Entrepreneurship development and Industrial Consultancy

Module 5. Business policy

Lesson 19
VENTURE CAPITAL AND JOINT VENTURE

19.1 Venture Capital

Venture capital is an important source of financing small scale enterprise and high technology and risky ventures. It is often thought of as the early stage financing of new and young enterprises seeking to grow rapidly. In this mode there is involvement of venture capitalist in the management of entrepreneurs unit. Traditional finances generally provide financial support to the established and proved technology areas only whereas venture capitalist provides financial support to high and new technology based units. In broad terms, Venture capital is the investment of long term equity finance where the venture capitalist receives his return generally in the form of capital gains. Under this mode, venture capital financer and entrepreneur work together as partners for the benefit of enterprise. The venture capitalist focuses on growth and wants to see small businesses grow in to larger ones.

19.1.1 Characteristics of venture financing

a) Equity participation: is actual or potential equity participation through direct purchase of shares, options or convertible securities with objectives of making capital gains by selling off the investment when the unit becomes profitable.

b) Long term investment: Time period of investment varies from 5 to 10 years.

c) Managerial participation: There is active involvement of venture capitalist in the enterprise. By providing necessary management skills viz., planning, organizing, controlling, leading and functions like finance, marketing etc.

Table 19.1 Stages in venture capital financing

19.1.2 Joint ventures

A joint venture is a contractual business under taking involving equity based single business activity. Joint ventures can be set up either in company's own territory or in a new territory generally in a developing country. Joint ventures are formed by the parties entering into an agreement. The agreement specifies the mutual responsibility and goal of contracting parties. The joint venture partners can generate the capital of the joint venture by injecting either cash alone or cash together with assets like technology, land and building. In joint ventures the operational details, rights and duties of contracting parties are clearly specified in written form to be helpful in legal controversy. A joint venture can be terminated at specified time in the contract or upon death of active partner or on basis of any court decision arrived at to solve any dispute.

Important clauses of a joint venture agreement are as follows:

1) The proportion of shareholding in the joint venture company

2) Specify nature of shares, indicate their transferability conditions.

3) Composition of the board of directors, appointment of chairman, quorum of board meetings, casting vote provisions.

4) general meeting

5) Appointment of CEO/MD.

6) Appointment of management committee.

7) Important decisions with mutual consent of partners.

8) Dividend policy

9) Funding provision

10) Change of control/exit clause

11) Anti-compete clauses

12) Access condition

13) Maintaining confidentiality

14) Indemnity clauses

15) Assignment

16) Break of Deadlock

17) Dispute resolution

18) Applicable law

19) Force Majeure

20) Termination provisions