Venture Capital is a form of private equity and type of financing that investors provide to start-up companies and small businesses in early-stage and emerging companies that have long-term growth potential. Venture Capital investments are mostly done by well-off investors, investment banks, and other financial institutions. Investment can be in a monitory form or technical or managerial expertise. Venture Capital investment is mostly done in small businesses which show potential for growth or businesses which have grown quickly and still are expected to grow in the future. Venture Capital investors generally get equity in a company while investing funds in a company which gives them large ownership in a company and a say in company decisions.
White Code has a group of professionals and experts with experience and skills to analyze the potential growth markets and understand the risk involved with investing. We advise our clients to make an informed decision by providing their market reports and future projections of the industry they are looking to invest in and assist them to perform due diligence and advise them on the center and state regulations to ensure compliance with regulatory authorities.
Deal Origination:
Venture capital financing begins with the origination of a deal. For venture capital businesses, a stream of deals is necessary. There may be various sources of origination of deals. One such source is the referral system in which deals are referred to venture capitalists by their parent organizations, trade partners, industry association, friends, etc.
Screening:
A 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 the 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 prima facie eligibility. Entrepreneurs are also invited for face-to-face discussion for seeking certain clarifications.
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-perineurial 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 a 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.
Deal Negotiation:
Once the venture is found viable, the venture capitalist negotiates the terms of the deal with the entrepreneur. This does so as to protect its interest. Terms of the deal include the 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. The terms of the deal should be mutually beneficial to both the venture capitalist and the entrepreneur. It should be flexible and its structure should safeguard the interests of both parties.
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.
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 an exit plan, determining the precise timing of exit that would depend on 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 the exit stage of venture capital financing, venture capitalist decides about disinvestments/realization alternatives which are related to the type of investment, equity/quasi-equity, and debt instruments. Thus, a venture to 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.
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