Description
The presentation highlights venture capital, firms across the world, analysis, portfolio, SEBI, Venture capital financing to IT sector, regulations
Venture Capital Financing & Private Equity
VC Firms mull bridge loans for existing portfolio companies : Hand-holding support during liquidity crisis – Vishwanath Kulkarni ? IDG Ventures : $150 mn VC Fund ? Helion Ventures - $350 mn India-focussed fund ? Harish Gandhi, ED, Canaan Partners said “Conserving become Business capital dt 6th Jan they Line has realise that very important. They do need to don’t want 2009 to go out to raise money for the next year or so and need to plan well”
?
1/31/2013 Venture Capital Finance 2
PE Deals dip to lowest since 2002 Declined for the first time in six years in 2008 ? 399 deals with an investment of $10.74 bn ? Down 23.28 %; in 2007 ($ 14 bn in 439 deals) ? Largest deal was $640 mn – Aditya Birla Telecom, subsidiary of Idea Cellular from Providence Equity Partners for a 20% stake ? MostTuesday, were in first2009 2008 ET : of the deals 13 Jan., half of
? ?
1/31/2013 Venture Capital Finance 3
? ?
?
?
?
BIG DEALS
$500 mn – NYSE, GOLDMAN, General Atlantic and SOFTBANK in NSE Rs. 820 Cr – Khazanah National hiked its stake in IDFC to 9.95% Rs 100 Cr – Kotak Mahindra Bank’s Private Equity Group invested in DRS Logistics $82 mn ADM invested for a 10% stake in SKNL Rs. 125 Cr – RAMKY Infra raised from IL&FS Investment Managers & SABREABRAAJ Fund
1/31/2013 Venture Capital Finance 4
TiE- The IndUS Entrepreneurs
How & when it all started? Indian Professionals waiting in Airport lounge for a Dignitary in 1992 ? TiE is not for VCF but Angel Investing ! ? Members
?
? 600 with Chapters in Boston, Austin and Los Angeles ? 20 institutions - leading Silicon Valley Venture Capital Investors, law firms, accounting firms and banks
50 % Business Plans in S Valley from Indians! ? Vinod Dham, Sailesh Mehta, Kanwal Rekhi, et al
?
1/31/2013 Venture Capital Finance
5
The Entrepreneurial Connection ?East Meets West in Silicon Valley
by ? Tata McGraw-Hill publication-2001 ? Prakash Bhalerao (Ambit Design Systems), Sabeer Bhatia (Hotmail, Arzoo), K B Chandra-sekhar (Exodus), Deepak Chopra ( Chopra Centre for Well Being), Desh Deshpande (Cascade Communications), Vinod Dham (Intel, NextGen, Silicon Spice), Prabhu Goel ( Gateway Design, Ipolicy), Rajat Gupta (McKinsey), Vinod Khosla (KPC & Byers), et al… (25 in all)
?
1/31/2013 Venture Capital Finance 6
Gurmeet Naroola
The first Entrepreneur Venture?
? ?
?
? ? ?
1492 A.D.: Europe’s period of “Liberalization” Voyage to discover a sea route to China, Japan… Sail West, with active support of the monarch… King of Portugal and his Committee… rejected ! Project was patronised by the Spanish Monarch About six years, many rounds of deliberations…
1/31/2013 Venture Capital Finance
7
Venture Capital
? ? ?
?
?
? ?
Development after Second World War Shift from Tech-oriented Mfg Orgns Unlisted Companies Finance to Non-conventional units Risky financing to new ventures based on innovative entrepreneurship Started in USA, UK, European countries Followed in East - Japan,
1/31/2013 Venture Capital Finance
8
What is Venture Capital ?
?
Money provided by Professionals or Wealthy – High Networth Individuals (HNIs) or Institutions like FIIs, FIs, etc who invest alongside management in young rapidly growing companies that have the potential to grow into significant economic contributors
?
It’s an important source of equity for start up co’s
1/31/2013 Venture Capital Finance 9
VC Firms
? ?
Generally private limited liability partnerships Or closely held corporations funded by :
? ? ? ? ? ? ? Private & public pension funds Endowment funds Foundations Corporations Wealthy individuals Foreign investors and Venture Capitalists..
1/31/2013
Venture Capital Finance
10
?
?
? ? ? ? ?
VCF in the West
New, tech-based professionals Untried areas ventured by entrepreneurs Inadequate investment VC and Entrepreneurs work as partners High risk, High returns (capital gains) No Security or Collateral High growth rate expected
1/31/2013
Venture Capital Finance
11
Some novel Ventures
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Federal Express Corpn - Courier industry was revolutionized with overnight delivery! ? Edwin H. Land - initially failed to convince Detroit Auto Industry with polarizing headlights - Then, invented Polaroid Camera ! ? Haloid Corporation funded inventor of Xerox - Mr. Chester Carlson for Photocopying !
?
Venture Capital Finance 12
Features of ? Equity Participation VC
? Long
Term Investment in
? Participation
Management
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Venture Capital Finance
13
VC in USA
? ? ? ? ?
?
Post War - 1946 : Formulation of American Research and Development Corporation (ARDC) in Boston : Gen. Georges Doroit, a Frenchborn military man – considered as Father of VC – Taught Risk Capital at HARVARD BS J H Whitney’s Minute Maid (1946) Orange Juice Rockfellers’ VENROCK in 1950 – Eastern Airlines SBIC Act, 1958 for financing VCs Tax Incentives to VCFs Reduction in Capital Gains Tax in 1978
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? 01.
Favourable Public Attitude
? 02.
Dynamic Financial System
Growth of VC in ? 03. Government Support USA
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VCs in Europe
? ?
?
?
?
Started in the Eighties - Slow growth European Venture Capital Assn1983 Change in Public Policy & Economic conditions Banks, Govt, Insurance Cos, Pension Funds and Corporate Investors Focus on Industrial, Consumer and Electronic Products
1/31/2013 Venture Capital Finance
16
? ? ? ? ? ?
?
VC in UK
Largest VC industry outside USA Steady growth of finance and talent Demonstration Effect of high profitability Tax incentives for investments in VCF Business Expansion Scheme to motivate Increase in Management Buy Outs Involvement of Merchant Bankers
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Venture Capital Finance
17
VC in Other Countries
? France - 50 % fiscal incentives from 1972 ? More tax incentives from 1983
? Netherlands - fast growing VC market ? Owned and supported by Banks/Govt ? Germany - 75 % Family owned Cos ? Change in attitude since 1985
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VC in Asia
?
? ? ?
?
Initially supported by friends, relatives etc Japan started Small Business Investment Companies in Sixties Australia launched VC in seventies Hong Kong, Singapore, South Korea and Taiwan in the beginning of eighties Government Policy favourable to VCs
1/31/2013 Venture Capital Finance 19
? ……..
VC - Defined
An equity/equityrelated investment in a growth-oriented small/medium business to enable investees to accomplish corporate objectives, in return for minority share-holding in the business or the irrevocable right to acquire it.
1/31/2013 Venture Capital Finance 20
?
?
? ?
?
? ? ?
An important link in the process Who supports an enterprise At a very early stage An experienced individual Who is a Professional with High Net Worth Provides “First Round” finance With “less” money orientation
Who is an Angel ?
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Venture Capital Finance
21
?
?
? ? ? ? ?
01. 02. 03. 04. 05. 06. 07.
Selection of Investment Stages of Financing Financial Analysis Structuring the Deal Investment Nurturing/Aftercare Valuation of Portfolio Exit
Steps in VC Financing
1/31/2013 Venture Capital Finance 22
? ? ?
?
? ?
01. Selection of Investment
Evaluate Business Plan of VCU (promoter) Similar to Project Appraisal by DFIs Track record of the Entrepreneur Market Potential Study and Projects Profitability Study Likely threats to project o/a technological obsolescence/ competition
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02. Stages of Financing
?
Early Stage Financing
? Seed Capital/pre-Start Up ? Start up ? Second round financing
?
Later Stage Financing
? ? ? ? Mezzanine/Development Capital Bridge/Expansion Buy Outs - MBOs and MBIs Turnarounds
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03. Financial Analysis
?
Idea-based and growth-based ventures ? 01. Conventional VC Valuation Method
? Evaluates VCU at starting and exit time
? ? ?
02. The First Chicago Method
? Evaluates entire earnings stream
03. Revenue Multiplier Method
? Annual revenue is estimated thro’ Multiplier
1/31/2013 Venture Capital Finance 25
?
?
? ? ? ? ?
Equity Instruments Debt Instruments Conditional Loan Conventional Loans Income Notes, NCDs, PCDs Zero Interest/Coupon Bonds/Debentures Secured Premium Notes, Deep Disc Bonds
04. Structuring the Deal
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Nurturing/ Aftercare
? Styles
? Hands-on Nurturing ? Hands-off Nurturing ? Hands-holding Nurturing
Objectives of Aftercare ? Techniques - Personal Discussions, Plant Visits, Feedback thro Nominee Directors, Periodic Reports, Commissioned Studies
?
1/31/2013 Venture Capital Finance 27
06. Valuation of Portfolio
?
Equity Investments
? Cost Method, Market Value Method, Quoted Market Value Method, Fair Market Method,etc
?
Debt Instruments
? Convertible Debt, Market Value Method, Fair Value Method, Non-Convertible Debt, Fixed Interest Non-Convertible Debt, Highly leveraged Investments
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07. Exit
Last stage in VC Financing ? To make profits or minimise losses ! ? Timing decided in advance / well planned ? Timing depends on
?
? ? ? ?
Nature of Venture Extent and type of finance state of competition market conditions, etc
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Disinvestment ? INVOLUNTARY ? Liquidation / Receivership Channels
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? VOLUNTARY ? Going Public ? Sale of Shares to Entrepreneurs /Employees ? Trade Sales / Sale to another company ? Selling to a new investor
Venture Capital Finance
30
VC in India
?
?
?
?
? ?
An equity finance in new companies As loan / convertible debt for capital gains Long Term investment in growth oriented small / medium firms to help them grow rapidly Active involvement of VCs to promoters extending “hands-on” approach / management High-risk-return; Compensation for other losses Not a technology-finance; early stage
1/31/2013 Venture Capital Finance 31
?
VC financing – 1975
? IFCI-sponsored Risk Capital Foundation (now IFCI Venture Capital Funds Ltd.) ? Industrial Development Bank of India (IDBI).
? ? ?
1976 – Seed Capital Scheme
Indian VC History
? Government of India (GoI)
1/31/2013 Venture Capital Finance
Till 1984 - risk and seed capital Need felt during 1985-investors burnt their fingers ? 1985 - VC fund
32
Indian VC Scenario
? ? ? ? ?
?
?
Need felt in 1985 - Failure of Small Issues GOI Long Term Fiscal Policy - 1985 DFIs lead VC Financing thro TDICI, RCTC Fiscal Incentives announced in 1988-89 CCI (1988) / SEBI 1995-96 Guidelines VCFs made on par with MFs by CBDT KB Chandrasekhar Committee 19992000
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Recommendations2000
?
? ? ? ? ? ? ?
Harmonisation of Multiplicity of Reglns. VCF Structures Resource Raising Investments Exit SEBI Regulations Company Law related issues and Other related issues
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SEBI - FVCIs Regns, 2000
?
? ? ? ? ? ?
Definition of FVCI Registration Investment Criteria General Obligations and Responsibilities Inspection and Investigation Procedure for action in case of Default Structure, etc.
1/31/2013 Venture Capital Finance 35
SEBI amends norms to VCFs
? ? ?
? ? ? ?
Business Line dt April 15, 2004 SEBI Committee headed by Dr Ashok Lahiri, CEA, MOF Can invest in Real Estate, NBFCs in Eqpmt Leasing and HP activities, Companies engaged in Gold Financing in Jewellery Minimum Investment Limits altered Allowed to invest in financially weak companies whose shares are listed 1-year lock-in of shares on listing removed Allowed to invest in Special Purpose Vehicles
1/31/2013 Venture Capital Finance 36
To name a few VCs
? ? ? ? ? ? ? ?
?
APIDC Venture Capital Ltd., Hyderabad Canbank Venture Capital Fund Limited, Bangalore Gujarat Venture Capital Fund Ltd, Ah’bad Industrial Venture Capital Ltd., Chennai Auto Ancilliary Fund, New Delhi Karnataka Information Techonology V C Fund Tamilnadu Technology Fund Orissa V C Fund, U P Venture Fund SICOM (Mumbai), Punjab Infotech Venture Fund…
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SIDBI
Set up under an Act, as a Principal Financial Institution for promotion, financing and development of Industry in the Small Scale Sector ? SIDBI – Venture Capital initiatives – created a Three Tier Venture Capital Structure at
?
? State / Regional level (12 VC Funds dedicated to IT) ? National level – Rs 1000 mn (USD 22 mn) for IT ? Other all India Funds
?
In Gujarat, Maharashtra, Tamil Nadu, Karnataka, Punjab, Kerala, Andhra Pradesh, Rajasthan, etc.
1/31/2013 Venture Capital Finance 38
? ? ? ? ? ? ?
1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2007-2008 estd..
? ? ? ? ? ? ?
Rs. 70 crores 320 610 2,200 5,300 8,400 50,000
Growth of VC in India
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Venture Capital Finance
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? FIIs ? D F Is in India ? Multilateral
Development Agencies ? Individuals and Companies ? Other Banks
? 51
per cent ? 23 per cent ? 9 per cent
? 11
per cent ? 6 per cent Major Contributors in VC
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Venture capital financing to IT sector
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New Technology Financing Success Rates
6 in 1000 business plans get funded on average The No 1 reason a start-up’s valuation is cut due to incomplete executive teams 10% of start up in a given venture capital portfolio will succeed 6 out of 1,000,000 of technology ideas will result in IPO
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Enterprise
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Financing of Technology Growth and Life-style Companies
revenue
Maturity
IPO, Acquisition Rapid growth and ramp-up Idea R&D Prototype
Debt Financing
Private Venture Capital Investors Angel Financing
Tech Growth
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Life Style
Venture Capital Finance
47
time
DRIVERS OF VENTURE INVESTING IN INDIA
? ? ? ? ?
Knowledge based industries growing fast and mostly global; less affected by domestic issues World class engineers, professionals, entrepreneurs 2nd largest English speaking population; science and mathematics at a premium India has advanced rapidly in the 90’s, catching up with global markets in many sectors Evidence of this in the US as well
? 25% of small IT companies in the US have Indian founders ? Disproportionately large presence of Indians in the US Software Sector (1 million?) ? 50% of all H1 visas issued to Indians
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48
? ?
? ? ?
REGULATORY ENVIRONMENT
The Indian Trust Act, 1882 or the Company Act, 1956 The Foreign Investment Promotion Board (FIPB) and the Reserve Bank of India (RBI) in case of an offshore fund The Central Board of Direct Taxation (CBDT) governs the issues pertaining to income tax The Securities and Exchange Board of India (SEBI) has come out with a set of guidelines Government of India – Ministry of Finance that may have to be approached in certain situations. Also intervention by allied agencies like the Department of Electronics, the National Association of Software and Computers (NASSCOM) and various taskforces and standing committees is not uncommon. 1/31/2013 Venture Capital Finance 49
?
Venture Capital Funding
1/31/2013
Venture Capital Funding started with Christopher Columbus’s voyage and later helped industrialisation all over the world in the last century. In the last thirty years, VCCs or VCFs in India were witnessing policy changes leading to Private Equity boom now
Venture Capital Finance
50
?
Private Equity
1/31/2013
Private Equity is medium to long-term finance provided in return for an equity stake in potentially high growth unquoted companies. Private equity in the UK originated in late 18th century, when entrepreneurs found wealthy individuals to back their projects on an ad hoc basis. This informal method of financing became an industry in the late 1970s and early 1980s when a number of private equity firms were founded and recognized as asset class.
Venture Capital Finance 51
Private Equity
Comprises of all venture investing, buyout investing and mezzanine investing. ? Mezzanine investment financing provides for major expansion in companies whose sales are increasing, and whose cash flow is break-even or slightly positive. ? Does not include angel investors, real estate investments or other investing scenarios outside of the public market.
?
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52
?
A VC is a subset of the larger PE asset class. The PE asset class includes VC, buyouts, and mezzanine investment activity. VC focuses on investing in private, young, fast growing companies. Buyout and Mezzanine investing focuses on investing in mature companies (www.iciciventure.com). In the Indian context, VC funding is extended generally to idea-based, start-up and unlisted companies. The present trend of PE funding is flowing into existing growth oriented companies which may be listed or unlisted.
1/31/2013 Venture Capital Finance 53
Difference between VC and PE
?
?
Throughout 1990s the technology hype, internet boom and massive capital investment propelled the New Economy revolution, but internet mania in the late 1990s caused IEC stocks to skyrocket until the dot com bubble burst in March 2000. SEBI then formulated latest guidelines for VCs on the basis of KB Chandrasekhar Committee. There is currently availability of abundant PE funds in India.
Developments
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India: Strong Macroeconomic Outlook
Current Snapshot
? Gross Domestic Product (GDP) of US $1,030 billion
? 12th largest economy in the world and 4th largest in PPP terms
? Real GDP growth of 9.4% in 2006-07
Projections - 2020
? GDP of $1,030 billion during calendar year 2007 ? Assuming real GDP growth rate of 8% per year and an average of 5.5% inflation: ? GDP of $1.920 billion in 2012
Projections – 2020 - Comparison
? Real GDP growth rate 8% per annum (13.5% including 5.5% annual inflation) ? 4th largest economy of the world after US, China and Japan ? 3rd largest economy in PPP terms behind China and the US
? GDP of $5,040 billion in 2020
?
?
? ?
?
? ?
?
http://www.deshpandefoundation.org/ www.privateequityinfo.com www.siliconindia.com www.nenonline.org www.indianangelnetwork.com www.mumbaiangels.com www.wadhwani-foundation.org www.ivca.com;
Some websites on PE
1/31/2013 Venture Capital Finance 59
?
?
?
? ? ?
www.pehub.com www.indiape.com http://www.calpers.ca.gov/index.jsp?bc =/investments/assets/equities/aim/peglossary.xml www.indianpe.com www.evalueserve.com www.ventureintelligence.com
Some more...
1/31/2013 Venture Capital Finance 60
doc_357088179.ppt
The presentation highlights venture capital, firms across the world, analysis, portfolio, SEBI, Venture capital financing to IT sector, regulations
Venture Capital Financing & Private Equity
VC Firms mull bridge loans for existing portfolio companies : Hand-holding support during liquidity crisis – Vishwanath Kulkarni ? IDG Ventures : $150 mn VC Fund ? Helion Ventures - $350 mn India-focussed fund ? Harish Gandhi, ED, Canaan Partners said “Conserving become Business capital dt 6th Jan they Line has realise that very important. They do need to don’t want 2009 to go out to raise money for the next year or so and need to plan well”
?
1/31/2013 Venture Capital Finance 2
PE Deals dip to lowest since 2002 Declined for the first time in six years in 2008 ? 399 deals with an investment of $10.74 bn ? Down 23.28 %; in 2007 ($ 14 bn in 439 deals) ? Largest deal was $640 mn – Aditya Birla Telecom, subsidiary of Idea Cellular from Providence Equity Partners for a 20% stake ? MostTuesday, were in first2009 2008 ET : of the deals 13 Jan., half of
? ?
1/31/2013 Venture Capital Finance 3
? ?
?
?
?
BIG DEALS
$500 mn – NYSE, GOLDMAN, General Atlantic and SOFTBANK in NSE Rs. 820 Cr – Khazanah National hiked its stake in IDFC to 9.95% Rs 100 Cr – Kotak Mahindra Bank’s Private Equity Group invested in DRS Logistics $82 mn ADM invested for a 10% stake in SKNL Rs. 125 Cr – RAMKY Infra raised from IL&FS Investment Managers & SABREABRAAJ Fund
1/31/2013 Venture Capital Finance 4
TiE- The IndUS Entrepreneurs
How & when it all started? Indian Professionals waiting in Airport lounge for a Dignitary in 1992 ? TiE is not for VCF but Angel Investing ! ? Members
?
? 600 with Chapters in Boston, Austin and Los Angeles ? 20 institutions - leading Silicon Valley Venture Capital Investors, law firms, accounting firms and banks
50 % Business Plans in S Valley from Indians! ? Vinod Dham, Sailesh Mehta, Kanwal Rekhi, et al
?
1/31/2013 Venture Capital Finance
5
The Entrepreneurial Connection ?East Meets West in Silicon Valley
by ? Tata McGraw-Hill publication-2001 ? Prakash Bhalerao (Ambit Design Systems), Sabeer Bhatia (Hotmail, Arzoo), K B Chandra-sekhar (Exodus), Deepak Chopra ( Chopra Centre for Well Being), Desh Deshpande (Cascade Communications), Vinod Dham (Intel, NextGen, Silicon Spice), Prabhu Goel ( Gateway Design, Ipolicy), Rajat Gupta (McKinsey), Vinod Khosla (KPC & Byers), et al… (25 in all)
?
1/31/2013 Venture Capital Finance 6
Gurmeet Naroola
The first Entrepreneur Venture?
? ?
?
? ? ?
1492 A.D.: Europe’s period of “Liberalization” Voyage to discover a sea route to China, Japan… Sail West, with active support of the monarch… King of Portugal and his Committee… rejected ! Project was patronised by the Spanish Monarch About six years, many rounds of deliberations…
1/31/2013 Venture Capital Finance
7
Venture Capital
? ? ?
?
?
? ?
Development after Second World War Shift from Tech-oriented Mfg Orgns Unlisted Companies Finance to Non-conventional units Risky financing to new ventures based on innovative entrepreneurship Started in USA, UK, European countries Followed in East - Japan,
1/31/2013 Venture Capital Finance
8
What is Venture Capital ?
?
Money provided by Professionals or Wealthy – High Networth Individuals (HNIs) or Institutions like FIIs, FIs, etc who invest alongside management in young rapidly growing companies that have the potential to grow into significant economic contributors
?
It’s an important source of equity for start up co’s
1/31/2013 Venture Capital Finance 9
VC Firms
? ?
Generally private limited liability partnerships Or closely held corporations funded by :
? ? ? ? ? ? ? Private & public pension funds Endowment funds Foundations Corporations Wealthy individuals Foreign investors and Venture Capitalists..
1/31/2013
Venture Capital Finance
10
?
?
? ? ? ? ?
VCF in the West
New, tech-based professionals Untried areas ventured by entrepreneurs Inadequate investment VC and Entrepreneurs work as partners High risk, High returns (capital gains) No Security or Collateral High growth rate expected
1/31/2013
Venture Capital Finance
11
Some novel Ventures
1/31/2013
Federal Express Corpn - Courier industry was revolutionized with overnight delivery! ? Edwin H. Land - initially failed to convince Detroit Auto Industry with polarizing headlights - Then, invented Polaroid Camera ! ? Haloid Corporation funded inventor of Xerox - Mr. Chester Carlson for Photocopying !
?
Venture Capital Finance 12
Features of ? Equity Participation VC
? Long
Term Investment in
? Participation
Management
1/31/2013
Venture Capital Finance
13
VC in USA
? ? ? ? ?
?
Post War - 1946 : Formulation of American Research and Development Corporation (ARDC) in Boston : Gen. Georges Doroit, a Frenchborn military man – considered as Father of VC – Taught Risk Capital at HARVARD BS J H Whitney’s Minute Maid (1946) Orange Juice Rockfellers’ VENROCK in 1950 – Eastern Airlines SBIC Act, 1958 for financing VCs Tax Incentives to VCFs Reduction in Capital Gains Tax in 1978
1/31/2013 Venture Capital Finance 14
? 01.
Favourable Public Attitude
? 02.
Dynamic Financial System
Growth of VC in ? 03. Government Support USA
1/31/2013 Venture Capital Finance 15
VCs in Europe
? ?
?
?
?
Started in the Eighties - Slow growth European Venture Capital Assn1983 Change in Public Policy & Economic conditions Banks, Govt, Insurance Cos, Pension Funds and Corporate Investors Focus on Industrial, Consumer and Electronic Products
1/31/2013 Venture Capital Finance
16
? ? ? ? ? ?
?
VC in UK
Largest VC industry outside USA Steady growth of finance and talent Demonstration Effect of high profitability Tax incentives for investments in VCF Business Expansion Scheme to motivate Increase in Management Buy Outs Involvement of Merchant Bankers
1/31/2013
Venture Capital Finance
17
VC in Other Countries
? France - 50 % fiscal incentives from 1972 ? More tax incentives from 1983
? Netherlands - fast growing VC market ? Owned and supported by Banks/Govt ? Germany - 75 % Family owned Cos ? Change in attitude since 1985
1/31/2013 Venture Capital Finance 18
VC in Asia
?
? ? ?
?
Initially supported by friends, relatives etc Japan started Small Business Investment Companies in Sixties Australia launched VC in seventies Hong Kong, Singapore, South Korea and Taiwan in the beginning of eighties Government Policy favourable to VCs
1/31/2013 Venture Capital Finance 19
? ……..
VC - Defined
An equity/equityrelated investment in a growth-oriented small/medium business to enable investees to accomplish corporate objectives, in return for minority share-holding in the business or the irrevocable right to acquire it.
1/31/2013 Venture Capital Finance 20
?
?
? ?
?
? ? ?
An important link in the process Who supports an enterprise At a very early stage An experienced individual Who is a Professional with High Net Worth Provides “First Round” finance With “less” money orientation
Who is an Angel ?
1/31/2013
Venture Capital Finance
21
?
?
? ? ? ? ?
01. 02. 03. 04. 05. 06. 07.
Selection of Investment Stages of Financing Financial Analysis Structuring the Deal Investment Nurturing/Aftercare Valuation of Portfolio Exit
Steps in VC Financing
1/31/2013 Venture Capital Finance 22
? ? ?
?
? ?
01. Selection of Investment
Evaluate Business Plan of VCU (promoter) Similar to Project Appraisal by DFIs Track record of the Entrepreneur Market Potential Study and Projects Profitability Study Likely threats to project o/a technological obsolescence/ competition
1/31/2013 Venture Capital Finance 23
02. Stages of Financing
?
Early Stage Financing
? Seed Capital/pre-Start Up ? Start up ? Second round financing
?
Later Stage Financing
? ? ? ? Mezzanine/Development Capital Bridge/Expansion Buy Outs - MBOs and MBIs Turnarounds
1/31/2013
Venture Capital Finance
24
03. Financial Analysis
?
Idea-based and growth-based ventures ? 01. Conventional VC Valuation Method
? Evaluates VCU at starting and exit time
? ? ?
02. The First Chicago Method
? Evaluates entire earnings stream
03. Revenue Multiplier Method
? Annual revenue is estimated thro’ Multiplier
1/31/2013 Venture Capital Finance 25
?
?
? ? ? ? ?
Equity Instruments Debt Instruments Conditional Loan Conventional Loans Income Notes, NCDs, PCDs Zero Interest/Coupon Bonds/Debentures Secured Premium Notes, Deep Disc Bonds
04. Structuring the Deal
1/31/2013 Venture Capital Finance 26
Nurturing/ Aftercare
? Styles
? Hands-on Nurturing ? Hands-off Nurturing ? Hands-holding Nurturing
Objectives of Aftercare ? Techniques - Personal Discussions, Plant Visits, Feedback thro Nominee Directors, Periodic Reports, Commissioned Studies
?
1/31/2013 Venture Capital Finance 27
06. Valuation of Portfolio
?
Equity Investments
? Cost Method, Market Value Method, Quoted Market Value Method, Fair Market Method,etc
?
Debt Instruments
? Convertible Debt, Market Value Method, Fair Value Method, Non-Convertible Debt, Fixed Interest Non-Convertible Debt, Highly leveraged Investments
1/31/2013
Venture Capital Finance
28
07. Exit
Last stage in VC Financing ? To make profits or minimise losses ! ? Timing decided in advance / well planned ? Timing depends on
?
? ? ? ?
Nature of Venture Extent and type of finance state of competition market conditions, etc
1/31/2013 Venture Capital Finance 29
Disinvestment ? INVOLUNTARY ? Liquidation / Receivership Channels
1/31/2013
? VOLUNTARY ? Going Public ? Sale of Shares to Entrepreneurs /Employees ? Trade Sales / Sale to another company ? Selling to a new investor
Venture Capital Finance
30
VC in India
?
?
?
?
? ?
An equity finance in new companies As loan / convertible debt for capital gains Long Term investment in growth oriented small / medium firms to help them grow rapidly Active involvement of VCs to promoters extending “hands-on” approach / management High-risk-return; Compensation for other losses Not a technology-finance; early stage
1/31/2013 Venture Capital Finance 31
?
VC financing – 1975
? IFCI-sponsored Risk Capital Foundation (now IFCI Venture Capital Funds Ltd.) ? Industrial Development Bank of India (IDBI).
? ? ?
1976 – Seed Capital Scheme
Indian VC History
? Government of India (GoI)
1/31/2013 Venture Capital Finance
Till 1984 - risk and seed capital Need felt during 1985-investors burnt their fingers ? 1985 - VC fund
32
Indian VC Scenario
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Need felt in 1985 - Failure of Small Issues GOI Long Term Fiscal Policy - 1985 DFIs lead VC Financing thro TDICI, RCTC Fiscal Incentives announced in 1988-89 CCI (1988) / SEBI 1995-96 Guidelines VCFs made on par with MFs by CBDT KB Chandrasekhar Committee 19992000
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Recommendations2000
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Harmonisation of Multiplicity of Reglns. VCF Structures Resource Raising Investments Exit SEBI Regulations Company Law related issues and Other related issues
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SEBI - FVCIs Regns, 2000
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Definition of FVCI Registration Investment Criteria General Obligations and Responsibilities Inspection and Investigation Procedure for action in case of Default Structure, etc.
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SEBI amends norms to VCFs
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Business Line dt April 15, 2004 SEBI Committee headed by Dr Ashok Lahiri, CEA, MOF Can invest in Real Estate, NBFCs in Eqpmt Leasing and HP activities, Companies engaged in Gold Financing in Jewellery Minimum Investment Limits altered Allowed to invest in financially weak companies whose shares are listed 1-year lock-in of shares on listing removed Allowed to invest in Special Purpose Vehicles
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To name a few VCs
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APIDC Venture Capital Ltd., Hyderabad Canbank Venture Capital Fund Limited, Bangalore Gujarat Venture Capital Fund Ltd, Ah’bad Industrial Venture Capital Ltd., Chennai Auto Ancilliary Fund, New Delhi Karnataka Information Techonology V C Fund Tamilnadu Technology Fund Orissa V C Fund, U P Venture Fund SICOM (Mumbai), Punjab Infotech Venture Fund…
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SIDBI
Set up under an Act, as a Principal Financial Institution for promotion, financing and development of Industry in the Small Scale Sector ? SIDBI – Venture Capital initiatives – created a Three Tier Venture Capital Structure at
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? State / Regional level (12 VC Funds dedicated to IT) ? National level – Rs 1000 mn (USD 22 mn) for IT ? Other all India Funds
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In Gujarat, Maharashtra, Tamil Nadu, Karnataka, Punjab, Kerala, Andhra Pradesh, Rajasthan, etc.
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1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2007-2008 estd..
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Rs. 70 crores 320 610 2,200 5,300 8,400 50,000
Growth of VC in India
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? FIIs ? D F Is in India ? Multilateral
Development Agencies ? Individuals and Companies ? Other Banks
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per cent ? 23 per cent ? 9 per cent
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per cent ? 6 per cent Major Contributors in VC
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Venture capital financing to IT sector
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New Technology Financing Success Rates
6 in 1000 business plans get funded on average The No 1 reason a start-up’s valuation is cut due to incomplete executive teams 10% of start up in a given venture capital portfolio will succeed 6 out of 1,000,000 of technology ideas will result in IPO
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Enterprise
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Financing of Technology Growth and Life-style Companies
revenue
Maturity
IPO, Acquisition Rapid growth and ramp-up Idea R&D Prototype
Debt Financing
Private Venture Capital Investors Angel Financing
Tech Growth
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Life Style
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time
DRIVERS OF VENTURE INVESTING IN INDIA
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Knowledge based industries growing fast and mostly global; less affected by domestic issues World class engineers, professionals, entrepreneurs 2nd largest English speaking population; science and mathematics at a premium India has advanced rapidly in the 90’s, catching up with global markets in many sectors Evidence of this in the US as well
? 25% of small IT companies in the US have Indian founders ? Disproportionately large presence of Indians in the US Software Sector (1 million?) ? 50% of all H1 visas issued to Indians
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REGULATORY ENVIRONMENT
The Indian Trust Act, 1882 or the Company Act, 1956 The Foreign Investment Promotion Board (FIPB) and the Reserve Bank of India (RBI) in case of an offshore fund The Central Board of Direct Taxation (CBDT) governs the issues pertaining to income tax The Securities and Exchange Board of India (SEBI) has come out with a set of guidelines Government of India – Ministry of Finance that may have to be approached in certain situations. Also intervention by allied agencies like the Department of Electronics, the National Association of Software and Computers (NASSCOM) and various taskforces and standing committees is not uncommon. 1/31/2013 Venture Capital Finance 49
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Venture Capital Funding
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Venture Capital Funding started with Christopher Columbus’s voyage and later helped industrialisation all over the world in the last century. In the last thirty years, VCCs or VCFs in India were witnessing policy changes leading to Private Equity boom now
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Private Equity
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Private Equity is medium to long-term finance provided in return for an equity stake in potentially high growth unquoted companies. Private equity in the UK originated in late 18th century, when entrepreneurs found wealthy individuals to back their projects on an ad hoc basis. This informal method of financing became an industry in the late 1970s and early 1980s when a number of private equity firms were founded and recognized as asset class.
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Private Equity
Comprises of all venture investing, buyout investing and mezzanine investing. ? Mezzanine investment financing provides for major expansion in companies whose sales are increasing, and whose cash flow is break-even or slightly positive. ? Does not include angel investors, real estate investments or other investing scenarios outside of the public market.
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A VC is a subset of the larger PE asset class. The PE asset class includes VC, buyouts, and mezzanine investment activity. VC focuses on investing in private, young, fast growing companies. Buyout and Mezzanine investing focuses on investing in mature companies (www.iciciventure.com). In the Indian context, VC funding is extended generally to idea-based, start-up and unlisted companies. The present trend of PE funding is flowing into existing growth oriented companies which may be listed or unlisted.
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Difference between VC and PE
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Throughout 1990s the technology hype, internet boom and massive capital investment propelled the New Economy revolution, but internet mania in the late 1990s caused IEC stocks to skyrocket until the dot com bubble burst in March 2000. SEBI then formulated latest guidelines for VCs on the basis of KB Chandrasekhar Committee. There is currently availability of abundant PE funds in India.
Developments
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India: Strong Macroeconomic Outlook
Current Snapshot
? Gross Domestic Product (GDP) of US $1,030 billion
? 12th largest economy in the world and 4th largest in PPP terms
? Real GDP growth of 9.4% in 2006-07
Projections - 2020
? GDP of $1,030 billion during calendar year 2007 ? Assuming real GDP growth rate of 8% per year and an average of 5.5% inflation: ? GDP of $1.920 billion in 2012
Projections – 2020 - Comparison
? Real GDP growth rate 8% per annum (13.5% including 5.5% annual inflation) ? 4th largest economy of the world after US, China and Japan ? 3rd largest economy in PPP terms behind China and the US
? GDP of $5,040 billion in 2020
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http://www.deshpandefoundation.org/ www.privateequityinfo.com www.siliconindia.com www.nenonline.org www.indianangelnetwork.com www.mumbaiangels.com www.wadhwani-foundation.org www.ivca.com;
Some websites on PE
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www.pehub.com www.indiape.com http://www.calpers.ca.gov/index.jsp?bc =/investments/assets/equities/aim/peglossary.xml www.indianpe.com www.evalueserve.com www.ventureintelligence.com
Some more...
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doc_357088179.ppt