What is Venture Capital?

Venture Capital: It is a type of financing company’s assets. To invest in a new company’s assets which carry higher risk but having longer growth potential is called venture Capital. It is also known as private equity because investors invest in private company only, which is not listed in stock market.

Venture Capitalist: They are professional investors who invest other’s people money in a new or small company which have higher growth in future. They are actively participating in management and their rate of return is 20 to 30%.

Angel investor: He is an individual investor who invest his own money in a new company to earn more profit is known as Angel investor. He is not taking active part in management.

Founder dilution: The entrepreneur (founder) has 100% ownership before amount raised from investors. If investors invest in a company then they get some ownership in that company and the founder’s ownership is reduces that is known as founder dilution.

Investor dilution: If investors sacrifice their ownership in the company for new investors to invest in that company this is known as investor dilution.

Type of Venture Capital or Stages of Venture Capital Financing:

1.       Early Stage Financing: It is sub-divided into three parts:

·         Seed financing: To provide money to a new entrepreneur to convert his idea into realty or you can say that providing money for market research and analysis for the idea. The funds are provided by insiders of a company or family, friends etc.

·         Startup Financing: To provide money for manufacturing and selling the products to a new company. It is also known as SERIES A round of financing. It raises 2 million to 15 million or it may be increases as requirement.

·         First stage Financing: In this stage venture capital firm gives money for business activities like electricity bill, carriage charges etc.

·         Second stage Financing: In this stage money provided to entrepreneur for business expansion to gain customers.

2.       Later stage: It contains four parts :

·         Third stage Financing/Mezzanine Financing: In this stage funds are used to prepare a company for being public or for Initial Public Offer IPO. It is a short term form of financing. It is also known as SERIES B round of financing. It raises 7 to 10 million approximately.

·         Turnarounds: VC firm provides fund when business suffers financial difficulties to overcome from the problems and achieve the required return on investment made by venture capitalist.

·         Fourth stage financing/ Bridge Financing: It is a short term loan provided for activities related to expansion of a business. It is a final stage of financing. It refers to exit stage of venture capital firm because they achieve target position in the market. It is also known as SERIES C round of financing.

·         Buyout Financing: It means purchasing the shares of a company to acquire the rights to participate in the management.

·         Management By-in: It is a type of buyout in which company is purchased by outside managers.

·         Management By-out: In this type of buyout, company is purchased by management if the company suffers loss and the management thinks they can control that loss and efficiently manage to run that business.

·         Employee By-out: In this type of buyout the employees of a company purchase more than 50% shares of company if they can run business more efficiently than managers of a company.

·         Leveraged By-out: In it more than 50% assets are purchased by leveraged money or we can say that the outside capital invested in a company is more than owner’s capital.

      

          Other series: The other rounds are Series AA, Series BB which are used when company fail to achieve its goal then new investors invest in a company start again its business by issuing preferred stock with convertible note.

Sources of Venture Capital:

Equity: Venture capitalist finances the company by purchasing its ordinary shares. Through which they can participate in the management. So that they can take decisions to earn return on investment.

Income note: It contain the feature of conditional loan and loan it means they charge royalty on sales and interest on loan amount.

Debt: Venture capitalist can finances the company through debt which means a loan is given to the company which is secured by assets of a company. It is known as Conditional Loan. The company either has to pay royalty on sales 2 – 15% or interest which is greater than 20% of market value.

Example of Venture Capital firm in India:

      Kalaari Capital: It is a technology driven Venture Capital firm who finances early stage of a company. Example: Zivame, Snapdeal.

      Sequioia Capital: It also finances early stage of a company and the sectors are:  Finance Services, Healthcare, Energy and Technology. Example: Justdial.