Thursday, December 17, 2009

Unit - 5 Venture Capital (Assignment by Suryansh Verma)


Venture Capital is investing in companies that have undeveloped or evolving products or revenue. It lays particular stress on entrepreneurial attempts and less mature businesses. Venture Capitalists are those who are desirous to accept high risk in order to attain a much more higher rate of return. A Venture Capital fund invests for a very long term, has a relatively small number of “stocks,” and seeks very high returns. If we try to explain Venture Capital financing from both perspectives of the investor side and the entrepreneur side, we should ask and answer those two questions: What does an Investor (also known as a Venture Capitalist) have and what does an entrepreneur have? Venture Capitalists have funds, or they have the ability to raise capital. They have experience in building companies creating wealth from the very beginning of a company up to the exit event. They have associates to help in formation of the company’s network. On the other hand, entrepreneurs have avant‐garde ideas, processes or products. They have the needed skill and practice to build and retain this business The Venture Capitalists invest in companies, because they are looking for opportunities of gaining considerably higher returns than in stock market returns. And entrepreneurs just need the money to fully cash in on the opportunity of their product/service. Thus, the Venture Capital .

Industry makes these two parties to come together and meet each other’s needsThere are four stages in Venture Capital financing. They can be summarized as: 

Seed stage: Financing provided to research, assess and develop an initial concept before a business has reached the start‐up phase. 
Startup stage: Financing for product development and initial marketing. Companies may be in the process of being set up or may have been in business for a short time, but have not sold their products commercially and will not yet be generating a profit. 
Expansion stage: Financing for growth and expansion of a company which is breaking even or trading profitably. Capital may be used to finance increased production capacity, market or product development, and/or to provide additional working capital. This stage includes bridge financing and rescue or turnaround investments. 
Replacement Capital: Purchase of shares from another investor or to reduce gearing via the refinancing of debt.

Investors are interested in Venture Capital by the anticipation of earning higher yields than they can by investing in publicly traded firms. Likewise, entrepreneurs may be attracted by the feasibility of higher returns on their human and financial assets. In this regard, the aim of Venture Capital financing is to increase the value of innovating companies, to allow today's "emerging" companies to advance into tomorrow's leading firms – by that means providing investors with noteworthy returns on their investment. Venture Capital firms invest in a lot of different new ventures, at least one of which should be successful. Apart from financing the new company, Venture Capital firms usually bring in their experience in the field and a network of al. Venture capital is an important source of equity for start‐up companies.
relations – social capitVCs want two things:
Equity: because if and when the business achieves considerable success, that equity stake will
be worth the invested capital.
Control: because VCs want to reduce the risk that the entrepreneur will run a promising
idea into the ground.


The criteria is as follows:
1. Identifiable Competitive Advantage .
2. High Growth Potential .
3. Attractive Valuation Relative to potential.
4. Well Defined Exit Alternatives.
There are some relevant questions to check whether a company is worth‐investment:

1. Does the company's product or service have a clear, differentiated advantage in its
2. Does the company, through intellectual property or other means, have sufficient barriers
to theentry of other competitors who can duplicate their advantage?
3. Does the company have a skilled, honest, realistic, seasoned management team with the ability to carry out the business plan and with the ability to responsively weather se
unanticipated problems and opportunities that ari along the voyage to success?
4. Are the company's customers pleased with the product or service, or with its earlyversions, and are they likely to become repeat customers?
5. Is the valuation of the company and the terms of the offered equity investment attractive enough to warrant the risk involved in the investment?
6. Of all of the above, the need for a strong management team is by far the most critical. For a venture opportunity to be attractive there must be a positive answer to all of these questions. But venture investors will spend most of their effort verifying the quality of
the team of managers who will be spending their money.
7. Once you have traversed all of these hurdles, you're ready to focus on the terms and methods of closing the deal. Once again, a company will turn to its expert legal and financial advisers for help with terms, documents, and closing. 

I. Industry Consolidation: Most of the industries in Turkey display a fragmented structure, offering lucrative inorganic growth opportunities through consolidation.
II. New Market Expansion: VC Firms expect its portfolio companies not only to be dominant players in the local market but also to have the vision to become regional or global players, provided that they have a suitable business concept for internationalization, in order to mitigate risks related to over‐exposure to one single geographic market. VC Firms do not only financially support international expansion, but also plays a key role to support company management to identify the right market and the mode of entry.
III. Strategic Redirecting: Management Team’s years of past experience in various fields including operations and consulting enables the investment team to engage in a guiding role whilst assessment of portfolio companies’ strategies with a focus on competitive advantage creation.

IV. Operational Improvement: Operational improvement is one of the most widely and successfully applied value creation strategies by VC Firms and enables the portfolio companies to adopt systems and approaches that will continue to create value after VC Firms’ exit. Operational improvement is achieved by improvement of existing or as the case may be, introduction of new management information and reporting systems and also development and implementation of new IT infrastructure, which are standard applications by VC Firms for its portfolio companies, to a greater extent particularly for investments completed recently.
V. Reinforce Management Team: Despite the scarcity of result‐oriented management talent that can deliver VC expectations, due to its local presence and experience, VC Firms not only successfully creates its own pool of capable executives, but also establishes relationships with a vast network of consultants and recruiting firms. For example, CFO’s can be selected and brought in for all of the portfolio companies by VC Firms.
VI. Corporate Governance, Transparency and Restructuring: VC Firms place great emphasis on the transparency, ethics and also efficiency of principals and procedures concerning the management of its portfolio companies. In order to establish financial and operational discipline, VC Firms restructures internal operational processes, policies and procedures, particularly those regarding personnel, expenses‐allowances and procurement, immediately after entry, which has been the case especially for investments completed more recently.