A Profile of Venture Capital in India-B.V.Raghunandan, SVS College, Bantwal-Karnataka-India
Dr.Veerendra Patil College, Bangalore
Karnataka-India
October 21, 2011
Definitions of Venture Capital
• Venture Capital is, “finance for young developing firm in areas of high technology”-William Davis
• VC is, "money put up by financial institutions or wealthy individuals to back risky commercial venture. This can be at the beginning of the venture’s life, or it can be later in its life” -Tim Hindle
Definitions of VC…continued• VC is, “an equity or equity-
featured capital seeking investment in new companies, new products, new processes,
or new service, that offer the potential of high return on investment” -I F C
• VC is, “an equity related investment in a high growth business in return for a minority shareholding in the business or the irrevocable right to acquire it”
Features of Venture Capital1. Form of Investment
2. New Companies
3. Turn-around Cos
4. High Risk-Return
5. Long-term Asscn
6. Exit Schedule
7. Participation in Mgt
8. Benchmarks
9. Taking Control
10.Technocrat Customers
Form of Investment
• Equity Form of Financing
• Gestation Period• Avoiding Debt Trap• Mega Projects• Risky Projects• Ownership cum
Management cum Consultancy
• Finance with Responsibility
New Companies• Companies Operating in
High Growth Industry• Sunrise Industry• Service Industry
• Technology Content• New Graduates• Industry Requiring
Professionalism
Turn Around Companies
• Sick Companies• Failed Companies• Poorly Managed Companies• Restructured Companies• Changed Product Profile
High Risk-Return Ventures• Expectation of a High Level of
Returns• A High Risk Profile of Ventures• Conventional Cost Curves are
Avoided• Projects of Blue Ocean
Strategies• Aiming at First Mover
Advantage• Ability in Timely Project
Completion• Evaluation of Project
Completion
Long Term Association
• Relation Lasting for a Period of around 7 years or more
• Intimate Association• Creation of a Data Base• Basis for Promoting other Projects• Creation of a Database
Exit Schedule• Target Period-5 to 7
years• Makes the Company
Profitable• Makes the Company
to Issue an IPO• VC sells off all the
Shares & Gets out• Makes the VC highly
liquid
Participation in Management
• Close Watch of Project Implementation• Technical and Business Consultancy• Helps the VC to understand the behind-the schedule
implementation• Finance cum Entrepreneur• Draws the Collaboration from other Projects financed
in the present and in the past
Benchmarks of Performance
• Benchmarks are established• Close Supervision of project implementation• Analysis of Causes for Project Delays• Entrepreneurial Qualities of the VC make the analysis
more understandable and realistic
Taking Control of VC Unit
• VC can take-over the VC Unit• Happens in case of consistent under-performance• Bring in another management team through MBI• Finances the other Group to buy the stake from the
Original Promoter
Technocrat Customers
• Professional Promoters• Techno-Savvy Promoters• Avoiding Family Owned Business• Promoting the Projects of Fresh Graduates
Factors leading to VC Financing• Free Licensing
Policy• Well Developed
Capital Market• New Projects• Taxation Policy• Professional
Promoters• Surplus Funds• High Risk Funding• Enterprise Culture
Venture Capital Vs Private Equity
Venture Capital• New Projects• Manage Initial Problems
• Investment Horizon-5 to 7 years
• Longer Gestation
Private Equity• Existing Projects• No need to manage initial
problems• Investment Horizon is 3 to 5
years• Shorter Gestation Period
Investment Process1) Seed Financing
2) Start-up Financing
3) First Stage Financing
4) Second Stage Financing
5) Mezzanine Financing
7) Bridge Financing
8) Management Buyouts
9) Management Buyin
10) Turn-around Finance
VC Financing in India • Term Lending
Institutions• Commercial Banks
• Private Sector• Foreign Funds
Term Lending Institutions
• Venture Finance without participation in management or exit schedule
• ICICI set up Technology Development & Information India Limited in 88-89
• IFCI set up Risk Capital and Technology Finance corporation Ltd
• IDBI set up IDBI-VCF• IL&FS set up IL&FS Venture Corporation
Commercial Banks
• Since April 1999, banks are allowed to enter VC sector
• Maximum investment in corporate securities limited to 5%, but stands enhanced to the extent VC finance
• Many banks entered on their own or as a joint venture
Private Sector
• Not many until 2000• Many IT Companies are entering the VC
sector through their surplus funds• Indus Venture Capital Fund, Credit Capital
Venture Fund, Marigold Capital Management Limited
• Most of the IT Professionals like Narayana Murthy (Catamaran) and Azim Premji are entering VC Financing
Foreign Funds• HSBC Pvt
Equity India Ltd• Temasek• Draper
International• Underbridge• Overbridge• General Atlantic
Partners• New Vernon
Emerging Trends
• Avoiding Exits• VCs forming Limited Liability
Partnership • Funded Units become the Limited
Companies under the control of the LLP• In India, more attention to SME Sector• More Attention towards fresh Graduates
THANK YOU