Page 254 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Unit 12: Merchant Banking and Venture Capital

6. Investment is liquid: A venture capital is not subject to repayment on demand as with an Notes
overdraft or following a loan repayment schedule. The investment is realised only when
the company is sold or achieves a stock market listing.
It is lost when the company goes into liquidation.

Task List some of the venture capitalists operating under your territory and analyse if
their services miss any of the features discussed above.

12.7 Techniques

Venture capital firms usually recognise the following two main stages when the investment
could be made in a venture namely:

Early Stage Financing

1. Seed Capital & Research and Development Projects: Venture capitalists are more often
interested in providing seed finance i. e. making provision of very small amounts for
finance needed to turn into a business.
Research and development activities are required to be undertaken before a product is to
be launched. External finance is often required by the entrepreneur during the development
of the product. The financial risk increases progressively as the research phase moves into
the development phase, where a sample of the product is tested before it is finally
commercialised "venture capitalists/firms/ funds are always ready to undertake risks
and make investments in such R & D projects promising higher returns in future.
2. Start Ups: The most risky aspect of venture capital is the launch of a new business after the
Research and development activities are over. At this stage, the entrepreneur and his
products or services are as yet untried.
The finance required usually falls short of his own resources. Start-ups may include new
industries/businesses set up by the experienced persons in the area in which they have
knowledge. Others may result from the research bodies or large corporations, where a
venture capitalist joins with an industrially experienced or corporate partner. Still other
start-ups occur when a new company with inadequate financial resources to commercialise
new technology is promoted by an existing company.
3. Second Round Finance: It refers to the stage when product has already been launched in
the market but has not earned enough profits to attract new investors. Additional funds
are needed at this stage to meet the growing needs of business. Venture Capital Institutions
(VCIs) provide larger funds at this stage than at other early stage financing in the form of
debt. The time scale of investment is usually three to seven years.

Later Stage Financing

Those established businesses which require additional financial support but cannot raise capital
through public issue approach venture capital funds for financing expansion, buyouts and
turnarounds or for development capital.
1. Development Capital: It refers to the financing of an enterprise which has overcome the
highly risky stage and have recorded profits but cannot go public, thus needs financial
support. Funds are needed for the purchase of new equipment/plant, expansion of

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