Description
venture capital, venture capital funds, VC scenario in India. It also explains exit route for VC.
Venture Capital Financing
Venture capital
• Blend of risk financing and handholding of entrepreneurs • Refers to risk finance as well as managerial support • Ideas and innovations which have potential for high growth but have inherent uncertainties are financed by venture capitalists • Venture capitalists provide networking, management and marketing support as well.
Venture capital
• Particularly suitable for knowledge technology based enterprises • Fundamental principle and
– No return without risk and higher the risk greater is the return
• Ultimate objective
– Long term profitability and viability of the investment – VCs not interested in short term gains like dividends rather long term capital appreciation
Venture Capital Funds
• Venture capital funds may be described as pools of capital constituted for investing in high risk opportunities in anticipation of potentially high risk-adjusted rates of returns. • Funds usually committed for extended period of time (712 years). • At the end ventures are liquidated and capital returned to the investor with capital appreciation. • Most VC investors are institutional or HNIs. • Managed by fund managers for certain fixed commission.
Advantages
• Inject long term equity finance
– May provide additional funds if required
• VC is business partner sharing the risk and rewards • Mentoring: Able to provide strategic, operational and financial advice based on past experiences • Has network of contacts in many areas which add value
– Recruiting key personnel – contacts in international markets
– Co-investments with other VCs for additional round of financing
• Facilitate IPO and trade sales
History
• Started in USA as an informal arrangement of finance • American Research and Development Corporation, a publicly traded investment company formed in 1946 to provide finance for start ups • By late 1950s such specialised investment firms increased in number, now called venture capital firms
– Federal Small Business Investment Company program (SBIC) in 1958 aided the growth of such firms
History
• Till seventies these firms concentrated on start ups and expanding companies • Exploiting breakthroughs in electronic, medical or data processing technology
– Became almost synonymous with technology finance
• Saw a slow down in 1974 • Again upsurge in 1978 • In 1980 Legislation allowed pension funds to invest in alternative assets classes such as VC
History
• 1983 was a boom year • Over 100 IPOs for the first time in US history
– Many of the present VCs were founded
• Nineties were the boom time primarily due to IT and favourable economic climate
– Interest rates were low and P/E ratio was high compared to historical averages
• Triggered Mergers and Acquisitions creating more opportunities for small venture backed companies to exit (cash out) at high prices • Over 1000 VCs sprang up in US
Globalisation
• Global venture capital (GVC) an important phenomenon • Significant impact on global entrepreneurship • Approximately 12% of GVC finance under management in Asia • Asia is difficult proposition due to different sets of political, legal and cultural systems • As per an estimate over 1500 VCs operating in Asia (mostly foreign)
VC in India
• Research and Development Cess Act 1986 is a precursor to the concept of VC in India
– The Act imposed 5% cess on all technical know how import payments to create a pool of funds
• Technology Development Fund was set up in 1987-88
– Meant to provide financial assistance to innovative and high risk technological programmes through the IDBI
• Another form of VC existed
– Funding of green field projects by the small investor by subscribing to initial public offerings
• Jindal Vijaynagar Steel raised money even before they started constructing the plant
VC in India
• In March 1987 IDBI was first to introduce Venture Capital Fund followed by ICICI, UTI, IFCI • Main focus on development of viable indigenous often untried technologies and adaptation of foreign technology for wider domestic applications • Credit Capital Venture Finance Limited started in private sector
– Mobilised funding from global agencies with joint sponsorship of Commonwealth Development Corporation, Asian Development Bank and Bank of India
• In 1988 GOI announced first venture capital guidelines • In 1989 four institutions were selected by the World Bank (under its Industrial Technology Development Project) to start venture capital activities in India • later added two more institutions
VC in India
• These institutions formed separate companies
– ICICI at Mumbai: TDICI, renamed as ICICI Venture – AP Industrial Development Corporation in Hyderabad: APIDC Venture Capital – Gujarat Industrial Investment Corporation: Gujarat Venture Capital finance Ltd. – Canara Bank, Bangalore: Canfina- VCF – IFCI, Delhi : RCTC, renamed as IFCI Venture Capital Funds – Infrastructure Leasing & Financial Services Ltd. Mumbai: Pathfinder
• Since then VC industry has grown multi fold in India
VC in India
• In 1992 domestic VCFs formed Indian Venture Capital Association (IVCA), which has become the nodal centre for all VC activities in the country • SEBI (Venture Capital Funds) Regulations 1996 purport to ensure that:
– Every VCF has to register with SEBI – VC funds do not access public investors who may not have the ability to assess the underlying risks in VCFs – VC funds invest in unlisted companies that are not in a position to access public financial markets – Do not invest more than 25% of the corpus in any one company.
• Income of VCFs by way of dividend and capital gains exempted from tax (Section 10 (23FB))
VC in India
• • • • Regional funds Corporate funds Offshore funds Others
– Merchant bankers – Angels
• Most players operate till pre IPO • Most funds are private equity type • Few funds provide finances to start-ups/seed money
VC in India
• VCs in India still to mature • No reliable estimates of VC funding • Many indistinguishable from routine foreign investment • VCs in India invest in profitable companies rather than start-ups • Major attractions for VC
– Software development, BPO, biotechnology, agro processing industries, pharmaceuticals, service enterprises, media, entertainment, healthcare
Exit route for VC
• Initial Public offer: most preferred. Goes to public through stock exchange • Trade sale: sells its stake to a strategic buyer which has similar/complementary plans to enter target industry • Promoter’s Buy back: promoter buys back VC’s stake at a pre determined price • Company buy back: Company buys back VC’s stake at a pre determined price • Management buy out: operating management acquires the business by buying equity held by promoters
doc_209226967.pptx
venture capital, venture capital funds, VC scenario in India. It also explains exit route for VC.
Venture Capital Financing
Venture capital
• Blend of risk financing and handholding of entrepreneurs • Refers to risk finance as well as managerial support • Ideas and innovations which have potential for high growth but have inherent uncertainties are financed by venture capitalists • Venture capitalists provide networking, management and marketing support as well.
Venture capital
• Particularly suitable for knowledge technology based enterprises • Fundamental principle and
– No return without risk and higher the risk greater is the return
• Ultimate objective
– Long term profitability and viability of the investment – VCs not interested in short term gains like dividends rather long term capital appreciation
Venture Capital Funds
• Venture capital funds may be described as pools of capital constituted for investing in high risk opportunities in anticipation of potentially high risk-adjusted rates of returns. • Funds usually committed for extended period of time (712 years). • At the end ventures are liquidated and capital returned to the investor with capital appreciation. • Most VC investors are institutional or HNIs. • Managed by fund managers for certain fixed commission.
Advantages
• Inject long term equity finance
– May provide additional funds if required
• VC is business partner sharing the risk and rewards • Mentoring: Able to provide strategic, operational and financial advice based on past experiences • Has network of contacts in many areas which add value
– Recruiting key personnel – contacts in international markets
– Co-investments with other VCs for additional round of financing
• Facilitate IPO and trade sales
History
• Started in USA as an informal arrangement of finance • American Research and Development Corporation, a publicly traded investment company formed in 1946 to provide finance for start ups • By late 1950s such specialised investment firms increased in number, now called venture capital firms
– Federal Small Business Investment Company program (SBIC) in 1958 aided the growth of such firms
History
• Till seventies these firms concentrated on start ups and expanding companies • Exploiting breakthroughs in electronic, medical or data processing technology
– Became almost synonymous with technology finance
• Saw a slow down in 1974 • Again upsurge in 1978 • In 1980 Legislation allowed pension funds to invest in alternative assets classes such as VC
History
• 1983 was a boom year • Over 100 IPOs for the first time in US history
– Many of the present VCs were founded
• Nineties were the boom time primarily due to IT and favourable economic climate
– Interest rates were low and P/E ratio was high compared to historical averages
• Triggered Mergers and Acquisitions creating more opportunities for small venture backed companies to exit (cash out) at high prices • Over 1000 VCs sprang up in US
Globalisation
• Global venture capital (GVC) an important phenomenon • Significant impact on global entrepreneurship • Approximately 12% of GVC finance under management in Asia • Asia is difficult proposition due to different sets of political, legal and cultural systems • As per an estimate over 1500 VCs operating in Asia (mostly foreign)
VC in India
• Research and Development Cess Act 1986 is a precursor to the concept of VC in India
– The Act imposed 5% cess on all technical know how import payments to create a pool of funds
• Technology Development Fund was set up in 1987-88
– Meant to provide financial assistance to innovative and high risk technological programmes through the IDBI
• Another form of VC existed
– Funding of green field projects by the small investor by subscribing to initial public offerings
• Jindal Vijaynagar Steel raised money even before they started constructing the plant
VC in India
• In March 1987 IDBI was first to introduce Venture Capital Fund followed by ICICI, UTI, IFCI • Main focus on development of viable indigenous often untried technologies and adaptation of foreign technology for wider domestic applications • Credit Capital Venture Finance Limited started in private sector
– Mobilised funding from global agencies with joint sponsorship of Commonwealth Development Corporation, Asian Development Bank and Bank of India
• In 1988 GOI announced first venture capital guidelines • In 1989 four institutions were selected by the World Bank (under its Industrial Technology Development Project) to start venture capital activities in India • later added two more institutions
VC in India
• These institutions formed separate companies
– ICICI at Mumbai: TDICI, renamed as ICICI Venture – AP Industrial Development Corporation in Hyderabad: APIDC Venture Capital – Gujarat Industrial Investment Corporation: Gujarat Venture Capital finance Ltd. – Canara Bank, Bangalore: Canfina- VCF – IFCI, Delhi : RCTC, renamed as IFCI Venture Capital Funds – Infrastructure Leasing & Financial Services Ltd. Mumbai: Pathfinder
• Since then VC industry has grown multi fold in India
VC in India
• In 1992 domestic VCFs formed Indian Venture Capital Association (IVCA), which has become the nodal centre for all VC activities in the country • SEBI (Venture Capital Funds) Regulations 1996 purport to ensure that:
– Every VCF has to register with SEBI – VC funds do not access public investors who may not have the ability to assess the underlying risks in VCFs – VC funds invest in unlisted companies that are not in a position to access public financial markets – Do not invest more than 25% of the corpus in any one company.
• Income of VCFs by way of dividend and capital gains exempted from tax (Section 10 (23FB))
VC in India
• • • • Regional funds Corporate funds Offshore funds Others
– Merchant bankers – Angels
• Most players operate till pre IPO • Most funds are private equity type • Few funds provide finances to start-ups/seed money
VC in India
• VCs in India still to mature • No reliable estimates of VC funding • Many indistinguishable from routine foreign investment • VCs in India invest in profitable companies rather than start-ups • Major attractions for VC
– Software development, BPO, biotechnology, agro processing industries, pharmaceuticals, service enterprises, media, entertainment, healthcare
Exit route for VC
• Initial Public offer: most preferred. Goes to public through stock exchange • Trade sale: sells its stake to a strategic buyer which has similar/complementary plans to enter target industry • Promoter’s Buy back: promoter buys back VC’s stake at a pre determined price • Company buy back: Company buys back VC’s stake at a pre determined price • Management buy out: operating management acquires the business by buying equity held by promoters
doc_209226967.pptx