Role of Venture Capital in Indian Energy Sector

In partial fulfillment of the requirements of the course

Financial Services

Submitted By:

Jatin Jindal Roll No: 19PGDM00B010

Pratik Dhake Roll No: 19PGDM00B017
Mayank Gupta Roll No: 19PGDM00B011

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 TABLE OF CONTENTS

(1) INTRODUCTION 3

(2) STAGES IN VC FUNDING 4

(3) FACTORS AFFECTING INVESTMENT DECESION OF VC 5

(4) VENTURE CAPITAL FOR RENEWABLE ENERGY IN INDIA 6

(5) CHALLENGES FACED BY VENTURE CAPITAL FIRMS IN ENERGY SECTOR IN INDIA 10

(6) BIBLIOGRAPHY 11

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 Introduction

Venture capitalist (VC) is the person or the firm that invests in start-ups or emerging companies to
acquire equity stake in the firm. These venture capitalists see a high potential in these start-ups and
firms. Venture capital is desirable for emerging businesses that have not been operating for too long
and are too small to gain public-market capital or those have not reached the stage that they can get
complete loan from the bank.
Venture capital investments in companies are usually for long term i.e. for around 5-8 years, which is
the time period that a business or startup takes to mature. In view of the risk involved in investing in
new businesses, VC companies expect 25% or higher return on the investments they make. VC’s key
skill is the ability to recognize new or transformative innovations that can generate high returns on
investments, that too in its early stage. In general, venture capitalists are not interested in small retail
businesses; they are searching for businesses that they can ultimately make public through an IPO
and get big returns.

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Stages in VC funding

There are typically six stages involved in the VC funding-

1. Seed Funding- This is the stage where the start-up is just the idea and the person requires the
funding needs funds to prove the idea.

2. Start-up Phase- At this stage, idea has grown into start-up and funds are needed for the
product development and marketing strategies.

3. Series-A Round- This is also known as the growth phase of the start-up. This is the stage
where growth has just begun and funds are needed for the expansion of business and then
Venture capitalist comes into the picture to invest in the business in favor of the stake.

4. Series-B Round- This is the 2nd round of acquiring funds for business. This is the stage when
the business in its growth phase is selling the product but still they are not able to generate
profits.

5. Expansion Stage- At this stage, the business requires funding for expanding it at various places
and also to develop new businesses.

6. Exit of VC- At this stage, VCs can exit from the firm by going into IPO or selling their stake to
another company in favor of the higher returns.

Generally, funding is not easy for start-ups and most of the start-ups fails to get funds. Most of the
start-ups are not even eligible for venture capital funding. Venture capitalists are too cautious about
investing in any new start-up as it involves a high risk. A report by Inc. in 2018 stated that just 0.62%
of the start-ups were able to raise funds through Venture capitalists. The chances of getting funds are
higher when the business has successfully gone past the start-up stage and has shown promising
growth.

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Most of the VC investments are made in a pool format in which few investors merge their individual
investments to collectively form one large fund that can be invested in a no. of different start-ups
rather than to invest in just singer start-up. This helps VCs to mitigate the risk of making a poor
investment by spreading the risk over many start-ups.

Factors Affecting Investment Decisions of VCs:

The factors considered by Venture capitalists for making investments are as follows:

(1) Strong Management Team: Venture capital firms ascertain the strength of the
management team by measuring parameters such as adequacy of level of skills, motivation
and commitment that makes a balance between members in sectors like marketing, finance
and operations, research and development, general management, personal management and
legal and tax problems. The track record of promoters is additionally taken into
consideration.

(2) Viability of Idea: Before taking investment call, venture capital firms contemplate on the
viability of project or the idea. Because a viable idea establishes the market for the
merchandise or service. The answers are looked for questions like Why the customers will
purchase the product, who the ultimate users are, who the competition is with and the
projected growth of the industry?

(3) Business Plan: The business plan ought to concisely describe the nature of the business, the
qualifications of the members of the management team, how well the business has
performed in past, and business projections and forecasts. The promoter’s experience in the
proposed or related businesses is an essential consideration. The business plan should also
meet the investment objective of the venture capitalist.

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 (4) Project Cost and Returns: VC would like to undertake investment in a venture only if future
cash inflows are more than the present cash outflows. While calculating the Internal Rate of
Return (IRR) the risk associated with the business proposal, the length of time his/her money
will be tied up are taken into consideration. Project cost, scheme of financing, sources of
finance, cash inflows for next five years are studied closely.

(5) Future Market Prospects: The marketing policies adopted, marketing strategies in relation to
the competitors, market research undertaken, market size, share and future market
prospects are some of the considerations that affect the investment decision.

(6) Existing Technology: Existing technology in operation and any technical collaboration
agreements entered into by the promoters also to a large extent affect the investment
decision.

(7) Miscellaneous Factors : Others factors which indirectly affect the investment decisions
include availability of raw material and labor, government policies, rules and regulations
applicable to the business/industry, location of the industry etc.

Venture Capital for Renewable Energy in India –

There are some venture capital firms which offer capital specifically for promoting clean energy and
efficient energy eco systems. There are both the Government as well as private firms that are
providing capital for start-ups in energy sector. All venture capital firms strictly assess business model
and its feasibility regardless of fact they are government or private. They also assess the past
performance, stakeholders and the impact of that business before providing funds. However there
also some firms which provide assistance to start-ups for getting funds from venture capitalists and
firms. The challenge is to get funding for these clean - tech projects at required pace and volume to
achieve Nationally Determined Contributions (NDCs).

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Some venture capitalists in India which are promoting green business in India are –

1. Infuse Ventures (Private)

2. EAI (Private)
3. Venture Capital Fund for Energy Efficiency (BEE) (Govt)
4. IFCI Green India Venture Fund (Govt)

1. Venture Capital Fund for Energy Efficiency (BEE)

For raising the capital under this scheme the requirements are -

a. The company should show demonstrable energy savings along with mitigating carbon
emissions and greenhouse gases.
b. The company should also provide the method by which the energy savings as well as
mitigation of GHGs and carbon can be measured.
c. The project should be new and should not be a project which has been taken over
before.

d. Viable technology has to be developed after carrying feasibility studies and energy
audit.

Venture capital Fund for Energy Efficiency (VCFEE) is one of the financial instruments
that come under the Framework for Energy Efficient Economic Development by BEE.

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The process for getting funding from VCFEE is as follows –

2. EAI

EAI has renewable energy funding support division. It helps new renewable energy
companies to raise funds from venture capital and private equity funds.

Process by which EAI assists to get funding from Venture Capitalists–

a. Collection of basic details of company including company profile, Team profile,

Business Model and past performance.
b. Companies satisfying initial criteria will be approached by EAI for a better
understanding.

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 c. More in depth understanding of company’s business model and expansion plans will
be taken.
d. Based on these inputs the EAI will search for suitable PE/VC firm for that investment.
e. EAI will also provide assistance to further develop an attractive business plan.
f. After identification of PE/VC, EAI also assists in first interaction with investor.

3. IFCI Green India Venture Fund

It is the part of IFCI Venture Capital Funds Limited which is Government Subsidiary. Green
India Venture Fund is invested in Clean Development Mechanism project and other
commercially viable projects. It have corpus of 220 Cr. It can invest between 4.5 Cr to 30
Cr. Its target returns are 20%.

The process followed by IFCI Ventures before funding –

a. Preliminary discussions with recruiters.

b. Business Plan Submission
c. Investment appraisal
d. Final Decision

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Challenges faced by Venture Capital firms (VCF) in Energy Sector in India
Characterized by a changing landscape and new opportunities, the energy space demands innovative
financing and investment models to appropriately accessing risk and profitability. Following are the
challenges faced by VCFs while investing in energy sector:

Ø Lack of awareness among entrepreneurs: The Venture Capital Firms (VCF) is still in nascent
stage in India, many young entrepreneurs are not aware of the funding opportunity which
could be made available to them by the VCFs in India.

Ø Poor Financial health of DISCOMs: the external debt of state-owned electricity distribution
companies (DISCOMs) is set to increase to 2.6 lakh crore as per the report of CRISIL India ltd.
This has heavily comprised the capability to pay to the generating companies in power sector.
And hence the VCFs are extra cautious when lending in energy industry in India.

Ø Developing Technology for low carbon projects: The technology risk exists for financing in
renewable sector in India, also the technology is quite new when compared with the oil
technology which is almost 100 years old, the technology for renewable energy is still in
evolving phase.

Ø Lower rate of return: Though Solar is in competition with coal, the returns are lower when
compared to the coal based projects. Although price of generating power through renewable
energy is reducing and hence the cost of production is reducing, this has led investors in
postponing the decision to invest to future in Renewable sector in India.

Ø Tangibility: Most of the VCs have invested in IT industry where the product is intangible, but
in energy industry where the product is tangible the capex is high and the time of return is
also long which makes the investment more risky.

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 Bibliography

(1) https://www.inc.com/debbie-madden/4-reasons-you-dont-need-vc-money-for-your-
startup.html

(2) Venture Capital Fund for Energy Efficiency (VCFEE) -

https://beeindia.gov.in/sites/default/files/VCFEE_0.PDF

(3) https://www.eai.in/ref/services/investee_support.html

(4) http://www.ifciventure.com/

(5) https://www.adb.org/

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