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Investment Banking # Seminar

Venture Capital
Financing
Venture Capital Financing
 Venturecapital is a means of financing fast-
growing private companies. Finance may be
required for the startup, development /
expansion or purchase of a company via a
mechanism such as in a management buyout.

 Withventure capital, the venture capitalist


acquires an agreed proportion of the equity of
the company in return for the requisite funding.
Merchant Banking
 Merchant banking
 a financial intermediation that matches entities that need
capital and those having capital.
 Thus, facilitate the flow of capital in the market.

 Changing role of a merchant banker


 In the past…
a financial intermediary facilitating the flow of
capital among the concerned parties.
 Today…
plays multiple roles which include those of an
entrepreneur, a management advisor, a transaction broker,etc
Merchant Bankers Role in VCF
 Assist venture proposals of entrepreneurs, with high risk, to seek
assistance from VCF.
 Acts as fiscal advisers to entrepreneurs, owners and managers of
undertakings,
 Analyze financial requirements, advise on how to structure balance sheets,
arrange for sources of capital to finance expansions and acquisitions,
 Structure a variety of different financial instruments to provide the financing
a company needs including Formal Venture Capital,
 To act as temporary CFO, running their client’s trade and taking control for
a period of about 18 months to three years (take about a third of their
client’s profits, which includes the accounts receivable)
 To vet businesses to make sure that their finances are in order;
management has a proven track record in a niche business; there's a
strong demand for the company's products; customers are creditworthy;
and the business's gross profit margins are between 25% and 30%.
 looking for new high-growth issues to launch to the market.
 play an important role in the process of "going public" by advising on the
terms and price of public issues and by arranging underwriting when
necessary.
SEBI regulations – investment conditions
and restrictions
 Minimum investment in a venture capital fund

A venture capital fund may raise monies from any investor whether
Indian, foreign or non-resident Indians.

No venture capital fund set up as a company or any scheme of a venture


capital fund set up as a trust shall accept any investment from any
investor which is less than five lakh rupees.

Each scheme launched or fund set up by a venture capital fund shall


have firm commitment from the investors for contribution of an amount of
at least Rupees five crores before the start of operations by the venture
capital fund.
 venture capital fund shall disclose the investment strategy at the time of
application for registration.
 venture capital fund shall not invest more than 25% corpus of the fund in
one venture capital undertaking.
SEBI regulations – investment conditions
and restrictions(cont)
 venture capital fund shall make investment in the venture capital
undertaking as enumerated below:

(i) at least 75% of the investible funds shall be invested in


unlisted equity shares or equity linked instruments.

(ii) Not more than 25% of the investible funds may be invested by
way of

(a) subscription to initial public offer of a venture capital


undertaking whose shares are proposed to be listed subject to
lock-in period of one year.

(b) debt or debt instrument of a venture capital undertaking in


which the venture capital fund has already made an investment
by way of equity.
SEBI regulations – obligations and
responsibilities
 The venture capital fund shall issue a placement memorandum
which shall contain details of the terms and conditions subject to
which monies are proposed to be raised from investors.

 The Venture Capital Fund shall file with the Board for information,
the copy of the placement memorandum or the copy of the
contribution or subscription agreement entered with the investors
along with a report of money actually collected from the investor.
SEBI regulations – contents of placement
memorandum
Details of the trustees or trustee company of the venture capital fund.

The proposed corpus of the fund and the minimum amount to be


raised for the fund to be operational and the provision for refund of
monies to investor in the event of non receipt of minimum amount

Manner of subscription to the units of the venture capital fund.


The period of maturity.

Manner in which the benefits accruing to investors in the units of the


trust are to be distributed.

Details of the fund manager or asset management company if any,


and the fees to be paid to such manager.

investment strategy of the fund.


How Venture Capital works ?
 VCF typically source most of their funding
from large investment institutions.
 Invest this amount in companies with high
growth potential or in companies which have
the ability to quickly repay.
 Exit - through the company listing on the
stock exchange, selling to a trade buyer or
through a management buyout.
How Venture Capital works ?(contd…)

 VCF - in the business of promoting growth in the


companies they invest in and managing the
associated risk to protect and enhance their
investors' capital.
 A typical VC allocates its time in the following
fashion:
 –Deal flow and solicitation…10%
 –Screening and evaluation…10%
 –Terms and negotiation…5%
 –Board meetings and monitoring…25%
 –Consulting, recruiting and assisting…45%
 –Exiting…5%
What does the Investment Process entail ?

 The investment process begins with the venture capitalist


conducting an initial review of the proposal to determine if it fits
with the firm's investment criteria. If so, a meeting will be
arranged with the entrepreneur/management team to discuss the
business plan.

 Preliminary Screening
The initial meeting provides an opportunity for the venture
capitalist to meet the entrepreneur and key members of the
management team to review the business plan and conduct initial
due diligence on the project. It is an important time for the
management team to demonstrate their understanding of their
business and ability to achieve the strategies outlined in the plan.
The venture capitalist will look carefully at the team's skills and
backgrounds.
What does the Investment Process entail ?
(cont)
 Negotiating Investment
This involves an agreement between the venture capitalist and
management of the terms of the memorandum of understanding.

The venture capitalist will then study the viability of the market to
estimate its potential. Often they use market forecasts that have
been independently prepared by industry experts who specialize
in estimating the size and growth rates of markets and market
segments.
The venture capitalist also studies the industry carefully to obtain
information about competitors, entry barriers, the potential to
exploit substantial niches, product life cycles, distribution
channels and possible export potential. The due diligence
continues with reports from accountants and other consultants.
What does the Investment Process entail ?
(cont)
 Approvals and Investment Completed
The process involves exhaustive due diligence and disclosure of
all relevant business information. Final terms can then be
negotiated and an investment proposal submitted to the board of
directors. If approved, legal documents are prepared.
A shareholders' agreement is prepared containing the rights and
obligations of each party. This could include, for example, veto
rights by the investor on remuneration and loans to executives,
acquisition or sale of assets, audit, listing of the company, rights
of co-sale and warranties relating to the accuracy of information
enclosed.
The investment process can take up to three months, and
sometimes longer.
ACC refractories - ICICI Venture
 The refractories business of ACC, which makes heat resistant
cement products, was doing quite well, with sales volumes rising
by 34 per cent during the last financial year.
 ASSOCIATED Cement Companies (ACC) sold its refractory
business to ICICI Venture Funds for Rs 257 crore.
 From the point of view of the buyer, this would be the first time in
India that a venture fund would be getting into managing a
manufacturing business through a 100 per cent buyout.
 ICICI Venture Funds is planning to work with the management of
the refractories business in its operations and sell it at later stage.
 I-Sec was the sole advisor to ICICI Ventures in this deal which
took six months in the making.
Recent Deals

Nimbus Media Content


3i Communications $45 mn Provider
Refractory business of
ICICI Ventures ACC $60 mn Refractory

Web media
and
Sequioa Capital+WestBridge Indiatimes.com $36 mn content

General Atlantic Jubilant Organosys $24 mn Healthcare


Media and
Gen Atlantic European Inv NDTV $26 mn Content

Truck and
Newbridge Capital Shriram Holdings $100mn equip. funding
Recent Exits

5.4% stake in Bharti Vodaf


Warburg Pincus Televentures one $810 mn

41% stake in i-Flex


Citigroup Ven Cap Fund Solutions Oracle $593 mn
Recent Exits by IPO

CVC International, ChrysCapital,


YES Bank Russell Asian Infrastructure Fund Banking Jun-05 $73.3mn

Shopper's
Stop ICICI Ventures, IL&FS VC Retail Apr-05 $39.5mn
Financial
India ICICI Ventures, Intel Capital, Actis, Servic
Infoline Kothari Pioneer, TDA Capital es Apr-05 $22mn
Nectar CVC International
Lifescien Pharmace
ces uticals Jun-05 $20.9mn
Allsec
Technol
ogies Kotak Mahindra, Eurindia ITES Apr-05 $9.9mn
Recent funds
Investment Banking # Seminar

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