Venture Capital Funding and Private Equity in India

Venture Capital
Financing &
Private Equity
Financial Services
and Markets
04/24/09 Venture Capital Finance 1
ET – April 03, 2007
• VC / PE investments cross $2 bn in Q1
• $2.4 bn in 78 deals ($1.4 bn across 69 last year)
• This does not include real estate investments!
• With new funds coming in, total investments
during the year 2007 likely to cross $ 10 bn mark
• Segments are – IT, Mfg, Financial Services,
Engg. & Construction, Transport & Logistics
• Source: Venture Intelligence India…

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 & SABRE-ABRAAJ Fund
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
The Entrepreneurial Connection
• East Meets West in Silicon Valley
• by Gurmeet Naroola
• 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)
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…
• Supported by Queen Isabella, a new direction …
• Christopher Columbus could launch his voyage !
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, Singapore, etc
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

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..
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
Some novel Ventures
• Federal Express Corpn - Courier industry was
revolutionized with overnight delivery!
• Edwin H. Land - initially failed to convince
Detroit Auto Industry with polarizing head-
lights - Then, invented Polaroid Camera !
• Haloid Corporation funded inventor of Xerox
- Mr. Chester Carlson for Photocopying !

Features of VC
• Equity Participation
• Long Term Investment
• Participation in Management

VC in USA
• Post War - 1946 : Formulation of American Research and
Development Corporation (ARDC) in Boston : Gen.
Georges Doroit, a French-born 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

Growth of VC in USA
• 01. Favourable Public Attitude
• 02. Dynamic Financial System
• 03. Government Support

VCs in Europe
• Started in the Eighties - Slow growth
• European Venture Capital Assn-1983
• Change in Public Policy & Economic
conditions
• Banks, Govt, Insurance Cos, Pension
Funds and Corporate Investors
• Focus on Industrial, Consumer and
Electronic Products
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 ofVenture
04/24/09 Merchant
Capital Finance Bankers 16
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
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

VC - Defined
• …….. An equity/equity-related
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.
Who is an Angel
• 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
Steps in VC Financing
• 01. Selection of Investment
• 02. Stages of Financing
• 03. Financial Analysis
• 04. Structuring the Deal
• 05. Investment Nurturing/Aftercare
• 06. Valuation of Portfolio
• 07. Exit
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
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
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
04. Structuring the Deal
• Equity Instruments
• Debt Instruments
• Conditional Loan
• Conventional Loans
• Income Notes, NCDs, PCDs
• Zero Interest/Coupon Bonds/Debentures
• Secured Premium Notes, Deep Disc Bonds
05. Investment
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
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

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
Disinvestment Channels
• VOLUNTARY
• Going Public
• Sale of Shares to Entrepreneurs /Employees
• Trade Sales / Sale to another company
• Selling to a new investor
• INVOLUNTARY
• Liquidation / Receivership
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 support
Indian VC History
• VC financing – 1975
– IFCI-sponsored Risk Capital Foundation
(now IFCI Venture Capital Funds Ltd.)
• 1976 – Seed Capital Scheme
– Industrial Development Bank of India
(IDBI).
• Till 1984 - risk and seed capital
• Need felt during 1985-investors burnt
their fingers
• 1985 - VC fund
– Government of India (GoI)
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 1999-2000
KBC Recommendations-2000
• Harmonisation of Multiplicity of Reglns.
• VCF Structures
• Resource Raising
• Investments
• Exit
• SEBI Regulations
• Company Law related issues and
• Other related issues
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.
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
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…
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.
Growth of VC in India
• 1996-97 • Rs. 70 crores
• 1997-98 • 320
• 1998-99 • 610
• 1999-2000 • 2,200
• 2000-01 • 5,300
• 2001-02 • 8,400
• 2007-2008 estd.. • 50,000

Major Contributors in VC
• FIIs • 51 per cent
• D F Is in India • 23 per cent
• Multilateral
Development • 9 per cent
Agencies
• Individuals and • 11 per cent
Companies
• Other Banks • 6 per cent
Venture capital
financing
to IT sector

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

Life Cycle of an Enterprise
B uilding a
sus tainable
B us ine ss
Market
Expansion
Pro duct
Busin ess Developm ent
Plan
Con cept
Marke
Markett
IP O Do
Domminan
inance
ce
Ma rk et Va lidat ion
S eed Fun d Ea rly C us tome rs

V ali date

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 Life Style 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

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 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.

Venture Capital Funding
• 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

Private Equity
• 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.
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.

Difference between VC and PE
• 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.
Developments
• 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.
Sectoral break-up of M & A and PE
Deals – 2005 and 2006


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Venture Capital

04/24/09 Venture Capital Finance 2

• It’s an important source of equity for start up co’s

04/24/09 Venture Capital Finance 11

• Long Term Investment

04/24/09 Venture Capital Finance 12

04/24/09 Venture Capital Finance 13

• 02. Dynamic Financial System

• 03. Government Support

04/24/09 Venture Capital Finance 14

• Netherlands - fast growing VC market

• Germany - 75 % Family owned Cos

04/24/09 Venture Capital Finance 18

• 01. Conventional VC Valuation Method

04/24/09 Venture Capital Finance 27

• 2007-2008 estd.. • 50,000

04/24/09 Venture Capital Finance 43

The No 1 reason a start-up’s valuation is cut

10% of start up in a given venture capital

6 out of 1,000,000 of technology ideas will

04/24/09 Venture Capital Finance 44

S eed Fun d Ea rly C us tome rs

04/24/09 Venture Capital Finance 45

Idea R&D Prototype

Private Venture Capital

04/24/09 Venture Capital Finance 47

04/24/09 Venture Capital Finance 48

04/24/09 Venture Capital Finance 49

04/24/09 Venture Capital Finance 51

04/24/09 Venture Capital Finance 54

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