venture capital

VENTURE CAPITAL

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Rajendran Ananda Krishnan

SYLLABUS

Informal risk capital market

Venture capital

Nature and overview, venture capital process

Locating venture capitalists

Approaching venture capitalists.


FINANCING THE BUSINESS

Early stage financing : refers to financialassistance required by the business duringbeginning of business operations. Two typesare financing are available during this stagethey are seed capital and start up capital.

Development financing : refers to anestablished business which for purpose ofdevelopment moves in for expansion ofbusiness. Finance required at this stage isknow as development or expansionfinancing.


Acquisition financing : it refers to financerequired by the company for the purpose ofacquiring other organizations.

Risk capital market refers to marketproviding debt and equity to non securefinancing institution.

Informal risk capital markets consist ofvirtually invisible group of wealthy investorscalled as business angels.

Public equity market : risk capital marketconsisting of publically owned stock ofcompanies.


ANGEL INVESTORS

Angles are early stage investors tobusiness. Angle investors provide capitaland valuable guidance to entrepreneurs.These investors along with financial capitalsalso provide intellectual capital toentrepreneurs.


FEATURES OF ANGEL INVESTOR

Angel investors prior to entrepreneursunderstand the needs of business andentrepreneurs and are able to provideuseful expertise and assistance

An angel investor is generally anindependent wealthy person who takes riskon investment

Angels take vested interest in the businessstart up in which they invest and becomeactively involved in the company to assist inother than financial aspects of business


Angel investors help entrepreneurs createtheir business by supplying the funding,office infrastructure, sufficing managementwith required expertise to assistentrepreneurs in running the business.


Venture capital

Venture capital is early stage financing ofnew and young enterprises seeking to growrapidly. Venture capitalist finances high andnew technology based enterprises where thebanks or financial institution generallysupport proven technology with establishedmarkets.

Venture capital is also described asunsecured risk financing. Venture capitalistdirectly purchases equity shares ofentrepreneur and participates in themanagement of entrepreneur business.


FEATURES OF VENTURE CAPITAL Investment by venture capital firms are made in

high tech areas using new technology orproducing innovative goods by using newtechnology.

Venture capitalist invest in long term start upcosts to high risk, high reward project.Technology used in the projects undertaken bythe venture capitalist in new and unprovenprojects.

Return on venture capital investment is illiquid.Return period may vary from seven to tenyears. Investment of venture capitalist is neitherrepayable, return is possible only when share ofcompany is sold at market price.


Venture capitalist not only invest in equityshares of company but also participate inmanagement affairs of business. So venturecapitalist not only participate in business butalso build business.

Venture capitalist use their wide contact withthe experts in technology and managementareas and provide strategic input toentrepreneurial team in order to reduceuncertainties.

Venture capitalist firm encourages, nurtureand help the entrepreneur grow because hehas limited resources, high level of risk.Venture capitalist also help entrepreneurs tomarket company products.


Investment by VCF are predominantly madein equity as shares because the dividendscan be delayed till the company startsmaking profit.

VCF act as co partner in in entrepreneurbusiness , share success and failureproportionate to equity investment byventure capitalist.


VENTURE CAPITAL PROCESS


Exit IPO Promoters buyback Trade sale

Buy back of equity by company

Post investment activities

Deal structuring

Evaluation

Screening

Deal origination

VENTURE CAPITAL PROCESSDeal origination : there are various VCF which

have originated from India as well as foreigncountries. It is essential for venture capital firmto have continuous source of deals in order tosurvive and grow in market.

Screening : VC firm carry out initial screeningof all the project on the basis of some broadcriteria. VCF usually prefer investing intechnology related industry which involvesdevelopment at large scale. E.g. Softwareindustry, information technology,pharmaceuticals, bio technology, agriculture andallied industries. They ensure success rate ofproject before investing on the same.


Evaluation : as VCF investment huge amountof money in entrepreneurs business and barehigh risk and as entrepreneur is new entrant tothe business, venture capitalist go in for detailedevaluation of entrepreneurs business in for ofscreening business plan, evaluatingmanagement team of company, understandingcredibility of entrepreneur of business.

Deal structuring : once the venture capitalisthas evaluated the proposal and found it to beviable, then VC and entrepreneur enter intocontract which is known as deal structuring.Which includes details relating to a) VC right tocontrol business b) board members c) right toreplace management in case of poorperformance d) buyback agreement andacquisition e) earn out agreements etc.


Post investment activities : success of VCactivity largely depends on envisagingefficient mechanism from investment andsuccessful implementation of disinvestment.VC are supposed to plan exit from venture atthe time of investment. The proposed exitplan have least plan and confirm to statutorycompliance.

• Initial public offer : benefits ofdisinvestment through IPO results inimproved marketability, improved liquidity,better prospectus for capital gains andwidely known status of the VC as well asmarket control through public shareparticipation.


• Promoters buy back : the promoters buyback VC stake at predetermined price andkeep the ownership control with him. VCconsider it as an exit option only whenpromoters are in position to mobilise fundsfor buy back of equity held by the ventureinvestors.

• Trade sale : VC may also disinvest hisholdings through offer for sale to public. Inthis trade sale VC sells his stake to thestrategic buyer who already owns a businessor has plans to enter target industry.


Buy back of equity by company : as perthe companies amendment act companieshave been allowed to buy back their ownequity shares. Even though the VC may notintent to exit through this route, he mayconsider as the venture has been failed toachieve high growth , below averageperformance of company.


LOCATING VENTURE CAPITALIST

EXIM bank : was set up in 1982 for thepurpose of financing, facilitating andpromoting international trade of India is theprincipal institution in the country forcoordinating working of institution engagedin financing exports and imports. EXIM bankhas made has made an entry into VCF byinvesting in VC firm which is the Indiantechnology venture unit scheme promotedby UTI. VC fund size is 150 crore other coinvestors apart from UTI include LIC,technology development board etc.


IDBI : VCF was started in 1986 with initialcapital of 10 crore and is part of technologydepartment of IDBI. It assist hightechnology, small and medium sized projectsrequiring fund from 0.5 to 25 million. It ismeant primarily to assist projects whichpromote commercial application for companywhich adopt imported technology for widerapplication in area of business. Financialsupport is provided from pilot stage andcovers 90 percent of total cost withpromoters stake to be at least 10 percent forthe venture.


ICICI venture fund management companylimited : ICICI venture was founded in 1988 as ajoint venture with unit trust of India. Then ICICIbought out UTI stake in 1988 and ICICI venturebecame a fully owned subsidiary of ICICI. ICICI withcorpus of $ 650 million is largely a private equityalong with the same it provides venture capitalservice.

IFCI venture capital funds Ltd : was originallyset up by IFCI as a society by the name of riskcapital foundation in 1975. its objective was toprovide institutional support to first generationprofessionals and technocrats setting up their ownventure in medium sized scale sector. The schemewas known as RCS ( risk capital scheme ). In 1988,RCF was converted into a company, risk capital andtechnology finance corporation Ltd.


Gujarat venture finance limited ( GVFL ): comes under the venture capital sponsoredby state level financial institution. GVFL hasprimarily focused on financing companies inSME group. GVFL is a company focusing onhigh risk and start up ventures. Thecompany funds entrepreneurs at the firststage of funding when the venture is takingoff. GVFL mainly finances companies in ITand bio technology sector.


SIDBI venture fund : small scale industrialdevelopment bank of India launched SMEgrowth fund a new venture capital fund onOctober 25th 2004 with large corpus of 500crore which was earlier 100 crore. This 8year life fund was established with objectiveto meet the long term risk capitalrequirement of innovative technology andtechnology oriented units in this sector. It isunique initiative sponsored by SIDBI jointlywith major public sector banks. The fundidentifies unlisted SME entities in variousgrowing sectors such as life sciences,retailing, light engineering, food processing,information technology etc.


UTI venture fund managementcompany : the VC and private equity ( PE )arm of unit trust of India an ITI groupstarted as pure VC company. Its ITVUS aventure capital fund finance companieswhich are into technology, life sciences andoutsourcing sectors. ITVUS has madeinvestment in Glen mark labs, subsexsystem and foursoft. The ascent India fundof UTI is worth 700 crores for investing inmid market companies from sectors likeauto ancillary, pharmacy, textiles, BPO etc.


Can bank venture capital fund : it hasrecently launched Bharat Nirman Fund whichhas corpus of Rs 55 crore. This bank aims tofund start ups in manufacturing and servicesectors. It also has three other funds whichwere launched in 1989. it is in the process ofexiting the first fund while the other two areoperational with the corpus almost tied up forinvestment in start ups.

Intel capital : part of Intel, it is a corporateventure group, and invest out of companybalance sheet. The fund in India, has investedin companies like Tejas networks, persistentsystems and Nipuna.


Punjab InfoTech venture fund : is worth 200million 10 year old, close ended capital venturecapital fund, conceptualised and funded byPunjab by state industrial developmentcorporation ( PSIDC ) Punjab state financialcorporation ( PSFC ), Punjab state electronicsdevelopment and production corporation limited(PSED & PC ) and small industrial developmentbank of India.

VCF of commercial banks : among the Indianbanks and other subsidiaries of SBI and canarabank have floated VCF. These banks provideVCF either in form of equity or conditionalloans. Canara bank has set up a VF throughsubsidiaries can bank financial services.


Private sector VCF : ANZ grind lays bankhas set up India's first private sector VCFnamely india investment fund with an initialcapital of rs 10 crore subscribed by NRI. Thefund provides assistance to high riskprojects, to promoters, fresh issue ofestablished companies with goodperformance record. The objective of thefund is to issue high capital growth for itsinvestors by participating in fast growingcompanies or high technology companieswith potential for high growth.


National venture fund for software andinformation technology industry : NFSITwas launched on December 10 1999. it isclose ended venture capital fund of 10 yearsold with initial corpus of Rs 100 crore. Thefund has been contributed by SIDBI ministryof communication and informationtechnology, government of India ( GOI )and industrial development bank of India.


GENERAL VALUATION APPROACH OF COMPANY

General valuation : in this method all the setof companies in same set of industries arecompared with each other depending on theevaluation credibility of business idea orbusiness is valuated.

Present value of future cash flow : in thismethod future sale and profits of company ispredicted based on the same capital is providedin present date to company. For purpose ofprediction past performance of data is taken asbasis.


Replacement value : in this methodvaluation of the assets is based on theamount of money it would take to replaceassets or system of the venture.

Book value : the book value approach usesthe adjusted book value or net tangibleasset value to determine the firms worth.Adjusted book value is obtained by makingthe necessary adjustment to the stated bookvalue by taking into account anydepreciation of plant.


Earnings approach : the earning approach isthe most widely used method of valuatingcompany as it provides potential investors withthe estimate of the probable return oninvestment. The potential earnings arecalculated by weighting the most recent yearsearnings.

Factor approach : in this method three majorfactors are used to determine value : earnings,dividend paying capacity and book value.Appropriate weight for particular companybeing valued are developed and multiplied bycapitalized value , resulting in overall weightagevaluation.

Liquidation value : refers to sale value ofcompany / liquidation value of company.


APPROACHING VENTURE CAPITALIST venture capitalist may be introduced through

quality introduction which refers to contactingVC through lawyer, banker, accountant. Thisprocedure of approach is required as VC maynot take interest in new project of unknownperson.

Entrepreneur before approaching VC should bevery well aware about his own business. Heshould contact VC who suits entrepreneursbusiness which includes VC who deals in similarproduct or idea.

After choosing VCF to finance the business,entrepreneur is required to send his businessplan to entrepreneur, after evaluating businessplan, understanding its plans potential andcredibility VC chooses to invest in the business.


THANK YOU


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