Presentation on theme: "VENTURE CAPITAL FUNDING. Entrepreneurs as problem solvers The most difficult problems in the world do not have obvious solutions They require creativity."— Presentation transcript:
Entrepreneurs as problem solvers The most difficult problems in the world do not have obvious solutions They require creativity and tenacity Entrepreneurs have the necessary traits: Vision Determination Resourcefulness Creativity A willingness to change direction when necessary
What is Venture Capital U.S. – 30 years in existence Fairly new term in Asia (until the last 2-3 years) Earliest venture capital firm in Asia began in 1963 in Japan Refers to investments in young, rapidly growing companies (particularly high-tech related) in the U.S. Serves as an intermediary between investors looking for high returns and entrepreneurs in need of capital Wider meaning in Asia ------- generally refers to equity investments in growing, unlisted companies. Private Equity Direct Investments
Sources of Funding What are they? Self Friends & Family Debt Grants, contracts – NIH, SBA, DARPA, etc. Angels Venture funds Crossover funds Strategic (other companies) Public markets
Where does the money comes from? Fund investors: Insurance companies Pension funds University endowment funds Family trusts Government Treasury / Agencies Listed corporations / Private companies Wealthy high net worth individuals (>US$1 million)
Nature of Venture Capital Debt Financing Public Market Objective: generation of long term capital gains Horizon: 2-7 years Liquidity: low Risk: High Instruments: shares, convertible bonds, options, warrants Critical factor(s): Management team and market potential, rather than collateral
Value-added services/advantages ◈ Financial and strategic planning ◈ Recruitment of key personnel ◈ Access to international markets and technology ◈ Introduction to strategic partners and acquisition targets ◈ Obtain a public listing
Industry Preference/Classifications ◈ Telecom ◈ Construction/Mining ◈ Media ◈ Agriculture/Fisheries ◈ IT ◈ Infrastructure ◈ Leisure/Entertainment ◈ Financial Services ◈ Electronics ◈ BioTech/Life Sciences ◈ Travel/Hospitality ◈ Real Estates ◈ Manufacturing/ Consumer Products
What are VC looking for in return? Big equity upside from appreciation in the value of the Company. Return target – normally in the range of IRR 15%-25%
Investment Process · Sourcing/Marketing Exits: ◈ IPOs ◈ Sale back ◈ Trade sale to Strategic investors · Initial evaluation & terms ◈ Put Option · Due diligence · Monitoring ◈ viable business plan ◈ board seat ◈ proprietary technology ◈ financial performance ◈ enforceable legal structure ◈ accounting/financial integrity · Documentation/Completion/Funding ◈ legal structure ◈ valuation · Final negotiation/term sheet ◈ Shareholders’ Agreement ◈ Subscription Agreement
Issues with venture capital No alignment with vision, mission, goals Enter with an intention to get out Demand – supply gap in funds Improper model Loss of control
Exit Strategy Preferred exit route – IPO Strategic investor Buy back M&As Bigger VC Fund investing etc.
Venture Capital Investment Process Screening Due diligence Evaluation Deal structuring Post-investment activity Exit
Stages of VC financing 1. Seed stage financing - The venture is still in the idea formation stage and its product or service is not fully developed. Money may also be spent on marketing research, patent application. - Capital provided for a business idea; usually supports product development and market research.
CONTD.. 2. Early Stage Start Up: First Stage: Second Stage:
CONTD.. 3. Mezzanine Stage Also known as Bridge Financing. - Capital provided for expansion of a profitable company for going public ( IPO).
Traditional Bank Finance vs Venture Capital Focus on entrepreneur, project and growth prospects rather than security High risk, high return & high failure scenario Instruments – Debt vs Equity In case of failure – returns nil/negligible Time horizon for returns – Long Asset based financing vs Strength of Idea Focus on security vs Growth Prospects
VC in the business lifespan Initial Idea, Business Formation Business Growth Maturing business Larger sustainable enterprise Entrepreneur conceives idea Often a small proprietorship Generally micro or sub- micro in size Entrepreneur works with team Business plan to grow business past micro stage Requires more infrastructure, addition of new products and services Increase in headcount VC provides financial support VC provides business building support Business growth slows Focus on profit and efficiency VC provides strategic and operational support Business enters small stage Pursues growth opportunities to get to medium and large size Other investors join
World Market Conditions “Fear” is high Global credit crunch/recession Uncertainty about size and extent of problem Companies most affected have bad balance sheets VSX Volatility Index Sept 2000- Sept 2008 Data courtesy of SV Life Sciences LLP
Effect on Private Companies Relatively limited impact on Indian companies Reduced access to public markets for exit or financing Reduced availability of credit and increased financing costs Potentially longer time period to exit and lower exit valuations
So… Financial markets are a mess India is a great place to be in these times Funding is still available, but… Bar is raised for new investments Valuations are down Each type of funding is affected differently
Impact of the crisis on venture capital Limited impact in the short term – in 95% of cases, funds will continue Quality VCs raise money from quality, long-term Limited Partners (LPs) VCs have not typically used debt … fortunately Potentially dramatic impact in the long term Exits – Definitely delayed significantly VC investment criteria will be more conservative Early-stage VCs will still invest in early-stage companies but hurdles will increase More sensitive on capital needs, time to market etc.
Asian Direct Investments: Past Excessive valuations Plenty of capital available Tightly - controlled enterprises → family business → allow only passive investments Limited Government support for foreign investors → legal reforms → → corporate governance (transparency) Risks associated with currency, political stability and credit
Situation in India Growth in India has been disproportionately concentrated in industry and services Rural and semi-urban India is lagging behind the rest of the country - These regions are afflicted with poor infrastructure, low levels of education, lack of literacy, among other problems Private capital is the only source large enough to meet the scale of India’s need - Social capital markets too small - Government does not understand private business sufficiently and is often compromised by political concerns
VC in India India - Perhaps no better place to be driving innovation Buyers less affected by acute economic turmoil Insatiable demand Demographics Lot’s of money still out there … the bar is much higher but great opportunities and great teams will get funded Take a strategic approach to fund raising. Target the best sources of money given your opportunity and stage of development Expect to spend a lot of time raising money
Needs of Micro & Small entrepreneurs Skill / ResourceSource Product / service Idea Operational capability Team Local market knowledge Flexibility Capital funding Strategic support Entrepreneur Outside source
Role of VCs VCs should demonstrate that private capital can be used to support the growth of these enterprises Target 32% per investment return while furthering development Overall fund return should entice other private sources to enter rural and semi-urban India
SIDBI Venture Capital Ltd. (SVCL) Wholly Owned Subsidiary of SIDBI Established to carry out business of setting up, advising and managing Venture Capital funds Professionally managed AMC Currently managing Rs.600 cr of VC funds as Investment Manager
National Venture Fund for Software and IT Industry (NFSIT) Set up as a Trust Fund registered with SEBI Inaugurated by the Hon’ble Prime Minister in December 1999 1 st fund with Government contribution Tenure - 10 years (close ended) Corpus - Rs.100 crore Contributors - SIDBI, MCIT (GoI) and IDBI AMC – SIDBI Venture Capital Ltd. Trustee – SIDBI Trustee Company Ltd.
NFSIT Rs.100 cr corpus Dedicated to Software & IT Industry Investment by way of equity/ equity type instruments Several hundred business plans examined Co-investment with other funds Investments in software services, products, ITES, Internet initiatives etc.
Role of SVCL SMEs require high level of handholding Active management participation by SVCL Nominee directors appointed on all investee cos. Quarterly internal audit by outside CA firm, progress reports and visits Help create systems, provide strategic input for key functional areas Help in resource mobilisation and fund raising
SIDBI Growth Fund Structured as a unit scheme of SIDBI SME Venture Fund, registered under Trusts Act and with SEBI Corpus size Rs.500 crore Initial corpus of Rs.100 crore committed by SIDBI Balance Rs.400 cr contributed by commercial banks. 8-year close-ended fund. Registered with SEBI.
SIDBI Growth Fund To meet the long term risk capital of SME units and to provide mentoring support Focus on growth sectors like – Biotech, IT, Pharma, Food processing, Retailing, Service sector projects Light Engineering etc
SIDBI Growth Fund Proven technology or business model Sound Management Team Sustainable competitive IPR and a well differentiated market positioning Clear exit plans for VC investors Potential of being market leader