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Venture Capital & Private Equity


What is the core DNA of a Venture Capitalist?

How do they make money?

• High risk – high return (?) ventures
• High probability of failure factored in
• Law of averages expected to play out – across funds
(sectoral, stage based…) and across investments
within funds
• Venture Capital method of Valuation:
1. Overall (Portfolio) return vs. individual project required
rate of return; probability and required rate of return
vary with stage of funding too
2. Exit period and exit multiple
3. 1 and 2 above to decide entry multiple and stake
• Hence, what kind of funding do VCs provide?
Infusion Ordinary Equity
(USD Equity (CCPS)
Venture Investor Date million) Stake (USD m) (USD m) Debt

Nation CX Partners Mar-13 20 29.73% 20

Blume Ventures,
Zopper Ventureast, Angels May-12 0.1 18.83% 0.02 0.08

Delhivery Nexus Ventures Aug-13 5 28.36% 0.5 4.5

Multiples PE, Nexus

Ventures May-15 85 22.28% 85

Peppertap SAIF, Sequoia Capital Apr-15 10 35.71% 0.01 9.99

Peppertap – Funding terms

JustDial – Exit

• Investment details: Tiger Global invested around

Rs.107cr. over 2 rounds in April 2007 and July 2009
for 14.67% stake.
Multiple Value
• Exit details: Company valuation (INR cr.) 7593.13
Revenue multiple 12.75 X
Exit Multiples
EBITDA multiple 38.23 X
PAT multiple 60.32 X
Investment multiple for 10.41 X
Tiger Global at exit
Structure of firm and key issues

• VC/PE firm, LPs, GPs, employees, VC/ PE funds

• Incentives for each, areas of potential conflicts
• External competition – for funds and investments
Mini Case Study
• Anti-dilution and Full Ratchets
➢ These clauses are needed in the event of a
down-valuation. E.g. Flipkart recently
down-valued by 30-40%
➢ Investors want to participate in the upside but
protect themselves from a loss in valuation
PE and VC – not exactly the same
Investment thesis of a typical PE
(How to turn around a target firm)
• Keep idle cash to a minimum
• Take on more debt (Trading-on-equity in practice)
• Design value-enhancing operating plans
• Active involvement of and commensurate incentive for Board
How does this play out in India?
• Indian promoters have been typically wary of ceding controlling
stake, as a result PE firms have had to settle for minority stake
• RBI norms do not allow banks to fund the debt component of
LBOs, so LBOs as in the West are ruled out. PE firms instead, lever
themselves ‘outside’, in the country they are domiciled.
• PE firms (Cat-II AIFs) had a lock-in period of 1 year after an IPO exit
on shares they had acquired in a firm prior to the IPO. This did not
apply to Cat-I AIFs such as VC firms and other investors. Earlier in
June 2017, this restriction on PE firms has been waived off.
Key Terminology in PE land

Funding (Balance Sheet terms) Operations (Revenue A/c terms)

• Committed Capital vs. • Management fees
Contributed Capital vs. • Performance fees (Carried
Invested Capital
• Capital calls & Drawdown
• Dry Powder • Realized vs. Unrealized
• Interim, final closing dates of gains & losses
funds • Preferred hurdle rate
• GP catch-up clause
Performance metrics
• ‘Since-Inception’ IRR
• Total Value to Paid-in Capital
Ratio/ cash over cash ratio
(C-o-C ratio)
Revenue & Cost model of a PE/VC
Revenues Expenses
• Management fees (from LP) • Compensation & Benefits
• Advisory fees (from portfolio (Salaries, etc.)
firms) • Performance fees (Carried
• Performance fees (Carried Interest)
Interest) a. Unrealized
a. Unrealized b. Realized
b. Realized • General & Fund expenses

Assuming LP contribution to be $400

Sample: Profit sharing
Net investment income or loss, net realized gain or loss, and unrealized gain or
loss on investments are allocated to the partners pro rata in proportion to their
respective capital contributions; however, the limited partners’ allocation of
profits and losses is divided between the limited partners and the General
Partner as follows:
• I. 100% to all partners until all the partners have received an amount equal to
the capital contributed
• II. 100% to limited partners until the limited partners have received an
aggregate amount equal to an 8% cumulative internal rate of return,
compounded annually, on the outstanding balance of the limited partners’
capital contributions
• III. 100% to the General Partner until the General Partner has received 20% of
the aggregate amount allocated to the limited partners pursuant to clause (II)
• IV. Thereafter, 80% to the limited partners and 20% to the General Partner.

The allocation of profits and losses in clauses III and IV represent carried
interest to the General Partner.
Key concepts & terminology for VC/ PE
Common terms VC specific PE specific

• General, Limited Partners • Angel, Series (A,B,C…) • Buyout funds

• Anchor investors funding • Leveraged buy-out
• Committed vs. called vs. • Seed, early stage, late • Senior debt and
invested capital stage, growth funding subordinated debt
• Capital calls, drawdown • Venture debt • Mezzanine debt
• Management fees • Cash burn • Dry powder
• Performance fees • Pre- and post-money • GP catch-up clause
(Carried Interest) valuation • Private debt funds
• Exit strategies and modes • Venture capital method
(Liquidity event) of valuation
• Clawback • Liquidation preference
• Realized vs. Unrealized • Employee stock option
gains & losses pool
• Preferred hurdle rate • Stake dilution
• ‘Since-Inception’ IRR • Down-valuation
• Total Value to Paid-in • Full/ partial ratchet
Capital Ratio/ Cash over • Term sheet
Cash ratio (C-o-C ratio)