After studying this chapter you will be able to understand: Venture capital; features of venture capital; modes of VC finance; areas of investment: Strong management team, a viable idea, business plan, project cost and return, future market prospects, existing technology, miscellaneous factors.
Trang 1Revise Lecture 16
Trang 2Financial services
Trang 3Financial services
new financial method of financing during the 20th century
professionals who invest alongside
management in young, rapidly growing or changing companies that have the
potential for high growth
Trang 4Financial services
designed for funding risk and
high-reward projects
venture capital is a means of financing
high technology projects
financial investment in a highly risky
project with the objective of earning a high rate of return
Trang 5• Features of venture capital
Trang 6Features of venture capital
summarized as;
High degree of risk:
highly risky project with the objective of earnings a high rate of return
Trang 7Features of venture capital
Equity participation:
potential equity participation wherein the objective of the VC is to make capital gain
by selling the shares once the firm
becomes profitable
Trang 8Features of venture capital
Long-term investment:
generally takes a long period to encash the investment in securities made by
venture capitalists
Trang 9Features of venture capital
Participation in management:
take an active interest in the management
of the assisted firm
from that of a traditional lender or banker
Trang 10Features of venture capital
stock market investor who merely trades in the shares of a company without
participating in their management
‘VC combines the qualities of banker, stock market investor and entrepreneur in one’
Trang 11Features of venture capital
Investment is liquid:
demand as with an overdraft or following a loan repayment schedule
company is sold or achieves a stock
listing It is lost when the company goes
into liquidation
Trang 12• Modes of VC finance
Trang 13Modes of VC finance
Venture capitalists provide funds for
long-term in any of the following modes;
Equity:
financial support to entrepreneurs in the
form of equity by financing 49% of the total equity
the overall control remain with the
entrepreneur
Trang 14Modes of VC finance
Conditional loan:
equity is an unsecured instrument and hence a less preferable option than a
secured debt instrument
no interest at all or coupon payment at nominal rate
Trang 15Modes of VC finance
Convertible loans:
other loans, which may be converted into equity if interest payments are not made within the agreed time limit
Trang 16• Areas of Investment
Trang 17Areas of Investment
types of investments
expansion while other focus on exit
financing
communications, electronic components and software companies seem to be
attracting the most attention from venture firms and receiving the most financing
Trang 18Areas of Investment
early and later stage investments to
maintain a balance between risk and
profitability
account the following factors while making investments;
Trang 19Areas of Investment
Trang 20Lecture 17
Trang 21• Basic Lending Principles
Trang 22Basic Lending Principles
Regulation Act, 1949, banking means
‘accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise’
Trang 23Basic Lending Principles
function is to add value to the bank
bank will be in a position to earn spreads
to sustain profitability
Trang 24Basic Lending Principles
obtained if the bank is in a position to take
and manage credit risk that arises on
account of the quality of the borrower and
liquidity risk that may arise by borrowing
short and lending long in order to attain
greater spreads
will also be exposed to risk arising from
both interest and exchange rates.
Trang 25Basic Lending Principles
balance its spreads and the risk levels
Trang 26• Liquidity
Trang 27Basic Lending Principles
Liquidity:
meet its financial obligations
relatively illiquid assets, but it funds its loans with mostly short-term liabilities
trigger for bank failures
Trang 28Basic Lending Principles
• Liquidity:
tends to reduce the income from that asset (cash, for example, is the most liquid asset
of all, but pays no interest)
as possible
to meet the demands of its depositors
risks experiencing a bank run
Trang 29Basic Lending Principles
• Liquidity:
forecast their liquidity requirements and
maintain emergency standby credit lines at other banks
major concern