Venture Capital Venue
“Venture capital is about capturing the value between the start-up phase and the public company phase.” — Fred Wilson
As part of my course, we had a subject called Entrepreneurship where as we had discussed a lot about how to start our business, how to rise funds, how to get an innovative idea and so on. Here I would like to give an overview on Venture Capital, a particular way to rise fund for our business.
Venture Capital is a private institutional investment made to start-up companies at early stage. Venture capital funds are the investments made by the investors who seek private equity stakes in small to medium business which are potent enough to grow. These investments are generally high-risk/high-return opportunities. The ventures involve risk in the expectation of sizable gain. The people who invest this money become the financial partners are called venture capitalist (VCs)
Stages in VCs
Deal origination
Origination of a deal is the primary step in venture capital financing. It is not possible to make an investment without a deal therefore a stream of deal is necessary- however the source of origination of such deals may be various. One of the most common sources of such origination is referral system. In referral system deals are referred to the venture capitalist by their business partners, friends etc.
Screening
It is the process by which the venture capitalist scrutinizes all the projects in which he could invest. The projects are categorized under certain criterion such as market scope, technology or product, size of investment, geographical location, stage of financing etc.
For the process of screening the entrepreneurs are asked to either provide a brief profile of their venture or invited for face-to-face discussion for seeking certain clarifications.
Evaluation
The proposal is evaluated after the screening and a detailed study is done. Some of the documents which are studied in details are projected profile, track record of the entrepreneur, future turnover, etc.
The process of evaluation is a thorough process which not only evaluates the project capacity but also the capacity of the entrepreneurs to meet such claims. Certain qualities in the entrepreneur such as entrepreneurial skills, technical competence, manufacturing and marketing abilities and experience are put into consideration during evaluation.
Negotiation
After the venture capitalist finds the project beneficial, he gets into deal negotiation. Deal negotiation is a process by which the terms and conditions of the deal are so formulated so as to make it mutually beneficial.
Both the parties put forward their demands and a way in between is sought to settle the demands. Some of the factors which are negotiated are amount of investment, percentage of profit held by both the parties, rights of the venture capitalist and entrepreneur
Investments
Once the deal is finalized, the venture capitalist Invests and becomes a part of the venture and takes up certain rights and duties.
The Venture capitalist however does not take part in the day to day procedures of the firm; it only becomes involved during the situation of financial risk.
Exit
The last stage of venture capital investment is to make the exit plan based on the nature of investment, extent and type of financial stake etc.
The exit plan is made to make minimal losses and maximum profits. The venture capitalist may exit through IPOs, acquisition by another company, purchase of the venture capitalists share by the promoter or an outsider.
Exit Mechanism
• IPO method- also called floatation method- exit happens thro a IPO- advantages are liquidity thro listing and higher profit- but it has the hassle of following the regulatory rules and higher cost
• Sale of shares method- Here the VC sells his holding to the promoters or his employees
• Put and call method- Here the VC and company would have entered into a PUT or call option with a predetermined price based on Business Value or Pice to Earning ratio or % to sales and upon reaching that level and other agreed times the put or call is exercised.
• Trade sell method:- Under this method, the entire investee company is sold to another company
• Liquidation:- The investment is a failure and the company is liquidated and the VC quits with a loss
Let us see some of Venture Capital firms and their top pickups for their investment
