Venture capital, social and rural entrepreneurship
MODULE 6
Sources of capital
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- There are various sources like:
- Owners' money
- Friends and relatives
- Angel investors
- Seed capital
- Venture capital
- Private placements
- IPO
- Debt for WC and long term capital
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Informal risk capital market
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- Many wealthy people looking for opportunities are called angel investors or risk capitalists.
- Business angels are high networth individuals who provide early stage capital to start-ups in the form of debt, equity or both.
- They provide capital to start-ups which are:
- too small to get attention of venture capitalists
- too risky for bank loans
- too limited in their revenue generation
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Types of Angel investors
- Corporate angels: senior managers from corporations with generous severance pay or who have taken early retirement may also get a senior management position.
- Entrepreneurial angel: they own and operate businesses. They usually participate in 4-5 companies. They invest usually and do not show interest to manage the business.
- Enthusiastic angels: For them investment is a hobby and are wealthy. They are aged and would like to help. They make small investments. They play no role in board.
- Micro management Angels: They are 'hands on'. They have attained wealth by their own experience they tend to impose tactics on them they usually do not assume management roles or want to be on the board of directors.
- Professional Angels: professionals like doctors, lawyers they invest in companies that offer professional services they have some experience. They invest in several companies at one time. They rarely seek board/management roles
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Advantages of Angel investors
- They seek smaller deals
- Prefer start-ups or early stage companies or organisation with seed capital.
- Invest in all industry sectors and show no bias
- Value adding partners of companies
- Geographically well dispersed
- They provide leveraging effect
- Cost effective; don't charge high fees.
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Disadvantages of Angel investments
- Not so helpful when the company needs large capital
- They want a say in the company which is sometimes detrimental
- When the going gets tough they can be troublesome
- Finding quality angels is difficult.
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Venture Capital
- Risk finance for entrepreneurial growth oriented investments for medium and long term returns to the entrepreneur in which the investor can actively participate because of his knowledge and experience
- Valuable and powerful source of equity capital available for start-ups and small businesses that grow exceptionally.
- In most cases a degree of managerial and technical expertise is provided.
- It is generally provided to early-stage, high potential companies with a view to generate an appreciable return.
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Nature of venture capital
- Equity participation: it is actual or potential equity participation through direct purchase of shares or debentures. The objective is to sell for capital gain when organisation becomes profitable.
- Long-term investment: it is long term, illiquid and not encashable on demand. It requires attitude to wait for years for appreciable profits
- Participation in management: continuous involvement in management of the business. This helps the venture. The VC gives his inputs on technology, marketing and management skills to the venture
- High degree of risk: Venture capital represents investment in a high risk project with a prospect of high rate of return.
- Achieve social objective: venture capital helps achieve social objective of equality and development.
- Investment is illiquid: investor realizes his investment when shares are sold at a good gain. If venture fails investor gets nothing. Liquidity is very poor.
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Need for venture capital
- Lack of capital for investment
- To enable start-up phase
- Acts as motivation to increase profits
- Experience of venture capitalist
- Involvement of venture capitalist
- Innovation
- Job creation
- Patient capital, not flighty
- Creating new industry clusters (media, retail, food processing, transportation, catering etc)
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Forms/stages of venture capital
- Early stage financing (seed capital, start-up stage, second round financing)
- Later stage financing (Expansion, replacement financing, turnaround finance, buy-outs, buy-ins)
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Advantages & Disadvantages of VC
Advantages
- Business consultations
- Management consultations
- Human resources
- Additional resources
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Disadvantages
- Management position
- Equity position
- Decision-making
- Business plans at risk
- Funding plan in doses
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Venture capital process
Process of entry for a VC (entry strategy)
- Deal origination: stream of deals is essential Referral system works. VC industry motivates coming up with proposals
- Screening: screening to shortlist on basis of product, market, size, place, stage of financing
- Evaluation/due diligence: after initial screening is done. VCs usually rely on subjective and comparative evaluation as the projects are new and entrepreneurs inexperienced. VCs evaluate the quality of management evaluating technology, product, market etc and business plan to evaluate risk and return.
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Venture capital process
- Investment valuation: done to determine the price of the deal. It is done on the basis of projected revenue and profitability, expected capitalization etc
- Deal structuring: terms of the deal, method and price of investment. All other issues like governance, shares, buy-back, management support etc will be worked out.
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Venture Capital process:
Process of exit for a VC (exit strategy)
Method by which a VC intends to cash-out of investment is called the exit strategy.
It is not easy to cashout as the venture is risky domain.
Some of the exit routes are:
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- Initial public offer:
- Acquisition by another company
- Purchase by investee company
- Purchase of VC share by 3rd party
Locating VC
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- VCs tend to specialize on geography, industry or services. Look for VCs on that basis
- Carefully research for such VCs. Look up VC directories. Lists available with names, addresses, businesses, restrictions
- Due diligence to check reputation and talk to investees to check. Check their credit history and strength. Check their goals culture and ethics
- Don't get discouraged if one VC rejects. It may be more to do with their style and approach or valuation of one's venture. Look for the right one.
Approaching venture capital
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- Explain why the business idea works through a demo. Everyone has ideas but convincing the VC about it is important
- Know the product inside-out. One should be capable in an hour long speech as well as in an elevator pitch
- Differentiate the product from what is available to get the interest of the VC
- Determine how the product is able to create value and how the new product is going to make a difference to the consumer
- Make a proper and professional contact with VC online network will help. Avoid walking in, sending emails may not help much
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Approaching venture capital
- Have a airtight, professional business plan with strategies including financials
- Find the right VC firm. They specialize in industry etc. look for a VC that fits one's venture
- Know the range of investment the VCs can make
- VC funding is all negotiation
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- never let them think you have no option
- VCs sometimes reject and wait for weeks
- Ask the broker for concessions after initial offer
Social entrepreneurship
Social enterprise
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- Social enterprise is an organization that applies commercial strategies to maximize improvements in financial, social and environment; well-being, rather than maximizing profits for external shareholders.
- This can be a for-profit or non-profit organisation.
- May be in the form of cooperative, business model, organisation etc. different from commercial objectives to social objectives.
- According to social enterprise alliance it is any organisation or venture that achieves a social or environmental mission using business methods.
Characteristics of social enterprise
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- Enterprise orientation: they are directly involved in producing goods/services to a market and they seek to be a viable trading organization with operating surpluses.
- Social aims: explicit social aims such as job creation, local services,. Ethical values including commitment to capacity building. They are accountable to the community for social, environmental and economic outcomes.
- Social ownership: they are autonomous with independent governance and ownership structures based on control by stakeholder groups or trustees. Profits are reinvested or sharing to stakeholders or used for the benefit of the community.
Need for social enterprise
- Meets the requirements of local communities, farmers, smes etc
- Advancing social mission- social inclusion
- Financial sustainability – government funding sources dries up
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Types of social enterprise
- Social firms: business firms set up to create employment for disadvantaged
- Cooperatives: people join together to meet to meet their needs through jointly owned enterprises.
- Development trusts: organization created to provide for people with disabilities and disadvantages.
- Intermediate labour market companies: provide training for long term unemployed and other disadvantaged groups to enter labour market
- Community business: enterprises having strong global links on local development and employment for local people
- Credit unions: finance cooperatives that help people who have community finance initiatives.
- Charities trading arms: charities in annovative ways like trade companies.
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Presentations:
- Meaning definition and types of entrepreneurs
- Importance and limitations of social entrepreneurship
- Meaning definitions and characteristics of rural entrepreneurship
- Need and types of rural entrepreneurship
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This download link is referred from the post: VTU MBA Lecture Notes - 1st Sem, 2nd Sem, 3rd Sem and 4th Sem || Visvesvaraya Technological University
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