Venture capital (VC): Defined
Venture Capital:
ven·ture cap·i·tal ˈvenCHər ˌkapədl/ noun:Venture capital (VC): Is invested in a project in which there is a substantial element of risk, typically a new or expanding business.
Definition: A venture capitalist:
A Venture capitalist is a person who invests in a business venture(s), providing capital for start-up or expansion of a business and by method of giving USD currency. Their business is to pool investment funds and find and invest in businesses that are going to provide their investors high rates of return.
Posted - Dec 7, 2017: Jun 14, 2018: Venture capital (VC) is financial capital provided to start-up companies with currency. It comes either from individual investors or specialised venture capital funds.
The idea behind venture capital is to gain equity in the start-up companies. Often, the start-ups pursue new ideas, such as in the Internet or in biotechnology.
Venture capital is money provided to new companies that hold a promise of long-term growth.
In exchange for the money, the companies will share ownership.
Because they are new companies and have no history of success, they usually have a higher risk of failure.
WolfGang Preston: Those firms hold crypto assets — most of which is in Bitcoin — in order to invest and divest in company tokens and cryptocurrencies as part of ICOs or just generally as retail investors do. ...
Bronson Teare: Venture Network is a very different animal to both traditional venture firms and to crypto funds.
Posted - Aug 16, 2018:
Crypto hedge fund: Pantera Capital is seeking to raise $175 million for its third venture fund, a staggering three-fold increase from its previous fund target. ... Another is a venture fund that targets already-listed crypto assets, using machine learning as well as input from the fund's partners to optimize investments.
What is Venture Capital?
It is private or institutional currency investment made into early-stage(s) / start-up companies (new ventures).
As defined, ventures involve risk (having uncertain outcome) in the expectation of a sizeable gain.
Defined, Venture capital (VC) is money invested in businesses that are small; or exist only as an initiative, but have huge potential to grow.
The people who invest this money are called Venture Capitalists (VCs).
The venture capital investment is made when a venture capitalist buys shares of such a company and becomes a financial partner in the business.
All Venture capital (VC) investment is also referred to risk capital or patient risk capital, as it includes the risk of losing the money if the venture doesn’t succeed and takes medium to long term period for the investments to fructify.
Venture capital (VC): typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms.
It is the USD currency provided by an outside investor to finance a new, growing, or troubled business.
The venture capitalist provides the funding knowing that there’s a significant risk associated with the company’s future profits and cash flow.
Capital is invested in exchange for an equity stake in the business rather than given as a loan.
This is why Venture capital (VC) is a suitable option for funding a costly capital source for companies and most for businesses having large up-front capital requirements which have no other cheap alternatives.
Software and other intellectual property are generally the most common cases whose value is unproven. That is why; Venture capital funding is most widespread in the fast-growing technology and biotechnology fields.
Features of Venture Capital investments:
- High Risk
- Lack of Liquidity
- Long term horizon
- Equity participation and capital gains
- Venture capital investments are made in innovative projects
- Suppliers of venture capital participate in the management of the company
Methods of Venture capital financing:
- Equity
- participating debentures
- conditional loan
THE FUNDING PROCESS:
Approaching a Venture Capital for funding as a Company:
The venture capital funding process typically involves four phases in the company’s development:
- Idea generation
- Start-up
- Ramp up
- Exit
Step 1: Idea generation and submission of the Business Plan:
The initial step in approaching a Venture Capital is to submit a business plan. The plan should include the below points:
- There should be an executive summary of the business proposal
- Description of the opportunity and the market potential and size
- Review on the existing and expected competitive scenario
- Detailed financial projections
- Details of the management of the company
Businesses with low capital source must have a detailed analysis done of the submitted financial plan for venture partnering funds granted or loaned by the Venture Capitalist (VCs) to decide whether to take up the project or not.
Step 2: Introductory Meeting:
Once the preliminary business analysis study is done by the Venture capital (VC).
The (VC) judges the project as per their wants/needs of desired preferences, there is a one-to-one meeting that is called for discussing the project in detail after the submission is read over firstly.
This is when the business asking for Venture capital (VC) investor's financial backing becomes a win-all or fail and their presentation must be perfect.
After the meeting the (VC) finally decides whether or not to move forward to the due diligence stage of the process.
Step 3: Due Diligence:
The due diligence phase varies depending upon the nature of the business proposal given to the Venture capital (VC) for financial backing.
This process involves making solvent the queries related to customer references, product and quality of their business strategy evaluations, all management interviews, and other mediary exchanges of information during this time period among (VCs).
Step 4: Term Sheets and Funding:
A businesses must be of an absolute legal sound mind by statutes and mediations of law in all regards before such ventures.
The term sheet is generally negotiable and must be agreed upon by all parties, after which on completion of legal documents and legal due diligence, funds are made available in partial and-or full.
Types of Venture Capital funding:
The various types of Venture capital (VC) are classified as per their applications at various stages of a business.
The three principal types of venture capital are early stage financing, expansion financing and acquisition/buyout financing.
The venture capital funding procedure gets complete in six stages of financing corresponding to the periods of a company’s development:
- Seed money: Low level financing for proving and fructifying a new idea.
- Start-up: New firms needing funds for expenses related with marketingand product development.
- First-Round: Manufacturing and early sales funding.
- Second-Round: Operational capital given for early stage companies which are selling products, but not returning a profit.
- Third-Round: Also known as Mezzanine financing, this is the money for expanding a newly beneficial company.
- Fourth-Round: Also calledbridge financing, 4th round is proposed for financing the "going public" process.
A) Early Stage Financing:
Early stage financing has three sub divisions seed financing, start up financing and first stage financing.
- Seed financing: is defined as a small amount that an entrepreneur receives for the purpose of being eligible for a start up loan.
- Start up financing: is given to companies for the purpose of finishing the development of products and services.
- First Stage financing: Companies that have spent all their starting capital and need finance for beginning business activities at the full-scale are the major beneficiaries of the First Stage Financing.
B) Expansion Financing:
Expansion financing is categorized into second-stage financing, bridge financing and third stage financing or mezzanine financing.
Second-stage financing: is provided to companies for the purpose of beginning their expansion.
The method of Second Stage Financing is also known as Mezzanine Financing.
It is provided for the purpose of assisting a particular company to expand in specific and a major way.
Bridge Financing: may be provided as a short term interest only finance option as well as a form of monetary assistance to companies that employ the Initial Public Offers as a major business strategy.
C) Acquisition or Buyout Financing:
Acquisition Financing: assists a company to acquire certain parts or an entire company. Management or leveraged buyout financing helps a particular management group to obtain a particular product of another company and at times can be agressive.
Advantages of Venture Capital:
- They bring wealth and expertise to the company.
- Large sum of equity finance can be provided.
- The business does not stand the obligation to repay the money.
- In addition to capital, it provides valuable information, resources, technical. assistance to make a business successful.
Disadvantages of Venture Capital:
- As the investors become part owners, the autonomy and control of the founder is lost.
- It is a lengthy and complex process.
- It is an uncertain form of financing.
- Benefit from such financing can be realized in long run only.
Exit Route:
- There are various exit options for Venture Capital to cash out their investment:
- IPO.
- Promoter buyback.
- Mergers and Acquisitions.
Examples of venture capital funding:
Kohlberg Kravis & Roberts (KKR), A top-tier alternative investment asset managers in the world, has entered into a definitive agreement to invest USD150 million (Rs 962crore) in Mumbai-based listed polyester maker JBF Industries Ltd. The firm will acquire 20% stake in JBF Industries and will also invest in zero-coupon compulsorily convertible preference shares with 14.5% voting rights in its Singapore-based wholly owned subsidiary JBF Global Pte Ltd. The fundingprovided by KKR will help JBF complete the ongoing projects.
Pepperfry.com, India’s largest furniture e-marketplace, has raised USD100 million in a fresh round of funding led by Goldman Sachs and Zodius Technology Fund. Pepperfry will use the fundsto expand its footprint in Tier III and Tier IV cities by adding to its growing fleet of delivery vehicles. It will also open new distribution centres and expand its carpenter and assembly service network. This is the largest quantum of investmentraised by a sector focused e-commerce player in India.
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