Characteristic Features and Venture Capital Investment Process

Investments are made in equity in high tech industry & wait for 5 – 7 years to
reap the benefit of capital gains.
Investments are made in innovative projects with new technology.
The claim over the management is decided on the basis of proportion to
investment.
Venture capital investor does not interfere in the day to day business.
Venture capital funds need not be repaid in the course of business units, but it
is realized through the exit route.

Venture Capital Investment Process
1) Establishment of contact between the Entrepreneur and the Venture Capitalist.
Prepare a project report.
5 important feasibility reports…..
Technical / Financial / managerial / Marketing / Socio economic
2) Preliminary Evaluation
3) Detailed Approval
Techno – economic feasibility
4) Sensitivity Analysis
The forecasted results of both sales & profits are tested & analyzed.
The risks & threats are evaluated.
5) Investment in the Project
a) The amount of funds required
b) Profile of the business
c) The life Time technology
d) The possible competition in the business
6) Monitoring the project & post investment support
The venture capitalist role begins with financing the project.

Stages of Venture Capital Financing
1) Early Stage Financing Initiate the new projects
a) Seed Capital Implementation of the research project
Starting from the all initial conceptual stage
1. The technology used – New technology
2. Different aspects of the product life cycle.
3. The total investment required
b) Start up Financing The innovator requires finance to commercialize the
product.
The research must be done to evaluate the probable
opportunities to exploit the market.
c) Second round of financing
This type of financing is required when the project
incurs loss or shows inability to yield sufficient profits.
They should decide on second round financing or may
seek the support of new investors.
2) Later Stage Financing Easy means of assistance.
a) Expansion Finance Executed to expand the market / production / To
establish warehouses
b) Replacement Capital Preferred at the time of public issues.
c) Management Buy Out Management Buy In
The venture capitalist helps the management of a
company to buy or take over the ownership of the
business.
Outsiders prefer to invest in buying the existing
business.
d) Rescue Capital Known as turn around capital
Risky & the investor may ask for major changes in the
management.

Types of Venture Capital Organization
1) Captive Venture Capital Funds
Wholly owned by financial institutions & are operated
as subsidiaries.
IDBI – Captive funds to assist venture capital
TDICI – Funds for venture capital [UTI – ICICI]
RCTC – Funds of UTI & IFCI
2) Independent Venture Capital Funds
Closed ended with minimum capital base & equity
oriented instruments.
The amount invested in the project will be realized
through the exit route.
3) Government Funds Wholly owned by the government

Exit Route of Venture Capital
The main aim of the venture capitalist is to realize the investment with huge
profit after the completion of successful efforts with the promoter in launching or
commercializing the product.
Exit means realization of investment through the issue of equity shares to the
public.
The main aim of venture capitalist is to find exit at maximum profit or if it is
unavoidable, exit with minimum loss.
5 Alternatives to routes of disinvestments practiced in a real life solution…
1) Going Public Prefer to go in for public issues.
Increases the liquidity of the business firm.
Opportunity for the company to list its shares in the
stock market.
It has to observe several legal formalities of stock
exchange.
They have to be accountable to all the organs of the
society.
2) Sale of Shares to Entrepreneur
An Entrepreneur himself prefers to buy the entire
shares with the help of his won group – even
employees.
3) Sale of a company to another company
Venture capitalist & the entrepreneur may agree to sell
the business unit to some other company.
Sale will be made on the basis of level of operations &
the nature of venture.
4) Finding a new investor Investor may decide to sell the unit to another new
investor.
5) Liquidation This is a lender of last resort.
When a firm performs very badly…
Cash loss over the years, the venture capitalist & the
entrepreneur decides to close down the operations.