LEARNINGS SESSION - 2

Course Name: CORPORATE ENTREPRENEURSHIP

What is a VC?

A venture capital is a financial mediator that provides funds to new businesses or Startups that deemed to
have high growth potential. Mostly, the funds are provided at the early stage of the firm. In return, these
VCs get equal value worth equity. The firms make profit either by selling stake or through dividends from
these startups when they mature.

Challenges for the Venture Capital

There are four major challenges/Market failures that need to be addressed by the Venture Capital

1. Uncertainty This problem arises due to uncertainties in the market and the risk associated with
the investment. A VC does not know whether a startup will grow in the future or die down.
Hence, to cover up for this, the VC several methods. Some of them are Portfolio management,
Staged investment, checks skin in the game, reputation etc.
2. Information Asymmetry This problem is related to the gap information about the business
between startup owners and the VC fund managers. This asymmetry may lead to over value or
under value a startup. Venture capital conducts due diligence or uses VC knowledge data base to
overcome this issue.
3. Agency Costs The Agency cost problem lies with the decision making of the firm management
that may not align with the core interests of the investors. This problem can lead to let go several
projects that had high potential for the firm. This is avoided by proper monitoring and seeking a
representation in the firms board members.
4. Transaction Costs This is also another problem faced by the VC that is solved by reputation
and syndication.

Source of Funds for VC

It was learnt from the class that the Venture capital are themselves funded by high net worth individuals,
rich companies etc. These financers of Venture Capitals are called Limited Partners (LPs). This is because
they have limited liability in case of lower returns or losses. These funds are managed by VC managers
who are called General Partners (GPs). They carry most of the liability to the losses in the funds.
Generally, a fund is mostly funded by LPs with contribution from GP is ~1%.

In contrast to the liabilities, the returns of GPs are very high. Typically, when a funds starts making profit,
VC is set to keep around 20% of the returns and 80% go to the fund providers.

What is CVC?
A Corporate Venture capital is the division of a company that seeks to invest in the new businesses at the
early stage just like VCs. The difference, though, lies in the objectives. While a VC has mostly financial
objectives, a CVC has both financial and strategic incentives.

Another difference between VC and CVC is the incentives of the fund managers. A CVC provides
relatively lower incentives to the managers as compare to a VC.

Intel Case

The intel case was discussed in class. Main objectives (both short term and long term) objectives were
discussed and a valid solution was discussed. While discussing various options available with Intel, 2x2
matrix was also discussed.