Mohammad Nazim UddinAssociate MemberInstitute of Chartered Accountants of Bangladesh

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Objectives

Understanding Venture Capital, an emerging source of finance, in Bangladesh ? To understand, as part of the presentations throughout the day, this will act as an introduction. Here we shall come to understand and be familiar with the concept, origin and evolution of venture capital , players of this market, regulations and also we shall see how it works and add value?

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Contents

1. Concept2. Origin3. Process of finance4. Stages of finance5. Mode of finance6. Exit7. Players8. Value creation9. Secret of success!10.Recall & recap

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Duration & Ground Rules

Duration: 60 Minutes

Attention areas:

1.Smoking 2.Cell phone3.Emergency exit4.Question timing

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1. Concept

Venture: Risk associated initiativeCapital: Fund deployed in production of goods and or services

Venture capital refers to that subset of private equity in a financial system which is raised by venture capitalists from individuals and entities having surplus resources and invest it preferably as equity in private, young, innovative & fast growing companies with an objective of exiting sometime around the maturity stage of the business cycle of investee business.

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2. Origin

-Early stage: Islamic Mudaraba Partnership• Medieval era•Protect entrepreneurs• Share risks, profits and losses

-Contemporary stage: Modern Private Equity• Post World War II• Georges Doriot, father of modern private equity, founded ARDC in 1946• To encourage private sector investments in business run by soldiers.

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3.Process of finance

1.Initiation

2.Screening

3. Due diligence

4. Deal structuring

5. Deal signing

6. Investment management

6. Exit

Or

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4.Stages of financing

Stages Tenor Risk Focus ActivitySeed Funding

7 to 10 years

Extremely High

Product development (idea-conception-R&D)

Start-up Funding

5 to 9 years Very High Prototyping & kick-off

Growth Funding

3 to 7 years High Large scale production & marketing

Expansion Funding

3 to 5 years Sufficiently High

New customers, markets, products (Working capital)

Pre-exit Funding

1 to 3 years Medium Public Issue facilitation (private placement)

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5.Mode of finance

1. Equity2. Conditional loan3. Participating debentures4. Quasi equity5. Income note

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6.Exit

The exit plan detailing preferable time and way shall clearly be depicted under the investment agreement signed in between the venture capitalist (GP) ,by the mandate (LP), and investee entity. Commonly used exit ways are:

1.IPO (Initial Public Offering)2.Trade Sale3.Promoter buyback4.Acquisition by or merger to third party etc.

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7.Players: Most related

The main players of this market are:

1.Venture capitalists/ Venture capital firms or companies2.Venture capital fund3.Investee company4.Firm or company related government authorities and laws such as RJSC, BSEC,NBR and Companies Act, Partnership Act, Trust Act, BSEC rules & regulations etc.5.Financial Institutions working as custodian, trustee etc6.Accountants, Consultants, Lawyers

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7.Players: Inter-relationships

Venture capitalists (general partners) raise their funds (venture capital fund) from individual and institutional investors (limited partners) where the general partners manage the fund & investments under fiduciary responsibility in consideration of fees and limited partners invest in investee company with the help of a trustee and custodian through the general partners.

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8.Value creation

Venture capitalists add value to the entrepreneurial eco-system in many ways. Such as:1.Under hands-on approach, As investment professionals, venture capitalists channel their experience ,expertise and network in addition to the capital for high risk early stage ventures.2.Ensure long term fund in form of equity and share the risk of entrepreneurs.3.Secure above average gain for the investors.

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8.Value creation contd

4. Nurture the practice of corporate governance.5. Helps in adopting advanced managerial and financial tools and best practices.6. Bring innovative solutions to the society.7. Finance when none dare and continue until it is lucrative to the others.8. Help investees with enhanced liquidity.9. Help to advance the critical sectors like IT, Bio-technology, communication & entertainment.10. other benefits: Increased Tax revenue, Employment generation, Globalization etc.

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9.Secret of success

The secret of winning the high risk to generate above average gain is nothing but the approach of portfolio risk management.Not that every deal is a success. But the success in few deals ensure the success of the portfolio/fund as a whole, even after off setting the loss of others!It is said 40% venture backed companies fail; 40 % return moderate amount of capital; only20% produce high returns.

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10.Recall & recap.

Thank you!