This document lays out a business proposal to start a venture capital firm in Canada, the business environment in Canada, various risks and challenges that can be faced and existing competition.

1. Submitted by:
Sonakshi Gupta
19DM217
BUSINESS PROPOSAL
SUBMITTED TO:
DR. JAGDISH
SHETTIGAR
&
DR. MONIKA JAIN
Venture Capital Firm:
Dhan Ventures

2. TABLE OF CONTENTS
S. NO. PARTICULARS
1 Venture Capital business overview
2 Business: DHAN VENTURES
3 Venture Capital Firm in Canada
4 Canadian VC Fund market
5 Fund regulation and Licensing
6 Competitors
7 Demand for VC Funds
8 Risks and challenges
9 Exit Route
10 Sources

3. Choice of business: Venture Capital Firm in Canada
Venture Capital business overview
Venture capital is a form of private equity and a type of financing that investors provide
to startup companies and small businesses that are believed to have long term
growth potential. Venture money is not long-term money. The idea is to invest in a company’s
balance sheet and infrastructure until it reaches a sufficient size and credibility so that it can be
sold to a corporation or so that the institutional public-equity markets can step in and provide
liquidity. In essence, the venture capitalist buys a stake in an entrepreneur’s idea, nurtures it
for a short period of time, and then exits with the help of an investment banker.
Someone with an idea or a new technology often has no other institution to turn to. Bankers
only finance a new business to the extent that there are hard assets against which to secure
the debt. And in today’s information-based economy, many start-ups have few hard assets.
The basic model in venture capital is “2-and-20”, or 2% in committed capital paid in fees
annually, and 20% of the profits and returns (carried interest) going to the partners.
Investors in venture capital funds are typically large institutional investors, such as pension
funds, insurance companies, financial firms, endowments, foundations, family offices, and
high net worth individuals—all of which put a small percentage of their total funds into high-
risk investments. They expect a return of between 25% and 35% per year over the lifetime of
the investment.
The general partners need some early winners, so they can go back to the limited partners
to raise another fund midway through the lifecycle of the first one. All of these are based on
assumption as there is no 100 percent guarantee that the companies in their portfolio will
generate enough returns. In the venture capital industry, both the entrepreneur and the
venture capitalist are susceptible to a significant amount of risks.
Business: DHAN VENTURES
The plan is to start a limited liability partnership, venture capital firm, Dhan Ventures,
Limited partnership agreement includes limitation of the liability of the general partners
(founders) against the following events: (1) disappointing returns from investments selected by
the general partner; (2) failure by the general partner to invest committed funds within an
agreed timetable; and (3) mismanagement by the general partner. The basic model in venture
capital is “2-and-20”, or 2% in committed capital paid in fees annually, and 20% of the profits
and returns (carried interest) going to the partners.

5. Why a Venture Capital Firm in Canada?
Canada is at 23rd position in the Ease of Doing Business ranking. The Canadian venture capital
(VC) market is well established and has been growing both in terms of the number of deals and
the amount of money invested. The investments hit their highest in the third quarter of
financial year 2019 in Canada. Overall, venture investors put a mammoth US$1.8 billion to
work in Q3 of this year, according to the Canadian Venture Capital & Private Equity
Association (CVCA). Also, Canada has three major metro areas — Toronto, Montreal and
Vancouver — with significant tech startup hubs. Plus Ottawa, where Shopify is based, has its
share of tech talent too. Looking at such a high potential of growth in this industry in
Canada, starting a venture capital fund in Canada is a good idea.
India is at 63rd position when Ease of Doing business is considered, whereas Canada is at
23rd. Under this, in Starting a business category India is at 136th position whereas Canada is
at 3rd. This makes Canada an attractive destination to start a new business.
Out of the total permanent residency immigrants in Canada, India held a share of whooping
43%. These immigrants look for employment opportunities, many even start their own
businesses. These Indian entrepreneurs will get funding, mentorship for growing the
business, and guidance for finding additional funding and a guidance on beginning their new
Canadian life. This diverse group of entrepreneurs from outside of Canada, will increase the
chances of innovation in our venture fund.
Most venture capital (VC) funds established in Canada are set up as limited partnerships
with investors becoming limited partners and a newly created corporation being the general
partner. The general partner has unlimited liability. Parallel funds are also set up as limited
partnerships. This structure is common for VC funds since:
• Losses as well as gains are flowed through to partners.
• Liability of the limited partners is limited generally to the amount of capital contributed
or agreed to be contributed, provided that they are generally not involved in the business
of the partnership (although participation on advisory committees is permitted).
For Canadian federal and provincial income tax purposes, a limited partnership is not taxed
as a separate entity and is considered a flow-through vehicle.
Canadian VC Fund market
In the first three months of 2019, the Canadian venture capital (VC) industry invested CAD
$1B across 142 deals. The average deal size was $7.4M, a 56% increase from Q1 last year
and a 34% increase compared to the average deal size during the 5-year period between
2014-2018 ($5.5M). Overall, venture investors put a mammoth US$1.8 billion to work in Q3
of this year, according to the Canadian Venture Capital & Private Equity Association (CVCA).
Higher investment returns have been a key factor in the improved performance of the
Canadian VC sector. Stronger performance attracts new capital into the market.

6. Fund regulation and licensing
In terms of issuing securities and raising funds throughout Canada, venture capital (VC)
funds must comply with securities laws. The Canadian Securities Administrators have
harmonised the rules on registration requirements under National Instrument 31-103. The
basic principles are that, unless otherwise exempt:
• A person that is in the business of trading in securities must register as a dealer.
• A person that is in the business of advising others on the investing in or buying or selling
securities must register as an adviser.
• A person acting as an investment fund manager (that is who directs the business,
operations or affairs of an "investment fund") must register as an investment fund
manager.
Depending on the facts, a person or firm may be required to register under more than one
category unless an exemption is available.
Often, and to the extent that neither the VC fund manager nor the fund engage in other
activities that would require registration, a VC fund manager (or, as applicable, the fund)
need not register as:
• An adviser, provided that the advice given in connection with the purchase and sale of
companies is incidental to its active management of companies it invests in.
• A dealer, provided that the raising of money from investors and its subsequent
investment are occasional and uncompensated activities.
An investment fund manager, provided that the VC fund manager is actively involved in the
management of the companies it invests.

7. Competitors
In terms of Canadian VC, there are various types of funds:
• Private independent venture funds that professionally manage capital from pension
funds, insurance companies, and other investors such as high net worth individuals.
• Government-sponsored venture funds such as the ones operated by the Business
Development Bank of Canada, a financial institution owned by the Government of
Canada.
• Corporate-sponsored venture funds that invest capital on behalf of corporations for
strategic objectives such as access to innovation.
• Venture funds operated by institutional investors including banks and Canadian pension
funds.
• Labour-sponsored venture capital corporations (LSVCC), a type of mutual fund
corporation, sponsored by a labour union, which makes VC investments in small and
medium sized businesses.
Private independent venture funds
Government-sponsored venture funds

8. Other venture funds
Overview of active funds in the Canadian VC sector
There is a prominent presence of VC firms in Canada which increases the competition from
existing firms in the industry. When we look at the consistent growth in the industry and start
up culture in Canada, this industry seems to be attractive option for investing.

9. Demand for VC Funds
With a system that rewards innovation, encourages collaboration, and supports diverse,
global entrepreneurship, it’s no surprise that Canada’s start up scene is on the rise while a
wave of Canadian founders are building companies not just out of Canada but all over the
world. With the growing start up culture in Canada the demand for funds is never ending.
Later-stage companies also demand venture capital fund and received significantly more
funding than seed companies, despite being involved in a fewer number of deals. Later-
stage companies received 54% of total VC dollars spent last year in Canada.
Companies prefer venture capital over traditional loans from banks as VC financing invests
in equity of the company. Debt involves fixed payments, which is not the case in equity.
Also, VCs are in for long run and rarely exit before 3 years while a bank will fund a project as
long as it is sure that enough cash flow will be generated to repay the loans. One of the
reasons why start ups prefer to raise funds from a VC fund instead of a bank is that VC
funding is based on the business model whereas bank loans are given on the basis of the
ability to pay back the loan along with a collateral security.
Venture Capitalists lend management support and provide entrepreneurs with many other
facilities. They even participate in the management process. VC generally invests in unlisted
companies and make profit only after the company obtains listing. VC extends need based
support in a number of stages of investments unlike single round financing by conventional
financiers. This increases the demand for funds through Venture Capital in Canada.
Risks and challenges
The rapid return to "normal" investment levels has left angry creditors with underfunded
portfolio companies, disgruntled shareholders facing lower valuations and the prospect of
repeated "down rounds," and limited partners clamouring for a return of their invested capital
This, in turn, exposes general partners of venture capital funds to significant new legal and
financial risks. In some cases, these risks could threaten the general partners' own economic
survival and significantly limit their ability to raise additional capital for their funds. (Although
partners rarely contribute significant capital to venture capital funds beyond their mandatory
minimal commitment, they typically receive fees based on the profits of the funds.)
General partners can offer the significant business experience and management expertise of
their principals or employees to portfolio companies, and often have their principals or
employees serve as directors or officers of the companies. Also, general partners may serve as
financial intermediaries for the purpose of:
> Structuring a venture capital fund's investment in portfolio companies;
> Identifying other funds to participate in financing rounds; or
> Assisting portfolio companies in obtaining commercial debt financing.

10. Each of these roles creates significant legal risks. Although these legal risks are generally
ignored in a growing economy, they become real business liabilities when portfolio companies
fail and the expected returns on invested capital evaporate.
Insurance companies, investors, and pension funds invest a small proportion of the money
they have into start-ups and small businesses that have high risks but have the potential to
generate very high returns, and they make those investments through venture capital funds
most times. Even though venture capitalists use rigorous scrutinizing processes, investing in
these start-ups still come along with a lot of risks. In the venture capital industry, the main
risks that venture capitalists or venture capital firms face are:
• Capital risk
Not only do venture capitalists face long-term risks of losing the value of the capital they
invested, they also risk recording losses as a result of liquidity constraints. Some of the
factors that can have effects on the long-term capital risk are equity market exposure and
manager quality.
The capital risk can be reduced if the management is efficient and has the capability to
generate can and produce value. It is essential for Venture capitalists to track changes in the
quality of personnel and any other changes that can have adverse effects on the quality of
management.
• Liquidity risk
The investors (venture capitalist) in a venture capital fund invest a certain amount of money
which makes them entitled to a share or the returns in the business. If the startup or small
business generates a return at the end, the returns are shared among the venture
capitalists.
Venture capitalist can sell the shares they have in a venture capital investment. However,
this can be unreliable because the secondary market for venture capital investments is
usually smaller and ineffective when compared to other markets.
• Funding risk
In a venture capital fund, the venture capitalist is faced with funding risk as a result of the
random timing of cash flows during the period of the investment.
This risk can be reduced by focusing on investing in companies that are in the later stage of
their business.
Big economic failures in future can also pose a threat to the venture capital industry, like,
market can become tremendously risk hostile, closure of financial markets for risky
investments, etc.
Changes in policies can also have an adverse impact on the venture capital industry, like
increased tax burden on VC can make it unpopular.

11. Exit
As long as venture capitalists are able to exit the company and industry before it tops out, they
can reap extraordinary returns at relatively low risk. Hence, the firm needs a good exit strategy
that can minimise losses if there are any.
The forms of exit that are typically used to realise a venture capital (VC) fund's investment
in a successful company are:
• A sale of the investee company.
• An initial public offering (IPO).
• Recapitalisation of the investee company through private equity or institutional
funding.
In Canada, there are four processes through which a financially distressed business can be
sold:
• Arrangement under the Companies' Creditors Arrangement Act (CCAA).
• Proposal under the Bankruptcy and Insolvency Act (BIA).
• Receivership under the BIA.
• Bankruptcy and liquidation under the BIA.

12. Sources
https://vcpreneur.com/vc-funds-101-understanding-venture-fund-structures-team-compensation-
fund-metrics-and-reporting-152b02e8504a
https://ca.practicallaw.thomsonreuters.com/6-516-
5530?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1
https://hbr.org/1998/11/how-venture-capital-works
https://www.bdc.ca/en/documents/analysis_research/venture-capital-landscape-paper-en.pdf
https://www.vcexperts.com/buzz_articles/297
https://sylvesterkaczmarek.com/blog/risk-management-approach-control-techniques-vc-funds/
https://news.crunchbase.com/news/canada-is-having-a-record-year-for-vc-funding/
https://central.cvca.ca/wp-content/uploads/2019/05/CVCA_EN_Canada_Q1-2019_Final.pdf
https://www.businessinsider.com/canadian-vc-firm-pays-relocation-residency-2017-6?IR=T