Methods of Venture capital financing
· All Venture Capital Firms (VCF) provide equity.
· Their contribution may not exceed 49% of the total equity capital.
· The effective control and majority ownership of the firm may remain with the entrepreneur.
· The Venture capitalist becomes entitled to a share in the firm’s
· Profits as much, he is liable for the losses.
· The advantage to the VCF is that it can share in the high value of the venture and make capital gains if the venture succeeds.
· These carry a fixed rate of interest. Redeemable at par/premium.
· Secured and can be cumulative or non-cumulative.
Partly convertible debentures
· A convertible portion
· Converted into equity shares at par/premium.
· A non-convertible portion
· Earns interest till redemption.
· These can be either convertible or non-convertible with zero/no interest rate.
Secured premium notes
· These are secured, redeemable at premium in lump sum /installments, have zero interest and carry a warrant against which equity shares can be acquired.
· This is a form of loan finance without any pre-determined repayment schedule or interest rate.
· A conditional loan is repayable in the form of a royalty after the venture is able to generate sales. No interest is paid on such loans.
· Some VCFs give a choice to the enterprise of paying a high rate of interest (above 20%) instead of royalty on sales once it becomes commercially sound.
· Some funds recover only half of the loan if the venture fails.
· Conventional loans carry lower interest initially which increases after commercial production commence.
· A small royalty is additionally charged to cover the interest foregone during the initial years.
· The repayment of the principal is based on a pre-stipulated schedule, Venture Capital Institutions usually do not insist upon mortgage/other security.