Submitted By: Bhawin Shah Gunjan Khushalani Kushagra Surana Neeraj Tolani Nimisha Sharma Parinita Rai Prachi

Jain

V ENTURE

CAPITAL

INTRO

Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth start-up 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 biotechnology, IT, software, etc.

Venture capital is a subset of private equity. Therefore all venture capital is private equity, but not all private equity is venture capital.

Cashing In: For the right businesses, VC will not be a tough hunt!

In addition to angel investing and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering.
In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership

V ENTURE C APITAL
VALUE ADDING
EQUITY
(liable capital) (linked with entrepreneurs interests)

IS :

For Growth Companies Usually Minority Stakes Syndication

Partnerships (Fund/Company) Active but Non-Operational Support Connectivity, Experiences, Advice

= Smart Capital or Capital Plus

D IFFERENCE BETWEEN VC AND PRIVATE EQUITY:

Private equity refers to equity or quasi-equity investments in high-growth companies and includes buyouts, mezzanine financing, privatization and public as well as private deals. The private equity asset class includes venture capital, buyouts, and mezzanine investment activity. While venture capital focuses on investing in private, young, fast growing companies, private equity players largely provide mezzanine or bridge funding.

H ISTORY OF VENTURE
CAPITAL IN INDIA

Early 70's when Govt of India appointed a committee laid by Late Shri R.S.Bhatt to find out the ways to meet a void in conventional financing for funding start-up companies based on absolutely new innovative technologies.
In mid 80's three all India financial institutions viz IDBI, ICICI, IFCI started investing into the equity of small technological companies.

In Nov 1988, Govt of India decided to institutionalize Venture Capital Industry and announce guidelines in the parliament. Controller of Capital issues implemented these guidelines known as CCI for VC. In 1995, Govt of India permitted Foreign Finance companies to make investments in India and many foreign VC private equity firms entered India.

R OLE

OF

VC

Board involvement Management recruitment Future capital raising Access to business network Strategy development Patience!

IT B OOM AND VC INDUSTRY

In 1997, IT boom in India made VC industry more significant. Due to symbiotic relationship between VC and IT industry, VC got more prominence as a major source of funding for the rapidly growing IT industry.

Recession during 1999 - 2001 took the wind out of VC industry. Most of the VC either closed down or wound-up their operations. Almost all of them changed their focus to existing successful firms for their growth and expansion. VC firms also got engaged into funding buyouts, privatisation and restructuring.

S OME SUCCESSFUL VC
INVESTMENTS ARE

I NDIAN P RIVATE E QUITY AND V ENTURE C APITAL A SSOCIATION

IVCA is a member based national organization that represents venture capital and private equity firms, promotes the industry within India and throughout the world and encourages investment in high growth companies. IVCA members comprise venture capital firms, institutional investors, banks, incubators, angel groups, corporate advisors, accountants, lawyers, government bodies, academic institutions and other service providers to the venture capital and private equity industry.

Members represent most of the active venture capital and private equity firms in India. These firms provide capital for seed ventures, early stage companies, later stage expansion, and growth finance for management buyouts/buy-ins of established companies.

A DVANTAGES

OF

VC

Business Consultations - Many venture capital firms have consultants on their staff that are well versed in specific markets. This can help a start up firm avoid many of the pitfalls that are often associated with start-up business ventures.
Management Consultations - Unfortunately, not all entrepreneurs are good business managers. Since venture capital firms almost always require a percentage of equity in the start-up firm, they likely will have a say in how the firm is managed. For the non-management expert, this can be a significant benefit.

Human Resources - In terms of finding the best talent for start up firms, venture capital firms often provide consultants who are specialists in hiring. This can help a start up firm avoid the pitfalls of hiring the wrong people for their company.
Additional Resources - Starting a new business is fraught with concerns about legal matters, payroll matters, and tax issues. It is not unusual for a venture capital firm to take an interest in providing these resources since they have a vested interest in the success of the company.

D ISADVANTAGES

OF

VC

Management Position - In many cases, a venture capital firm will want to add a member of their team to the start up company's management team. This is generally to ensure that the company can be successful, though this can also create internal problems. Equity Position - Most venture capital firms require that the company give up an equity position to them in return for their funding. This amount is not small, in many cases it can be as much as 60 percent of the equity in the company. In effect, this means that the entrepreneur is not controlling their business; it is being controlled by the venture capital firm.

Decision Making - One of the biggest problems that many entrepreneurs face when they agree to accept venture capital is they often are giving up many key decisions in how their company will operate. Venture capital firms that have taken an equity position want a "seat at the table" when any major decision is made and they often have the power to override decisions.
Business Plans - When a business plan is written and submitted for financing considerations, most finance companies will agree to sign a non-disclosure agreement. This is not the case in most venture capital firms. Venture capital firms will nearly always refuse to sign a nondisclosure agreement due to the legal ramifications of doing so. This can put ideas from an entrepreneur at risk.

Funding Plan - If an entrepreneur writes their business plan and determines they need $500,000 to get the business launched, they may be lulled into thinking that these funds will come up front. This is simply not the case. Venture capital firms almost always set goals and milestones for releasing funds. Funding from venture capital firms is typically done in stages with an eye on the expansion of the business.

V ENTURE

CAPITAL PROCESS

1. D EAL O RIGINATION

A continuous flow of deals is essential for the venture capital business. Deals may originate in various ways.
Referral system is an important source of deals. Deals may be referred to the VCs through their parent organizations, trade partners, industry associations, friends etc. The venture capital industry in India has become quite proactive in its approach to generating the deal flow by encouraging individuals to come up with their business plans.

Consultancy firms like Mckinsey and Arthur Anderson have come up with business plan competitions on an all India basis through the popular press as well as direct interaction with premier educational and research institutions to source new and innovative ideas. The short listed plans are provided with necessary expertise through people who have experience in the industry.

2. S CREENING

VCFs carry out initial screening of all projects on the basis of some broad criteria. For example the screening process may limit projects to areas in which the venture capitalist is familiar in terms of technology, or product, or market scope. The size of investment, geographical location and stage of financing could also be used as the broad screening criteria.

3. E VALUATION / D UE D ILIGENCE

Once a proposal has passed through initial screening, it is subjected to a detailed evaluation or due diligence process.

Most ventures are new and the entrepreneurs may lack operating experience. Hence a sophisticated, formal evaluation is neither possible nor desirable. The VCs thus rely on a subjective but comprehensive, evaluation.

VCFs evaluate the quality of the entrepreneur before appraising the characteristics of the product, market or technology. Most venture capitalists ask for a business plan to make an assessment of the possible risk and expected return on the venture. The length of this stage is normally 6-12 weeks and includes interview of customers, former employees, competitors and industry experts. It is intense legal and financial work.

According to a study conducted by Professor IM Pandey of Indian Institute of Management, Ahmedabad a venture capital fund places most importance on the following eleven parameters in the same order of importance while evaluating a venture for possible funding.
Integrity Urge to grow Long-term vision Commercial orientation Critical competence vis--vis venture Ability to evaluate and react to risk Well-thought out strategy to remain ahead of competition High market growth rate Expected return over 25% p.a. in five years Managerial skills Marketing skills

Investment Valuation The investment valuation process is aimed at ascertaining an acceptable price for the deal. The valuation process goes through the following steps:
Projections on future revenue and profitability Expected market capitalization Deciding on the ownership stake based on the return expected on the proposed investment

The pricing thus calculated is rationalized after taking in to consideration various economic scenarios, demand and supply of capital, founders/management teams track record, innovation/ unique selling propositions (USPs), the product/service size of the potential market, etc.

4. D EAL S TRUCTURING

Once the venture has been evaluated as viable, the venture capitalist and the investment company negotiate the terms of the deal, i.e. the amount, form and price of the investment. This process is termed as deal structuring.
The agreement also includes the protective covenants and earn-out arrangements. Covenants include the venture capitalists right to control the investee company and to change its management if needed, buy back arrangements, acquisition, making initial public offerings (IPOs) etc, Earn-out arrangements specify the entrepreneurs equity share and the objectives to be achieved.

Venture capitalists generally negotiate deals to ensure protection of their interests. They would like a deal to provide for
A return commensurate with the risk

Influence over the firm through board membership

Minimizing taxes Assuring investment liquidity The right to replace management in case of consistent poor managerial performance.

The investee companies would like the deal to be structured in such a way that their interests are protected. They would like to earn reasonable return, minimize taxes, have enough liquidity to operate their business and remain in commanding position of their business.
There are a number of common concerns shared by both the venture capitalists and the investee companies. They should be flexible, and have a structure, which protects their mutual interests and provides enough incentives to both to cooperate with each other.

The instruments to be used in structuring deals are many and varied. The objective in selecting the instrument would be to maximize (or optimize) venture capitals returns/protection and yet satisfy the entrepreneurs requirements. The different instruments through which a Venture Capitalist could invest a company include: Equity shares, preference shares, loans, warrants and options. In India, straight equity and convertibles are popular and commonly used. Nowadays, warrants are issued as a tool to bring down pricing.

5. P OST I NVESTMENT A CTIVITIES

Once the deal has been structured and agreement finalized, the venture capitalist generally assumes the role of a partner and collaborator. He also gets involved in shaping of the direction of the venture. This may be done via a formal representation of the board of directors, or informal influence in improving the quality of marketing, finance and other managerial functions.

The degree of the venture capitalists involvement depends on his policy. It may not, however, be desirable for a venture capitalist to get involved in the day-to-day operation of the venture. If a financial or managerial crisis occurs, the venture capitalist may intervene, and even install a new management team.

6. E XIT
TYPES
IPO (Initial Public Offering)
Trade Sale

RETURN POTENTIAL
Highest Medium (High)

HOW?
Flotation at the Stock Exchange Market
Sale to Industrial or Strategic Investor Sale to Management Team or Company Sale to another Financial Institution (e.g. Venture Capitalist) Sorry!

Buy-Back
Secondary Purchase Liquidation Write-Off

Low
? ? None

S HOPPERS

STOP

VC DEAL

Shoppers stop raised money via Venture capital route in 2000 from ICICI Venture, IL &FS and Zodiac clothing.

It was an early stage investment, organized retail untested concept in India.

Shoppers stop operated through 4 stores and a revenue of Rs 800 mn (USD 18 mn). ICICI Venture played an active role in facilitating the supply chain and systems efficiency of Shoppers' Stop. ICICI Venture provided active inputs on the firm's growth strategy to become a leader in lifestyle store format space.

E XIT ROUTE THROUGH IPO

Shoppers stop became a 17 store chain with a turnover of Rs. 600 mn (USD 136 mn), by the time of ICICI venture's exit in 2005.

The Issue was over subscribed by 8.6 times.

Listed at a premium of 56% Today shoppers stop has more than 40 stores in India.