Venture Capital

By

Md.Masud Hossen

Agenda

Concept Definition Origin And DevelopmentCharacteristicsFeatures StagesEligibility To Seek Venture Capital FundingThe Venture Capital Investment ProcessSouth Asian Venture Capital Scenario

Cont….

Bangladesh’s Scenario

Venture Capital Fund In Bangladesh

Advantages Of Venture Capital

Disadvantages Of Venture Financing

Recommendations

Concept Of Venture Capital

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

Definition

Venture capital is a subset of

private equity and refers to

equity investments made for the

launch, early development, or

expansion of a business

Venture capital means funds made available for startup firms and small

businesses with exceptional growth potential.

Cont….

wealth available for investment in new or speculative enterprises “ Venture Capital is defined as long-term equity investment in novel technology based projects with display potential for significant growth and financial return.”

- According to 1995 Finance Bill

Origin And Development Of Venture Capital Concept

• 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

Characteristics

Long time horizon

Lack of liquidity

High risk

Equity participation

Participation in management

Features Of Venture Capital

Venture capital is usually in the form of equity or mix of equity

debt.

Commercial success of funded venture is not tested and hence

VC is a risk investment.

If successful, VCs can get extraordinary returns.

VC is not just a fund provider but also is involved in managing

the envisaged growth of the firm.

VC are interested in capital gains and cash gains.

Stages of Financing

1. Seed Money:

Low level financing needed to prove a new idea.

2. Start-up:

Early stage firms that need funding for expenses associated with marketing and product development.

3. First-Round:

Early sales and manufacturing funds.

4. Second-Round:

Working capital for early stage companies that are selling product, but not yet turning a profit .

5. Third-Round:

Also called Mezzanine financing, this is expansion money for a newly profitable company

6. Fourth-Round:

Also called bridge financing, it is intended to finance the "going public" process

Risk in each stage

Financial Stage Period (Funds locked in years)

Risk Perception Activity to be financed

Seed Money 7-10 ExtremeFor supporting a

concept or idea or R&D for product

development

Start Up 5-9 Very HighInitializing

operations or developing prototypes

First Stage 3-7 HighStart commercials

production and marketing

Financial Stage Period (Funds locked in years)

Risk Perception Activity to be financed

Second Stage 3-5 Sufficiently highExpand market and

growing working capital need

Third Stage 1-3 Medium

Market expansion, acquisition &

product development for

profit making company

Fourth Stage 1-3 Low Facilitating public issue

Eligibility To Seek Venture Capital Funding

Strength and motivation of management teams

Clarity on product development strategies

Carefully defined target markets with possibility to scale-up in a big way

Innovation quotient in proposed product or idea

VC investment process

Deal origination

Screening

Due diligence (Evaluation)

Deal structuring

Post investment activity

Exit plan

South Asian Venture Capital Scenario

South Asia includes venture capital managers based in Bangladesh, India, Pakistan, Nepal and Sri Lanka. Compared to other regions in Asia, there are more South Asia-based fund managers with vehicles in market currently targeting infrastructure and real estate investments.

In 1973 a committee on development of small and medium enterprises highlighted the need to foster venture capital as a source of funding new entrepreneurs and technology in the south Asian region.

2007 2008 2009 2010 2011 2012 2013YTD0

5

10

15

20

25

30

35

31 31

2423

22 22

45.4

7.2

4.32.8 3.4

20.9

No.of Funds ClosedAggregate Capital Raised ($bn)

Annual South Asia-Based venture capital Fundraising, 2007 -2013 (As at August 2013)

Bangladesh’s Scenario

Asian Tiger Capital Partners is one of the first financial institutions in Bangladesh focusing on private equity and venture capital.

Buoyed by the inclusion of Bangladesh in J P Morgan’s “Frontier Five” group of countries and also Goldman Sach’s “Next Eleven” group, Asian Tiger Capital Partners have launched themselves in Bangladesh complete with a Bengal tiger as logo.

Cont…

It is stated earlier that a systematic problem exists within the major segments of the financial system in Bangladesh in catering to the financing needs of SMEs. Therefore, it is argued that the venture capital industry may be developed as an additional financial intermediary for catering to the financing and non-financing needs of the SMEs, as it can participate in the management of the investee firms actively and exercise those are……

due diligence process participative management approach information asymmetry and transactions costs bounded rational

Venture Capital Fund In Bangladesh

• Venture Investment Partners Bangladesh Limited (VIPB)

• BD Venture Limited

ADVANTAGES OF VENTURE CAPITAL

provide large sum of equity finance. Venture Capitalist are rewarded by business success

& the capital gain. Able to bring wealth and expertise to your company The Venture Capitalist also has a wide network of

contacts. Providing additional funds.

DISADVANTAGES OF VC Lengthy and complex process (needs detailed business plan,

financial projections and etc.)

In the deal negotiation stage, you will have to pay for legal

and accounting fees

Investors become part owners of your business - founder loss

of autonomy or control

Recommendations

The company will invest in small and medium size enterprises across the country, with a special focus on promising rural ventures. Each firm must have annual revenue of at least TK 4.0 Million.

Venture capitalists will help companies grow, but they eventually seek to exit the investment in three to seven years.

Venture capitalists may be generalist or specialist investors, depending on their investment strategy. Venture capitalists can be generalists, investing in various industry sectors

Cont….

Investment made on development of management and

employees through training, improving skills.

Avoid venture capitalist in interference in Business activity.

Increasing market facilities.

Provide more infrastructure facilities.

THE END

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