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