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Start-up: Supports product development and initial marketing. Start-up financing provides funds to companies for product development and initial marketing. This type of financing is usually provided to companies just organized or to those that have been in business just a short time but have not yet sold their product in the marketplace. Generally, such firms have already assembled key management, prepared a business plan and made market studies. At this stage, the business is seeing its first revenues but has yet to show a profit. This is often where the enterprise brings in its first "outside" investors. First Stage: Capital is provided to initiate commercial manufacturing and sales. Most first-stage companies have been in business less than three years and have a product or service in testing or pilot production. In some cases, the product may be commercially available. Formative Stage: Financing includes seed stage and early stage. Later Stage: Capital provided after commercial manufacturing and sales but before any initial public offering. The product or service is in production and is commercially available. The company demonstrates significant revenue growth, but may or may not be showing a profit. It has usually been in business for more than three years. Third Stage: Capital provided for major expansion such as physical plant expansion, product improvement and marketing. Expansion Stage: Financing refers to the second and third stages. Mezzanine (bridge financing): Finances the step of going public and represents the bridge between expanding the company and the IPO. Also, Balanced-stage: financing refers to all the stages, seed through mezzanine. Buyouts and second-stage financing are the most popular stages of venture capital financing. Globally, according to a report by PricewaterhouseCoopers, around 80 per cent of the total private equity investment is done at these stages.
The National Venture Capital Association defines venture capital as: "Money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors." Innovation is the key driver of competitiveness within organizations as well as within countries. It has been well said: "Nothing is more powerful than an idea whose time has come." However, innovative ideas need more than research and knowledge to succeed. They need not only financial, but also, managerial (technical, marketing and HR), support to achieve success. This support is lent in many forms by private funding and incubation organizations such as venture capitalists. Akhil Gupta, JMD & CFO of Bharti Airtel, once remarked, "While we could have raised funding from other sources, Warburg Pincus' involvement helped us in scaling up significantly." Almost identical has been the findings of a research conducted recently by Venture Intelligence (founded by Arun Natarajan, a leading provider of information and networking services to the private equity and venture capital ecosystem in India) with the guidance of Prof. Amit Bubna of Indian School of Business, Hyderabad, to study the economic impact of PE and VCs on the Indian businesses. In the process venture capitalists have created some of the best known companies in the world. Without VCs we might not have seen companies such as Apple, Compaq, Sun Microsystems, and Intel to name a few.
depends upon the discretion of SEBI which can impose suitable terms and conditions upon the applicant before it is recognized as FVCI. After an investor has been recognized and registered as FVCI by SEBI it has to seek further approval of RBI under FEMA Regulations before making investment in India. Such an FVCI can apply to RBI for general permission through SEBI to invest in IVCU or VCF or in a scheme floated by such VCF [Reg. 5(5) and Sch. 6 of FEM (Transfer or Issue of Security by a person Resident Outside India) Regulations, 2000]. The definitions of VCFs and VCU are given both in FEM (Transfer or Issue of Security by a person Resident Outside India) Regulations, 2000[Reg. 2(xi) and Reg. 2(va) respectively] and SEBI (Foreign Venture Capital Investor) Regulations 2000[Reg. 2(1)(l) and Reg. 2(1)(m) respectively]. The definitions are almost similar in nature except the fact that SEBI Regulation uses the term VCU whereas FEM regulations use the term IVCU. Joint reading of both these regulations explains the terms VCFs and VCU in following manner. Indian Venture Capital Undertaking (IVCU): IVCU means a company incorporated in India whose shares are not listed on a recognized stock exchange in India and which is not engaged in an activity specified under the negative list specified by the SEBI. IVCU is generally a new born private company which is yet to establish itself and is in need of funds and experienced advice and support. Venture Capital Fund (VCF): It is a fund established in the form of a trust or a company including a body corporate and registered with SEBI under SEBI (Venture Capital Fund) Regulations 1996 and which has a dedicated pool of capital raised in manner specified in regulations and which invests in VCU in accordance with said regulations. A VCF is also allowed to make investments in VCU subject to provisions in SEBI (Venture Capital Fund) Regulations. Therefore a FVCI that has got registered with SEBI as such and has been permitted by RBI to make investments in India can make investment in either IVCU or VCF or both. FVCI that has been permitted by RBI to make investment in IVCU or VCF can make investment by purchasing equity or equity linked instruments or debt instruments or debentures of an IVCU or of a VCF. Equity linked instruments means and includes instruments that are later convertible into equity shares or share warrants, preference shares or debenture convertible into equity. These investments can be through Initial Public Offer or Private Placement or in units of schemes/funds set up by VCF [Schedule 6 of Foreign Exchange Management (Transfer or Issue of Security by a person Resident Outside India) Regulations, 2000]. But an FVCI registered with SEBI and permitted by RBI can make investment only in those IVCU and VCF that are also registered with SEBI under respective SEBI regulations [Master Circular on Foreign Investment in India No. 6/2004-05 Dated 1-7-2004]. According to Reg. 11 of SEBI (Foreign Venture Capital Investors) Regulations, 2000 a FVCI registered with SEBI is permitted to make investment in following manner:
An FVCI can invest all of its funds in a domestic VCF- a registered FVCI is allowed to invest 100% of its funds in a VCF registered under SEBI (Venture Capital Fund) Regulations. It has to invest at least 66.67% of its investible funds in unlisted equity shares or equity linked instruments of Venture Capital Undertakings. It can invest only 33.33% of its funds (and not more), by Subscribing to initial public offer of adventure capital undertaking whose shares are proposed to be listed; Investing in debt or debt instrument of the VCU provided it has already invested by way of equity in such a VCU Preferential allotment of equity shares of a listed company subject to lock in period of one year. Investment by subscription or purchase in the equity shares or equity-linked securities of a financially weak listed company or industrial listed company. Investment by way of subscription or purchase in Special Purpose Vehicles created for the purpose of facilitating or promoting investment in accordance with these regulations. FVCI have a fixed life cycle. Every FVCI making investments in IVCU or VCF has to mandatorily disclose life cycle of its fund before making any investments. It has to further disclose all its investment strategies to the SEBI before it makes any investment in India.
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unlisted firms. Earlier, secondary deals were structured around these regulations and required FIPB approval for each and every transaction. But now, RBIs new rule will ensure hassle-free investments for VC/PE funds in these sectors, as provided in FVCI guidelines. According to experts, there will be other advantages as well, as FIIs investing through FDI cannot buy more than 10 per cent in a company while FVCIs can buy over 10 per cent. FVCIs are also exempt from entry and exit pricing restrictions and dont have a lock-in on the shares of their portfolio companies going for initial public offerings. This will make FVCI the more favored route rather than FIIs, which is being used by several private equity and venture capital funds at this point of time. However, the RBI ruling also states that investments through market transactions will have to comply with provisions of the SEBI (FVCI) Regulations, 2000, which will need further clarification. Also, as investment by FVCIs is restricted in nine sectors, it remains to be seen how this percolates into actual benefit for the foreign PE/VC firms. If implemented in its full form, the move is likely to have a significant positive impact on investments from FVCIs. According to VCCEdge, the financial research platform of VCCircle, there was 16 exits through secondary deals valued at $718 million in the entire CY2011. Till March 27, 2012, there have been eight secondary deals worth $545 million. Secondary deals, in terms of stake transfer from one private equity firm to another, are expected to be a large market over the next three years as investors seek exit from 20062008 vintage deals while others are sitting on significant dry powder. Private investments in public equities (PIPEs), either through public issues or direct purchases from the market, have also been on the rise after falling in 2009 post-Lehman crisis. Public market deals increased from 70 to 93 in volume from 2010 to 2011, while rising from $2.37 billion to $3.5 billion over the same period. Till March 27, 2012, there have been 23 PIPE deals worth $670 million. Over the last 6-8 months, global private equity majors like the Carlyle Group, General Atlantic, Providence Equity Partners and the Blackstone Group have also picked up shares in listed company from the markets. In fact, most mid-market private equity firms in India have started investing in public markets opportunistically, but there are also some dedicated players like Nalanda Capital and WestBridge Capital.
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Proposed Budget 2012: Venture Capitalists fear setback, to meet officials shortly
The India Venture Capital Association, the industry body for private equity firms and venture capital companies, is planning to meet finance ministry officials shortly to discuss the impact some of the Budget proposals would have on their investments. "Often PE firms scale up their portfolio companies through inorganic growth (acquisitions). Share premium paid in such acquisitions becomes taxable, thereby impacting the PE operations," said Raja Kumar, founder & CEO, Ascent Capital The proposal to introduce certain rules to curb money laundering, including the move to tax any premium on issue of shares over fair market value, as income in the hands of the investee company, will impact unregistered venture capital funds and angel investors, fear industry officials. Private equity fund officials say the cost of initial acquisition may not rise in the first instance, but the cost would go up when its portfolio companies acquire another company. Venture capital funds say emerging businesses like e-commerce, which has attracted significant investments in the past, could be affected as premium is paid considering factors such as future projections and cash flows. According to industry estimates, in the past three years the e-commerce sector has attracted close to $450 million from venture capital funds. Mahendra Swarup, president, IVCA, said the move to tax share premium will also impact downstream investment in infrastructure firms, where they use a holding company structure to acquire aspecial purpose vehicle. Budget 2012 has also made it mandatory for private equity funds coming from some taxfriendly jurisdictions like Cayman Islands and Bahamas to obtain the certificate of residence. "The Tax Residency Certificate (TRC) needs to be in the prescribed form; else the tax authority can overlook the TRC and deny the treaty benefits. It may not be possible for every country to issue a TRC in the prescribed form due to internal reasons," Swarup said. The government has also proposed a General Anti-Avoidance Rule (GAAR) in the Budget, which vests unlimited power with the revenue authorities, tax experts said.
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round, and was joined by return backers Tenaya Capital, U.S. Venture Partners and CM Capital. The company has now raised over $36 million. CiRBA Inc., a Toronto-based provider of infrastructure control software, has raised C$15 million in third-round funding. Tandem Expansion Fund led the round, and was joined by return backers Sigma Partners and Edgestone Capital Partners. BiO2 Medical Inc., a San Antonio-based developer of catheters to prevent pulmonary embolism-related mortality and morbidity, has raised $13.7 million in Series B funding. San Antonio's Targeted Technology Fund and Pasadera Capital led the round, which includes the conversion of a $1 million State of Texas Emerging Technology Fund (ETF) award. UnboundID, an Austin, Texas-based provider of a platform for identity services, has raised $12.5 million in Series B funding from OpenView Venture Partners. ImaginAb Inc., a Los Angeles-based developer of in vivo imaging agents for positron emission tomography, has raised $12.5 million in Series A funding. Novartis Venture Funds led the round, and was joined by Merieux Developpement, Nextech Invest, Cycad Group and return backer Momentum Biosciences. Tracelytics, a Providence, R.I.-based provider of application performance management SaaS, has raised $5.2 million in Series A funding. Bain Capital Ventures led the round, and was joined by seed backers Google Ventures, Battery Ventures and Flybridge Capital Partners. CloudLock, a Waltham, Mass.-based maker of software for securing enterprise cloud data, has raised $8.7 million in Series B funding. Ascent Venture Partners was joined by return backer Cedar Fund. Sojern, a San Francisco-based travel data and media company, has raised $7.5 million in new VC funding. Industry Ventures led the round, and was joined by return backers Norwest Venture Partners, Trident Capital and Focus Ventures. Vigilent, an El Cerito, Calif.-based provider of energy management systems for data centers, has raised $6.7 million in new funding led by Accel Partners.
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