VENTURE CAPITAL S.

CLEMENT

VC what it is all about?

Venture capital
Dr.Bimal jalan (Former Governor-RBI) - In liberal environment, let a thousand ideas of science and technology bloom and let these translated in to innovative ventures by our entrepreneurs.

WHAT IS VC FUNDING?

IS IT JUST THE STORY OF THE MAN WITH THE IDEA AND THE MAN WITH THE MONEY?

What is V.C.

VC is in the form of equity or debt made in new or exiting business where risk and return are high E.g. exiting product video mobile phone New product - GENOME/ Interface with brain. Convergence in IT hardware

What is VC
It is a Capital typically provided by outside investors for financing of new, growing or struggling businesses. A Venture Capitalist is a person who makes such investments Venture Capital Fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans VC undertaking where VCF makes investment

Genesis of VC
Concept can be linked to story of Christopher Columbus when he travelled westwards instead of east wards from Europe Modern VC began after II nd world war VC in mostly Military applications. 1946 American Research and Development Corporation whose biggest success was Digital equipment. The founder of ARD was General Georges Doroit who was considered as father of VC. Rockefeller Family invested in Eastern Airlines (defunct now) which was one of the earliest

Genesis of VC
1960 bull run in IPO helped VC flourish. 1968 Digital equipment provided 101 annualized return. 1970 failure of 1000 VCs 1978 regulatory support in the form of abolition of capital gains tax etc 1980 institutional support made available but return plunged.

V.C. -Features

High risk & High return It can relate to technology or materials Long term investment Equity or Debt Non availability of conventional finance Profit through capital gains Other support through managerial /marketing

Difficulties in Valuing Start-up Companies

Immediate earnings are negative No past history No comparable companies

No market prices

Target Companies
Startups Early stage companies Private companies in the scale-up phase Pre IPO financing rounds

Nature of these investors

Unconventional Professional expertise Make highly risky investments Expectation high return Deal with difficult Asset Pricing and Valuation

WHAT VCs WILL LOOK FOR IN INVESTEE COMPANIES

COMPANY Vs OTHER ENTITIES UNLISTED Vs LISTED ACCEPTABLE % OF EQUITY ACCEPTABLE SIZE OF INVESTMENT NUMBER OF YEARS THAT INVESTMENT MUST BE HELD TYPE OF FINANCIAL INSTRUMENTS ALLOWED DESIRED RATE OF RETURN

IN THE POST- INVESTMENT STAGE, VCs WILL

ADD VALUE Vs ONLY MONITORING AND RELYING ON COLLATERAL RECOVERY HELP WITH FINANCIAL, MARKETING, TECHNICAL & PERSONNEL LINKAGES PROVIDE INCENTIVES FOR BETTER PERFORMANCE Vs PENALTIES FOR LACK OF IT MONITOR CLOSELY THROUGH BOARD REPRESENTATION PLUS CONTINUAL CONTACT

FINANCING

STAGES IN FINANCING Ist stage seed financing - for supporting a concept/idea,R&D, product development,fullscale production & marketing IInd stage for working capital & initial expansion & also bridge financing for IPO

FINANCING
IIIrd stage acquisition for management buy out or for growth & expansion or turn around financing for sick nits

EXIT ROUTE
Sell the share to promoters IPO route Mergers & Acquisitions

VC

Who Invests in Venture Capital

High networth individuals with appetite for high risk / reward paradigm Institutions diversifying investment portfolios Insurance companies, pension funds, banks, etc. Funds of funds Governments acting as catalysts

VC

How the Value Creation Model works

A typical Venture Capital Fund may invest in 20 companies Typically, 10 will fail, 4 will succeed and 6 may be okay Venture Capital funds do not avoid risk but manage it By balancing the portfolio Focusing on the people and the ideas Mentoring, Coaching, adding value All new ventures are high risk Reducing perceived risk does not reduce real risk Number of failures is hard to control To balance, the ones that win must win big Hence each investment must be structured for high returns

VC

Fund Economics

Fund of Rs. 110 Crore (20 Investments @ Rs. 5 crores)

Operating Costs 10 Companies fail 03 Companies limp along 02 Companies chug along 02 Companies do great 02 Companies are stars TOTAL : ( - )Rs. 10 crores : ( - )Rs. 50 crores : ( - )Rs. 05 crores : ( + )Rs. 05 crores : ( +) Rs, 150 crores : ( + )Rs. 500 crores : Rs. 600 crores

This is an IRR of 40%

VC

Venture Capital in India - The Good News

Over 70 VC/Private Equity funds operating in India today . 90% are global funds rest Indian funds Profile of majority of VCs are Investment banking ..a few from industry Cumulative funds under management over the past 3 years : $ 5.6 billion ; over 50% is focussed on IT/Telecom Cumulative investments in past 3 years : $ 3 billion.. Several New Funds Announced in year 2001 targeting India

V VC

Media & Entertainment PE/VC Deals Done

Films Distribution
Shringar Films

Broadcasting & Software

NDTV TV 18 SAB TV Vijay TV Aaj Tak Technology Media Group UTV Interactive

Media & Entertainment PE/VC Deals Done

Cable Television & Distribution

Indus Ind Media

Music

Easy Buy Music

Radio Film Software & Animation

Pentamedia

In the US this sector has attracted US$ 320mn in Q4 2001

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 coinvestments 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.

REGULATORY
INDIAN TRUST Act 1882 or Company Act 1956 shall apply depending upon the constitution of VC Offshore funds permission from Foreign Investment promotion board and RBI CBDT governs the issues of capital gains and other tax related issues.

Approval by SEBI - foreign venture capital investors

4. (1) For the purpose of the grant of a certificate to an applicant as a Foreign Venture Capital Investor, SEBI shall consider the following conditions for eligibility, namely: (a) the applicants track record, professional competence, financial soundness, experience, general reputation of fairness and integrity. (b) Whether the applicant has been granted necessary approval by the Reserve Bank of India for making investments in India

(c) whether the applicant is an investment company, investment trust, investment partnership, pension fund, mutual fund, endowment fund, university fund, charitable institution or any other entity incorporated outside India; or

Approval by SEBI - foreign venture capital investors

(d) whether the applicant is an asset management company, investment manager or investment management company or any other investment vehicle incorporated outside India (e) whether the applicant is authorized to invest in venture capital fund f) whether the applicant is regulated by an appropriate foreign regulatory authority or is an income tax payer; or submits a certificate from its banker of its or its promoters track record where the applicant is neither a regulated entity nor an income tax payer

REGULATORY

Registration with SEBI Constitution company/Body corporate/trust No other activity except VCF Minimum interment Re 5 crores and single investr Re 5 lac. Investment criteria Not more than 25% of corpus in one VCU Can invest in overseas VCU subject to RBI rules No investment in associate company 66.6% investment unlisted company and 33.3% in IPO of VCU. No investment by way of Debt or Debt instrument in a company in which already VCF has invested by way of Equity No investment in SPV created by VCF Minimum 3 years of lock in period for IPO

Regulatory
Winding up When the period of scheme in the placement memorandum is over When trustees decide to wind up 75% of investors petition for winding up When SEBI directs to wind up As per provisions of companys act winding up

Approval by SEBI - foreign venture capital investors

(g) the applicant has not been refused a certificate by the SEBI. (h) whether the applicant is a fit and proper person. [ Applicability of Securities and Exchange Board of India (Criteria for Fit and proper Person) Regulations, 2004 4A. The provisions of the Securities and Exchange Board of India (Criteria for fit and proper person) Regulations, 2004 shall, as for as may be, apply to all applicants or the foreign venture capital investors under these regulations]

Indian experience

1986 Policy notification by GOI 5% cess on all imports to create a fund to finance VC by IDBI SEBI to regulate VCs & issuance of guidelines Major players ICICI,IDBI,ILFS etc
VC

2006 PE/VC Trends US$7.5bn invested in 2006 across 299 deals. IT & ITES retained its status as the favorite industry among PE investors, followed by manufacturing and real estate. Largest PE deal was $900M LBO of Flextronics by Kohlberg Kravis Roberts (KKR). M&A and IPO activity continued to remain strong.

VC in 2009 Venture Capital firms invested $77 million over 17

deals in India during the three months ending September 2009, The amount invested during the period was significantly lower compared to the same quarter in 2008 (which had witnessed $298 million being invested across 55 deals), but higher compared to the immediate previous quarter ($64 million across 17 deals). The latest numbers take the total VC investments in the first nine months of 2009 to $201 million (across 46 deals) as against the $709 million (across 124 deals) during the corresponding period in 2008.

VC in 2009.
Among the largest investments reported investment during Q3 2009 was the Lightspeed Venture Partners-led investment of Rs. 50 crores (about $10 million) in Mumbai-based Itz Cash Card, Indias largest multi-purpose pre-paid card company. Existing investors Matrix Partners India and Intel Capital participated. Information Technology and IT-Enabled Services (IT & ITES) companies accounted for 41% of the investments during Q3 09 (42% by value), the GIVCA/Venture Intelligence research shows. Helped by the continued interest in microfinance firms, the BFSI industry attracted $25 million across five companies. Early-Stage deals (First / Second Round of VC investments into companies that are less than five years old) accounted for 60% of the VC investments (in volume terms) during Q3 09.

VC in India
"3G, rural penetration to catalyse PE investments in Teleco" Mobile VAS, Mobile Broadband and Telecom Software companies, as well as companies providing services to telcos, are among the favourite sectors of PE & VC investors within the industry, a survey by research firm Venture Intelligence reveals

ICICI Venture
Founded 1988 as JV with UTI 1998 - fully owned subsidiary of ICICI Total Assets US$ 56.3 Billion Market Capitalisation US$ 10.8 Billion

ICICI-Investment Criteria
Strong Management Team High Growth Sector Global Competitiveness Valid Business Strategy Established Technological edge Clear Exit Strategy

ICICI-India Advantage Fund Series Series I

21 landmark transactions Portfolio of high growth sectors like Logistics, Pharmaceuticals, Retail, Low Cost Airlines etc

Series II
US$ 810 Million Fund created Invest in buyout & growth capital transaction in mid & large cap companies

Series III & IV

Largest Real Estate Fund US$ 550 Million Invest in projects in permanent location in stable but growing markets.

Other Funds
ICICI Econet Fund
Launch in 2000 Corpus of Rs. 1,000 Million In 2001 Strategic investment by Compaq Corporation Focus on Internet & Technology

Emerging Sectors Fund

Launch 2002 Corpus of Rs. 4,005 Million Portfolio in Retail, Media & Biotechnology

SIDBI Venture Capital Limited (SVCL)

Mission : "To catalyze entrepreneurship by providing capital and other strategic inputs for building businesses around growth opportunities and maximize returns on investment "

SVCL
SVCL has funded over 21 projects Project evaluation process SVCL always take a Board seat SVCL provides networking and management support as well

SVCL Relationship
Help the entrepreneur to manage his business more effectively Provide Small Indian enterprises not only with fund support but also market access Provide strategic support to assisted companies Provides Networking facility

Project Selection Requirements

Strong and committed core team Growth potential / Viable business plan Long-term competitive advantage Subscription to equity / equity type instruments A Clear exit plan

National Fund for Software & IT Industry (NFSIT)

SIDBI, MIT and IDBI are the contributors to this fund Close-ended 10 year fund with an initial corpus of Rs.1000 million Contributors to fund: SIDBI - Rs. 500 million (US$ 11.11 million) MIT - Rs. 300 million (US$ 6.67 million) IDBI - Rs. 200 million (US$ 4.44 million) Main objective of the fund: To meet the total fund requirements of the software and IT companies (Small Enterprises) To help in arranging strategic alliances with overseas IT units

NFSIT Portfolio

SME Growth Fund

Set up by SIDBI in association with Major commercial banks It is a 8-year life Fund Initial Corpus of Rs. 5000 Million It distinguishes itself as the largest VC fund dedicated to the SME. Objective To meet the long-term risk capital requirement of innovative and technology oriented units in this sector.

SME Growth Fund Portfolio

Gujarat Venture Finance Ltd. (GVFL)

Pioneer of venture capital in India Started in 1990 World Bank initiative under the support of Gujarat Industrial and Investment Corporation (GIIC) Raised 5 Venture Capital Funds invested in 57 companies Recently launched a SME Fund

Project Selection Requirements

SME Segment High risk & start-up venture Technology & Bio-technology sector

Gujarat Biotechnology Venture Fund

Corpus Rs. 50 Million target of Rs. 500 Million Prospective Investors
State Govts.; Banks; Corporate entities; Institutional Investors; HNIS.

Areas of Investment
Biopharma Agri-Biotech Contract Research Industrial Biotechnology

Gujarat IT Fund
Corpus Rs. 276.2 Million Investing Institutions
SIDBI Gujarat Informatics Ltd.

Companies invested in
Net4nuts Ltd. Ecube I Solutions Ltd. Anupam Globalsoft Ltd. Icenet.net Ltd. Convergelabs Technologies Pvt. Ltd.