Venture Capital in India

B. Hari Prasad HFM 10

"If there is one place on the face of this Earth where all the dreams of living men have found a home from the very earliest days when man began the dream of existence, it is India - Romain Rolland, French philosopher

Agenda
Introduction Drivers of Venture Capital Growth in India Phases of Venture Capital Growth in India Classification of VCFs in India Process of VC Financing Growth of VC deals Forecast till 2010 Challenges for VC Growth in India

Introduction
Venture capital finance is often though of as the early stage financing of new and young enterprises seeking to grow rapidly Major Features of Venture Capital Equity Participation: Venture financing is equity participation through direct purchase of shares, options or convertible securities Long-term Investment: Venture financing requires long-term investment attitude that necessitates the Venture capital firms (VFCs) to wait for a long period, say 5 to 10 years, to make large profits Participation in Management: Venture financing ensures continuing participation of the venture capitalist in the management of the entrepreneurs business.

Thus, venture capital provides the seed capital required to grow a business from an idea stage. This serves as a boon for entrepreneurs as they receive capital along with guidance in managing their business

Drivers of VC growth in India

High growth in technology and knowledge based industry. Services sector, which is predominantly a knowledge based industry contributes to over 55% of Indian GDP and is growing at a much faster rate than agriculture or manufacturing Several emerging centers of innovation in India biotech, alternate energy, education, wireless, IT, semiconductor, pharmaceutical. India has produced several leading companies that service both domestic as well as global clients. Many of the global leaders like SAP, Google, Dell have moved their innovation and service centers to India Telecoms deregulation has driven significant VC investment since 1996
 Principal recipients of VC money were mobile operators, ISPs and Bharti

Investment in financial services in the last three years has mostly been in the form of PIPEs, which have proved profitable for investors Investment in the media sector is driven by cable networks and TV production companies India has climbed the value chain from just producing low values services to high value-add services and products India has a favorable regulatory scenario for venture capital investments
 Government highly supportive of growth in technology and knowledge based sectors  Strong and supportive legal framework Information Technology Act, VC norms, ESOPs, copyright, etc

This is a clear indicator that the growing Indian economy is the best place to bet ones money on. VCs, both domestic as well as foreign, are thus greatly interested in investing in India

Phases of VC growth in India

Risk Capital Foundation seems to be the first VC-PE firm to start operations in India in 1975. In 1987, IDBI started VC operations followed by ICICI ventures Global VCs and PE firms actively investing in India

(2000 onwards)
Emergence of successful Indiacentric VC firms

Phase 4

Formation of TDICI in the 80s and regional funds as GVFL & APIDC in the early 90s

Entry of Foreign Venture Capital funds between 19951999

Phase 3

Phase 2

Phase 1
Venture Capital Industry in India has come a long way from humble beginning as regional funds to an industry which is attracting foreign capital for booming sectors in India

Classification of VC Funds in India

VCFs promoted by Central Govt controlled finance institutions Eg: IFCI -RCTFCI VCFs promoted by foreign bank and private sector companies and financial institutions VCFs promoted by State government

VCFs In India

controlled development finance institutions. Eg: GVFCL -APVCL

VCFs promoted by public sector banks such as Canfina (canara finance) by canara bank, SBI-cap by SBI.

What VCs look for while financing an idea

Technology Does the company have disruptive technology applicable to a large market? Is this a science project (research!)? VC-backed companies need sizable revenues in 4-6 years Team Does the team have passion and the ability to execute? How is the chemistry between the founders? Has this team tasted success before? If they failed, have they learnt from that experience? Traction Has the market signaled demand? Are enterprises signing POs, or are consumers rushing to sign up?

Process involved in VC Financing

Process for VC financing

Market Product

Entrepreneurial Product

Expected RoI
Decision Screening

Expected RoI

Evaluation

Approval

Deal Structuring

Post Investment Activity

Exit Plans

After 2003, the number and value of deals has been constantly increasing
Num of enture a ital eals ber N umber of eals
350 300 250 200 150 100 50 0 280 146 78 56 71 299 161 alue in $ n alue of deals

alue of

eals

110

2000 2001 2002 2003 2004 2005 2006 2007 (first half) No of deals

7500 8000 7000 5468 6000 5000 4000 2200 3000 1650 2000 1160 937 591 470 1000 0 2000 2001 2002 2003 2004 2005 2006 2007 (first half) Value of deals

Th e gro wth o f th e ind u s try po s t 2 0 0 3 , h a s be e n a s to u nd ing, bo th in te rms o f nu mbe r o f d e a ls a s we ll a s va lu e o f th e d e a ls , th u s re -impo s ing th e fa ith in th e Ind ia n e co no my

VC scenario in the first half of 2007

Stage of Company Early Stage Growth Stage Late Stage PIPE Buyout Others

No of Deals 24 25 67 34 6 6

Value of Deals 154 1082 2162 1714 440 47

The first half of 2007 witnessed a significant interest in financial sector with most of the deals being in the growth stage companies. However, in the current scenario, with the financial sector in deep mess, VC investments might slow down in this sector. Alternatively, since company valuations have come down greatly, some VCs might still operate deals in this sector

VC Scenario forecast till 2010

The Indian growth story led to predictions that by 2008, over $15bm would flow into India for VC investments and thus would become the top-7 countries receiving such a VC fund This could rise to $20bn by 2010 With already 366 firms operating in India and 69 others planning to enter, this number seems reasonable Even after the economic slowdown, if India manages to grow at 7-8% growth rate, with an annual inflation of around 6%, India would touch $4500 bn GDP and hence can absorb all of the VC investments planned mostly in
 IT and ITES  Biotechnology (Pharma and Clinical Research)  Online Education

Existing prediction till 2010 seem to show an optimistic mood for VC investment in India

Issues and Challenges for Indian VC industry

Indian VC yet to be established as a sustainable asset class among institutional investors Limited amount of true risk-capital will impact entrepreneurial activity Exit challenges shallow capital markets and dull M&A environment for small companies Beyond services, India yet to create a brand-name for IP-led companies, like Israel has successfully done Global meltdown may have a strong effect on the VC investment climate in India

Conclusion

India has been transformed itself from a low cost, cheap labour center producing low-value add services to a cost efficient high value add service provider and product innovator. This scenario has turned it into a hotbed for VC investments. VC industry in India is set to flourish amidst the great interest in the Indian growth story by the western countries. India, with its own set of advantages and limitations, has carved a space for itself in the VC world