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It is investments in business ventures from idea Stage through expansion of a Company already producing and selling a product and through preparation or exit from the investment via buyout or initial public offering Venture capital investing may be done at several stages along the Way, but eventual exit is a primary consideration. By its very nature, such investing requires a horizon of several years and the willingness to accept several failures for every success in the venture capital portfolio: The possibly enormous return on the winning venture must compensate for many likely failed ventures.
Venture capital investment process, characteristics and global and local venture capital environment is analyzed in Section 2. Then practical application of venture UAPITA investments in a local context is then presented. Section 4 to the report presents the authors analysis of present venture capital trends in a local context and how venture capital investments could be directed towards countries economic development. 2. Literature review 2. 1 Stages of Venture Capital Investments Solicit (1996) provides a good review of the various stages of venture capital investments.
Several rounds of financing take place, and these can be characterized by where they occur in the development of the venture itself. Here, Chili’s classification review is adapted and blended with other common industry reemerging. 1 . Seed-stage financing is capital provided for a business idea. The capital generally supports product development and market research. 2. Early stage financing is capital provided for companies moving into operation and before commercial manufacturing and sales have occurred.
Start-up is capital provided for companies just. Moving into operation but without any commercial product or service sales. The capital generally supports product development and initial marketing. First-stage financing is capital provided to initiate commercial manufacturing and sales. 3. Formative-stage financing includes seed stage and early stage. 4. Later-stage financing is capital provided after commercial manufacturing and sales have begun but before any initial public offering.
Second-stage financing refers to capital used for initial expansion of a company already producing and selling a product but perhaps not yet Profitable. Third-stage financing is capital provided for major expansion, such as physical plant expansion, product improvement, or a major marketing campaign. Mezzanine (bridge) financing is capital provided to prepare for the step of going public and represents the bridge between the expanding company and the initial public offering (PIP). 5. Expansion-stage financing includes second and third stage.
Balanced-stage financing is a term used to refer to all the stages, seed through mezzanine. 2. 2 Characteristics of Venture Capital Investments. Venture capital investing has several characteristics, some which are common to alternative investing in general, but many of which are unique: Liquidity: Venture capital investments do not provide an easy or short-term path for cashing out. Long term commitment required: Venture capital requires a long-term ointment because of the time lag to liquidity.
If the average investor is averse to liquidity, there will be a liquidity risk premium on venture capital. Difficulty in determining current market values: Because there is no continuous trading of the investments similar to the target entity and business. This poses a problem for reporting the market value exposure of the current venture capital portion of an investors portfolio. Limited historical risk and return data: Because there is no continuous market in venture capital, historical risk and return data have limitations.
Limited information: Because entrepreneurs operate in previously uncharted territory, there is little information on which to base estimates of cash flows or the probability of success of their ventures. Entrepreneurial/management mismatches: Although surely profit motivated, some entrepreneurs may be more wedded to the success of their favorite idea than to the financial success of the venture. During the early life of a firm, there are also two major problems that may arise.
First, the entrepreneur may not be a good manager, so the existence or creation of a good management team is critical. Second, rapid growth produces a change in the type of managerial expertise required, so that entrepreneurs/managers who can succeed with small ventures need the ability to adapt to the different demands of larger companies, or the investors must be in a position to replace them. 2. 3 Venture Capital in a Global Context Venture capital is one of the major categories of private equity investing and the most traditional one.
The growth of venture capital industry was manly driven by the ASSAI. In 2012, about 70% of the global venture capital investment has taken place in ASSAI. According to the National Venture Capital Association, 11% f private sector jobs come from venture backed companies and venture backed revenue accounts for 21% of US GAP. Further developed economies such as China, Japan, Germany and UK have a well-developed venture capital industry. Fast developing countries such as India, Israel and Canada also have efficient and well established venture capital system in place.
Following are some of the global venture capital associations established currently. British Venture Capital Association Canada’s Venture Capital & Private Equity Association (C.V.) Indian Venture Capital Association (PICA) Japanese Venture Capital Association (JAVA) In Asian context, India, China & Singapore have a well established venture capital industry. India and China amounted to 12% of the global venture capital investments in 2012. 2. 3. 1 Venture capital deal values Figure 2. Global annual venture capital investment values (2006-2012) Source: DOD Jones Venture Source, 2013 As per the Figure 2. 1, USA has been the major player in global venture capital industry followed by European countries. China & India are the main players in Assai. Global venture capital investments have reduced considerably in 2009 with the global economic crisis and it has improved thereafter. But in 2012, again it has reduced mainly due to widespread global economic uncertainty. Global venture capital investments have declined by 20% year-on-year to USED 41. Billion, while the number of venture capital investment rounds declined 8% to 4,970 in 2012. 2. 3. 2 No of deals in venture capital and stage of investment Figure 2. 2 Global capital investments (No of investment deals and stage of investment) High amount of venture capital investments in terms of number of transactions are directed to revenue generating ventures. 2. 3. 4 Key global venture insights in 2012 I. PVC investment strongest in US and Europe than Asia 012 saw a considerable fall in the dollar value of PVC investments.
PVC investments dropped by 15% in both the US and Europe while Israel and China reported drops of more than 40% in the value of investments. II. Global PVC-backed Ipso down The amount raised through PIP fell globally by 27% from IIS$22. B in 2011 to US$16. B in 2012. The US bucked the global downtrend and saw a doubling of proceeds on 2011, albeit largely due to the US$6. B raised by the Faceable PIP. Ill. Global PVC-backed M&A declining despite recovery in some markets PVC-backed M&A activity saw deal counts decline by more than 20% from 787 eels in 2011 to 618 deals in 2012.
After reaching a peak of 856 deals in 201 0, during the post-2008 recovery, the number of PVC backed M&As has been declining in the last two years. IV. Median years from initial PVC financing to PIP and M&A exit falling Overall, the number of years it takes to exit from initial financing to an PIP or M&A is much higher in the US and Europe than in China. Through 2012, the time to exit in median years from initial financing through PIP or M&A across regions reflects signs that the PIP market still lacks significant momentum. V. Global median pre-money valuations
Over the past few years the US has led in terms of median pre-money valuations across regions, followed by China. While the US, China and Europe witnessed an increase in pre-money valuations through 2011, valuations declined significantly in 2012. 2. 4 Venture capital in a Sir Lankan context Compared to neighboring India, Sir Lankan venture capital industry is still at primary stage. In current market conditions bankers have become risk averse and there is major role that venture capital providers could play to provide necessary funds to encourage new business ventures.
There are several venture UAPITA providers in Sir Lankan such as Lankan Ventures, Blue Ocean Ventures, Venture Engine, DECK Veranda Bank, Federation of Chamber of Commerce and Industry of Sir Lankan and Ceylon Chamber of Commerce. But still venture capital has not become a mainstream funding method for Sir Lankan context. Following are the some of the venture capital initiatives in Sir Lankan. I. Anything. Elk commenced with venture capital investment of Ardent Capital Dialog Exact PL entered in to an investment agreement with newly launched entity Digital Commerce Lankan (Pit) Ltd. DOC), to acquire a 26% stake in the many for US$I . 59 million from venture capital firm, Ardent Capital. The remaining equity in DOC is held by the shareholders of Anything (Pit) Ltd. , Sir Land’s market-leading daily deals player and fastest growing e-commerce company. Anything. Elk was a novel concept to Sir Lankan and the venture commenced with the financial assistance of the venture capital firm initially. After 2 years in operations the company is valued at IIS$6. 1 million. II. Millennium IT Millennium is a leading innovative trading technology firm.
Millennium’s systems are used by exchange businesses around the world including, Turquoise, CAP, the London Metal Exchange and a series of emerging market exchanges. Founded in 1996 with venture capital funding, and was acquired by the international diversified exchange business London Stock Exchange Group in October 2009. Ill. Lankan Ventures Limited (LEVEL) Lankan Ventures Limited (LEVEL) was incorporated in February 1992 as a venture capital company. Following the PIP in 1995 Wheaton National Bank also became a major shareholder.
As at 31 March 2009, ODBC Bank and Wheaton National Bank were the major shareholders of the Company with shareholdings of 58% and 20% respectively. In January 2010, the two banks sold their shareholdings to Acuity Partners (Private) Limited a joint venture company equally held by the two banks. Accordingly as at 31 March 2010, Acuity Partners (Private) Limited held 80% of the Company. From the inception L FL had been investing in a large number of sectors but in the past 5 years it had mainly focused on investments in energy and healthcare sectors.
In June 2006 LEVEL formed a fully owned subsidiary under the name LEVEL Energy Fund (Private) Limited (LEFT) to channel its investments in the energy sector. Up to now LEFT had invested in 04 mini-hydro power enervation projects having a total installed capacity of 14. 4 MM and generation potential of 60 AWG. Synopsis of venture capital investments made by L FL is as follows. Power & energy sector Invite (Private) Limited (NAP) RSI. 33 million. Unit Energy Lankan (Private) Limited (EEL) RSI. 85 million. Newell Cascade Hydro Power (Private) Limited (INCH) RSI. 9 million. Healthcare sector Duran Heart Surgical Centre (Private) Limited (DISC RSI 14. 62 million. Duran Medical & Surgical Hospital (Private) Limited (DMS) RSI. 125 million Construction Outdated Brothers Limited (TUB) RSI. 20. Million. Information Technology e-Services Lankan Limited (SSL) RSI. 25 million Manufacturing Royal Firewood Porcelain Limited (RAFF) RSI. 30 million. 3. 0 Practical applications and learning. Providing Venture Capital is a high risk investment for an investor due to following factors: 1.
Start-up businesses has less business experience 2. Business ideas are new and not tested 3. Dependency on medium to long term expected cash flows Thus we believe Venture Capital providers should take measures to manage risk associated with new ventures, when venture capital is granted. Following are mom of the actions suggested to manage the risk. 1 . Sound Business Plan: New venture should have a well drafted business plan with business description scope, financial projections and a competitive market analysis with realistic assumptions. 2.
Management Aspects of New Venture: An Entrepreneur may be filled with new business ideas but at the end if that person haven’t planned about the management of the business, failure is unavoidable. Therefore more focus should be given on the management aspects of these new ventures before funding. 3. Business Scenario Analysis: Before funding, scenario analysis should be carried out considering the market and industry variables that could affect the business. It is very important to have worst case, business as usual and best case scenarios to be analyzed properly, so it is possible to obtain better understanding on the risk exposure.
We are of the view that having access to venture capital in an industry is very important for economic growth. Importance of availability of venture capital in an economy could be summarized as below: 1 . Job Creation: Availability of venture capital will encourage entrepreneurs to establish their own businesses. This would generate more new job opportunities in the economy, driving down unemployment rate and supporting economic growth. 2. Encourage Market Competitiveness: This would facilitate the pursuit of high return, high risk businesses and initiatives, increasing market competitiveness. . Encourage Entrepreneurs: Most of the great business ideas do not get commercialese due to lack of funding. This would discourage entrepreneurs, and many have simply given up as they are unable to fund new ideas. But availability of venture capital will encourage entrepreneurs to put their new ideas in action. . Reduce Brain Drain: Brain drain is a major issue to most of the developing countries. Well educated talented people migrate in to developed countries as they do not have sufficient opportunities in their domestic industries.
Availability of venture capital would expand domestic industries and would result support to keep talent within the country. 5. Improves Future Cash Flows of an Economy: Venture Capital is focused about generating high returns. Once these new ventures become successful and probably go for PIP and would result in attracting more cash flows including foreign investments. Following are the drivers to boost venture capital activity in Sir Lankan Economic activity (GAP, inflation, unemployment) Depth of capital markets (size and liquidity) Taxation reforms Investor protection and corporate governance Human and social environment (e. . , human capital, labor market policies, crime) Entrepreneurial culture and opportunities (e. G. , innovation capacity, the ease of doing business, the development of high-tech industries) 5. 0 Conclusion Sir Lankan venture capital industry has to be more proactively engage in investing in new business ventures. Most of the times, potential entrepreneurs re not aware of availability of such funding facilities in Sir Lankan. Thus awareness about venture capital should be increased.