venture capital financing. venture capital – some views general georges doriot – father of us...
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VENTURE CAPITAL FINANCING
VENTURE CAPITAL – Some Views
General Georges Doriot – father of US Venture Capital
“Venture Capital is Patient and Brave Money that seeks new and growing companies and invests for long haul”
Gombers & Lerner: Venture capital at crossroads
“Independently managed dedicated pools of capital that focus on Equity or Equity linked investments in a privately held, high growth companies”
VENTURE CAPITAL
Long-term Equity / QUASI Equity finance in
businesses with high growth and profit potential
Return through capital gains
Risk-reward sharing in nature
Not synonymous to high-tech finance
VENTURE CAPITAL IS NOT
Development Finance
Term Loan
Conventional Financing
Passive Equity investment support
R&D funding sources
CONVENTIONAL FINANCING
TERM LOANS
SECURITY BACKED
PASSIVE
FIXED OBLIGATIONS
RISK AVERSE
SHORT-TO-MEDIUM TERM PERSPECTIVE
PREFERENCE FOR LARGE AND STABLE BUSINESSES
VENTURE CAPITAL
EQUITY / QUASI EQUITY
UNSECURED
ACTIVE
PAYMENT RELATED TO PERFORMANCE
WILLING TO ASSUME RISKS
LONG TERM CONSIDERATION
PREFERENCE FOR SMALLER START UPS
VENTURE CAPITAL IN INDIA
STARTED IN MID EIGHTIES BY THREE ALL INDIA FINANCIAL INSTITUTIONS AND A PRIVATE COMPANY.
IN 2002 VENTURE CAPITAL FUNDS INVESTED $590.21 MILLION IN INDIAN COMPANIES.
INDUSTRY HUBS :MUMBAI, DELHI, BANGALORE.
IN 2002, INDIA RANKED AS THE SECOND MOST ACTIVE VC MARKET IN ASIA PACIFIC (EXCLUDING JAPAN).
Major VC Companies in India: ICICI Venture, Gujarat Venture Finance Limited, UTI ventures, SIDBI Ventures Etc.
Stages of Company Evolution &Primary External Finance Source
Public Issue
Mezzanine /Private Equity
Venture Capital Funds
Angel Investors
Personal Savings
Incubators
SEED START-UP EARLY GROWTH
SUSTAINED GROWTH
STAGES OF INVESTMENT
SEED TO GET A COMPANY STARTED. THE PRODUCT MAY BE IN A R&D PHASE, IT MAY JUST BE AN IDEA.
START UP GOES TO COMPANIES, WHICH HAVE A PRODUCT BUT MUST DO SOMETHING
WITH IT.
FIRST ROUND GOES TO COMPANIES WHICH HAVE USUALLY PROGRESSED BEYOND A
START-UP – USUALLY TO PROMOTE GROWTH.
Contd…
SECOND ROUND ALSO CALLED “SUBSEQUENT ROUND” - FOR PROMOTING
OR SUSTAINING GROWTH. IT MAY ALSO BE A “SAVING INVESTMENT” OR “BAIL OUT” IF THE COMPANY HAS NOT PERFORMED UPTO EXPECTATION.
BRIDGE/ MEZZANINE FINANCING THIS IS ALSO CALLED “MEZZANINE FINANCING”. THIS
CAPITAL IS GIVEN FOR A SPECIFIC PURPOSE, EG., TO COVER EXPENSES INCIDENTAL TO THE RECEIPT OF LARGE PRODUCT ORDER.
VC PROCESS
DEAL SOURCING
INITIAL EVALUATION
DUE DILIGENCE & APPRAISAL
DEAL STRUCTURING
MONITORING & NURTURING
EXIT
Establish fund & Target investment opportunities
Raise Capital for Investment
Due diligence & Appraisal
Deal Structuring
Monitoring & Nurturing
Exit
Generate deal flow. Identify new & Young companies with high potential
Screen & Evaluate deals
WHAT A VENTURE CAPITALIST LOOKS FOR
Promoter of repute and integrity. Team. An idea that will address large markets. Attractiveness of technology and fit. Upside potential and down side exposure. Anticipated growth rate. Age and stage of development. Fund requirement. Goal congruence. Additional round of funds. Returns. Exit.
FINANCIAL STRUCTURING -TO MATCH EVERY NEED
FINANCING THROUGH– EQUITY– QUASI EQUITY -
• PREFERENCE SHARE• CONVERTIBLE PREFERENCE SHARE• CONVERTIBLE DEBENTURES
– SUBORDINATED UNSECURED DEBTS• INCOME NOTES, CONDITIONAL LOANS
CONVERTIBLES ARE PREFERRED
• DILEMMA OF PRICING IS SOLVED• ENTREPRENEUR GETS REWARDED FOR HIS HARD
WORK• EXIT IS SIMPLER
FINANCIAL STRUCTURING
OBJECTIVE
COMPENSATE PROMOTER
PROVIDE FOR CASH BURN
MANY ROUNDS OF FINANCING
EXIT
POSSIBLE MEANS
PREFERENCE SHARE CONVERTIBLES WARRANTS DIFFERENTIAL PRICING / SWEAT EQUITY
PREFERENCE SHARE
CONVERTIBLE PREFS CONVERTIBLE INCOME NOTES
INCOME NOTES OPTIONALLY CONVERTIBLE
RIGHTS
FINANCIAL STRUCTURING - CONSIDERATIONS OF A VENTURE CAPITALIST
MAXIMISING FINANCIAL RETURNS GIVEN THE LEVEL OF RISK
PERCENTAGE OF HOLDING TO HAVE EFFECTIVE SAY FOR DEVELOPMENT OF THE COMPANY THROUGH BOARD REPRESENTATION
MANAGEMENT’S RELATIVE CONTRIBUTION TO CAPITAL TO ASSURE THAT MANAGERS HAVE MORE AT STAKE THAN JUST THEIR EGOS
MINIMIZATION OF TAXES TO INVESTORS
FUTURE LIQUIDITY
VOTING CONTROL
PROTECTION AGAINST LOSSES IN CASE OF LIQUIDATION OR DOWN SIZING
EXIT
FINANCIAL STRUCTURING - CONSIDERATIONS FOR AN ENTREPRENEUR
CONTINUE TO HOLD THE BUSINESS THAT THEY HAVE CREATED
FINANCIAL REWARDS
ADEQUATE RESOURCES NEEDED TO ACHIEVE THEIR GOAL
MINIMIZATION OF TAX EXPOSURE FOR BUYING CHEAP STOCK
VALUE ADDITION BY THE VENTURE CAPITALIST
COMMON CONSIDERATION FOR BOTH
FLEXIBILITY FOR GROWTH OF THE COMPANY
RETENTION OF KEY EMPLOYEES THROUGH ADEQUATE PARTICIPATION AND REWARD.
VALUE ADDITION BY VENTURE CAPITAL
BUILDING UP SYSTEMS & PROCEDURES, LEGAL & STATUTORY
COMPLIANCES
NEGOTIATION FOR TECHNOLOGY TRANSFER & TIE-UPS
KEY PERSONNEL RECRUITMENT & TEAM BUILDING
MARKETING TIE-UPS
NETWORKING
RESOURCE MOBILIZATION
APPOINTMENT OF EXPERTS & CREATION OF ADVISORY BOARDS
CORPORATE GOVERNANCE
HELPING COMPANIES PARTICIPATE IN VARIOUS FORUMS
ORGANIZING TRAINING, WORKSHOPS FOR COMPANIES
THANK YOU