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
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Mezzanine Finance
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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.
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