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Venture Capital in India
Ramesh .S Professor Indus Business Academy
Brief account of Venture capital and private equity investment in India VCPE investments in India had witnessed a phenomenal growth both in terms of amount invested (from $1.8 billion in 2004 to $22 billion in 2007 before tapering off to $8.1 billion in 2008) as well as the number of deals (from 80 in 2004 to 481 in 2007 and then slowing down to 297 in 2008). • The VCPE investment activity in India was becoming more matured and broad based. While 4 out of 10 industry categories accounted for more than 80% PE investments in 2004; investments were much more evenly distributed across the 10 industry categories in 2008.
Venture Capital (VC) VC is a specific investment strategy designed to provide funding for startup companies. It’s a very popular financing source for technology companies. It allows for fast growth without needing revenue at an early stage. It’s highly risky, but can be quite lucrative. Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as
but not yet turning a profit • Third-Round: Also called Mezzanine financing. but not all private equity is venture capital Financing stages There are typically six stages of venture round financing offered in Venture Capital that roughly correspond to these stages of a company's development. Venture capital is a subset of private equity. 4th round is intended to finance the "going public" process • Between the first round and the fourth round. IT. such as an IPO or trade sale of the company. Crowd funding is also emerging as an option for see funding. this is expansion money for a newly profitable company • Fourth-Round: Also called bridge financing. Seed Money: Low level financing needed to prove a new idea. Start-up: Early stage firms that need funding for expenses associated with marketing and product development • First-Round (Series A round): Early sales and manufacturing funds • Second-Round: Working capital for early stage companies that are selling product. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred as Series A round) in the interest of generating a return through an eventual realization event. though it involves risk but at the same . Therefore all venture capital is private equity. software.biotechnology. often provided by angel investors. venture-backed companies may also seek to take venture debt Features of Venture Capital Financing Under VC capital finance the lender provides financial support to a company which is in early stage of development. etc.
Others prefer operating locally while others will operate nationwide. Features of VC are: • VC involves not only investing money but also active participation in the management of the company by the person who has made investments in the company. • VC financing is usually done for companies which are small level or medium level and also relatively newly formed companies are the preferred choice of venture capitalist.time it has the potential for generating abnormal returns for VC. Some of the factors that influence VC decisions include: Business situation: Some VCs tend to invest in new ideas. • . Others prefer investing in established companies that need support to go public or grow. or fledgling companies. • VC does VC financing in order to make a capital gain on equity Investment at the time of exit. Types Venture Capitalist firms differ in their approaches. • VC divests his or her holding once the investments has generated returns in accordance with the VC desired return. • VC is in the form of equity participation rather than giving it as loan or debt. There are multiple factors and each firm is different. • Others invest solely in certain industries.
and often considered a "partner-track" position. Although the titles are not entirely uniform from firm to firm. • Associate – This is typically the most junior apprentice position within a venture capital firm. Principals will have been promoted from a senior associate position or who have commensurate experience in another field such as investment banking or management consulting. Venture capitalists with finance backgrounds tend to have investment banking or other corporate finance experience. but broadly speaking venture capitalists come from either an operational or a finance background. • Principal – This is a mid-level investment professional position. • Roles Within the venture capital industry. After a few successful years. Typical career backgrounds vary. other positions at venture capital firms include: Venture partners – Venture partners are expected to source potential investment opportunities ("bring in deals") and typically are compensated only for those deals with which they are involved. or expect fast growth. an associate may move up to the "senior associate" position and potentially principal and beyond. Venture capitalists with an operational background tend to be former founders or executives of companies similar to those which the partnership finances or will have served as management consultants.Company expectations often vary. • . The amount of help a VC provides can vary from one firm to the next. the general partners and other investment professionals of the venture capital firm are often referred to as "venture capitalists" or "VCs". Some may want a quicker public sale of the company. Associates will often have worked for 1–2 years in another field such as investment banking or management consulting.
Some EIR's move on to executive positions within a portfolio company. • List of venture capital companies in India These are venture capital companies in India. EIRs are engaged by venture capital firms temporarily (six to 18 months) and are expected to develop and pitch startup ideas to their host firm (although neither party is bound to work with each other). • • • Accel Partners India Artheon Ventures Artiman Ventures .Entrepreneur-in-residence (EIR) – EIRs are experts in a particular domain and perform due diligence on potential deals.
Power and Infrastructure in addition to those sectors that were traditionally preferred by VCPE investors like IT & ITES. Healthcare. .• • • • • • • • • • • • • • • • • • • • BlueRun Ventures Canaan Partners DFJ India Epiphany Ventures Helion Venture Partners IFCI Venture Capital Funds India Innovation Investors Intel Capital Inventus (India) Advisory Company JAFCO Asia Lightspeed Venture Partners Netz Capital Nexus India Capital Norwest Venture Partners Ojas Venture Partners Reliance Venture SAIF Partners Trident Capital VentureEast Apax Partners I þÿ • • There were huge PE investments in technology-led. • The rate of growth in number of deals was consistently lower than the growth rate of amount invested. capital intensive sectors like Telecom. etc.
The CAGR in the US for the same period was just 6%. • As far as Y-o-Y growth in VCPE investments were concerned. • While VCPE investments in India as a percentage of GDP had grown from a mere 0. even after considering the severe negative growth in 2008) were one of the highest in world. • Late stage and PIPE (Private Investment in Public Equity) deals had consistently accounted for a major share of VCPE investments over the five year period with late stage deals being the least affected even in the period of economic downturn while early stage deals had suffered the most. This trend was observed not only in developed markets like the US and UK but also in emerging markets like India and Brazil. • Majority of early stage investments were contributed by domestic investors while a large share of PIPE and buyout investments was funded by foreign investors probably suggesting the tendency by foreign investors to invest in established businesses.5% of GDP in 2008.e. VCPE investments in US as a percentage of GDP was relatively constant and hovered around 0.4% of GDP in 2004 to more than 1. • Buyout investments were comparatively very few in India and constituted only 3% of total number of PE investment deals. The trend was also consistent across the industry categories except for IT & ITES.• The overall inclination in VCPE investment was towards having lesser number of high quality deals of larger size and hence average amount per deal was rising steadily.7-0. . • Indian VCPE investments with a CAGR of 47% during 2004-2008 (i.8 % of GDP. India had experienced extremely high growth rates of 379% and 118% in 2006 & 2007 respectively followed by steep decline of 63% in 2008. The corresponding rise and fall in investments was relatively moderate in the US. • There was a strong correlation between investments in VCPE markets and Capital markets.
com Structure of VCPE firms in India VCPE firms are investment managers that act as agents for investors such as High Net worth Individuals (HNI) & institutional investors such as foundations and pension funds etc VCF can be created in a form of – (a) trust (b) company including (c) a body corporate .Rameshsrameshs@yahoo.
Such a partnership structure leverages the financial management and operational expertise of the GPs and the availability of capital from the LPs Most VCPE operate under a unique legal framework known as Limited Liability Partnership (LLP). this is an advantage for VCPE firms as it provides them flexibility that is needed in operating in high risk environment . The capital raised from investors has a fund life of 10 years & can be extended up to 2 years Fund is formed as a legal agreement in which investors of funds are called as Limited partners (LP) and fund managers are General Partners (GP).
the act has undergone amendments September 2006.Regulatory aspects of VC investments in India The role of regulating VCPE activity in the country is being done by SEBI through the enactment of Securities and Exchange Board of India (Venture Capital) Regulations. March 2008 and April 2010. Since the time of its enactment. . 1996. in addition to the numerous administrative circulars of SEBI.
1996 According to SEBI (Venture Capital) Regulations. the main objective of the entity should be to engage in venture capital investment and the trust deed or the memorandum should explicitly state that [Section 4]. two advisory committees were appointed in 2000 and 2003 to identify critical areas of regulatory support. a venture capital fund can be formed as a: • Trust. 1956 or • A body corporate. 1882 or • Company. registered under Companies Act. Following is the brief description of the policy environment relating to VC industry: SEBI (Venture Capital Funds) Regulations. Fund generation Investors can invite contribution to the pool either through private placement or through an agreement with investors for contribution or subscription. registered under Indian Trusts Act. 1996. set up or established under the laws of the central or state legislature In all forms. .Recognizing the importance of Policy support.
A venture capital undertaking could be an Indian company or a firm registered in a foreign country. a copy of which should be filed with SEBI. For the purpose generating the pool of fund for investment. If the VC fund is formed as a company. 1996 Some of the major changes are listed below: • The minimum investment size in the unlisted equities has been reduced from 75% of the investible funds to 66.67%. Firms not registered in India should with RBI regulations in addition to that of SEBI. Of the generated pool of capital. investment strategies. the details of the trustees. and manner of subscription. a placement memorandum or contribution or subscription agreement with the investors needs to be issued. .33% of the pool can be invested in: • IPOs of venture capital undertakings • Debt instruments of the portfolio firms Changes in the SEBI (Venture Capital) Regulations. vide amendment in April 2004. Investment Regulation 1996 makes it mandatory for the VC firm to disclose the investment strategy of the fund at the application stage itself. duration of the fund. and tax implications to the investors. Remaining 33. The document shall contain information like. fund size. • Lock-in period of one year for the pre-IPO shares held by the VC fund is removed vide the above amendment.The minimum pool size for each fund is fixed at INR 50 million.67% should be invested in equities or equity linked instruments of unlisted entities. the memorandum and articles of association should explicitly prohibit the firm from making an invitation to the public to subscribe to its shares. It caps the investment in any one firm at 25% of the corpus. at least 66. fund managers.
According to SEBI (FVCI) Regulations.33% on other securities of the funded ventures. for domestic VCs . The domestic custodian would monitor the investment of FVCI in India and furnish periodic reports and other information as required to SEBI. and investment in equities of listed but financially weak or sick companies remain the same as given in SEBI (VC) Regulations. is registered under the Regulations and proposes to make investment in accordance with the Regulations. 33. All other conditions on investment like the minimum 66. 2000 are similar. 1996. NBFCs and gold financing companies since April 2004 amendment.67% of the pool to be invested in unlisted equities.• VC firms are permitted to invest in real estate companies. 1996 and the SEBI (FVCI) Regulations. 2000 a "foreign venture capital investor" means an investor incorporated and established outside India. certain changes are provided in the later regulation to accommodate and integrate foreign investors into the Indian system. An FVCI has to appoint a domestic custodian for the purpose of custody of securities. SEBI (Foreign Venture Capital Investor) Regulations. A foreign VC fund is exempted from the 25% cap on investment in a single VC undertaking through an Amendment in 2004. While most provisions in both SEBI (VC) Regulation. lock-in period for preferential allotment. 2000 SEBI brought out a separate regulation to enable foreign VC funds to invest in Indian entities.
Routes of VCPE investment in India There are 4 major routes through which VCPE investments happen in India: The investor can register with SEBI as a Domestic or Foreign Venture Capital Fund. This route provides for certain pass through tax benefits (No capital gain or with-holding tax on dividend). This is usually done through a Mauritius subsidiary. The Indian Mauritius Taxtreaty provides the benefit of charging no capital gain tax in either India or Mauritius on the sale of . Direct Investment in an Indian company from outside India. But it comes with some disadvantages that certain services of such funds are restricted as per the SEBI Regulations.
The 4th route is similar to that mentioned in point 2 where a US company invests in a subsidiary in India by routing the investment through a Mauritius subsidiary of the US company to avail tax benefits of the IndiaMauritius Tax Treaty. Funding comes through Foreign Direct Investment (FDI) through the automatic route in sectors where 100% FDI is permissible.shares of shares of an Indian company by a Mauritius company. . This is mainly done by US companies or investors who have set up their back end systems or support processes to cater to the front-end business in the US. Investment in an Indian subsidiary of a US company.
Classification in which VCPE investments are made in India Classification is done on the following basis: Type of industry Stage of investment (growth) Classification on the type of investors (domestic or foreign investor) Nature of promoters – Corpven. Financial corporations. Investment banks. Private equity/venture capital firm Region Classification based on growth in which VCPE investments are made . Govt institutions.
Briefly explain regional distribution of investments by VCPE. .
The preference pattern of VCPE investors was studied for six years during 2004-09. Remaining years – 20% PRIV INVESTORS – Declined from 35% in 2004 to 20% in 2009 IBANK INVESTORS – No early stage investments till 2006. EARLY STAGE INVESTMENT BY DIFFERENT INVESTORS GOVT INVESTORS – 35% in early stage during 05. PROPORTION OF PIPE + PRE IPO & EXPANSION STAGE INVESTMENTS FOR CORPVEN INVESTORS . 06 & 09.Analyze the investment portfolio made by VCPE. started from 2007 Early stage investments involve more risk than investing in later stages. Foreign investors are lower than domestic. EARLY STAGE INVESTMENTS BY DOMESTIC & FOREIGN INVESTORS 20% of deals made by domestic investors (in terms of number of investments) are in early stage. The analysis is based on 1511 investments made by 309 investors.
Decline in proportion of PIPE + Pre IPO deals in total number of CORPVEN deals – 80% deals in 2004 & only 20% in 2009 Steady increase in proportion of deals in expansion stage – 20% in 2004 & 80% in 2009 PROPORTION OF DEALS BY GOVT & IBANK INVESTORS IN BFSI SECTOR 2004-07: IBANK grew from 10 – 40% & GOVT moderate increase from 10 to 19% Post 2007: Due to global financial crisis. deals in IBANK sector fell to 0% while GOVT investors in BFSI increased to 58% .
and is no longer considered an attractive sector by the investors. This indicates that the business models in the IT and ITES sector has matured over the years. .IT & ITES SECTOR BY GOVT & CORPVEN INVESTORS 2004: 47% by GOVT investors and 63% by CORPVEN There is a decline in GOVT investors in IT & ITES sector from 2005 & in 09 it accounted for 1%.
. Particularly in 08 and 09. 2007-09: IT & ITES: Increase in foreign investments & decrease in domestic investors ENGINEERING & CONSTRUCTION: Domestic investments grew in 07 whereas decreasing trend by foreign investors in 2009 In recent years no single sector seems to dominate the investments made by foreign investors. Investments made by domestic investors on the other hand indicate strong preferences in various years.DOMESTIC & FOREIGN INVESTMENTS IN DIFFERENT INDUSTY CATEGORIES There is no common ground for both investors. the percentages of investments in each of the four sectors are quite close.
A majority of angel investors had experience in the engineering and construction sector. One would have expected that most of them to have had experience in the technology or services sectors. Most GPs in the VCPE firms on the other hand have experience in financial management and not as much in operational areas.Profile the Angel investors and VCPE Fund Managers. While the trends on functional experience is as expected. A comparison of the profiles of angel investors and fund managers is quite interesting. There was a significant percentage with experience in the manufacturing sector too. the trend of more of the angels having experience in the traditional sectors was not quite on expected lines. In terms of the functional experience. . most of them had operational experience. This probably explains the reason behind why most VCPE investments are late stage and PE type investments rather than early stage VC type investments.