Venture capital presentation

By: Mohamed Ismail Megahed
DBA, Finance

VC Concepts and Definition
 Venture capital is the capital invested in a
business where the chances of success are
uncertain.
 It is term to describe the financing of startup
and early stage business as well as
businesses in “ turn around” situations

VC Concepts and Definition
 Venture capitalist is a person who make such
investments.
 Venture capital fund is a partnership or trust or
a company that primarily invests the financial
capital of promoters and other investors in
enterprises that are too risky for the standard
capital markets or bank loans

VC History
 VC concept is a US origin concept.
 Organized VC fund was started in 1946 when
American research and development
corporation (ARD), a publicly traded, closed-
end investment company was formed.
 In 1958 for computer maker digital equipment
corp was provided with start-up financing by
ARD.
 ARD was eventually profitable, providing its
original investors with a 15.8% annual rate of
return over its 25 year as an independent firm

VC Advantages
1 ) The most distinguishing feature of Venture Capital is
that it is provided largely in the form of equity, when the
investee company is unable to float its equity shares
independently in the market, or from other sources in the
initial stage. Thus risk capital is provided, which is not
available otherwise due to the high degree of risk
involved in the venture.
2) The venture capitalist, though participates in the equity,
does not intend to act as the owner of the enterprise.
The venture capitalist does not participate in the day-to-
day management, but aids and guides the management
by providing the benefit of his skill, experience and
expertise.

VC Advantages
3) The Venture Capitalist does not intend to retain his
investment in the investee company for ever. He intends to
divest his shares, as soon as the company becomes a
profitable business and the returns from the business are
high as per expectations. At this stage he withdraws himself
from the venture and in turn provides finance for another
venture.
4) A Venture Capitalist intends to earn largely by way of capital
gains arising out of sale of his equity holdings, rather than
through regular returns in the form of interest on loans.
5) A Venture Capitalist also provides conditional loans which
entitles him to earn royalties on sales depending upon the
expected profitability of the business.

VC Firm features
 Investment in high-risk, high-returns ventures
 Participation in management
 Raises fund from several sources
 Diversification of the portfolio
 Exit after specified time

Methods Of Venture Financing
 Equity
 Conditional Loan
 Income Note
 Other Financing Methods

VC’s contribution to
entrepreneur
 In addition to money, professional VC as a
shareholder bring strong industry, operational,
financial and investment banking skills to the
partnership with the target company
 VC adds the most value by assisting in the
creation of the best possible team to manage
and supervise the target company
 Management assessment is one of the major
tasks to be carried out by the venture capital
before deciding to invest

VC’s contribution to
entrepreneur
• Through the VC’s expertise and network the
portfolio companies could gain access to:
1. Follow-on capital through venture capital ties
2. Knowledge of partnership opportunities in multiple
markets
3. In-depth operational and management experience’
4. Access to high-quality management teams
5. Ties to the investment banking community

STAGES OF VENTURE CAPITAL
FINANCING
Finance Stage
Early Stage
Seed Capital
Start Capital
Later stage Expansion
Follow On
Financing
Replacement
Turn Around Management
Buy Out

FINANCING
 A venture capital fund provides finance to the
venture capital undertaking at different stages
of its life cycle according to requirements.
These stages are broadly classified into:
(1) Early stage financing.
(2) Later stage financing. Each of them is further
sub-divided into a number of stages.

FINANCING
 Early Stage Financing includes: Seed capital stage, Start-up
stage, and Second round financing.
 Seed Capital Stage: This is the primary stage associated with research
and development. The concept, idea, process pertaining to high
technology or innovation are tested on a laboratory scale. Generally, the
ideas developed by Research and Development wings of companies or
scientific research institutions are tried. Based on laboratory trial, a
prototype product development is carried out. Subsequently, possibilities
of commercial production of the product is explored. The risk perception
of investment at this stage if quite high and only a few venture capital
funds invest in the seed capital stage of product development. Such
financing is provided to the innovator in the form of low interest bearing
personal loans.

FINANCING
 Start-up Stage: Venture capital finance is made available at the start-up stage of
the projects which have been selected for commercial production. A start-up
refers to launching or beginning a new activity which may be the one taken out
from the Research and Development stage of a company or a laboratory or may
be based on transfer of technology from abroad. Such product may be an import
substitute or a new product/service which is yet to be tried. But the product must
have effective demand and command potential market in the country. The
entrepreneurs who lack financial resources for undertaking production, approach
the venture capital funds for extending funds through equity. Before making such
investments, venture capital fund companies assess the managerial ability,
capacity and the commitment of entrepreneur to make the project idea as
success. If necessary, the venture capital funds lend managerial skills,
experience, competence and supervise the implementation to achieve
successful operation. High degree of risk is involved in start-up financing.

FINANCING
 Second Round Financing: After the product has been launched in
the market, further funds are needed because the business has
not yet become profitable and hence new investors are difficult to
attract. Venture capital funds provide finance at such stage, which
is comparatively less risky than the first two stages. At this stage,
finance is provided in the form of debt also, on which they earn a
regular income.

FINANCING
 Later Stage Financing: Even when the business of
the entrepreneur is established it requires
additional finance, which cannot be secured by
offering shares by way of the public issue. Venture
capital funds prefer later stage financing as they
anticipate income at a shorter duration and capital
gains subsequently.

FINANCING
 Expansion Finance: Expansion finance may be needed
by an enterprise for adding production capacity once it
has successfully gained market share and expects
growth in demand for its product. Expansion of an
enterprise may take the form of an organic growth or
by way of acquisition or takeover. In the case of
organic growth the entrepreneur retains maximum
equity holdings of the entrepreneur and the venture
capitalist could be in much higher proportion
depending upon factors such as the net worth of the
acquired business, its purchase price and the amount
already raised by the company from the venture
capitalists.

FINANCING
 Replacement Finance: In this form of financing, the
venture capitalist purchases the shares from the
existing shareholders of the company who are willing
to exit from the company. Such a course is often
adopted with the investors who want to exit from the
investee company, and the promoters do not intend
to list its shares in the secondary market, the venture
capitalist perceives growth of the company over 3 to
5 years and expects to earn capital gain at a much
shorter duration.

FINANCING
 Turn Around: When a company is operating at a loss
after crossing the early stage and entering into
commercial production, it may plan to bring about a
change in its operations by modernizing or expanding
its operations, by addition to its existing products or
deletion of the loss-making products, by reorganizing
its staff or undertaking aggressive marketing of its
products, etc. For undertaking the above steps for
reviving the company, infusion of additional capital is
needed. The funds provided by the venture capitalist
for this purpose are called turn

FINANCING
around financing. In most of the cases, the venture capitalist which
supported the project at an early stage may provide turnaround
finance, as a new venture capitalist may not be interested to invest
his funds at this stage. Turn around financing is more risky
proposition. Hence the venture capitalist has to judge in greater
depths the prospects of the enterprise to become viable and
profitable. Generally substantial investment is required for this form
of financing. Besides providing finance, the venture capitalist also
provides management support to the entrepreneur by nominating its
own directors on the Board of the company to effectively monitor the
progress of recovery of the company and to ensure timely’
implementation of the necessary measures.

FINANCING
 Buyout Deals: A venture capitalist may also provide finance
for buyout deals. A management buyout means that the
shares (and management) of one set of shareholders, who
are passive shareholders, are purchased by another set of
shareholders who are actively involved in the operations of
the organisation. The latter group of shareholders buyout
the shares from the inactive shareholders so that they
derive the full benefit from the efforts made by them
towards managing the enterprise. Such shareholders may
need funds for buying the shares, venture capitalist provide

Types of VCs
 Angel investors
 Financial VCs
 Strategic VCs

Types of VCs
 Angel investors
• Typically a wealthy individual
• • Often with a tech industry background, in position to
judge high-risk investments
• • Usually a small investment (< $1M) in a very early
stage company.
• • Motivation:
• – Dramatic return on investment via exit or liquidity
event:
• • Initial Public Offering (IPO) of company
• • Subsequent financing rounds
• – Interest in technology and industry

Types of VCs
 Angel investors
Typically a wealthy individual
• Often with a tech industry background, in position
to judge high-risk investments Usually a small
investment (< $1M) in a very early stage
company.
• Motivation: Dramatic return on investment via exit
or liquidity event:
• Initial Public Offering (IPO) of company
• Subsequent financing rounds
• Interest in technology and industry

Types of VCs
 Financial VCs
Most common type of VC
• An investment firm, capital raised from institutions and
individuals Often organized as formal VC funds,
• Sometimes organized as a holding company
• Fund compensation: carried interest
• Holding company compensation: IPO
• Fund sizes: ~$25M to 10’s of billions
• Motivation:
• Purely financial: maximize return on investment
• IPOs, Mergers and Acquisitions (M&A)

Types of VCs
 Strategic VCs
Typically a (small) division of a large technology
company
• Examples: Intel, Cisco, Siemens, AT&T
• Corporate funding for strategic investment
• Help companies whose success may spur
revenue growth of VC corporation
• Not exclusively or primarily concerned with return
on investment
• May provide investees with valuable connections
and partnerships
• Typically take a “back seat” role in funding

Where Does Venture Capital Money Come
From?
• Professional Venture Capital Firms raise money from Insurance Companies,
Educational Endowments, Pension Funds and Wealthy Individuals.
• These organizations have an investment portfolio which they allocate to
various asset classes such as stocks (equities), bonds, real estate etc.
• One of the assets classes is called “Alternative Investments”- venture capital
is such an investment. Perhaps 5% to 10% of the portfolio might be allocated
to Alternative Investments.
• The portfolio owners seek to obtain high returns from these more risky
Alternative Investments.

How are Venture Capital Funds Organized?
• Most Venture Capital Funds are Limited Partnerships:
Venture Capital Fund
Limited Partners
Pension Funds, Educational Endowments,
Foundations, Insurance Companies, Wealthy
Individuals
General Partners The General Partners use an Offering
Memorandum to raise a fund of a given size
from the Limited Partners by convincing them
that the GPs have a unique strategy or
expertise in a particular sector or sectors of the
market. Fund raising can take a year or more.
If the GPs are successful they will convince
enough Limited Partners to invest enough
money to achieve the size fund offered.
When this happens there is a first “close” of
the fund.

What Do Venture Capitalists Do?
• Source Deals
• The GPs have to “source” deals- I.e. find investment
opportunities. This is done in a variety of ways-
referrals from trusted sources (other funds,
entrepreneurs they have invested in before, lawyers,
accountants etc.)
• Make Investment Decisions
• From the opportunities identified the GPs pick the
ones they think will be the “winners”. They might
look at 50 or 100 opportunities for each one they
invest in

What Do Venture Capitalists Do?
• Manage The Investment
• The GP/VCs have a fiduciary duty to the LPs to “manage” the
investment. This means they usually sit on the Board of
Directors. Given this time commitment a VC might only be able
to handle 6 to 10 portfolio investment companies at a time.
• Harvest The Investment
• The GP/VCs win only if they can get their money out of the
investment (“harvest the investment”). This usually takes the
form of an acquisition of the portfolio company or taking the
portfolio company public in an Initial Public Offering (IPO).
Note: even the most successful funds rarely have even 1/3 of
their portfolio investments become successful – i.e even with
careful vetting 2 out of 3 investments are not “wins”.

Venture capital presentation

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