Venture Capital Investment Process

[Maliha Islam]

Venture Capital Investment Process

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

THE FUNDING PROCESS: Approaching a Venture Capital for funding as a Company
Venture Capital Process

The venture capital funding process typically involves four phases in the company’s development:

Idea generation
Start-up
Ramp up
Exit

Step 1: Idea generation and submission of the Business Plan
The initial step in approaching a Venture Capital is to submit a business plan. The plan should include the below points:

There should be an executive summary of the business proposal
Description of the opportunity and the market potential and size
Review on the existing and expected competitive scenario
Detailed financial projections
Details of the management of the company
There is detailed analysis done of the submitted plan, by the Venture Capital to decide whether to take up the project or no.

Step 2: Introductory Meeting
Once the preliminary study is done by the VC and they find the project as per their preferences, there is a one-to-one meeting that is called for discussing the project in detail. After the meeting the VC finally decides whether or not to move forward to the due diligence stage of the process.

Step 3: Due Diligence
The due diligence phase varies depending upon the nature of the business proposal. This process involves solving of queries related to customer references, product and business strategy evaluations, management interviews, and other such exchanges of information during this time period.

Step 4: Term Sheets and Funding
If the due diligence phase is satisfactory, the VC offers a term sheet, which is a non-binding document explaining the basic terms and conditions of the investment agreement. The term sheet is generally negotiable and must be agreed upon by all parties, after which on completion of legal documents and legal due diligence, funds are made available.

Types of Venture Capital funding
The various types of venture capital are classified as per their applications at various stages of a business. The three principal types of venture capital are early stage financing, expansion financing and acquisition/buyout financing.

The venture capital funding procedure gets complete in six stages of financing corresponding to the periods of a company’s development

Seed money: Low level financing for proving and fructifying a new idea
Start-up: New firms needing funds for expenses related with marketingand product development
First-Round: Manufacturing and early sales funding
Second-Round: Operational capital given for early stage companies which are selling products, but not returning a profit
Third-Round: Also known as Mezzanine financing, this is the money for expanding a newly beneficial company
Fourth-Round: Also calledbridge financing, 4th round is proposed for financing the "going public" process

A) Early Stage Financing:
Early stage financing has three sub divisions seed financing, start up financing and first stage financing.

Seed financing is defined as a small amount that an entrepreneur receives for the purpose of being eligible for a start up loan.
Start up financing is given to companies for the purpose of finishing the development of products and services.
First Stage financing: Companies that have spent all their starting capital and need finance for beginning business activities at the full-scale are the major beneficiaries of the First Stage Financing.

B) Expansion Financing:
Expansion financing may be categorized into second-stage financing, bridge financing and third stage financing or mezzanine financing.

Second-stage financing is provided to companies for the purpose of beginning their expansion. It is also known as mezzanine financing. It is provided for the purpose of assisting a particular company to expand in a major way. Bridge financing may be provided as a short term interest only finance option as well as a form of monetary assistance to companies that employ the Initial Public Offers as a major business strategy.

C) Acquisition or Buyout Financing:
Acquisition or buyout financing is categorized into acquisition finance and management or leveraged buyout financing. Acquisition financing assists a company to acquire certain parts or an entire company. Management or leveraged buyout financing helps a particular management group to obtain a particular product of another company.

Advantages of Venture Capital
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 successful
Disadvantages of Venture Capital
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
Exit route
There are various exit options for Venture Capital to cash out their investment:

IPO
Promoter buyback
Mergers and Acquisitions
Sale to other strategic investor

Examples of venture capital funding
Kohlberg Kravis & Roberts (KKR), one of the top-tier alternative investment asset managers in the world, has entered into a definitive agreement to invest USD150 million (Rs 962crore) in Mumbai-based listed polyester maker JBF Industries Ltd. The firm will acquire 20% stake in JBF Industries and will also invest in zero-coupon compulsorily convertible preference shares with 14.5% voting rights in its Singapore-based wholly owned subsidiary JBF Global Pte Ltd. The fundingprovided by KKR will help JBF complete the ongoing projects.

Pepperfry.com, India’s largest furniture e-marketplace, has raised USD100 million in a fresh round of funding led by Goldman Sachs and Zodius Technology Fund. Pepperfry will use the fundsto expand its footprint in Tier III and Tier IV cities by adding to its growing fleet of delivery vehicles. It will also open new distribution centres and expand its carpenter and assembly service network. This is the largest quantum of investmentraised by a sector focused e-commerce player in India.

Source: https://www.edupristine.com/blog/venture-capital