CHAPTER1

I
NTRODUCTI
ON
1.
1Meani
ng

1.
2Feat
uresofv
ent
urecapi
tal

1.
3Obj
ect
iveofv
ent
urecapi
tal

1.
4Scopeofv
ent
urecapi
tal

1.
5Vent
urecapi
tal
inv
est
mentpr
ocess

1.
6Met
hodsofv
ent
uref
inanci
ng
1.
1MEANI
NG
Vent ur
ecapi t
al (
VC)i sat ypeofpr i
vat
eequi ty,
[
1]af orm off i
nancingt hatisprovidedby
fi
rmsorf undstosmal l,early-
stage,emergingfirmst hatar edeemedt ohav ehigh
growt hpotenti
al,orwhi chhav edemonst r
atedhi ghgr owt h(intermsofnumberof
empl oyees,annual revenue, orboth).Venturecapitalfirmsorf undsi nvestintheseear ly
-
stagecompani esinexchangef orequit
y,oranowner shipst ake, i
nt hecompani est hey
i
nv estin.Venturecapi talist
stakeont heriskoff i
nanci ngr i
skyst art-
upsi nthehopes
thatsomeoft hefirmst heysuppor twil
lbecomesuccessf ul.Becausest art
upsf acehi gh
uncer t
ainty,
[
2]VCi nv est mentsdohav ehighr atesoff ail
ure.Thest art-
upsar eusual l
y
basedonani nnov ativet echnologyorbusinessmodel andt heyar eusual l
yfrom thehi gh
technologyindustries,suchasi nformati
ont echnology( IT),cl
eant echnol ogyor
biotechnology.

Thet y pi
calv
ent urecapitalinvest
mentoccur saf
teraninit
ial
"seedf undi
ng"round.The
fi
rstr oundofinst i
tuti
onalventurecapital
tofundgrowthiscall
edt heSeriesAr ound.
Vent urecapi
tali
st sprovidet hi
sfi
nancinginthei
nterestofgenerati
ngar eturnthrough
anev ent
ual"exi
t "event,
suchast hecompanyselli
ngsharestothepubl i
cf orthef i
rst
ti
mei naniniti
alpubl i
cof f
ering(I
PO)ordoi ngamergerandacqui sit
ion(alsoknownas
a"tradesale")oft hecompany .

Inadditiont oAngel investing,equitycrowdf undi ngandot herseedf undingopt ions,

venturecapi tal isattr
activef ornewcompani eswi thlimit
edoper ati
nghi st
oryt hatar e
toosmal ltor aisecapitalint hepublicmar ketsandhav enotr eachedt hepoi ntwher e
theyar eabl et osecur eabankl oanorcompl eteadebtof feri
ng.Inexchangef ort hehigh
ri
skt hatv entur ecapitali
stsassumebyi nvesti
ngi nsmal lerandear l
y -
stagecompani es,
venturecapi talistsusuallygetsi gnifi
cantcont rolovercompanydeci sions,inaddi ti
ont o
asignificantpor ti
onoft hecompani es' owner ship(andconsequent lyvalue).Start-ups
l
ikeUber ,Airbnb, Fl
ipkart,Xiaomi &Di di Chuxingar ehighlyv al
uedst artups,commonl y
knownasuni corns,wher ev enturecapitali
st scont r
ibutemor et hanfinancingt othese
earl
y-stagef irms; theyalsoof t
enpr ovidest rategicadv i
cet othef i
rm'sexecut i
v esoni ts
businessmodel andmar ketingstrategies.

Star
tuporgrowthequi
tycapi
talorl
oancapit
alprov
idedbypri
vatei
nvest
ors(t
heventur
e
capi
tal
ist
s)orspeci
ali
zedfi
nancial
inst
it
uti
ons(devel
opmentfi
nancehousesorv
enture
capi
talfi
rms).Al
socal
ledri
skcapit
al.
Venturecapi t
ali
sat ypeoff undingforaneworgr owingbusiness.Itusual
lycomes
from venturecapit
alfi
rmst hatspeciali
zeinbuil
dinghighri
skfinancialpor
tfol
i
os.Wi
th
venturecapital
,theventur
ecapi t
alfi
rm gi
vesfundingtothestart
upcompanyi n
exchangef orequityi
nthest artup.Thi
sismostcommonl yfoundinhi ghgrowth
technologyindustr
iesli
kebiot echandsoftware.

Apersonwhodealsi
nvent
urecapi
tal
isav
ent
urecapi
tal
i
st,
andusual
l
ywor
ksf
ora
vent
urecapi
tal
fir
m.

Thefir
mt y pi
cal
lyhasoneormor einvestmentpor t
fol
iosthatareownedbyalimi
ted
part
nership.Theventur
ecapitali
stisoftenagener alpart
nerintheport
fol
i
o,and
i
ndivi
dual i
nvest
orsorot heri
nsti
tuti
ons( part
icular
lyuniv
ersit
yendowmentsand
pensi
onf unds)areli
mitedpartnersinthelimitedpartner
ship.

1.
2feat
ures

Feat
uresofVent
ureCapi
tal
:

Themai
nfeat
uresofv
ent
urecapi
tal
canbesummar
isedasf
oll
ows:

(
i)Hi
ghDegr
eesofRi
sk:

Venturecapi
talrepr
esent
sfinanci
ali
nvest
menti
nahi
ghl
yri
skpr
ojectwi
tht
heobj
ect
ive
ofearningahighrateofr
eturn.

(
ii
)Equi
tyPar
ti
cipat
ion:

Venturecapit
alf
inanci
ngis,
inv
ariabl
y,anact
ual
orpotenti
alequit
ypart
ici
pati
onwherei
n
theobject
iveofventur
ecapi
tal
istist
omakecapital
gainbysell
ingtheshar
esoncethe
fi
rm becomesprofit
able.

(
ii
i)LongTer
mInv
est
ment
:

Ventur
ecapi
talfi
nanci
ngi
sal ongter
minv
est
ment.I
tgener
all
ytakesal
ongper
iodt
o
encashthei
nvest
mentinsecuri
ti
esmadebyt
hevent
urecapi
tal
ist
s.

(
iv)Par
ti
cipat
ioni
nManagement
:

I
nadditi
ontoprovi
dingcapi
tal,v
entur
ecapital
fundstakeanact
ivei
nterestint
he
managementoftheassist
edf i
rms.Thus,t
heapproachofvent
urecapit
alfir
msis
di
ff
erentfr
om t
hatofat r
adit
ionall
enderofbanker
.
Iti
sal sodiff
erentfr
om t hatofaordinar
ystockmarketi
nvestorwhomer elyt
radesint
he
sharesofacompanywi thoutpar
ti
cipati
nginthei
rmanagement .Ithasbeenri
ghtl
ysai
d,
“venturecapit
alcombi nesthequalit
iesofbanker
,st
ockmar ketinvest
orand
entrepreneurinone.”