However, it is not that only the software and related industries can benefit by the venture capitalists. Any industry which has the potential of exponential growth in a short time would be attractive to a venture capitalist. In fact, often, an entrepreneur resorts to finance from venture capital only after the traditional sources of finance are exhausted.

While the common impression that venture capitalists are willing to finance fancy ideas ofpeople having relatively no track record is at least partly true, the real cost to the entrepreneur of such finance is fairly high. While venture capital is usually financing in the form of equity capital which does not result in any strain on the entrepreneur in debt and interest outgoes, he loses on account of the appreciation in capital which results from the successful implementation of the business.

Venture capitalists generally expect extremely high relative returns from the business they finance since they have to cover for the unsuccessful businesses financed as well as for the risks and the management costs they incur. Inevitably, also, venture capitalists involve themselves closely with the decision-making process of the business and this is an aspect which the entrepreneur will have to prepare himself for since otherwise it may be perceived to be interference causing strain to both parties.

However, this is only to put venture capital as a source of finance in proper perspective and not tounduly criticise it. In this article, let us explore various issues that would arise when venture capital is considered by an entrepreneur.

As stated earlier, venture capital may appear to be a blessing for the entrepreneur who not only does not have any sound track record for himself but even the industry in which he seeks to set up the unit in usually does not have a track record of stability and assured growth. However, they need to take a close look at this source of fund and what it would cost them over the years before closing the deal. Attention should particularly be given to aspects relating to preparation and presentation of the proposal, structuring aspects, drafting of agreements, tax and other aspects.

First of all, as stated earlier, it must be kept in mind that venture capital is relatively a costlier form of finance. The venture capitalists are said to expect anywhere between 30 to 60 per cent compounded annual returns in the form of appreciation in the value of the equity. However,particularly when other sources of finance are not forthcoming, and also considering that the finance is in the form of equity, the cost aspect is not unduly emphasised.

Entrepreneurs should also note the high rate of rejection inherent in the screening of venture capital proposals by the venture capitalists. This can be dealt with by the entrepreneurs in many ways. Firstly, this means that the proposal has to be prepared and presented well. The entrepreneur should not hesitate in taking professional help in this and other aspects of raising finance in the form of venture capital. In fact, as will be seen later, the transaction can become so complex that specialist professional help is indispensable. It also means that the entrepreneur should not depend at least in the initial stages on only one venture capitalist. Finally, he has also to be prepared for the eventuality that, despite his best efforts, his proposal is rejected by all the venture capital funds.

If there is an impression that theentrepreneur merely has to present his idea and his idea and efforts are his only contribution, that should be quickly dispelled. The experience in the West shows that venture capitalists are more comfortable if the entrepreneur is willing to stake all he has got in the business. Thus, in such a case, the entrepreneur does not have any comfort that if the venture fails, his savings in the form of property and others can be used by him to carry on living.

An important aspect of finance by way of venture capital is that the entrepreneur has to be willing to disclose in detail all aspects of his business, the critical factors for its success and, usually, the business secrets. Undoubtedly, much of this may arise at a fairly advanced stage of the proposal but this is something which the entrepreneur should be aware of. Here again, proper presentation of the proposal is necessary whereby enough information is given from which the success of the proposal can be visualised but without compromising on the know-howaspects. The reputation and working of the venture capitalist would have to be considered to satisfy oneself that there is minimal possibility of leakage or conflict of interest.

(To be continued)

The author is a Mumbai-based chartered accountant