VENTURE CAPITAL FINANCE

DEPARTMENT OF MANAGEMENT STUDIES

Venture Capital Is not: Cowboy Finance or Rich Mens Toy !

Venture Capital is a form of "risk capital". In other words, that is invested in a business where there is a substantial element of risk relating to the future creation of profits and cash flows. Risk capital is invested as shares (equity) rather than as a loan and the investor requires a higher "rate of return" to compensate him for his risk.

Venture Capital provides long-term, committed share capital, to help unquoted companies grow and succeed. If an entrepreneur is looking to start-up, expand, buy-into a business, buy-out a business in which he works, turnaround or revitalize a company, venture capital could help do this.

Features of Venture Capital

High Risk
By definition the Venture capital financing is highly risky and chances of failure are high as it provides long term start up capital to high risk - high reward ventures.

Venture capital assumes four types of risks

Management risk Market risk Product risk Product may not be commercially viable. Operation risk Operations may not be cost effective resulting in increased cost decreased gross margins. Inability of management teams to work together. Product may fail in the market.

Equity participation venture financing is potential equity participation through purchase of shares, options or convertible securities. Capital gains In the early stage of business, because dividends can be delayed, equity investment implies that investors bear the risk of venture and would earn a return commensurate with success in the form of capital gains.

Participation in management
VCF ensures continuing participation of venture capitalist in management of entrepreneur business.

Long term investment

VC requires long term investment attitude that necessitates the VC firms to wait for a long period say 5 to 10 years to make large profits.

Venture Capital in India

 History of Venture Capital in India dates back to early 70's when Govt of India appointed a committee laid by Late Shri R.S.Bhatt to find out the ways for funding start-up companies based on absolutely new innovative technologies.  1988 - Govt of India decided to institutionalize Venture Capital Industry and announce guidelines in the parliament.

 At the same time World Bank selected 6 institutions to start VC investment in India. This included TDICICI (ICICI), GVFL, Canbank Venture Capital Fund, APIDC, RCTC (now known as IFCI Venture Capital Funds Ltd.) and ILF (now known as Pathfinder).  1995 - Govt of India permitted Foreign Finance companies to make investments in India and many foreign VC private equity firms entered India.  1997 - IT boom in India made VC industry more significant. Due to symbiotic relationship between VC and IT industry, VC got more prominence as a major source of funding for the rapidly growing IT industry.

 1999-2001 - The recession during 1999 - 2001 took the wind out of VC industry. Most of the VC either closed down or wound-up their operations. Almost all of them changed their focus to existing successful firms for their growth and expansion.  2004 onwards - Global VCs firms actively investing in India Since India s economy has been growing at 7%8% a year, and since some sectors, including the services sector and the high-end manufacturing sector, have been growing at 12%-14% a year, investors renewed their interest and started investing again in 2004.

Process of VCF

Investee company Business plan Approaching VC s Info supply Financing Growth

Venture capitalist Deal origination Screening Due Dilligence Deal structuring Monitoring Exit

Deal origination

Referral system

Active search

Intermediaries

Due Dilligence
Preliminary evaluation: The applicant required to provide a brief profile of the proposed venture to establish prima facie eligibility. Detailed evaluation: Once the preliminary evaluation is over, the proposal is evaluated in greater detail. VCFs in India expect the entrepreneur to have:Integrity, long-term vision, urge to grow, managerial skills, commercial orientation.

Deal structuring
Venture capitalist and the venture company negotiate the terms of the deals. Includes the venture capitalist's right to control the venture company and to change its management if needed and exit terms.

Post investment activity

 The venture capitalist generally assumes the role of a partner and collaborator.  Degree of the venture capitalist's involvement depends on his policy.  It may not be desirable for a venture capitalist to get involved in the day-to-day operation of the venture. If a financial or managerial crisis occurs, the venture capitalist may intervene, and even install a new management team.

Exit Routes
Types
IPO (Initial Public Offering) Trade Sale Buy-Back Secondary Purchase Liquidation

Return
Highest

How?
Flotation at the Stock Exchange Market Sale to Industrial or Strategic Investor Sale to Management Team or Company Sale to Another Financial Institution (e.g. Venture Capitalist) --

Medium (high) Low

? ?

Regulations of Venture Capital

Venture Capital activity in India comes under the purview of different sets of regulations namely:
1. The SEBI (Venture Capital Funds) Regulation, 1996[Regulations] lays down the overall regulatory framework for registration and operations of venture capital funds in India. 2. Overseas venture capital investments are subject to the Government of India Guidelines for Overseas Venture Capital Investment in India dated September 20, 1995 3. For tax exemptions purposes, venture capital funds also need to comply with the Income Tax Rules made under Section 10(23FA) of the Income Tax Act.

All the three set of regulations prescribe different investment criteria for VCFs as under :
 SEBI regulations permits investment in equity or equity related instruments of unlisted companies and also in financially weak and sick industries whose shares are listed or unlisted.  SEBI Regulations provide that at least 80% of the funds should be invested in venture capital companies and no other limits are prescribed.  The Income Tax Rules provides that VCF shall invest only up to 40% of paid up capital of the company and also not beyond 20% of the corpus of the venture capital fund.

There are sectoral restrictions under the Income Tax guidelines which provide that a VCF can make investment only in companies engaged in following business for claiming tax exemption;  Software,  Information Technology,  Production of basic drugs in pharmaceutical sector,  Bio-technology,  Agriculture,

 Allied sector and such other sectors as notified by the Central Government in India and for production,  Or manufacture of articles or substance for which patent has been granted by National Research Laboratory,  Or any other scientific research institution approved by the Department of Science and Technology.

Objectives and vision for Venture Capital in India

Potential for Entrepreneurs

The management (IIMs) and technology institutes (IITs) are globally known as centers of excellence. Every year over 200,000 engineers graduate from Government and private run engineering colleges. Management institutes produce more than 400000 management graduates annually.

 The success stories of Indians are well known in Sillicon Valley. At least 30% of the start-up enterprises in Silicon Valley are currently being started by Indians. As per NASSCOM data, the Indian software sector crossed the Rs 100 bn mark turnover during 1998. The sector grew 58% on a year to year basis and exports accounted for Rs 65.3 billion while the domestic market accounted for Rs 35.1 bn

Fields like telecommunications, media and entertainment, medical and health services and other technology based manufacturing and product development, venture capital industry can play catalytic role to put India on the world map as a success story.

VC Investments by Industry(2010) By Volume

HEALTH CARE 6% EDUCATION 6% BFSI 6% IT & ITES 55% OTHER SERVICES 3% OTHER 13%

ENGG.& CONSTRUCTION 10% Source: Venture Intelligence PE/VC Deal Database

Appendix 2: VC Investments in Q3 - 2010

Company
Aryaka Networks Aqua Designs India InMobi National Collateral Management Services Perfint Healthcare Naaptol.com Cold Star Logistics Gensol Consultants

Sector
Cloud Computing Water Treatment Mobile VAS

Amount (US$M)
14 12 8

Investors
Nexus Ventures Peepul Capital Sherpalo Ventures Rabo Equity

Services to 8 Commodities Firms Medical Devices Online Services (Shopping) Cold Storage Carbon Credit Advisory 7.2 7 6.5 6

Norwest, IDG Ventures India, Accel India Canaan Partners Tuscan Ventures India VP

Some articles showing the current status of VCF

Angel investors betting big on Indian startups

During the first quarter of 2008, US-based venture capitalists invested $350 million in 38 deals in India, a 42% jump from the previous quarter, when $246 million was invested in 33 companies. In the case of China, the funding by US-based Venture Capital firms dipped 24% to $250 million invested in 32 firms during the first quarter of 2008, down from the $331 million invested in 39 deals in the previous quarter, according to data from the Money Tree report from PricewaterhouseCoopers and the US-based National Venture Capital Association.
Source: Business Daily from THE HINDU group of publications Saturday, Apr 26, 2008

Angels investors and Mumbai Angels co founder Sasha Mirchandani has set up an entity, Kae Capital, to invest in startups. Kallol borah, a technology and entrepreneurial community organizer, launched Headstart Ventures last year and is looking for low burn, fast breakeven startups to invest in. All these investors are raising anywhere between $5 million and $20 million for their funds and will invest between $100,000 and $500,000 in startups, which is where the gap really exists today.

Source : Economic Times,2011

IIM-A Eyes venture capital to fund its incubators

Buoyed by the growing tribe of students wanting to go solo with their own entrepreneurial venture, IIM-A is looking to attract venture capital funds to the campus. The premier management institute is also in talks with several corporates to provide seed capital to budding entrepreneurs from its incubation lab. The number of students starting up their own venture is increasing in every batch. In a batch of 250 students, at least 10-15 are starting their own ventures

Source: Business Daily from THE HINDU group of publications

List of VC firms in India

Accel Partners India Anteon VenturesIFCI Venture Capital Funds India Innovation Investors Intel Capital Inventus (India) Advisory Company JAFCO Asia Lightspeed Venture Partners Netz Capital Blue Run ventures Nexus India Capital Norwest Venture Partners Ojas Venture Partners Reliance Venture SAIF Partners Trident Capital VentureEast Apax Partners Canaan Partner Helion Venture Partners

Thank you !!!