Entrepreneur Mind - Lesson 5: Venture Finance

Venture Capital Financing

Venture Capital Financing

• It is a form of private equity and a type of financing that investors provide to start-up companies and small businesses that are believed to have long-term growth potential

• Venture Capital generally comes from well-off investors, investment banks and any other financial institutions

Back to the 19th century

• venture capital is a subject private equity(PE). While the roots of PE can be traced during this time.

after Second World War

Venture capital only developed as an industry

Harvard Business Professor George Doriot

• Generally considered the Father of Venture Capital

American Research and Development Corporation (ARDC)

The Father of Venture Capital started this in 1946 and raised a $3.5 million fund to invest in companies that commercialized technologies during WWII

First investment of ARDC

Company that had ambitions to use x-ray technology for cancer treatment

• the $200,000 that Doriot Invested turned into $1.8 million when the company went in public in 1955

1955

Year when the company went in public

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

Venture Capital Process

Fund Raising - Evaluation - Investment - Governing - Exit - Distribution

Fund raising

Source capital from banks, corporations, funds

Evaluation

Evaluate venture opportunities

Investment

Invest capital into enterprise

Governing

Govern business to profitable growth

Exit

Generate liquidate through IPO

Distribution

Distribute returns to investors

Four Phases in the company's development

1. Idea generation

2. Start up

3. Ramp up

4. Exit

Five Stages in Venture Capital Financing

1. Seed Stage

2. Start up stage

3. First stage

4. Expansion Stage

5. Bridge Stage

Advantages of Venture Capital Financing

• 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 sucessful

Dsiadvantages

• 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

Importance of venture

It strengthens the capital market which not only improves the borrowing concern but also creates a situation whereby they can raise their own capital through capital market

Venture Capital Financing

is funding provided to companies and entrepreneurs. It can be provided at different stages of their evolution.

Venture Capital Financing

It has evolved from a niche activity at the end of the second world war into a sophisticated industry with multiple players that play an important role in spurring innovation