Venture Capital

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.

About the author

Muhammad Qasim

Muhammad Qasim, founder of Shaheen ebooks website, which is an online ebooks library serving Urdu books, novels, and dramas to the global Urdu reading community for the last 3 years (since 2018.

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