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After studying this chapter you will be able to understand: Venture capital; features of venture capital; modes of VC finance; areas of investment: Strong management team, a viable idea, business plan, project cost and return, future market prospects, existing technology, miscellaneous factors.
Revise Lecture 16 Financial services • Venture Capital Financial services • • Venture capital has been emerged as a new financial method of financing during the 20th century It is the capital provided by firms of professionals who invest alongside management in young, rapidly growing or changing companies that have the potential for high growth Financial services • • • It is a form of equity financing especially designed for funding high-risk and highreward projects There is a common perception that venture capital is a means of financing high technology projects The term ‘venture capital’ represents financial investment in a highly risky project with the objective of earning a high rate of return • Features of venture capital Features of venture capital • The main features of VC can be summarized as; High degree of risk: • VC represents financial investment in a highly risky project with the objective of earnings a high rate of return Features of venture capital Equity participation: • VC financing is, invariably, an actual or potential equity participation wherein the objective of the VC is to make capital gain by selling the shares once the firm becomes profitable Features of venture capital Long-term investment: • VC financing is a long-term investment It generally takes a long period to encash the investment in securities made by venture capitalists Features of venture capital Participation in management: • • In addition to providing capital, VC funds take an active interest in the management of the assisted firm Thus, the approach of VC firms is different from that of a traditional lender or banker Features of venture capital • • It is also different from that of a ordinary stock market investor who merely trades in the shares of a company without participating in their management It has been rightly said, ‘VC combines the qualities of banker, stock market investor and entrepreneur in one’ Modes of VC finance Convertible loans: • The convertible loan is subordinate to all other loans, which may be converted into equity if interest payments are not made within the agreed time limit • Areas of Investment Areas of Investment • • • Different venture groups prefer different types of investments Some specialize in seed capital and early expansion while other focus on exit financing Biotechnology, medical services, communications, electronic components and software companies seem to be attracting the most attention from venture firms and receiving the most financing Areas of Investment • • The venture capital firms finance both early and later stage investments to maintain a balance between risk and profitability The venture capitalists usually take into account the following factors while making investments; Areas of Investment Strong management team A viable idea Business plan Project cost and return Future market prospects Existing technology Miscellaneous factors Lecture 17 • Basic Lending Principles Basic Lending Principles • According to section of the Banking Regulation Act, 1949, banking means ‘accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise’ Basic Lending Principles • • Another major reason of the lending function is to add value to the bank By lending the funds mobilized by it, a bank will be in a position to earn spreads to sustain profitability Basic Lending Principles • • Profitability through lending will be obtained if the bank is in a position to take and manage credit risk that arises on account of the quality of the borrower and liquidity risk that may arise by borrowing short and lending long in order to attain greater spreads Further, the spreads earned in this activity will also be exposed to risk arising from both interest and exchange rates Basic Lending Principles • Thus, while lending, the bank should try to balance its spreads and the risk levels • Liquidity Basic Lending Principles Liquidity: • • • Liquidity for a bank means the ability to meet its financial obligations A bank lending finances invests in relatively illiquid assets, but it funds its loans with mostly short-term liabilities A shortage of liquidity has often been a trigger for bank failures Basic Lending Principles • • • • Liquidity: Holding assets in a highly liquid form tends to reduce the income from that asset (cash, for example, is the most liquid asset of all, but pays no interest) So banks try to reduce liquid assets as far as possible However, a bank without sufficient liquidity to meet the demands of its depositors Basic Lending Principles • • • Liquidity: The result is that most banks now try to forecast their liquidity requirements and maintain emergency standby credit lines at other banks Banking regulators also view liquidity as a major concern ... venture firms and receiving the most financing Areas of Investment • • The venture capital firms finance both early and later stage investments to maintain a balance between risk and profitability... Project cost and return Future market prospects Existing technology Miscellaneous factors Lecture 17 • Basic Lending Principles Basic Lending Principles • According to section of the Banking Regulation... Banking Regulation Act, 1949, banking means ‘accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque,