Venture Capital-f (2)

7/29/2019 Venture Capital-f (2)

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VENTURE CAPITAL


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VC FUNDING IS

it is the business of employingCapital patiently to maximisereturns while managing risks in arelatively high-risk venture.

versus

simply minimizing risks for a

surer fixed return.


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Contd.

Venture capitalists are typically veryselective in deciding what to invest in;As a rule of thumb, a fund may invest in

one of four hundred opportunitiespresented to it. Funds are mostinterested in ventures with exceptionallyhigh growth potential.


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VC fund is often thought of as,theearly stage financing of new andyoung enterprises seeking to growrapidly.


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Different Stages of a business

Funding Stages:

Angel Funding: Idea stage (seed)

VC Funding: Product or prototype ready,

starting clients in place & business modeltested (germinated seed)

PE Funding: Business in existence forsometime, needs to scale up. (Plant)

IPO: Established, steady; time to branch out.(Tree)


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Features of Venture Capital

Equity Participation-VC is equity participation throughdirect purchase of shares, options or convertiblesecurities

Long-term Investment: of about 5-10 yrs

Participation in Management: VCs participate in themanagement of the entrpreneurs business


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Advantages of VC over other formsof finance

The Venture capitalist:

Injects long term equity finance which provides a solid capitalbase 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 whichwere in similar situations.

Also has a network of contacts in many areas that can addvalue to the company, such as in recruiting key personnel,providing contacts in international markets, introductions tostrategic partners, and if needed co-investments with otherventure capital firms when additional rounds of financing arerequired.

May provide additional rounds of funding should it be required

to finance growth.


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Development of VC in India

The concept was introduced in India in 1987

It was operated by Industrial DevelopmentBank of India.

In the same year Industrial Credit andInvestment Corporation of India alsostarted VC activity.

Govt started leivying 5% cess on all payment

related to VC


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Categories of VCF in India

VCFs promoted by Central govt controlled DevelopmentFinance Institutions: IFCI

RCTFCI

VCFs promoted by State govt controlled DevelopmentFinance Institutions: GVFCL

APVCL

VCFs promoted by Commercial Banks:

Canfina by Canara Bank SBI-cap by SBI

VCFs promoted by Private Venture Capitalists


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Methods of Venture Financing

Equity: VC gets the status of a owner &becomes entitled to a share in the firms profitsas much he is liable for losses.

Conditional Loan: is repayable in the form ofa royalty after the venture is able to generatesales

Income Note: is a hybrid security combination

of conventional loan & conditional loan. Others:

Participating Debenture

Convertible loan

Preferred & Special Ordinary Shares


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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


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Writing a business plan is a process in whichthe entrepreneur is forced to think about allaspects of the business

Write it yourself Focus on

The people, the opportunity / businessmodel, Risk and Reward

Write down the exit options (the investorwants to get money out of it as well).


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Types of VC Firms

Depending on your type business, the venturecapital firm you approach will differ. Forinstance, if you're an internet [start-up

company], funding requests from a moremanufacturing-focused firm will not beeffective. Doing some initial research on whichfirms 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


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Targeting specific types of firms will yield thebest 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


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The Investment Process


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In Brief: VC Investment Process

While no two investment processes are identical, there are somecommon steps through which most deals move:

Step 1 : Introduction - deals have a much higher chance of gettingclosed if the company is referred to the VCs by a trusted source. Atthis stage, an executive summary and/or business plan might go tothe VC.

Step 2 : VC meets the entrepreneur or team. Discusses thebusiness opportunity in detail - sees if the team really understandsthe key dimensions to the business. At this time the team mayhave to give a formal presentation.

Step 3 : VC performs reference checks on the team and duediligence on the business opportunity, trying to understand theteam, company, market and industry better.


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Step 4 : Management team meets the all the partners at the VCfirm. (This can happen earlier or later.)

Step 5 : Terms are negotiated - valuation and other financialterms, governance and other control issues, etc. TermSheet is signed.

Step 6 : Legal, financial and technical due diligence performed.

Step 7 : If all works out, legal documents, including ShareholderAgreements, are drafted.

Step 8 : Legal documents are signed, and funds transferred fromVC fund to company.

Timing: The entire process may take as short as 3 months. Butoften the initial contact happens well before any deal isconcluded, as the VC might be waiting to see how thingsdevelop at the company.


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Revenue Stream For VC

Personal savings - one can fund the business frompersonal savings or by raising personal loans offering onespersonal property as collateral security.

Bootstrapping One can startthe business venture with

the limited available funds, and then use the profits tofurther develop the business.

External sources for business funding: Venture capital- VCinvestment firms raise & pool together money frominstitutional investors and other high net worth individuals.

TheseVC funding firms quite often provide managerial andtechnical expertise apart from funds for the business. Theventure capital company


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Trends In VC Funding

There are typically six stages of financing offered in VentureCapital, that roughly correspond to these stages of acompany'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 forexpenses associated with marketing & product development

First-Round:Early sales and manufacturing funds Capitalfor a venture that has successfully passed the initial start-up

phase. The business plan has been written and the productis


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Second-Round:Workingcapital for early stagecompanies that are selling product, but not yet turning aprofit Usually provided by venture capital firms and(investment) banks Often used for marketing purposes

and growth of the Third-Round:Also calledMezzanine financing, this is

expansion money for a newly profitable companySometimes another round of financing is necessarybefore being profitable. In other cases the money is used

by profitable companies to be able to Fourth-Round:Also calledbridge financing, 4th round is

intended to finance the "going public" process


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Setting the stage - VentureCapital in India

Phase I - Formation of TDICI in the 80s and regionalfunds 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)


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The Opportunity

High Growth in Technology and Knowledge basedIndustries. KBI growing fast and mostly global, lessaffected 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 tohigher-value products.

Quality of entrepreneurship on ascending curve.


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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 ofthe invested firm

Venture capital investment is illiquid


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Structure of VCs

Mostly funds Charge about 2% + success fee

Also companies Limited partnerships

Prevalence of banks

Revenue implications


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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


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VC : Disadvantages

Dilution of shareholding

Increased 3rd party governance

Increased controls

Increased commitment to statedstrategy


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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


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Valuation exercise

1. Get rid of scamsters

2. Hygiene factors beware of thingsthat can shut down a business

3. Growth & industry considerations

4. Due diligence1. Physical evaluation

2. Calling in the experts5. Monetise value


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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 capitalistapproval


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Problems

Locating players

Concerns regarding exchange of info

Larger companies look equallyattractive with lesser risk

Even listed securities are giving greatreturns


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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


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Lending strategy of banks

Business plan

Financial statement

Profile of promoter

Asset base Gross

Net

Credit scoring


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How Banks cover risks

Collateral Internal incl. a/c receivable

External

Personal guarantees

Debt covenants

Short maturity debt


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Managing banks

Complete paperwork in time

Submit financial statements asscheduled

Route all transactions through bank

Ask for extras free drafts, alerts,etc

Exude confidence and well being

Transmit good news

Be proactive about inspections


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Cash is king

Can result form unplanned success

Is usually due to lack of planning ortardiness in collections

Dissatisfaction among suppliers Higher costs

Lower quality

Dissatisfied (worried) employees High bad debts migration of

customers


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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 ( tocheck particulars)


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Collection strategies

Keep a close watch on customersfortunes

Immediately contact on any delayedpayment

Be firm its your own money

Allow a customer to graduate in hiscredit ratings with you


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Break-even analysis

Identify fixed and variable costs

Explore possibilities of changing fixedinto variable costs

And vice-versa

Can be expressed in terms of Capacity utilisation

Sales revenue


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Application of BEA

Helps in taking investment decisions

Profit optimisation planning

Helps in pricing decision

Can be modified to calculateprofitability at various levels ofcapacity utilisation / sales


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Avnish Bajaj, Matrix Partners

Balaji Srinivas, Aureos Capital

Alok Mittal, Canaan Partners


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2i Capital (India) Private Limited- is an asset managementgroup that has insight into investment opportunities that arisefrom India's vibrant and broad industrial and service sectors,and large, growing domestic market on the one hand, whileleveraging the country's recognised expertise in technology,

engineering, and technology services into global markets, onthe other.

Actis- have been investing in emerging markets for over 55years through our origins as part of CDC Capital Partners. Weare most active in Africa, China, Malaysia and South Asia, andwe invest in SMEs and Power through our Aureos and Globeleqarms.

Artiman Ventures- is an early stage venture capital firmdevoted to investing in world-class entrepreneurs with leadingedge technologies.

Avon Capital Services Ltd - Mumbai based Financial Services

and Management Consultancy Company.
http://explore.oneindia.in/detail/5/2icapital-com.htmlhttp://explore.oneindia.in/finance/vc/http://explore.oneindia.in/detail/1/act-is.htmlhttp://explore.oneindia.in/detail/1/act-is.htmlhttp://explore.oneindia.in/finance/vc/http://explore.oneindia.in/detail/5/2icapital-com.html


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Baring Private Equity Partners (India) Limited -commenced investment management activities in 1998 as partof the Baring Private Equity Partners Group. We provideinvestment advisory services to Baring Funds, which havecumulative assets under management in excess of $275

Million, in the manufacturing, pharmaceutical, informationtechnology and services sectors.

Berkeley Finance & Consulting - BFC offers fund-raising,consulting and strategic alliance formation services helpingorganizations planning to transform/expand operations byadding new products

BlueRun Ventures - Being global lets BlueRun Ventures seekout best-of-breed technologies and entrepreneurs in themarkets where innovation is accelerating. BRV has beenworking with Nokia Venture Partners on few investments.


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CANBANK VENTURE CAPITAL FUND LIMITED - is CanaraBank sponsored Venture fund. Incorporated in 1989, CanbankVenture is an experienced fund management companycurrently 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 inthe 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 exceptionalentrepreneurs, who have a gut for the original, and arepassionately dedicated to building category-leading techcompanies. Investing in technology ventures across all stages,GTV provides access to capital and resources to companieswith global market leadership potential.


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IVCA

Indian Venture Capital and Private Equity Association (IVCA)is a member based national organization, which promotesthe industry within India and throughout the world andencourages investment in high growth companies. Members

represent most of the active venture capital and privateequity firms in India. These firms provide capital for seedventures, early stage companies, later stage expansion, andgrowth finance for management buyouts/buy-ins ofestablished companies.

IVCA members comprise venture capital firms, institutionalinvestors, banks, incubators, angel groups, corporateadvisors, accountants, lawyers, government bodies,academic institutions and other service providers to theventure capital and private equity industry.

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Venture Capital-f (2)