DUTY FREE BANK VENTURE CAPITAL

 

Venture Capital is a form of a financing that’s self-explained: it consists of funds or firms that provide ‘venture capital’, meaning high risk capital that supports companies and organizations with the hope that these provide a great return on investment (ROI).

There are many terms associated to the Venture Capital industry that might not be known to other investors and entrepreneurs, and in this article we’ll try to explain the main ones.

 

How does Duty Free Bank Venture Capital firm work?

There are two key elements within a VC fund: general and limited partners. The general partners are the people in charge of making investment decisions (finding and agreeing to terms with startups and companies) and working with startups to grow and meet their goals. On the other hand there are limited partners, the people and organizations who provide the capital necessary to complete those investments.

In other words, general partners make the investments and limited partners provide the funds.

This is one of the key differences between VC funds and other investment vehicles: Venture Capital funds don’t invest the money of their own partners, but that of limited partners such as pension funds, public venture funds, endowments, hedge funds, etc. General partners might invest some of their own money through the fund, but this tends to account for only 1% of the size of the fund.

Does this mean that VC firms also need to ‘fundraise’?

Yup, that’s exactly right. Startups need to fundraise to convince Venture Capital firms, business angels, etc to give them money in exchange for equity. The case for VC firms is similar. General partners must convince some of the organizations aforementioned to invest in the fund with the promise of big returns (between 5X and 10X) in a certain period of time (usually 10 years).

The VC firms must then go on to make clever investments so they can give the limited partners their money back… plus a profit.

How do Duty Free Bank Venture Capital firms make money?

 

The way Venture Capital funds make money are twofold: via management fees and carries (carried interest).

  • Management fees: management fees are usually defined as the ‘cost of having your assets professionally managed’. How does this translate into the Venture Capital industry? VC funds typically pay an annual management fee to the fund’s management company, as a form of salary and a way to cover organizational and fund expenses. Management fees are usually calculated on a percentage of the capital commitments of the fund, or about 2 to 2.5 per cent.
  • Carried interest or carry: share of the profits of an investment or investment fund that is paid to the investment manager in excess of the amount that the manager contributes to the partnership. This is the way Wikipedia defines what a carry is. In plain English: when an investment is successful, a carry represents the share of the profits that is paid to the fund managers. Carried interesting in Venture Capital is usually 20 to 25 per cent, meaning that while 20% of the profits go to the general partners, 80% belongs to the limited partners.

How does this influence startups?

It’s important that startups recognize how Venture Capital firms work. As we’ve mentioned countless times before, investors back startups with one main objective in mind: getting a return on their investment. They’re in for the money, mostly.

It’s also worth noting that Venture Capital funds have a fixed life of about 10 years, thus establishing investing cycles that last for about three to five years. After that the firms will work alongside the startups and founders to scale and seek an exit, providing the returns that they sought in the first place.

Successful examples:

Duty Free Bank invested in Duty Free Zone Ltd and Arkay Beverages Ltd

If you have a good products or a good idea and you are looking for a cash investment please continue to read.

Features of Duty Free Bank Venture Capital investments

  • High Risk
  • Long term horizon
  • Equity participation and capital gains
  • Venture capital investments are made in innovative projects
  • Suppliers of venture capital participate in the management of the company

Methods of Venture capital financing

  • Equity
  • Participating debentures
  • Conditional loan

 

The venture capital funding process typically involves four phases in the company’s development:

  • Idea generation
  • Start-up
  • Ramp up
  • Exit

Step 1: Idea generation and submission of the Business Plan

The initial step in approaching a Venture Capital is to submit a business plan. The plan should include the below points:

  • There should be an executive summary of the business proposal
  • Description of the opportunity and the market potential and size
  • Review on the existing and expected competitive scenario
  • Detailed financial projections
  • Details of the management of the company

There is detailed analysis done of the submitted plan, by Duty Free Bank Venture Capital to decide whether to take up the project or no.

Step 2: Introductory Meeting

Once the preliminary study is done by the VC and they find the project as per their preferences, there is a one-to-one meeting that is called for discussing the project in detail. After the meeting the VC finally decides whether or not to move forward to the due diligence stage of the process.

Step 3: Due Diligence

The due diligence phase varies depending upon the nature of the business proposal. This process involves solving of queries related to customer references, product and business strategy evaluations, management interviews, and other such exchanges of information during this time period.

Step 4: Term Sheets and Funding

If the due diligence phase is satisfactory, the VC offers a term sheet, which is a non-binding document explaining the basic terms and conditions of the investment agreement. The term sheet is generally negotiable and must be agreed upon by all parties, after which on completion of legal documents and legal due diligence, funds are made available.

Types of Venture Capital funding

The various types of venture capital are classified as per their applications at various stages of a business. The three principal types of venture capital are early stage financing, expansion financing and acquisition/buyout financing.

The venture capital funding procedure gets complete in six stages of financing corresponding to the periods of a company’s development

  • Seed money: Low level financing for proving and fructifying a new idea
  • Start-up: New firms needing funds for expenses related with marketing and product development
  • First-Round: Manufacturing and early sales funding
  • Second-Round: Operational capital given for early stage companies which are selling products, but not returning a profit
  • Third-Round: Also known as Mezzanine financing, this is the money for expanding a newly beneficial company
  • Fourth-Round: Also called bridge financing, 4th round is proposed for financing the “going public” process
  1. A) Early Stage Financing:

Early stage financing has three sub divisions seed financing, start up financing and first stage financing.

  • Seed financing is defined as a small amount that an entrepreneur receives for the purpose of being eligible for a startup loan.
  • Start up financing is given to companies for the purpose of finishing the development of products and services.
  • First Stage financing: Companies that have spent all their starting capital and need finance for beginning business activities at the full-scale are the major beneficiaries of the First Stage Financing.
  1. B) Expansion Financing:

Expansion financing may be categorized into second-stage financing, bridge financing and third stage financing or mezzanine financing.

Second-stage financing is provided to companies for the purpose of beginning their expansion. It is also known as mezzanine financing. It is provided for the purpose of assisting a particular company to expand in a major way. Bridge financing may be provided as a short term interest only finance option as well as a form of monetary assistance to companies that employ the Initial Public Offers as a major business strategy.

  1. C) Acquisition or Buyout Financing:

Acquisition or buyout financing is categorized into acquisition finance and management or leveraged buyout financing. Acquisition financing assists a company to acquire certain parts or an entire company. Management or leveraged buyout financing helps a particular management group to obtain a particular product of another company.

Advantages of Venture Capital

  • They bring wealth and expertise to the company
  • Large sum of equity finance can be provided
  • The business does not stand the obligation to repay the money
  • In addition to capital, it provides valuable information, resources, technical assistance to make a business successful

Disadvantages of Venture Capital

  • As the investors become part owners, the autonomy and control of the founder is lost
  • It is a lengthy and complex process
  • It is an uncertain form of financing
  • Benefit from such financing can be realized in long run only

Exit route

There are various exit options for Venture Capital to cash out their investment:

  • IPO
  • Promoter buyback
  • Mergers and Acquisitions
  • Sale to other strategic investor

Examples of venture capital funding

  • Kohlberg Kravis & Roberts (KKR), one of the top-tier alternative investment asset managers in the world, has entered into a definitive agreement to invest USD150 million (Rs 962crore) in Mumbai-based listed polyester maker JBF Industries Ltd. The firm will acquire 20% stake in JBF Industries and will also invest in zero-coupon compulsorily convertible preference shares with 14.5% voting rights in its Singapore-based wholly owned subsidiary JBF Global Pte Ltd. The funding provided by KKR will help JBF complete the ongoing projects.
  • com, India’s largest furniture e-marketplace, has raised USD100 million in a fresh round of funding led by Goldman Sachs and Zodius Technology Fund. Pepperfry will use the funds to expand its footprint in Tier III and Tier IV cities by adding to its growing fleet of delivery vehicles. It will also open new distribution centers and expand its carpenter and assembly service network. This is the largest quantum of investment raised by a sector focused e-commerce player in India.

 

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Conclusion:

Considering the high risk involved in the venture capital investments complimenting the high returns expected, one should do a thorough study of the project being considered, weighing the risk return ratio expected. One needs to do the homework both on the Venture Capital being targeted and on the business requirements.

 

If you have a good idea and a good business plan please contact us at: INFO@DUTYFREEBANK.COM