2011

Venture Capital Financing In India

ABW-401
Venture capital financing is a type of financing by venture capital: the type of private equity capital is provided as seed funding to early-stage, high-potential, growth companies and more often after the seed funding round as growth funding round (also referred as series A round) in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company.

Raghav Gupta 092046 B.Com-IV Sem

VENTURE CAPITAL FINANCING : Introduction : y The venture capital investment helps for the growth of innovative entrepreneurships in India. y Venture capital means risk capital. y The risk envisaged may be very high may be so high as to result in total loss or very less so as to result in high gains

The concept of Venture Capital :

y Jane Koloski Morris, Venture Economics, defines venture capital as 'providing seed, start-up and first stage financing' and also 'funding the expansion of companies that have already demonstrated their business potential but do not yet have access to the public securities market or to credit oriented institutional funding sources.

y The European Venture Capital Association describes it as risk finance for entrepreneurial growth oriented companies.

The Origin of Venture Capital :

y In the 1920's & 30's, the wealthy families of and individuals investors provided the start up money for companies that would later become famous. y Eastern Airlines and Xerox are the more famous ventures they financed. y In its early years VC may have been associated with high technology, over the years the concept has undergone a change and as it stands today it implies pooled investment in unlisted companies.

About Venture Capital (VC)

Starting and growing a business always require capital. There are a number of alternative methods to fund growth. These include the owner or proprietors own capital, arranging debt finance, or seeking an equity partner, as is the case with private equity and venture capital. Private equity is a broad term that refers to any type of non-public ownership equity securities that are not listed on a public exchange. Private equity encompasses both early stage (venture capital) and later stage (buyout, expansion) investing. In the broadest sense, it can also include mezzanine, fund of funds and secondary investing. Venture capital is a means of equity financing for rapidly-growing private companies. Finance may be required for the start-up, development/expansion or purchase of a company. Venture Capital firms invest funds on a professional basis, often focusing on a limited sector of specialization (eg. IT, infrastructure, health/life sciences, clean technology, etc.).

The goal of venture capital is to build companies so that the shares become liquid (through IPO or acquisition) and provide a rate of return to the investors (in the form of cash or shares) that is consistent with the level of risk taken. With venture capital financing, the venture capitalist acquires an agreed proportion of the equity of the company in return for the funding. Equity finance offers the significant advantage of having no interest charges. It is "patient" capital that seeks a return through long-term capital gain rather than immediate and regular interest payments, as in the case of debt financing. Given the nature of equity financing, venture capital investors are therefore exposed to the risk of the company failing. As a result the venture capitalist must look to invest in companies which have the ability to grow very successfully and provide higher than average returns to compensate for the risk. When venture capitalists invest in a business they typically require a seat on the company's board of directors. They tend to take a minority share in the company and usually do not take day-to-day control. Rather, professional venture capitalists act as mentors

and aim to provide support and advice on a range of management, sales and technical issues to assist the company to develop its full potential. Venture capital has a number of advantages over other forms of finance, such as: It injects long term equity finance which provides a solid capital base for future growth. The venture capitalist is a business partner, sharing both the risks and rewards. Venture capitalists are rewarded by business success and the capital gain. The venture capitalist is able to provide practical advice and assistance to the company based on past experience with other companies which were in similar situations. The venture capitalist 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. The venture capitalist may be capable of providing additional rounds of funding should it be required to finance growth.

Differences from traditional capital :

Sr. no

Venture Capital
Less fluid Traditional Requires high return rate Invested based on longer-run future Concerned with product and market potential Venture capitalist and partner are co-owners

Traditional Capital
More fluid Bears lower return Invested based on immediate future Concerned with past performance Loaning bank is creditor Requires collateral

1. 2. 3. 4. 5.

Venture Capital in India : y In India the Venture Capital plays a vital role in the development and growth of innovative entrepreneurships. y Venture Capital activity in the past was possibly done by the developmental financial institutions like IDBI, ICICI and State Financial Corporations. y In India, the need for Venture Capital was recognized in the 7th five year plan and long term fiscal policy of GOI.

Venture Capital Investments in India : y Investments in India Investments in private equity and venture capital in India increased almost 600%...USD $7.46 billion. y Total investments in private equity and venture capital in India increased almost 600% between2004 and 2006, from USD $1.1billion to USD $7.46 billion. Key 2007 highlights include: y 31% of all deals were between USD $10 and 25 million. y Venture capital accounted for 25% of private equity deals (in volume terms) in 2007. y PE firms obtained exits on 65 companies, including 16 via IPOs Source: The Economic Times

TRENDS IN INDIA :
SEBI Venture Capital Funds (VCFs) Regulations, 1996 : y Has a dedicated pool of capital raised in a manner specified in the regulations. y Invests in venture capital undertakings (VCUs) in accordance with these regulations. y A Venture Capital Undertaking means a domestic company whose shares are not listed on a recognized stock exchange in India

y Which is engaged in the business of providing services/production/manufacture of articles/things but does not include such activities/sectors as are specified in the negative list by SEBI with government approval.

Venture funds in India can be classified on the basis of the type of promoters. : y VCFs promoted by the Central govt. controlled development financial institutions such as TDICI, by ICICI, Risk capital and Technology Finance Corporation Limited (RCTFC) by the Industrial Finance Corporation of India (IFCI) and Risk Capital Fund by IDBI. y VCFs promoted by the state governmentcontrolled development finance institutions such as Andhra Pradesh Venture Capital Limited (APVCL) by Andhra Pradesh State Finance Corporation (APSFC) and Gujarat Venture Finance Company Limited (GVCFL) by Gujarat Industrial Investment Corporation (GIIC)

Venture funds in India can be classified on the basis of the type of promoters. : y VCFs promoted by Public Sector banks such as Canfina by Canara Bank and SBI-Cap by State Bank of India. y VCFs promoted by the foreign banks or private sector companies and financial institutions such as Indus Venture Fund, Credit Capital Venture Fund and Grindlay's India Development Fund.

The Venture Capital Investment Process:

The venture capital activity is a sequential process involving the following six steps.  Deal origination  Screening  Due diligence Evaluation)  Deal structuring  Post-investment activity  Exit

Deal origination:
In generating a deal flow, the VC investor creates a pipeline of deals or investment opportunities that he would consider for investing. Deals may be referred to VCFs by their parent organizations, trade partners, industry associations, friends etc.

Screening:
VCFs, before going for an in-depth analysis, carry out initial screening of all projects on the basis of some broad criteria. The size of investment, geographical location and stage of financing could also be used as the broad screening criteria.

Due Diligence:
y Due diligence is the industry jargon for all the activities that are associated with evaluating an

investment proposal. y The venture capitalists evaluate the quality of entrepreneur before appraising the characteristics of the product, market or technology. y The evaluation of ventures by VCFs in India includes;  Preliminary evaluation (The applicant required to provide a brief profile of the proposed venture to establish prima facie eligibility& Detailed evaluation )  Detailed evaluation Once the preliminary evaluation is over, the proposal is evaluated in greater detail. VCFs in India expect the entrepreneur to have:- Integrity, long-term vision, urge to grow, managerial skills, commercial orientation.

Deal Structuring:
y venture capitalist and the venture company negotiate the terms of the deals, that is, the amount, form and price of the investment. y The agreement also include the venture capitalist's right to control the venture company and to change its management if needed, buyback arrangements, acquisition, making initial public offerings (IPOs), etc. y Earned out arrangements specify the entrequreneur's equity share and the objectives to be achieved.

Post Investment Activities:

y venture capitalist generally assumes the role of a partner and collaborator.

y The degree of the venture capitalist's involvement depends on his policy. y If a financial or managerial crisis occurs, the venture capitalist may intervene, and even install a new management team.

Exit:
y Venture capitalists generally want to cash-out their gains in five to ten years after the initial investment.  Initial Public Offerings (IPOs)  Acquisition by another company  Purchase of the venture capitalist's shares by the promoter  Purchase of the venture capitalist's share by an outsider.

Venture Capital process :

Deal Flow Generation

Assesment & Selection

Deal Making

Monitoring

Exit

A Case on Technology Development & Information Company Of India Ltd. (TDICI ) : y TDICI was incorporated in January 1988 with the support of the ICICI and the UTI

y TDICI called VECAUS ( Venture Capital Units Scheme) was started with an initial corpus of Rs.20 crore. y At present the TDICI is administering two UTI mobilised funds under VECAUS-I and II, totaling Rs.120 crore.

Some of the projects financed by the TDICI are discussed below. : y MASTEK, a Mumbai based software firm, in which the TDICI invested Rs.42 lakh in equity in 1989. y TEMPTATION FOODS, located in PUNE, which exports frozen vegetables and fruits, went public in November 1992. y RISHABH INSTRUMENTS of Nasik got Rs.40 lakh from the TDICI. y SYNERGY ART FOUNDATION, which runs art galleries in Mumbai and Chennai and plans to set up in Pune and Delhi too, had received Rs.25 lakh from the TDICI

Conclusion :
y Venture Capital Business has been drastically decreasing due to many reasons. y Liberalize the stringent policies and pave the way to the venture capital investors y There are large sectors of the economy that are ripe for VC investors, like,. I.T., Pharma, Manufacturing. Telecom, Retail franchises, food processing and many more

BIBLIOGRAPHY
 http://www.authorstream.com  http://en.wikipedia.org/wiki/Venture_capital_finan cing  http://cleantech.com  http://www.managementparadise.com