more critical and more interested in where there money is invested.
3.Employees/Investees/External managers:These group interest focus in Venture Capital industry as an Employer and Business partner.As long as preference are fullfilled,this group have much interest in in detail stratergies .With an expected positive development of VC industry we expect it to remain an attractive partner for employees and external professionals.The VC firm can/could provide more experianced management,contact within the industry,access to markets,to knowledge and to people.The better the VC can provides these values the better he can attract investees.
Five External factors and Drivers that impact the Venture capital industry:
1.Competitive Rivalry:There is a competitive rivalry within the industry,there are various market segments.A Venture capital company invest in early seed stage does not directly compete with an other one,investing in MBO's and MBI's.So between the segments the competition is moderate.It is more within the segment,between like and like of cource all together compete for money from investors and for experianced people.At present industry still is in growth phase we assess the competition between the players in general as moderate.Highly liquid capital markets and a growing number of startups provide sufficient Business opportunity for the whole industry.
2.Threat of New enterance:In this industry there is high profit which attract new entrants.Despite money needed but it is not difficult.If you have industry contacts and good network,you can set up new Venture capital company.In today's time of liquid financial market it is not the problems to obtain funds.Thus specially people working in the industry for several years have pre requisites to setup new companies.Beside that other larger financial and non fiancial firms can take some money and setup a new VC firm as a means of diversifications or some other reason.
3.Power of Suppliers:Powere of supplier of money is not very high beacause of high liquidity in today's financial markets.It is very important for the Venture capital companies to demonstrate good track record of high profits in order to attract funds.The investment preferance is given to the investors where they put there money.Also,equally importance to venture capital firms to compete for attracting good talent.
4.Power of Buyers:Buyers are the investee companies.They are selected by the Venture capital companies according to there preference in order to minimise potential loses.Depending upon the proportion of supply and demand of Venture capital we assess the supply as moderate to high.
5.Threat of substitute:There are hardly any substitute for the Venture capital industry product,consisting equity combined with management help,contacts and guidance.
conclusions:We see that there is moderate competition in Venture capital industy because of growing industry.It is rapedly changed to mature and growth slow down.
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