Methods of Venture capital financing

Methods of Venture capital financing  Equity Participating debentures conditional loan

Methods of Venture capital financing

Equity Capital 
·         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.

Participating debentures

Non-convertible debentures
·         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.

Coupon bonds/debentures
·         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.
Conditional loan

·         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.