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VENTURE CAPITAL

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VENTURE CAPITAL
Venture capital is a means of financing fast-growing private
companies. Finance may be required for the startup,
development/expansion or purchase of a company via a mechanism
such as in a management buyout.
- Venture capital is capital typically provided by outside investors for
financing of new, growing or struggling businesses.
- Venture capital investments generally are high risk investments but
offer the potential for above average returns.
- A venture capitalist (VC) is a person who makes such investments.
- A venture capital fund is a pooled investment vehicle (often a
partnership) that primarily invests the financial capital of third-party
investors in enterprises that are too risky for the standard capital
markets or bank loans.

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HISTORY OF VC
USA is the birth place of Venture Capital Industry as we know it
today. During most its historical evolution, the market for arranging
such financing was fairly informal, relying primarily on the resources of
wealthy families.
In 1946, American Research and Development Corporation (ARD),
a publicly traded, closed-end investment company was formed.
ARD's best known investment was the start-up financing it provided in
1958 for computer maker Digital Equipment Corp. ARD was eventually
profitable, providing its original investors with a 15.8 percent annual
rate of return over its twenty-five years as an independent firm.
The number of such specialized investment firms, eventually to be
called venture capital firms, began to boom in the late 1950s.The growth
was aided in large part by the creation in 1958 of the federal Small
Business Investment Company program. Hundreds of SBICs were
formed in the 1960s, and many remain in operation today.
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VENTURE CAPITAL: INDIAN CONTEXT
Early Beginnings
In the absence of an organised Venture Capital industry till
almost 1998, individual investors and development financial
institutions played the role of venture capitalists in India.
Entrepreneurs have largely depended upon private placements,
public offerings and lending by the financial institutions.
In 1973 a committee on Development of Small and Medium
Enterprises highlighted the need to foster venture capital as a source
of funding new entrepreneurs and technology. Thereafter some
public sector funds were set up but the activity of venture capital did
not gather momentum as the thrust was on high-technology projects
funded on a purely financial rather than a holistic basis.
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VENTURE CAPITAL: INDIAN CONTEXT
Regulatory Guidelines & Framework
Later, a study was undertaken by the World Bank to examine the
possibility of developing Venture Capital in the private sector, based on which
the Government of India took a policy initiative and announced guidelines for
Venture Capital Funds (VCFs) in India in 1988.
However, these guidelines restricted setting up of VCFs by the banks
or the financial institutions only. Thereafter, the Government of India issued
guidelines in September 1995 for overseas investment in Venture Capital in
India. For tax-exemption purposes, guidelines were also issued by the Central
Board of Direct Taxes (CBDT) and the investments and flow of foreign
currency into and out of India have been governed by the Reserve Bank of
India's (RBI) requirements. Further, as a part of its mandate to regulate and to
develop the Indian capital markets, the Securities and Exchange Board of
India (SEBI) framed the SEBI (Venture Capital Funds) Regulations, 1996.
These guidelines were further amended in Apr 2000 with the objective of
fuelling the growth of Venture Capital activities in India.
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VC IN INDIA – POLICY SUPPORT
Industry Size, Activity and Participants
Pursuant to the regulatory framework mentioned above, some
domestic VCFs were registered with SEBI. Some overseas investment
has also come through the Mauritius route. However, the venture
capital industry, understood globally as "independently managed,
dedicated pools of capital that focus on equity or equity-linked
investments in privately held, high-growth companies", is relatively in
a nascent stage in India. Figures from the Indian Venture Capital
Association (IVCA) show that, till 1998, around Rs. 30 billion had
been committed by domestic VCFs and offshore funds which are
members of IVC]. Figures available from private sources indicate that
overall funds committed are around US$ 1.3 billion. Investible funds
are less than 50% of the committed funds and actual investments are
lower still .
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VC IN INDIA – POLICY SUPPORT
Policy Support
Given the proper environment and policy support, there is
undoubtedly tremendous potential for venture capital activity in
India. The Finance Minister of India, in his 1999 budget speech,
announced that "for boosting high-tech sectors and supporting first
generation entrepreneurs, there is an acute need for higher
investment in venture capital activities." The SEBI committee on
Venture Capital was set up in July, 1999 to identify the
impediments and suggest suitable measures to facilitate the growth
of venture capital activity in India. Also keeping in view the need
for a global perspective it was decided to associate Indian
entrepreneurs from Silicon Valley in the committee.
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VC- IN INDIA – OBJECTIVES AND VISION
Venture capital is valuable not just because it makes risk capital available
at the early stages of a project but also because of the expertise of
venture capitalist that leads to superior product development.
- Venture capitalists finance innovation and ideas which have potential
for high growth but with inherent uncertainties.
- This makes it a high-risk, high return investment.
- Venture capitalists provide networking, management and marketing
support as well. In the broadest sense, therefore, venture capital
connotes financial as well as human capital.
- In the global venture capital industry, investors and investee firms
work together closely in an enabling environment that allows
entrepreneurs to focus on value creating ideas and allows venture
capitalists to drive the industry through ownership of the levers of
control, in return for the provision of capital, skills, information and
complementary resources.
- This very blend of risk financing and hand holding of entrepreneurs by
venture capitalists creates an environment particularly suitable for
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knowledge and technology based enterprises.
ADVANTAGES OF VENTURE CAPITAL
Venture capital has a number of advantages over other forms of finance, such as :
• Finance - The venture capitalist injects long-term equity finance, which
provides a solid capital base for future growth. The venture capitalist may
also be capable of providing additional rounds of funding should it be
required to finance growth.
• Business Partner - The venture capitalist is a business partner, sharing the
risks and rewards. Venture capitalists are rewarded by business success and
the capital gain.
• Mentoring - The venture capitalist is able to provide strategic, operational
and financial advice to the company based on past experience with other
companies in similar situations.
• Alliances - The venture capitalist also has a network of contacts in many
areas that can add value to the company, such as in recruiting key
personnel, providing contacts in international markets, introductions to
strategic partners and, if needed, co-investments with other venture capital
firms when additional rounds of financing are required.
• Facilitation of Exit - The venture capitalist is experienced in the process of
preparing a company for an initial public offering (IPO) and facilitating in
trade sales.
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WHAT DO VC’S LOOK IN AN
ENTREPRENEUR ?
'(Venture capital) certainly isn't about quick trading profits in
the stock market. At its best, it is about helping entrepreneurs
grow really great companies.‘
Bill Ferris, Executive Chairman, Castle Harlan Australian
Mezzanine Partners
Here's what member funds are likely to look for when they talk
to entrepreneurs with fresh idea :
– strong, motivated management teams
– clear strategies
– large but carefully defined target markets
– proven abilities to outperform the competition
– innovation

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What does a VC look for?
Venture capital is not suitable for all businesses, as a venture
capitalist typically seeks :
– Superior Businesses
– Quality and Depth of Management
– Corporate Governance and Structure
– Venture capitalists are put off by complex corporate
structures without a clear ownership and where personal
and business assets are merged.
– Appropriate Investment Structure
– An Exit Plan

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What does the Investment Process entail ?
The investment process begins with the venture capitalist
conducting an initial review of the proposal to determine if it
fits with the firm's investment criteria. If so, a meeting will be
arranged with the entrepreneur/management team to discuss the
business plan.
1. Preliminary Screening,
2. Negotiating Investment, and
3. Approvals and Investment Completed.
The investment process can take up to three months, and
sometimes longer. It is important, therefore, not to expect a
speedy response. It is advisable to plan the business financial
needs early on to allow appropriate time to secure the required
funding.
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What does the Investment Process entail ? Contd…
What are the various Legal Terms used while drafting an
Agreement ?
It is likely that a shareholders' agreement would be prepared
containing the rights and obligations of each party. This
could include :
– Amount and terms of investment.
– Dividend policy.
– Composition of the board of directors.
– Reporting - management reports, monthly accounts, annual budgets.
– Liquidity (exit) plans.
– Rights of CO-sale
– Warranties.
– Matters requiring venture capitalist approval (such as auditors,
employment contracts, major asset purchases, major debt obligations
and significant variations of plans).
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AREAS OF INDIAN VC INVESTMENT
- IT and IT-enabled services
- Software Products (Mainly Enterprise-focused)
- Wireless/Telecom/Semiconductor
- Banking
- PSU Disinvestments
- Media/Entertainment
- Bio Technology/Bio Informatics
- Pharmaceuticals
- Electronic Manufacturing
- Retail
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What are essential areas to be covered in your
business plan?
1. Executive Summary
2. Background on the company
3. The product or service
4. Market analysis
5. Marketing
6. Business operations
7. The management team
8. Financial projections
9. Amount and use of finance required and exit opportunities

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INDIAN VC INDUSTRY ISSUES AND
CHALLENGES
Indian VC yet to be established as a sustainable asset class
among institutional investors. Moreover a limited amount
of true “risk-capital” impacts entrepreneurial activity.

Exit challenges exist mainly due to shallow capital markets


and dull M&A environment for small companies.

Most importantly, India is yet to create a brand-name for IP-


led companies, like Israel has successfully done

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