Venture capital

Roshankumar S Pimpalkar
Email: roshankumar.2007@rediffmail.com


Venture capital is money provided by professionals who
invest alongside management, in young, rapidly growing
companies that have the potential to develop into
economic powerhouse.

Venture capital firms are generally private partnerships, or
closely held private companies funded by private and
public pension funds. It is also referred as Risk capital


Venture capitalists:

Finance new rapidly growing companies

Purchase equity shares

Assists in the development of new products or services

Add value to the enterprise through active participation
in management


Venture capitalists invest in

First generation businesses promoted by first generation
entrepreneurs

Untried and untested products and technology

High risk projects that have high risk of failures but with
enormous possible rewards


Stages of Venture capital assistance:

Seed money

Start-up capital

Second and third stage assistance

Mezzanine financing


Seed Money

It refers to financing the project at the development stage
of product or service. At this stage risk is highest. There is
no guarantee that the prototype will evolve successfully
and later turn out to be viable commercially. Very few
venture capitalist firms specialize in seed-capital financing.


Start-up capital

At this stage funds, which are adequate to generate initial
sales sufficient in volume to yield, are provided. In most of
the cases it is provided in the form of private placement in
equity of the venturer-entity. The funding is for the period
of 3 to 5 years at the end of which the entity is expected to
achieve a stable growth.


Second and third stage assistance

In case the initial start-up funding may prove to be
inadequate because of inefficiency of management or
unexpected changes in operating environment, further
funds are infused by the venture capitalist.


Mezzanine financing

Sometimes company needs money to fund expansion
programs, which would help it to make public offering at a
later stage. Finance provided for such expansion is known
as Mezzanine financing. Its duration is very short.


Modes of financing:

Pure equity financing
Conditional loans, repayable in the form of royalties on
sales
Income notes, a hybrid instrument which carries returns
both in form of interest and contingent payment linked to
sales or profit levels
Participating debentures carrying returns ranging from
zero initially, to nominal market rates for an interim period
and profit sharing arrangement over and above nominal
market rate of interest at the end.


Before investing, venture capitalists look at three
areas, namely, the proposed product or service, the
potential market and the management team.


VC’s evaluate the project by determining the following

Possible gains from capital infusion

Capability of management

Financial projections and its variability

Possible exit strategy


Expectation of returns

The business in this case are highly risky hence the
expectation of returns are high. The returns expected
might range from 60 to 80% for seed money financing and
20 to 25% for second and third stage financing


The Pay Day

For a venture capitalist, an Initial Public Offering (IPO) is
the ‘Pay-Day’. That’s when they get the return on their
investment. Most venture investors consider IPO as the
best type of “exit” point. A successful exit is also seen by
many market-watcher as a barometer to measure the
expertise of the venture investor, and the success of the
fonder-owners themselves.

IF YOU HAVE ANY SUGGESTION, OPINION OR FEEDBACK
PLEASE FEEL FREE TO WRITE US AT
roshankumar.2007@rediffmail.com

Venture capital

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