VENTURE CAPITAL FINANCING

BASIC

CONCEPTS IN INDIA

DEVELOPMENT NEED

FOR VC

STAGES

OF VENTURE CAPITAL FINANCING

ADVANTAGES DISADVANTAGES PITFALLS CASE

TO BE AVOIDED

STUDY

 Venture

capital is a type of private e !ity "apita# typi"a##y provi$e$ for ear#y%sta&e' (i&(%pote)tia#' &ro*t( "o+pa)ies i) t(e i)terest of &e)erati)& a ret!r) t(ro!&( a) eve)t!a# rea#i,atio) eve)t s!"( as a) IPO or tra$e sa#e of t(e "o+pa)y"apita# i)vest+e)ts are &e)era##y +a$e as "as( i) e."(a)&e for s(ares i) t(e i)veste$ "o+pa)y"apita# fi)a)"e is ofte) !se$ as /t(e ear#y sta&e fi)a)"i)& of )e* a)$ yo!)& e)terprises see0i)& to &ro* rapi$#y1-

Ve)t!re

Ve)t!re

 A venture

capitalist is a perso) or i)vest+e)t fir+ t(at +a0es ve)t!re i)vest+e)ts' a)$ t(ese ve)t!re "apita#ists are e.pe"te$ to 2ri)& +a)a&eria# a)$ te"()i"a# e.pertise as *e## as "apita# to t(eir i)vest+e)tscapital fund refers to a poo#e$ i)vest+e)t ve(i"#e t(at pri+ari#y i)vests t(e fi)a)"ia# "apita# of t(ir$%party i)vestors i) e)terprises t(at are too ris0y for t(e sta)$ar$ "apita# +ar0ets or 2a)0 #oa)s-

A venture

DEVELOPMENT IN INDIA
q q

T(is "o)"ept *as i)tro$!"e$ i) I)$ia i) 3456It *as operate$ 2y /I)$!stria# Deve#op+e)t 2a)0 of I)$ia1I) t(e sa+e year /I)$!stria# Cre$it a)$ I)vest+e)t Corporatio) of I)$ia1 (a$ a#so starte$ ve)t!re "apita# a"tivityGover)+e)t starte$ #evie$ 78 "ess o) a## pay+e)ts re#ate$ to ve)t!re f!)$-

VENTURE CAPITAL FUND IN INDIA CAN BE CATEGORI ED INTO FOLLO!ING FOUR GROUP

VCF9s are pro+ote$ 2y%

:;Y COMPANIES NEED FINANCING<

For start%!ps or &ro*i)& "o+pa)ies' as *e## as t(ose fa"i)& a +a=or "(a)&e' fi)a)"i)& is o)e of t(e 0ey 2!si)ess iss!esNe* "apita# is )ee$e$ e-&- for

3- Fi)a)"i)& of pro$!"t $eve#op+e)t >- Fi)a)"i)& of +ar0et pe)etratio) ?- Fi)a)"i)& of i)vest+e)ts @- :or0i)& "apita# fi)a)"i)& to se"!re operative "o)ti)!ity 7- Mai)tai)i)& #i !i$ity to 2e a2#e to "over $ai#y pay+e)ts

FEATURES OF VENTURE CAPITAL

q

E"UIT# PARTICIPATION$

Ve)t!re fi)a)"i)& is pote)tia# e !ity parti"ipatio) t(ro!&( $ire"t p!r"(ase of s(ares' optio)s or "o)verti2#e se"!rities;o*ever' it "a) a#so 2e +a$e i) t(e for+ of "o)verti2#e $e2t a)$ t(erefore' it is )ot e."#!sive#y e !ity i)vest+e)tLONG%TER& INVE T&ENT

Ve)t!re fi)a)"i)& re !ires #o)&%ter+ i)vest+e)t attit!$e t(at )e"essitates t(e ve)t!re "apita# fir+s to *ait for a #o)& perio$ say 7 to 3A yrs' to +a0e #ar&e profits-

PARTICIPATION IN &ANAGE&ENT

It e)s!res "o)ti)!i)& parti"ipatio) of t(e ve)t!re "apita#ist i) t(e +a)a&e+e)t of e)trepre)e!r9s 2!si)ess- It a#so provi$es 2!si)ess s0i##s to t(e i)vestee fir+s *(i"( is ter+e$ as /(a)$s o)1 approa"('IG' RI ( RETURN

So+e of t(e ve)t!res yie#$ very (i&( profita2#e ret!r)sT(e ret!r)s are esse)tia##y t(ro!&( "apita# &ai)s at t(e ti+e of e.its fro+ $isi)vest+e)ts i) t(e "apita# +ar0et-

PRIVATE E"UIT#

Private e !ity "a) 2e !se$ to $eve#op )e* pro$!"ts a)$ te"()o#o&ies' to e.pa)$ *or0i)& "apita#' to +a0e a" !isitio)s' or to stre)&t(e) a "o+pa)yBs 2a#a)"e s(eet!IDE COPE

Te"()o#o&y fi)a)"e is a s!2%set of VC fi)a)"i)&Besi$es fi)a)"i)& (i&(%te"()o#o&y orie)te$ "o+pa)ies' it a#so i)vo#ves fi)a)"i)& of s+a## a)$ +e$i!+ si,e$ fir+s !)ti# t(ey are esta2#is(e$-

Sta&es of Ve)t!re Capita# I)vesti)&

Depe)$ !po) C
v v v

Ti+e s"a#e Ris0 per"eptio)s I)vest+e)t $e"isio) pro"ess Ear#y sta&e fi)a)"i)& See$ sta&eE pre%"o++er"ia#i,atio) sta&e Start !p sta&e sta&e fi)a)"i)&

Divi$e$ i)toC
v aD 2D

v)Se"o)$ v)

EARLY STAGE FINANCING

eed sta)e*pre%c+,,erciali-ati+n financin) T(e ve)t!re is sti## i) t(e i$ea for+atio) sta&e a)$ its pro$!"t or servi"e is )ot f!##y $eve#ope$ItBs rare for a ve)t!re "apita# fir+ to f!)$ t(is sta&eT(e +ai) ris0 at t(is sta&e is +ar0eti)& re#ate$Pro+oters +!st ta0e t(e a$va)ta&e of +ar0et opport!)ity' ti+i)& of #a!)"(i)& of pro$!"t et"I) +ost "ases' t(e +o)ey +!st "o+e fro+ t(e fo!)$erBs o*) po"0et' fro+ t(e F? FsF GFa+i#y' Frie)$s' a)$ Foo#sD' a)$ o""asio)a##y fro+ a)&e# i)vestorsRis0 per"eptio) is very (i&(-

tart%Up

I) t(is sta&e' t(e "o++er"ia# +a)!fa"t!ri)& (as to "o++e)"e-VC is provi$e$ for pro$!"t $eve#op+e)t a)$ i)itia# +ar0eti)&Pro$!"tEservi"e is "o++er"ia#i,e$ for t(e first ti+e a)$ so+e i)$i"atio) of t(e pote)tia# +ar0et for )e* pro$!"t is avai#a2#eNe* pro=e"ts s!"( as t(ose 2ase$ o) )e* or (i&( te"()o#o&y or i) *(i"( t(e e)trepre)e!r (as &oo$ 0)o*#e$&e a)$ *or0i)& e.perie)"e are i)"#!$e$-

financin) T(eec+nd sta&e atr+und *(i"( t(e pro$!"t (as a#rea$y 2ee) #a!)"(e$ i) t(e +ar0et 2!t t(e 2!si)ess (as )ot yet 2e"o+e profita2#e e)o!&( for p!2#i" offeri)& to attra"t )e* i)vestorsPro+oter (as i)veste$ (is o*) f!)$s 2!t +ore f!)$s are re !ire$ to 2e i)f!se$ 2y VCI9s t(a) at t(e ear#y sta&e of fi)a)"i)&-

LATER STAGE FINANCING

Esta2#is(e$ 2!si)esses *(i"( re !ire a$$itio)a# fi)a)"ia# s!pport 2!t "a))ot ta0e re"o!rse to p!2#i" iss!es of "apita# are i)vo#ve$ i) t(is sta&eT(ey )ee$ to +eet i)"reasi)& +ar0eti)& e.pe)ses to e)ter )e* +ar0ets to fi)a)"e rapi$#y i)"reasi)& a""o!)ts re"eiva2#e-

&e--anine* devel+p,ent capital

At

t(is poi)t t(e "o+pa)y is a prove) *i))er a)$ i)vest+e)t 2a)0ers (ave a&ree$ to ta0e it p!2#i" *it(i) H +o)t(sfi)a)"i)& is a s(ort ter+ for+ of fi)a)"i)& !se$ to prepare a "o+pa)y for its IPOreprese)ts t(e 2ri$&e 2et*ee) t(e e.pa)$i)& "o+pa)y a)$ t(e IPO of s!"( type of VCF are p!r"(ase

Me,,a)i)e

Uses

B!y%o!ts
T(ese refer to t(e tra)sfer of +a)a&e+e)t "o)tro#T*o types

Management Buy-OutsCVCIs provi$e f!)$s to e)a2#e "!rre)t operati)& +a)a&e+e)t Ei)vestors to a" !ire a) e.isti)& 2!si)essManagement buy-insC F!)$s provi$e$ to e)a2#e a) o!tsi$e &ro!pGof +a)a&ersDto 2!y a) o)&oi)& "o+pa)yT(ey !s!a##y 2ri)& t(ree t(i)&s to&et(er%a +a)a&e+e)t tea+' a tar&et "o+pa)y a)$ a) i)vestorGVCID

More ris0y t(a) MBOs 2e"a!se +a)a&e+e)t "o+es fro+ o!tsi$e a)$ fi)$ it $iffi"!#t to assess t(e a"t!a# pote)tia# of t(e tar&et "o+pa)y-

B!y%O!ts i)vo#ve a ti+e fra+e fro+ i)vest+e)t to IPO of 3 to ? years *it( #o* ris0 per"eptio)-

T!r)aro!)$s

S!2set of 2!y%o!ts a)$ i)vo#ve 2!yi)& t(e "o)tro# of a si"0 "o+pa)yT*o 0i)$s of i)p!ts are re !ire$%+o)ey a)$ +a)a&e+e)t- VCIs (ave to i$e)tify &oo$ +a)a&e+e)t a)$ operatio)s #ea$ers(ipTi+e fra+e%? to 7 years a)$ i)vo#ves +e$i!+ to (i&( ris0

Initial Pu.lic Offerin) /IPO0

T(e "o+pa)y fi)a##y a"(ieves #i !i$ity 2y 2ei)& a##o*e$ to (ave its sto"0 2o!&(t a)$ so#$ 2y t(e p!2#i"So+e "o+pa)ies (ave +ore fi)a)"i)& sta&es t(a) s(o*) a2ove a)$ ot(ers +ay (ave fe*er- Very fe* rea"( t(e 2ri$&e a)$ IPO sta&es- It a## $epe)$s o) t(e i)$ivi$!a# "o+pa)y1

ta)es +f VC financin)

ADVANTAGES

T(ey a##o* e)trepre)e!rs to 2!i#$ t(eir "o+pa)y *it( OPM Got(er peop#eBs +o)eyDMe)tori)& A##ia)"es Fa"i#itate e.it

DISADVANTAGES

Most ve)t!re "apita#ists see0 to rea#ise t(eir i)vest+e)t i) a "o+pa)y i) ?%7 years- If a) e)trepre)e!r9s 2!si)ess p#a) "o)te+p#ates a #o)&er ti+eta2#e 2efore provi$i)& #i !i$ity' ve)t!re "apita# +ay )ot 2e appropriate- E)trepre)e!rs s(o!#$ a#so "o)si$erCI Pri"i)& I)tr!sio) Co)tro#

PITFALLS TO AVOID IN VENTURE CAPITAL

Do)Bt

2e too te"()i"a#- I)vestors pay +ore atte)tio) to )!+2er a)$ fi&!res 2e"a!se t(ey !)$ersta)$ t(e+ 2etter&ive fa#se (opes )ot provi$e i)"o+p#ete fi)a)"ia# i)for+atio)-

Do)Bt Do

Sa#es

are )ot t(e so#!tio) to a## pro2#e+s- I)vestors are #oo0i)& for 2!si)esses t(at (ave pote)tia# for #o)& ter+ ret!r)spro2#e+s of t(e 2!si)ess is )ot a &oo$ i$eaI)vestors a#so !)$ersta)$ t(at a## 2!si)ess (as pro2#e+s pri"e #evera&e-I i) yo!r pro$!"t is a#so )ot a &oo$ i$ea-I

Co)"ea#i)&

Lo*

Over"o)fi$e)"e

CASE STUDY

Ve)t!re Capita# fir+s i)vest J@67%M i) I)$ia $!ri)& >AA4 Venture Capital firms invested $117 million over 27 deals in
India during the six months ending June 2009, according to a stud ! Venture Intelligence

Venture Capital firms invested $"7# million over 92 deals in India during the t$elve months ending %ecem!er 2009, according to a stud ! Venture Intelligence

T(e a+o!)t i)veste$ $!ri)& >AA4 *as #o*er "o+pare$ to >AA5 *(i"( (a$ *it)esse$ J5?H +i##io) 2ei)& i)veste$ a"ross 37? $ea#s- VC fir+s (o*ever 2e&!) to i)"rease t(eir pa"e of i)vest+e)ts i) K@BA4' +a0i)& @> i)vest+e)ts *ort( J>H7 +i##io) % si&)ifi"a)t#y (i&(er t(a) t(at $!ri)& t(e sa+e perio$ i) >AA5 G>? i)vest+e)ts *ort( J3A> +i##io)D as *e## as K?BA4 G34 $ea#s *ort( J6@ +i##io)DT(e stro)& re"overy i) i)vest+e)t a"tivity i) t(e #ast !arter of >AA4 as *e## t(e risi)& i)terest a+o)& &#o2a# i)vestors to*ar$s e+er&i)& +ar0ets #i0e I)$ia is !ite e)"o!ra&i)& for t(e &ro*t( of t(e se"tor D!ri)& >A3A' *e e.pe"t si&)ifi"a)t fo##o*%o) i)vest+e)ts i)to "o+pa)ies t(at raise$ Series A ro!)$s i) t(e past >%? years as *e## as a rise i) e.it a"tivity as t(e &#o2a# e"o)o+i" re"overy &at(ers pa"e-