by An important aspect of venture capital investing is the exit strategies. Venture capital funds primarily invest with an exit in mind after a few years. After successfully funding at seed, pre-production, production and expansion stages, a venture capitalist will start assessing exit strategies. The exit in the form of disinvestment or liquidation is the last and final stage of the venture capital funding.
The key types of liquidation/disinvestments are trade sales, sale of quoted equity post initial public offering (IPO), and write-offs. Let’s look at each of these in detail:
- Trade Sales: In this type of strategy the private company is sold or merged with an acquirer for stocks, cash, or a combination of both.
- IPO: If the company has done well, the venture capital investors will take the IPO route, by issuing shares registered for public offering. The venture capital investors and other private investors will get their portion of shares who can put them in the open marketplace for trading after an initial lock-in period.
- Write-offs: These are voluntary liquidations that may or may not result in any proceeds.
- Buy-back: In this method the entrepreneur buys-back the investment share from the venture capitalists and takes it back to being a privately held company. Investors who invest in a venture capital fund get distributions of public stock or cash from realized venture capital investments. Sometimes the fund may require further investments from limited partners. At other times, they may make cash or share distributions at random times during the lifetime of the fund. Investors can sell their interests to another buyer if they find one.
Venture Capital Investment process
Deal origination
Origination of a deal is the primary step in venture capital financing. It is not possible to make an investment without a deal therefore a stream of deal is necessary however the source of origination of such deals may be various. One of the most common sources of such origination is referral system. In referral system deals are referred to the venture capitalist by their business partners, parent organisations, friends etc.
Screening
Screening is the process by which the venture capitalist scrutinises all the projects in which he could invest. The projects are categorised under certain criterion such as market scope, technology or product, size of investment, geographical location, stage of financing etc. For the process of screening the entrepreneurs are asked to either provide a brief profile of their venture or invited for face-to-face discussion for seeking certain clarifications.
Evaluation
The proposal is evaluated after the screening and a detailed study is done. Some of the documents which are studied in details are projected profile, track record of the entrepreneur, future turnover, etc. The process of evaluation is a thorough process which not only evaluates the project capacity but also the capacity of the entrepreneurs to meet such claims. Certain qualities in the entrepreneur such as entrepreneurial skills, technical competence, manufacturing and marketing abilities and experience are put into consideration during evaluation. After putting into consideration all the factors, thorough risk management is done which is then followed by deal negotiation.
Deal Negotiation
After the venture capitalist finds the project beneficial he gets into deal negotiation. Deal negotiation is a process by which the terms and conditions of the deal are so formulated so as to make it mutually beneficial. The both the parties put forward their demands and a way in between are sought to settle the demands. Some of the factors which are negotiated are amount of investment, percentage of profit held by both the parties, rights of the venture capitalist and entrepreneur etc.
Post investment activity
Once the deal is finalised, the venture capitalist becomes a part of the venture and takes up certain rights and duties. The capitalist however does not take part in the day-to-day procedures of the firm; it only becomes involved during the situation of financial risk. The venture capitalists participate in the enterprise by a representation in the Board of Directors and ensure that the enterprise is acting as per the plan.
Exit plan
The last stage of venture capital investment is to make the exit plan based on the nature of investment, extent and type of financial stake etc. The exit plan is made to make minimal losses and maximum profits. The venture capitalist may exit through IPOs, acquisition by another company, purchase of the venture capitalists share by the promoter or an outsider.
Venture Capital in India
- Low level financing for proving and fructifying a new idea.
- Start-up financing where the new firms need funds for expense relating marketing and product development.
- First round financing which includes manufacturing and early sales funding
- Second round financing, which includes operational capital given for early stage companies which are selling products but not returning a profit
- Third round financing, which is also called a Mezzanine financing and includes the money needed to expand a newly beneficial company
- Fourth round financing also called Bridge financing and includes the financing the going public process.
