2.  The term venture capital is understood in many ways. In a narrow sense, it
refers to investment in new enterprises that are lacking a stable record
of growth.
 In a broader sense venture capital refers to the commitment of capital as
shareholding, for the formulation and setting up of small firms specializing
in new ideas or new technologies.
 Its not merely about injecting the funds rather its an association with
successive stages of firm’s development with distinctive types of financing
appropriate to each stage of development.

3.  Venture capital is long term risk capital to finance high technology
projects which involves risk but at the same time has strong potential for
growth.
 Venture capital pools their resources including managerial abilities to
assist new enterprises in the early years of the project.
 Once the project reaches the stage of profitability, they sell equity
holdings at high premium.

4. A venture capital company is defined:
“A financing institution which joins an entrepreneur as a co promoter in a project
and shares the risks and rewards of the enterprise”
‘Venture capital generally comes from well-off investors, investment banks, and
any other financial institutions’.

5. Features of venture capital
1. Venture capital usually in the form of an equity particulars.
2. Investment is made only high risk but high growth potentials projects.
3. Venture capital is available only for recommendations of new ideas or new
technologies and not for the enterprise which are engaged in trading ,
booking, financial services, agency, R & D.
4. Venture capital joins the entrepreneurs as a co promoter in projects and
share the risks and rewards of the enterprise.
5. There is continuous involvement in business after making an investment by
the investor.

6. 6. once the investment has reached the full potential the venture capitalist
disinvests his holdings either to the promoters or in the market. The basic
objective of investment is not profit but capital appreciation at the time of
disinvestment.
7. Venture capital Is not just injection of money but also an input needed to
set up the firm, design its marketing organize and mange it.
8. Investment is usually made in small and medium scale enterprise.

7. Activities of VC funds
 Provide seed capital for industries and support a concept or idea.
 Provide additional capital to new business at various stages of growth.
 Bridge finance/ project financing
 Capital of new entrepreneurs in foreign operations.
 Equity financing to management groups for taking over other
companies.
 Capital to mature enterprises for expansion, diversification and
restructuring.
 Start up capital for initial production and marketing.

11. Advantages of Venture Capital
Help in gaining business expertise:
One of the primary advantages of venture capital is that it helps new entrepreneurs gather business
expertise. Those supplying VC have significant experience to help the owners in decision making,
especially human resource and financial management.
Business owners do not have to repay
Entrepreneurs or business owners are not obligated to repay the invested sum. Even if the company
fails, it will not be liable for repayment.
Helps in making valuable connections
Owing to their expertise and network, VC providers can help build connections for the business
owners. This can be of immense help in terms of marketing and promotion.

12. Helps to raise additional capital
VC investors seek to infuse more capital into a company for increasing its valuation. To do that,
they can bring in other investors at later stages. In some cases, the additional rounds of funding
in the future are reserved by the investing entity itself.
Aids in upgrading technology
VC can supply the necessary funding for small businesses to upgrade or integrate new
technology, which can assist them to remain competitive.

13. Indian venture capital industry

14.  Venture Capital in India was known since nineties era. It is now that it has
successfully emerged for all the business firms that take up risky projects
and have high growth prospects as well.
 Venture Capital in India is provided as risk capital in the forms of shares,
seed capital and other similar means.
 In 1988, ICICI emerge as a venture capital provider with unit trust of India.
And now, there are a number of venture capital institutes in India.
 Financial banks like ICICI have stepped into this and have their own venture
capital subsidiaries.
 Apart from Indian investors, international companies too have settled in
India as a financial institute providing investments to large business firms. It
is because of foreign investors that financial markets have developed in
India on a large scale.
 Introduction of western financial philosophies, tight contracts, focus on
profitable projects and active involvement in finance was contributed by
foreign investors only.

15.  The financial investment process has evolved a lot with time in India. Earlier
there were only commercial banks and some financial institutes but now
with venture capital investment institutes, India has grown a lot.
 Business forms now focus on expansion because they can get financial support
with venture capital.
 The scale and quality of the business enterprises have increased in India now.
With international competition, there have been a number of growth oriented
business firms that have invested in venture capital.
 All the business firms that deal in information technology, manufacturing
products as well as providing contemporary services can opt for venture
capital investment in India.

16. Methods of venture financing
1. Equity participation
2. Convectional loan
3. Conditional loan
4. Income notes

17. Equity financing:
is a fund-raising method used by start-up companies who are in need of a large amount of capital,
having a robust business plan and better chances of high potential future growth.
These firms are new to the market with irregular income in the beginning phase due to which they are
not able to give timely returns to investors. Under such conditions, the equity financing method proves
to be the most beneficial method for start-up businesses.
Companies raise funds from investors and in return provide them a stake in their business. The overall
contribution of investors is not more than 49% such that they do not have voting rights. Entrepreneurs
have full power to make critical decisions and run the business venture.

18. Debentures
 The debenture is another common method used by start-up firms for acquiring the required
amount of funds. It denotes a guarantee given by the company to fund providers for repayment of
their money once the security gets matured. The company issues a debt paper to investors which
act as an acknowledgment slip in order to raise funds for a specific time period. The interest is paid
by the firm on debentures on distinct rates which varies as per the phase of their operations: –
1. Before business commencement phase- Nil
2. After business commencement phase- Low interest rate
3. Phase after a particular level of operations- High interest rate

19. Conditional Loans
 Conditional loans are different from bank loans which do not carry any fixed rate of
interest nor any pre-determined schedule of payment. Here, under these types of
loans, the entrepreneur pays the lender in the form of royalty once the venture
starts generating revenue. There is no payment of interest on the loan amount to
the lender. The royalty rate may be in the range of 2% to 15% which varies due to
factors such as external risks, gestation period, and patterns of cash flow.

20.  Conventional Loans
 Conventional loans are unlike conditional loans, where the entrepreneurs are required to pay
interest to lenders. During the initial days, the interest paid is at a lower rate which increases
with the rise in profit earned by the venture
 Income Notes
 Income notes are a hybrid form of financing available for business ventures. It combines the
features of both conditional loans and traditional loans from banks or NBFCs. The
entrepreneur pays interest and is required to repay the principal amount within the predetermined
period of time. The royalty amount is also paid by the entrepreneur on sales volume or profit.

21. Major ingredients of Indian venture
capital industry:
 IDBI venture capital fund
 The risk capital and technology finance corporation
 Technology and development and information company of India ltd
 Gujrati venture finance ltd
 Indus venture capital fund
 State bank of India capital markets ltd.
 Credit capital venture fund ltd.
 The India venture capital association

22. Demerits of venture capital
1. Founder Ownership Is Reduced
When raising a funding round, you will need to dilute your equity to issue new
shares to your investors. Many companies outgrow their initial funding and have to
raise additional rounds from venture capital firms. This process results in founders
losing the majority ownership in their company and with it, the control and
decision-making power that comes with being a majority shareholder. Founders
can mitigate this risk by only raising the amount that’s necessary.
2. Finding Investors Can Be Distracting for Founders
Startups decide it’s time to raise venture capital when other funding sources have
been exhausted and the money is necessary for growth. However, fundraising can
take several months and shouldn’t come at the cost of managing the company. By
starting the process before funding is critical, founders give themselves enough time
to both continue to grow the company and raise enough money to keep growing.

23.  Forced Management:
Typically venture capital funding comes with a few strings attached. First, investors
will require a stake in equity. Second, they will want to add management and
possibly, remove some key managers currently in place.
The forced management changes may come under the request of bringing in a more
experienced hand. In some cases, the investor may have decades of qualified
business experience, which could be beneficial. However, handing over control of
your management team is not always ideal. Your management team will often set
the stage for your company’s culture. If the team has any dislike, or it seems that the
funding is held over your head time and time again, the capital may not have been
worth it.

24. 3. Funding Is Relatively Scarce & Difficult to Obtain
According to a report by the National Venture Capital Association, only about
5,000 venture capital deals were made in the U.S. in 2019. Almost 3,000 of
these companies had already received venture capital in the past. Venture
capitalists point out they receive about 1,000 proposals for every three or four
companies they fund.
One option for startups seeking first-time funding is an incubator or an
accelerator. They often provide as much as $150,000 in funding and a three-
month crash course that prepares companies for growth and future rounds of
funding. Startups should also consider angel investment for smaller amounts of
funding on more flexible terms.

25. 4. Overall Cost of Financing Is Expensive
Giving up equity in your company may seem inexpensive compared to
taking out a loan. However, the cost of equity is only realized when the
business is sold. Venture capital provides much more than capital, like advice
and introductions. However, the decision should not be made lightly,
especially if there are other funding alternatives.
For example, two startups both need $1 million and are valued at $10 million.
The first company takes out an SBA loan for startups for 10 years at 10%
interest, and the other raises $1 million for 10% equity. In ten years, if both
companies sell for $100 million, the founders of the first company paid
$600,000 in interest for the loan and retained equity, while the second
company lost $10 million of proceeds from the sale due to the equity dilution.

26. 5. Formal Reporting Structure & Board of Directors Are
Required
When you get venture capital funding, you’ll be required to set
up a board of directors and a more rigid internal structure. Both
facilitate growth and transparency for the company, enabling it
to scale. This can limit the flexibility of the company and reduce
the amount of control that the founders have. However, it is
beneficial to a company that is growing rapidly.

27. 6. Extensive Due Diligence Is Required
Venture capital partners need to screen startups because they are investing
money that belongs to outside contributors. This happens in two stages. In
the initial stage, your technology and business fundamentals are evaluated
to determine if the market exists and if the business can be scaled. In the
second stage, they conduct a more thorough review of your teams’
background and the startups financial and legal position.
Although this process can take several months, it is beneficial for the
startups that go through it. By identifying problems and addressing them
early in the startups’ development, it is much easier to correct them. Future
rounds of funding become simpler too, because many issues have already
been reviewed and corrected.

28. 8. Funds Are Released on a Performance Schedule
Funds raised from venture capital firms are released gradually as the
startup hits certain milestones. These are specific to the business but
include revenue goals, customer acquisition, and other metrics
determined by the venture capital firm. These goals and any conflicts
should raise a flag for discussion with the board.
It can distract founders if the targets are the only things being chased,
but it also leads to greater business success.

29. Business Plans for Venture Capital Funding: What
does the plan include?
Executive Summary:
An executive summary forms a brief of the whole business plan which like any other synopsis of a
document gives a clear idea on what it is all about. An important part of the business plan, an
“Executive Summary” helps cultivate the interest of an investor to read further.
Company Analysis:
The Company Analysis is a complete scan of the company. Company AnalysisThe goal of
this section is to educate the investor about your company’s history and explain why
your team is perfect to execute on the business opportunity. Give some history and
provide the background on the company. Show off your track record. Detail prior
accomplishments, including funding rounds, product launches, milestones reached and
partnerships secured.
It answers various questions that an investor might be interested to know about. The questions can
include: what a company does, its area of functioning, and the products or services of the
business, product or services details.

30. Industry Analysis:
This part of the B-Plan provides a complete picture of the industry that the
company will operate in. The importance of this analysis can be understood by the
fact that any investor would like to thoroughly understand the industry in which the
company will deal. It includes industry size, trends, segments etc.
Marketing Plan:
Describe how your company will penetrate the market, deliver
products/services, and retain customers. Products - Detail all products
and services, but focus primarily on the short-to-intermediate time
horizon. Promotions - Explain which marketing/advertising strategies will
be used and why. Price - Provide a clear rationale for your pricing
strategy. Place - Explain how your products/services will be delivered to
your customers. Explain how you will retain your customers. Define your
partnerships.

31. Financial Plan:
The financial plan includes the actual numbers (if any) and forecasts of how the business
projects itself and where it sees itself in a matter of a few years (3-5 years projections). A set
of financial projections is included with this section automatically.
Detail your key assumptions here. Detail the uses of funds. Understandably,
investors want to know what, specifically, you plan to do with their money

32. Conclusion:
Business plans are a descriptive outlook to the business that acts as a
convincing tool for getting that elusive funding from venture capitalists. A
business plan that covers a great deal about the business and presents a true picture
of the market is the first (and usually the most important) step in gaining a venture
capitalist’s attention.

33. Pitfalls to Avoid
According to a study of 101 failed startups, 29% cited a lack of sufficient capital as the ultimate reason for failure. So how can you
best approach your search for capital in an attempt to keep your startup from becoming just another one of the roughly 90% that
fail?
1. Target the Appropriate Audience: If you’re looking for early stage financing (under $5 million), don’t waste time on
professionally managed venture-capital funds. Instead, focus on angel investors specializing in taking a company from
inception to the next stage of financing.
2. Your time is valuable, so don’t waste it by sending an unsolicited business plan. Network to get introductions to good
prospective angel investors.
3. Keep it Short: The longer the plan, the more likely it will be pushed aside and never picked up again. Think along the lines of
a three-page executive summary or shorter.

34. 5) Don’t Aggressively Value Your Business: Investors are nervous to invest after several
market collapses, and lower valuations are commonplace. Therefore, proposing an aggressive
valuation will be a waste of time. Many successful companies wait to discuss valuation until
they have an interested investor.
6) Follow Through: Venture capitalists can’t be counted on to get back to you, so take the
initiative to keep in touch.

36. 1. Deal Origination:
 Venture capital financing begins with origination of a deal. There may be various
sources of origination of deals.
 One such source is referral system in which deals are referred to venture
capitalists by their parent organizations, trade partners, industry
association, friends, etc.
 Another source of deal flow is the active search through, networks, trade fairs,
conferences, seminars, foreign resist etc.
 Certain intermediaries who act as link between venture capitalists and the potential
entrepreneurs, also become source of deal origination.

37. 2. Screening:
 Venture capitalist in his endeavor to choose the best ventures first of all undertakes
preliminary scrutiny of all projects on the basis of certain broad
criteria, such as technology or product, market scope, size of
investment, geographical location and stage of financing.
 Venture capitalists in India ask the applicant to provide a brief profile of the
proposed venture to establish prime facie eligibility. Entrepreneurs are also invited
for face-to-face discussion for seeking certain clarifications.

38. 3. Evaluation:
 After a proposal has passed the preliminary screening, a detailed evaluation of the
proposal takes place. A detailed study of project profile, track record of the
entrepreneur, market potential, technological feasibility future turnover,
profitability, etc. is undertaken.
 Venture capitalists in Indian factor in the entrepreneur’s background, especially in
terms of integrity, long-term vision, urge to grow managerial skills and business
orientation. They also consider the entrepreneur’s entre-preneurital skills, technical
competence, manufacturing and marketing abilities and experience. Further, the
project’s viability in terms of product, market and technology is examined.
 Besides, venture capitalists in India undertake thorough risk analysis of the proposal
to ascertain product risk, market risk, technological and entrepreneurial risk. After
considering in detail various aspects of the proposal, venture capitalist takes a final
decision in terms of risk return spectrum, as brought in figure 31.1.

40. 4. Deal Negotiation:
 Once the venture is found viable, the venture capitalist negotiates
the terms of the deal with the entrepreneur. This it does so as to
protect its interest. Terms of the deal include amount, form and
price of the investment.
 It also contains protective covenants such as venture capitalists right to
control the venture company and to change its management, if necessary, buy
back arrangements, acquisition, making IPOs. Terms of the deal should be
mutually beneficial to both venture capitalist and the entrepreneur. It should
be flexible and its structure should safeguard interests of both the parties.

41. 5. Post Investment Activity:
 Once the deal is financed and the venture begins working, the venture
capitalist associates himself with the enterprise as a partner and
collaborator in order to ensure that the enterprise is operating as per the
plan.
 The venture capitalists participation in the enterprise is generally through a
representation in the Board of Directors or informal influence in
improving the quality of marketing, finance and other managerial functions.
Generally, the venture capitalist does not meddle in the day-to-
day working of the enterprise, it intervenes when a financial or
managerial crisis takes place

42. 6. Exit Plan:
 The last stage of venture capital financing is the exit to realize the investment so as to
make a profit/minimize losses.
 The venture capitalist should make exit plan, determining precise timing of exit that
would depend on an a myriad of factors, such as nature of the venture, the extent and
type of financial stake, the state of actual and potential competition, market
conditions, etc.
 At exit stage of venture capital financing, venture capitalist decides about
disinvestments/realisation alternatives which are related to the type of investment,
equity/quasi-equity and debt instruments.
 Thus, venture capitalize may exit through IPOs, acquisition by another company,
purchase of the venture capitalist’s share by the promoter and purchase of the venture
capitalist’s share by an outsider.