Venture Capital

-

Venture Capital


A form of equity financing designed specially for funding high risk and high reward projects is known as ‘Venture Capital’. It helps in financing high-tech projects, research and development projects etc., Thus it is a typical ‘private equity investment.’ Venture Capitalists finance high risk return ventures, usually in new enterprises small or medium ones to produce new products, in expectation of high gains or spectacular returns. They continuously involve themselves with the clients’ investments, either by providing loans or managerial skills or any other support. The basic objective of venture capitalists is to make capital gain or equity investment at the time of exit and to get regular return on debt financing. They provide value-added services to the invested firms without any interference of the management but usually make huge capital gains at the time of exit. Liquidity of the venture capital depends upon the success of the new venture or product. It was Bhatt Committee (Committee on Small and Medium Entrepreneurs) in the year 1972 , which recommended the creation of venture capital in India.


Stages of Venture Capital Financing

Setting up of New Venture
     Seed Capital
Start up Finance
Early Stage Finance
Follow on Finance
Expansion Finance
Replacement Finance
Turnaround Finance


 

















Mezzanine Finance


 


                                      
EXIT
                                   

                                                         
                                                 IPO                     Sale of Shares             Puts and Calls
 


Seed Capital
            Involves primarily R&D financing, for product development and capital provision to startup.
Startup Finance
            Stage where new activity is launched which is related with initial marketing and establishment of product facilities.
Early stage Finance
            Finance to initiate commercial manufacturing and sales.
Follow on Finance
            Second round finance where the project has passed the test of acceptability and has proved to be successful.

Expansion Finance
            Finance provided to fund the expansion or growth of a company which is breaking even; used to finance increased production capacity, market or product development and to provide additional working capital; sometimes also made available for acquisition or takeover.

Replacement Finance
            Also known as money-out deal, where venture capitalists extend financing for the purchase of the existing shares from an entrepreneur or their associates in order to reduce their holdings in the unlisted company. The venture capitalists may buy ordinary shares from vendors and may convert them into preference shares bearing a fixed dividend coupon. Such shares may be converted back into ordinary shares if the company is listed.

Turnaround Finance
            Type of finance provided in the event of an enterprise becoming unprofitable after the launch of commercial production; to sustain the current operation of the enterprise.

MBO s Management Buy-Outs
The acquisition of a company from the existing owners by a team of  existing management / employees who may or may not have been actively involved in the day-to-day running of the company & are making the acquisition with a view towards becoming active owner-managers.

MBI s Management Buy-Ins
            Involves bringing in a management team comprising of outsiders, who are strangers to the company, where they are part of the existing team.

 Mezzanine Finance
            The last stage of equity related funding is Mezzanine finance, which is actually half way between equity and loan capital, in terms of risk and return. It is often the last type of financing supplied to a private company in the final run up to trade a sale or public floatation. It may be issued either as a debt (high coupon bonds) or as a high ranking equity (preference shares). It is a bridge finance having a maturity of less than 2 years.
            Every venture capital will be liquidated after accomplishment of the purpose of the venture investment. several factors will be taken into consideration before deciding the exit , such as the nature of the venture, the extent and type of financial stake, the state of actual and potential competition, market condition, the style of functioning, as well as the perception of the venture capital companies, etc., It will exit from the venture assistance in terms of equity investment by going public or floatation through IPO, or Sale of Shares to entrepreneurs who have promoted the ventures or through Put option(the right to sell) or though Call option (the right of the entrepreneurs  to buy) by determining the price using the Book Value of net assets of the units assisted or through trade sales where the entire investee company is sold to another company at an agreed price or even though liquidation where the exit takes place in a voluntary manner. 


Comments

Post a Comment

Popular posts from this blog

The Apple's Brand Personality

-
Image
  Apple has a branding strategy that focuses on the emotions. The Apple brand personality is about lifestyle; imagination; liberty regained; innovation; passion; hopes, dreams and aspirations; and power-to-the-people through technology. The Apple brand personality is also about simplicity and the removal of complexity from people's lives; people-driven product design; and about being a really humanistic company with a heartfelt connection with its customers. Apple Brand Equity and Apple's Customer Franchise The Apple brand is not just intimate with its customers, it's loved, and there is a real sense of community among users of its main product lines. The brand equity and customer franchise which Apple embodies is extremely strong.  The preference for Apple products amongst the "Mac community ", for instance, not only kept the company alive for much of the 90's (when from a rational economic perspective it looked like a dead duck) bu...
Read more

FACTORS RESTRICTING INTERNATIONALIZATION OF BUSINESS

-
Image
FACTORS RESTRICTING INTERNATIONALIZATION OF BUSINESS 1.Sovereign political entities Every country has a sovereign political entity. There are more restrictions imposed on them for importing and exporting the goods and services in order to safeguard their national interest. The traders in international marketing have to observe such restrictions. These restrictions include the following.  Imposition of Tariffs and Customs Duties These are levied both on import and export of goods and services in order to make them costly in the importing country and not to ban their entry in to the country completely.  Restrictions on quantities Quantity restrictions are imposed in order to restrict trade in some specific commodities. The main purpose of this restriction is the protection of home country from the competition of the foreign commodities.  Exchange control The government may not ban the entry of goods in the country, but the importer is not allowed to get the necessary foreign excha...
Read more

Disadvantages of Demat

-
Trading in securities may become uncontrolled in case of dematerialized securities. It is incumbent upon the capital market regulator to keep a close watch on the trading in dematerialized securities and see to it that trading does not act as a detriment to investors. For dematerialized securities, the role of key market players such as stock-brokers needs to be supervised as they have the capability of manipulating the market. Multiple regulatory frameworks have to be conformed to, including the Depositories Act, Regulations and the various Bye-Laws of various depositories. Agreements are entered at various levels in the process of dematerialization. These may cause worries to the investor desirous of simplicity. There is no provision to close a demat account, which is having illiquid shares. The investor cannot close the account and he and his successors have to go on paying the charges to the participant, like annual folio charges etc.. After liquidating the holdings, many I...
Read more