Welcome into the World of

Venture Capital and Private

Equity

Venture Capital and Venture Capital and Private Equity in IndiaPrivate Equity in IndiaVenture Capital and Venture Capital and

Private Equity in IndiaPrivate Equity in India

Contents• Definition• Need for Venture Capital (VC)• Why firm requires VC• Requirement of funds at different stage of life cycle• Characteristic of VC firm• Financial and corporate VC• Source of funds for VC• Venture Captalist• VC investment in India

Venture capital

Invested in a firm with an Innovative concept or un- proven technology

Venture capital is a type of private equity capital typically provided by professional, outside investors to new, growth businesses.

Venture Capital is sub-set of Private equity. High risk bearing Capital Venture capital can also include managerial and

technical expertise Gestation period is very large Soft money to develop enterprise

Contd… It is different from other institutional capital because its

provision is customized to the needs of the receiver and the skills of the provider and requires close, ongoing, face-to-face interaction.

Venture capital investments are generally made as cash in exchange for shares in the invested company.

Venture capital funding is much more of a partnership than the standard modes of institutional financing.

Those who have the technology concepts Those who have the entrepreneurial capacity to

implement these concepts in the market Those who have the funds to finance this exercise

come together. This is called ecosystem

Need of Venture capital The opening of the economy to greater domestic and

international competition. Tequire a capacity to innovate and bring innovations to the

market. Technological progress involves improvement in skills,

better capital equipment and the introduction of new products, processes and business methods.

It requires investment in education and research and in technology extension.

Expenditure on R & D was about 0.74 per cent of GNP in 2004-05

Which amounts to a little less than $ 4 billion a year

Why Firm requires VC Funds Many enterprises cannot go to the capital market and

raise finance through the issue of publicly traded debt and equity.

Some enterprises may be too small to bear the cost of a public issue.

The field of activity is too risky even for the adventurous market player.

The field of activity has tended to operate in an un incorporated environment, as is the case with real estate development etc.

Requirements of funds at different stages of life cycle

Seed financing: to the technologist/entrepreneur to prove a concept

Start-up financing: for product development and initial marketing to a few customers.

First stage financing: to initiate commercial production and marketing.

Second stage financing: for expansion to scale. Later stage financing: for expansion of an enterprise

that is already profitable. Bridge/Mezzanine financing: as a preparation for going

public or for buyout/takeover.

Characteristic of VC firm Financial Factors Intangible asset like value of the idea and the qualification of

entrepreneur. The VC firm dependent on its own performance for internal

funds generated and is dependent on the returns and information provided by it for external factor.

Can not be subjected to Credit rating. VC firm is finance entirely or to the major extend by equity. Venture capitalist has an active involvement in the

investment and controls the functioning of the investment. Capital employed have high gestation period.

Characteristic of VC firm Production factors An innovative product. Untestified Technology for commercial success. VC firm with an innovative idea and new product can

set precedent in the market. VC firm can set high standard for others to replicate. They don’t have to face competitive pressure.

Marketing factors Marketing strategies are niche strategies. Interested in high margin instead of high growth.

Contd.. Target sustain expand and safeguard the niche through

its efforts like• R&D efforts • Business plane• Product differentiation• Creating barriers to entry

High focus on marketing skimming activity to get maximum returns so that

• Venture capitalist can exit out of deal.• Performance would fetch handsome results for

investor.

Short-term target

Contd… Operational factors Risk involved in decision making depends upon the mindset

of organization. Formulate strategies to meet the time bond target. Managers of the firm are direct partners. They take decision as per returns available and reduce the

perceived risk through• More of information • R&D efforts

Organizational factors VC Institution comprise of firm, the financial intermediary

and the market.

Contd… Returns are to be worked out by considering risk involved. Risk is countered with more of information. Organic organization structure having • Flexibility • Decentralization Result oriented organization culture which focus on • Goal setting • Achieving these goal on time.• Innovations and creativity so as to survive. Employs opportunities of the firm are planned with a short

term prospective. Rules and regulation are flexible and situational

dependent. Managers actively involved in commercialization of the

idea.

Financial VC and Corporate VC

Financial VC Only give financial advices on management decision and

best practices. It is an active investor. Corporate VC Sometimes called as passive investor Supported by large corporate house. Helps to expand market share and sector presence with

support of their “Brand Equity”. Helps company to get better talent, expand product portfolio

and network better in the industry. Increases employee morale The company can get ready customer based.

Example of Corporate VC’s

• Intel Capital.• Google Venture.• Adobe Capital.• Cisco Venture.• IBM• Yahoo

Case’s of Corporate VC’s.• Cisco and Adobe invested as a corporate VC in

Indiagames.• Later Adobe Flash platform for mobile space and Cisco

IPTV and Gaming focus helped Indiagames to expand and diversify.

• Google and Reliance is invested in independent VC firms like Seedfund and Erasmic Ventures and called Fund to Fund approach.

• Microsoft and IBM are interested in investing in new concept.

Source of Funds of Venture Capital

• Venture Capital funds are highly risky and high return funds.

• Most Venture Capital raise their “funds” from institutional investors ,such as pension funds, insurance companies, foundations and high net worth individuals.

• The investor who invest in venture capital funds are referred to as “limited partners”.

Venture Capitalist• Venture capitalists, who manage the

funds are referred to as “general partners”.

• They are from Finance and Operation background with rich experience.

• They get 2% of the fund as a fee for managing it and share of profit if it’s above 20% on annual basis.

Golden Rule of Venture Capital

Venture Capitalist always invest in a new innovative concept. Therefore the firm enjoys very high profit margin at initial stage, but as competitor enters the market, profit margin start decreasing and that is the high time for the Venture capital to exit from the firm with high valuation.

Three strategies to exit from the Venturefirm

1.IPO2.Merger3.Acquisition

Registration and Regulation of VC in

India

• Trusts registered under the Indian Trusts Act and Venture Capital companies.

• The Securities and Exchange Board of India (SEBI) regulates venture capital by both domestic venture capital funds (DVCF) and foreign venture capital investors (FVCIs).

Worlds Famous VC/PE Association Worldwide

• Indian Venture Capital Association• China Venture Capital Association• British Venture Capital Association• European Venture Capital Association• Hong Kong Venture Capital & Private

Equity Association• Swiss Private Equity & Corporate

Finance Association

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