VENTURE CAPITAL

VC FUNDING IS
it is the business of employing Capital patiently to maximise returns while managing risks in a relatively high-risk venture.
versus

simply minimizing risks for a surer fixed return.

Contd.
Venture capitalists are typically very selective in deciding what to invest in; As a rule of thumb, a fund may invest in one of four hundred opportunities presented to it. Funds are most interested in ventures with exceptionally high growth potential.

 VC fund is often thought of as,the early stage financing of new and young enterprises seeking to grow rapidly.

Different Stages of a business

Funding Stages: Angel Funding: Idea stage (seed) VC Funding: Product or prototype ready, starting clients in place & business model tested (germinated seed) PE Funding: Business in existence for sometime, needs to scale up. (Plant) IPO: Established, steady; time to branch out. (Tree)

Features of Venture Capital

Equity Participation-VC is equity participation through direct purchase of shares, options or convertible securities Long-term Investment: of about 5-10 yrs Participation in Management: VCs participate in the management of the entrpreneurs business

Advantages of VC over other forms of finance

The Venture capitalist: Injects long term equity finance which provides a solid capital base for future growth. Is a business partner, sharing both the risks and rewards (rewarded by business success & the capital gain. Is able to provide practical advice and assistance to the company based on past experience with other companies which were in similar situations. Also has a network of contacts in many areas that can add value to the company, such as in recruiting key personnel, providing contacts in international markets, introductions to strategic partners, and if needed co-investments with other venture capital firms when additional rounds of financing are required. May provide additional rounds of funding should it be required to finance growth.

Development of VC in India
The concept was introduced in India in 1987 It was operated by Industrial Development Bank of India. In the same year Industrial Credit and Investment Corporation of India also started VC activity. Govt started leivying 5% cess on all payment related to VC

Categories of VCF in India

VCFs promoted by Central govt controlled Development Finance Institutions:
IFCI RCTFCI

VCFs promoted by State govt controlled Development Finance Institutions:

GVFCL APVCL Canfina by Canara Bank SBI-cap by SBI

VCFs promoted by Commercial Banks:

VCFs promoted by Private Venture Capitalists

Methods of Venture Financing

Equity: VC gets the status of a owner & becomes entitled to a share in the firms profits as much he is liable for losses. Conditional Loan: is repayable in the form of a royalty after the venture is able to generate sales Income Note: is a hybrid security combination of conventional loan & conditional loan. Others:
Participating Debenture Convertible loan Preferred & Special Ordinary Shares

VC Mainly Looks at?

Promoters Integrity, Relevant Experience, Drive Level. Uniqueness of their IDEA Focus on/ Commitment to their IDEA High Entry Barriers Competitive Advantages Good Market Size & Growth Rates

 Writing a business plan is a process in which the entrepreneur is forced to think about all aspects of the business Write it yourself Focus on The people, the opportunity / business model, Risk and Reward Write down the exit options (the investor wants to get money out of it as well).

Types of VC Firms
Depending on your type business, the venture capital firm you approach will differ. For instance, if you're an internet [start-up company], funding requests from a more manufacturing-focused firm will not be effective. Doing some initial research on which firms to approach will save time and effort. When approaching a VC firm, consider their portfolio:
Business Cycle: Do they invest in budding or established businesses? Industry: What is their industry focus? Investment: Is their typical investment

 Targeting specific types of firms will yield the best results when seeking VC financing. The National Venture Capital Association segments dozens of VC firms into ways that might assist you in your search. It is important to note that many VC firms have diverse portfolios with a range of

The Investment Process

In Brief: VC Investment Process

While no two investment processes are identical, there are some common steps through which most deals move: Step 1 : Introduction - deals have a much higher chance of getting closed if the company is referred to the VCs by a trusted source. At this stage, an executive summary and/or business plan might go to the VC. Step 2 : VC meets the entrepreneur or team. Discusses the business opportunity in detail - sees if the team really understands the key dimensions to the business. At this time the team may have to give a formal presentation. Step 3 : VC performs reference checks on the team and due diligence on the business opportunity, trying to understand the team, company, market and industry better.

Step 4 : Management team meets the all the partners at the VC firm. (This can happen earlier or later.) Step 5 : Terms are negotiated - valuation and other financial terms, governance and other control issues, etc. Term Sheet is signed. Step 6 : Legal, financial and technical due diligence performed. Step 7 : If all works out, legal documents, including Shareholder Agreements, are drafted. Step 8 : Legal documents are signed, and funds transferred from VC fund to company. Timing: The entire process may take as short as 3 months. But often the initial contact happens well before any deal is concluded, as the VC might be waiting to see how things develop at the company.

Revenue Stream For VC

Personal savings - one can fund the business from personal savings or by raising personal loans offering ones personal property as collateral security. Bootstrapping One can start the business venture with the limited available funds, and then use the profits to further develop the business. External sources for business funding: Venture capital- VC investment firms raise & pool together money from institutional investors and other high net worth individuals. These VC funding firms quite often provide managerial and technical expertise apart from funds for the business. The venture capital company

Trends In VC Funding
There are typically six stages of financing offered in Venture Capital, that roughly correspond to these stages of a company's development. Seed Money: Low level financing needed to prove a new idea (Often provided by "angel investors") Start-up: Early stage firms that need funding for expenses associated with marketing & product development First-Round: Early sales and manufacturing funds Capital for a venture that has successfully passed the initial start-up phase. The business plan has been written and the product is

 Second-Round: Working capital for early stage companies that are selling product, but not yet turning a profit Usually provided by venture capital firms and (investment) banks Often used for marketing purposes and growth of the Third-Round: Also called Mezzanine financing, this is expansion money for a newly profitable company Sometimes another round of financing is necessary before being profitable. In other cases the money is used by profitable companies to be able to Fourth-Round: Also called bridge financing, 4th round is intended to finance the "going public" process

Setting the stage - Venture Capital in India

Phase I - Formation of TDICI in the 80s and regional funds as GVFL & APIDC in the early 90s. Phase II - Entry of Foreign VCFs between 1995-1999 Phase III - (2000 onwards). Emergence of successful India-centric VC firms Phase IV (current) Global VCs and PE firms actively investing in India 150 Funds active in the last 3 years (Government, Overseas, Corporate, Domestic)

The Opportunity
High Growth in Technology and Knowledge based Industries. KBI growing fast and mostly global, less affected by domestic issues. Several emerging centers of innovation biotech, wireless, IT, semiconductor, pharmaceutical. Ability to build market leading companies in India that serve both global and domestic markets. India moving beyond supplier of low-cost services to higher-value products. Quality of entrepreneurship on ascending curve.

Venture capital
Long term equity finance Investing as opposed to banks who lend Looking for high gains Accepting high risks Can be involved in management of the invested firm Venture capital investment is illiquid

Structure of VCs
Mostly funds
Charge about 2% + success fee

Also companies Limited partnerships Prevalence of banks

Revenue implications

VC : Advantages
No fixed expense of debt servicing Financial flexibility Sharing of risk Value added investing
Attracting talent Networking with service providers/suppliers Accessing markets

Enhanced credibility with lenders

VC : Disadvantages
Dilution of shareholding Increased 3rd party governance Increased controls Increased commitment to stated strategy

Types of VC
Early stage financing Seed capital or pre-start up or R&D Start up financing Second round financing Later stage financing Expansion Replacement Turnaround

Valuation exercise
1. Get rid of scamsters 2. Hygiene factors beware of things that can shut down a business 3. Growth & industry considerations 4. Due diligence
1. Physical evaluation 2. Calling in the experts

5. Monetise value

Agreement particulars
Amount and terms of investment. Dividend policy. Composition of the board of directors. Reporting - management reports, monthly accounts, annual budgets. Liquidity (exit) plans. Rights of sale Warranties. Matters requiring venture capitalist approval

Problems
Locating players Concerns regarding exchange of info Larger companies look equally attractive with lesser risk Even listed securities are giving great returns

The road ahead

Placement agents (Venture Partners) Trade meets Syndication
Getting a larger team / new perspective Spreading risk Eg July systems (wireless content) got $10m from 6 VCs

Lending strategy of banks

Business plan Financial statement Profile of promoter Asset base
Gross Net

Credit scoring

How Banks cover risks

Collateral
Internal incl. a/c receivable External

Personal guarantees Debt covenants Short maturity debt

Managing banks
Complete paperwork in time Submit financial statements as scheduled Route all transactions through bank Ask for extras free drafts, alerts, etc Exude confidence and well being Transmit good news Be proactive about inspections

Cash is king
Can result form unplanned success Is usually due to lack of planning or tardiness in collections Dissatisfaction among suppliers
Higher costs Lower quality

Dissatisfied (worried) employees High bad debts migration of customers

Collection strategies
Investigate new customers Supply against written orders Sign on a legal contract Maintain close contact with customers Get and repeat positive feedback Send invoice ASAP Contact before sending invoice ( to check particulars)

Collection strategies
Keep a close watch on customers fortunes Immediately contact on any delayed payment Be firm its your own money Allow a customer to graduate in his credit ratings with you

Break-even analysis
Identify fixed and variable costs Explore possibilities of changing fixed into variable costs And vice-versa Can be expressed in terms of
Capacity utilisation Sales revenue

Application of BEA
Helps in taking investment decisions Profit optimisation planning Helps in pricing decision Can be modified to calculate profitability at various levels of capacity utilisation / sales

 Avnish Bajaj, Matrix Partners Balaji Srinivas, Aureos Capital Alok Mittal, Canaan Partners

2i Capital (India) Private Limited - is an asset management group that has insight into investment opportunities that arise from India's vibrant and broad industrial and service sectors, and large, growing domestic market on the one hand, while leveraging the country's recognised expertise in technology, engineering, and technology services into global markets, on the other. Actis - have been investing in emerging markets for over 55 years through our origins as part of CDC Capital Partners. We are most active in Africa, China, Malaysia and South Asia, and we invest in SMEs and Power through our Aureos and Globeleq arms. Artiman Ventures- is an early stage venture capital firm devoted to investing in world-class entrepreneurs with leading edge technologies. Avon Capital Services Ltd - Mumbai based Financial Services and Management Consultancy Company.

Baring Private Equity Partners (India) Limited commenced investment management activities in 1998 as part of the Baring Private Equity Partners Group. We provide investment advisory services to Baring Funds, which have cumulative assets under management in excess of $275 Million, in the manufacturing, pharmaceutical, information technology and services sectors. Berkeley Finance & Consulting - BFC offers fund-raising, consulting and strategic alliance formation services helping organizations planning to transform/expand operations by adding new products BlueRun Ventures - Being global lets BlueRun Ventures seek out best-of-breed technologies and entrepreneurs in the markets where innovation is accelerating. BRV has been working with Nokia Venture Partners on few investments.

CANBANK VENTURE CAPITAL FUND LIMITED - is Canara Bank sponsored Venture fund. Incorporated in 1989, Canbank Venture is an experienced fund management company currently managing Four funds. ChrysCapital - manages $1 billion across four funds and aspires to build the leading investment firm focused on India. Our disciplined investment approach translates the growth in the Indian economy into superior returns for our investors. Global Technology Ventures Ltd - GTV, based in Bangalore, India, is a technology holding company, tracing its lineage to the Sivan Securities Group. GTV partners with exceptional entrepreneurs, who have a gut for the original, and are passionately dedicated to building category-leading tech companies. Investing in technology ventures across all stages, GTV provides access to capital and resources to companies with global market leadership potential.

IVCA
Indian Venture Capital and Private Equity Association (IVCA) is a member based national organization, which promotes the industry within India and throughout the world and encourages investment in high growth companies. Members represent most of the active venture capital and private equity firms in India. These firms provide capital for seed ventures, early stage companies, later stage expansion, and growth finance for management buyouts/buy-ins of established companies. IVCA members comprise venture capital firms, institutional investors, banks, incubators, angel groups, corporate advisors, accountants, lawyers, government bodies, academic institutions and other service providers to the venture capital and private equity industry.