VENTURE CAPITAL FINANCING : VENTURE CAPITAL FINANCING Introduction : Introduction The venture capital investment helps for the growth of innovative entrepreneurships in India.
Venture capital means risk capital.
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 : The concept of Venture Capital 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.
The European Venture Capital Association describes it as risk finance for entrepreneurial growth oriented companies. The Origin of Venture Capital : The Origin of Venture Capital 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.
Eastern Airlines and Xerox are the more famous ventures they financed.
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. Differences from traditional capital : Differences from traditional capital Venture capital
Requires high return rate
Invested based on longer-run future
Concerned with product and market potential
Venture capitalist and partner are co-owners Traditional
Bears lower return
Invested based on immediate future
Concerned with past performance
Loaning bank is creditor
Requires collateral Venture Capital in India : Venture Capital in India In India the Venture Capital plays a vital role in the development and growth of innovative entrepreneurships.
Venture Capital activity in the past was possibly done by the developmental financial institutions like IDBI, ICICI and State Financial Corporations.
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 : Venture Capital Investments in India Investments in private equity and venture capital in India increased almost 600%...USD $7.46 billion.
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:
31% of all deals were between USD $10 and 25 million.
Venture capital accounted for 25% of private equity deals (in volume terms) in 2007.
PE firms obtained exits on 65 companies, including 16 via IPOs Source: The Economic Times TRENDS IN INDIA : TRENDS IN INDIA SEBI Venture Capital Funds (VCFs) Regulations, 1996 : SEBI Venture Capital Funds (VCFs) Regulations, 1996 Has a dedicated pool of capital raised in a manner specified in the regulations.
Invests in venture capital undertakings (VCUs) in accordance with these regulations.
A Venture Capital Undertaking means a domestic company whose shares are not listed on a recognized stock exchange in India
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. : Venture funds in India can be classified on the basis of the type of promoters. 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.
VCFs promoted by the state government-controlled 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. : Venture funds in India can be classified on the basis of the type of promoters. VCFs promoted by Public Sector banks such as Canfina by Canara Bank and SBI-Cap by State Bank of India.
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 Investment Process: The venture capital activity is a sequential process involving the following six steps.
Due diligence Evaluation)
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. : 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. Slide 14: Due Diligence:
Due diligence is the industry jargon for all the activities that are associated with evaluating an investment proposal.
The venture capitalists evaluate the quality of entrepreneur before appraising the characteristics of the product, market or technology.
The evaluation of ventures by VCFs in India includes;
(The applicant required to provide a brief profile of the proposed venture to establish prima facie eligibility& 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. Slide 15: Deal Structuring:
venture capitalist and the venture company negotiate the terms of the deals, that is, the amount, form and price of the investment.
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.
Earned out arrangements specify the entrequreneur's equity share and the objectives to be achieved. Slide 16: Post Investment Activities:
venture capitalist generally assumes the role of a partner and collaborator.
The degree of the venture capitalist's involvement depends on his policy.
If a financial or managerial crisis occurs, the venture capitalist may intervene, and even install a new management team.
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 : Venture Capital process Venture Capital Funding : Venture Capital Funding Top Ten Investments in Infrastructure Companies : Top Ten Investments in Infrastructure Companies A Case on Technology Development & Information Company Of India Ltd. (TDICI ) : A Case on Technology Development & Information Company Of India Ltd. (TDICI ) TDICI was incorporated in January 1988 with the support of the ICICI and the UTI
TDICI called VECAUS ( Venture Capital Units Scheme) was started with an initial corpus of Rs.20 crore.
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. : Some of the projects financed by the TDICI are discussed below. MASTEK, a Mumbai based software firm, in which the TDICI invested Rs.42 lakh in equity in 1989.
TEMPTATION FOODS, located in PUNE, which exports frozen vegetables and fruits, went public in November 1992.
RISHABH INSTRUMENTS of Nasik got Rs.40 lakh from the TDICI.
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 : Conclusion Venture Capital Business has been drastically decreasing due to many reasons.
Liberalize the stringent policies and pave the way to the venture capital investors
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 QUESTIONS : QUESTIONS