VENTURE CAPITAL FINANCING

What is Venture Capital?

• “Venture Capital can be defined as equity or equity related investment in to New Young Dynamic Growth and Ideas based industries who are not yet ready to approach capital markets for raising/generating money/capital”.

• Venture capital can be summarized as “your ideas and our money” concept of developing business. Venture capitalists are people who pool financial resources from high networth individuals, corporates, pension funds, insurance companies, etc. to invest in high risk - high return ventures that are unable to raise funds from regular channels like banks and capital markets.

Venture Capital: Key Features

• Private or institutional investment (capital)in relatively early-stage companies (ventures)

• Mainly used by companies like:– Computer and network technology– Telecommunications technology– Biotechnology

• Purely Growth and Idea Based Financing

• High Risk and High Return

Difference between Venture Finance & Debt Finance

Points Venture Finance Debt Finance

Objective Maximize Return Interest paymentHolding Period

2-5 years Short/Long term

Instruments

Eq. shares, Convertible bonds/ Debentures, Conditional loan

Loan, Factoring, Leasing

Collateral Very Rare YesOwnership Yes NoControl Minority shareholders,

rights protection, board members

Covenants

Impact on B/S

Reduced Leverage Increased Leverage

Exit Mechanism

Public offering, Sale to third party, Sale to entrepreneur

Loan repayment

Difference between a Venture Capital and Bankers/Money Managers

• Asset Based Financing V/s Growth and Idea Based Financing• Banker is a manager of other people's money while the venture

capitalist is basically an investor.• Venture capitalist generally invests in new ventures started by

technocrats (entrepreneurs) who generally are in need of capital.• The most important difference between a venture capitalist and

conventional Bank Finance is that VC not only provide finance but also offers management supports like wise… Financial and strategic planning Recruitment of key personnel Obtain bank and other debt financing Access to international markets and technology Marketing Strategy Formulation Helps in IPO Formalities

Users of Venture Finance…

• Newly floated companies that do not have access to equity capital and/or other related instruments.

• Firms, manufacturing products or services that have vast growth potential (HIGH-TECH FIRMS).

• Firms with above average profitability.

• Novel products that are in the early stages of their life cycle.

• Projects involving above-average risk.

• Diversified Business Ventures.

Venture Capital Investment Process:

1. Initial Evaluation: 2. Due diligence: 3. Deal structuring, Negotiation and Investment

valuation: 4. Documentation: 5. Monitoring and Value addition: 6. Exit:

VC: Stages of Financing

Early-stage Financing:

• Seed Financing:

• Startup Financing:

• Second Stage Financing:

VC: Stages of Financing – Contd…

Later Stage/Expansion Financing:

• Bridge Financing:

• Acquisition Financing:

– Management by out

– Management by ins

Methods of Venture Financing:

Equity:• All VCFs in India provide equity but generally their

contribution does not exceed 49 percent of the total equity capital. Thus, the effective control and majority ownership of the firm remains with the entrepreneur.

• They buy shares of an enterprise with an intention to ultimately sell them off to make capital gains.

Conditional Loan:• It is repayable in the form of a royalty after the venture is able

to generate sales. • No interest is paid on such loans. • In India, VC charge royalty ranging between 2 to 15 percent.

Methods of Venture Financing: Contd…

Income Notes: • It’s a hybrid security and it’s a combination of conditional loan

and conventional loan.• The entrepreneur has to pay both interest and royalty on

sales, but at substantially low rates.

Participating Debentures

Convertible Loan

Investment Nurturing Styles:

Hands-on Style: suggests supportive and direct involvement of the venture capitalist in the assisted firm through Board representation and regularly advising the entrepreneur on matters of technology, marketing and general management.

• Indian venture capitalists do not generally involve themselves on a hands-on basis of nurturing.

Hands-off Style:• No Managerial advice/assistant is provided• Indian Venture Funds generally follow this pattern.

Intermediate Style/Hands Holding: Means if assisted firm demands then only managerial/advisory services are to be provided by venture capitalist.

Investment Nurturing: Services

• Venture capitalists (VCs) continuously monitor their companies.» VCs typically serve on the company’s Board of Directors.» VCs provide mentoring and strategic advice to the

company’s managers.» VCs often provide business contacts to company

managers.» VCs help recruit additional managers for the company.» VCs set company performance targets. If these targets

are not met, VCs may have the option of replacing the Key Personnel of their client firm.

Regulatory System & Policy Matters:

• The venture capital operations in India are regulated by SEBI. • SEBI (venture capital funds) ‘Regulations’ 1996 • Registration • All VCFs must be registered with SEBI and pay Rs.25,000 as

APPLICATION FEE and Rs. 5,00,000 as REGISTRATION FEE for grant of certificate.

• Recommendations of SEBI (Chandrasekhar) Committee, 2000 SEBI appointed the Chandrasekhar Committee to identify the obstacle in the growth of venture capital industry in the country and suggest suitable measures for its rapid growth.

• The recommendations pertain to, 1. Harmonization of regulations 2. VCF structures3. Resource raising 4. Investments5. Exit6. SEBI regulations and Company law related issues 8. Other related issues.

Exit Strategies:

• IPO

• Sale of shares to entrepreneurs/employees

• Sale of shares to new investors

• Liquidation of client’s firm

Problems of Venture Capital Financing:

1. Requirement of an experienced management team.

2. Requirement of an above average rate of return on investment.

3. Longer payback period.

4. Uncertainty regarding the success of the product in the market.

5. Questions regarding the infrastructure details of production like plant location, accessibility, relationship with the suppliers and creditors, transportation facilities, labors availability etc.

6. The size of the market, Major competitors and their market share.

Prospects of Venture Capital Financing: 1. Globally competitive developing economy with

existence of MNCs.

2. Second Largest English Speaking, Scientific & Technical Manpower in the WORLD.

3. Vast pool of existing and ongoing scientific and technical research carried by large number of research laboratories (ATIRA/PRL/ISRO/ICAR/EDI/CDRI/NIFT/CSIR/CFTR).

4. Initiatives taken by the Government in formulating policies to encourage investors and entrepreneurs.

5. Supportive regulatory system managed/regulates by SEBI.

6. Govt. Stability

Key Players:

VCFs promoted by the Central Govt:

• Technology Development Fund (TDF) in the year 1987-88

• ICICI, IFCI AND IDBI.

• Risk capital and Technology Finance Corporation Limited (RCTFC)

VCFs promoted by the State Government:

• Andhra Pradesh Venture Capital Limited (APVCL)

• Gujarat Venture Finance Limited (GVFL)

VCFs promoted by Public Sector banks:

• SBI-Cap by State Bank of India

• Canfina by Canara Bank

Key Players – Contd…

• VCFs promoted by the Foreign Banks or Private Sector Co’s :• Indus Venture Fund • Credit Capital Venture Fund • Alliance Venture Capital Advisors Ltd.• Baring Private Equity Partners• e Ventures India• HBSC Private Equity• Indus Venture Management Ltd.• Infinity Ventures• Marigold Capital Services Ltd.