Concept of Venture Capital The term venture capital comprises of two words that is, “Venture” and “Capital”. Venture is a course of processing, the outcome of which is uncertain but to which is attended the risk or danger of “loss”. “Capital” means resources to start an enterprise. To connote the risk and adventure of such a fund, the generic name Venture Capital was coined. Venture capital is considered as financing of high and new technology based enterprises. It is said that Venture capital involves investment in new or relatively untried technology, initiated by relatively new and professionally or technically qualified entrepreneurs with inadequate funds. The conventional financiers, unlike Venture capitals, mainly finance proven technologies and established markets. However, high technology need not be pre-requisite for venture capital. Venture capital has also been described as ‘unsecured risk financing’. The relatively high risk of venture capital is compensated by the possibility of Continue reading
Venture Capital Financing
Stages of Venture Capital Financing
The Venture Capital Financing Spectrum The requirements of funds vary with the life cycle stage of the enterprise. Even before a business plan is prepared the entrepreneur invests his time and resources in surveying the market, finding and understanding the target customers and their needs. At the seed stage the entrepreneur continue to fund the venture with his own or family funds. At this stage the funds are needed to solicit the consultant’s services in formulation of business plans, meeting potential customers and technology partners. Next the funds would be required for development of the product/process and producing prototypes, hiring key people and building up the managerial team. This is followed by funds for assembling the manufacturing and marketing facilities in that order. Finally the funds are needed to expand the business and attain the critical mass for profit generation. Venture capitalists cater to the needs of the entrepreneurs at Continue reading
Venture Capital Investment Process
Venture capital investment process is different from normal project financing. In order to understand the venture capital investment process a review of the available literature on venture capital finance is carried out. Tyebjee and Bruno in 1984 gave a model of venture capital investment process which with some variations is commonly used presently. As per this model this activity is a five step process as follows: Deal Organization Screening Evaluation or Due Diligence Deal Structuring Post Investment Activity and Exit Deal origination: In generating a deal flow, the VC investor creates a pipeline of deals or investment opportunities that he would consider for investing in. Deal may originate in various ways. referral system, active search system, and intermediaries. Referral system is an important source of deals. Deals may be referred to VCFs by their parent organisations, trade partners, industry associations, friends etc. Another deal flow is active search through networks, Continue reading
Difference between Venture Capital & Other Funds
Venture Capital Vs Development Funds Venture capital differs from Development funds as latter means putting up of industries without much consideration of use of new technology or new entrepreneurial venture but having a focus on underdeveloped areas (locations). In majority of cases it is in the form of loan capital and proportion of equity is very thin. Development finance is security oriented and liquidity prone. The criteria for investment are proven track record of company and its promoters, and sufficient cash generation to provide for returns (principal and interest). The development bank safeguards its interest through collateral. They have no say in working of the enterprise except safeguarding their interest by having a nominee director. They do not play any active role in the enterprise except ensuring flow of information and proper management information system, regular board meetings, adherence to statutory requirements for effective management control where as Venture capitalist Continue reading