3Entrepreneurs as problem solvers The most difficult problems in the world do not have obvious solutionsThey require creativity and tenacityEntrepreneurs have the necessary traits:VisionDeterminationResourcefulnessCreativityA willingness to change direction when necessaryEntrepreneurship is a powerful tool. Traditional entrepreneurship, however is profit seeking. As a result, it may not a) be interested in rural India given the difficulties, or b) may not promote even development
4What is Venture Capital U.S. – 30 years in existenceFairly new term in Asia (until the last 2-3 years)Earliest venture capital firm in Asia began in 1963 in JapanRefers 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 capitalWider meaning in Asia generally refers to equity investments in growing, unlisted companies.Private EquityDirect Investments
5Sources of Funding What are they? Self Friends & Family Debt Grants, contracts – NIH, SBA, DARPA, etc.AngelsVenture fundsCrossover fundsStrategic (other companies)Public markets
6Where does the money comes from? Fund investors:Insurance companiesPension fundsUniversity endowment fundsFamily trustsGovernment Treasury / AgenciesListed corporations / Private companiesWealthy high net worth individuals (>US$1 million)
7Nature of Venture Capital Debt FinancingPublic MarketObjective: generation of long term capital gainsHorizon: 2-7 yearsLiquidity: lowRisk: HighInstruments: shares, convertible bonds, options, warrantsCritical factor(s): Management team and market potential, rather than collateral
8Value-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
9Industry 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
10What 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%
11Investment 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
12Issues with venture capital No alignment with vision, mission, goalsEnter with an intention to get outDemand – supply gap in fundsImproper modelLoss of control
13Exit Strategy Preferred exit route – IPO Strategic investor Buy back M&AsBigger VC Fund investing etc.
15Venture Capital Investment Process ScreeningDue diligence EvaluationDeal structuringPost-investment activityExit
16Stages of VC financing 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.
20Traditional Bank Finance vs Venture Capital Focus on entrepreneur, project and growth prospects rather than securityHigh risk, high return & high failure scenarioInstruments – Debt vs EquityIn case of failure – returns nil/negligibleTime horizon for returns – LongAsset based financing vs Strength of IdeaFocus on security vs Growth Prospects
21VC in the business lifespan Initial Idea, Business FormationLarger sustainable enterpriseBusiness GrowthMaturing businessEntrepreneur conceives ideaOften a small proprietorshipGenerally micro or sub-micro in sizeEntrepreneur works with teamBusiness plan to grow business past micro stageRequires more infrastructure, addition of new products and servicesIncrease in headcountVC provides financial supportVC provides business building supportBusiness growth slowsFocus on profit and efficiencyVC provides strategic and operational supportBusiness enters small stagePursues growth opportunities to get to medium and large sizeOther investors join
22World Market Conditions “Fear” is highGlobal credit crunch/recessionUncertainty about size and extent of problemCompanies most affected have bad balance sheetsVSX Volatility Index Sept Sept 2008Data courtesy of SV Life Sciences LLP
23Effect on Private Companies Relatively limited impact on Indian companiesReduced access to public markets for exit or financingReduced availability of credit and increased financing costsPotentially longer time period to exit and lower exit valuations
24So… Financial markets are a mess India is a great place to be in these timesFunding is still available, but…Bar is raised for new investmentsValuations are downEach type of funding is affected differently
25Impact of the crisis on venture capital Limited impact in the short term – in 95% of cases, funds will continueQuality VCs raise money from quality, long-term Limited Partners (LPs)VCs have not typically used debt … fortunatelyPotentially dramatic impact in the long termExits – Definitely delayed significantlyVC investment criteria will be more conservativeEarly-stage VCs will still invest in early-stage companies but hurdles will increaseMore sensitive on capital needs, time to market etc.
26Asian Direct Investments: Past Excessive valuationsPlenty of capital availableTightly - controlled enterprises → family business → allow only passive investmentsLimited Government support for foreign investors → legal reforms → → corporate governance (transparency)Risks associated with currency, political stability and credit
27Situation in IndiaGrowth in India has been disproportionately concentrated in industry and servicesRural 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 problemsPrivate 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 concernsNumbers from the World Bank’s India Country Strategy, published September 2004
28VC in India India - Perhaps no better place to be driving innovation Buyers less affected by acute economic turmoilInsatiable demandDemographicsLot’s of money still out there … the bar is much higher but great opportunities and great teams will get fundedTake a strategic approach to fund raising. Target the best sources of money given your opportunity and stage of developmentExpect to spend a lot of time raising money
29Needs of Micro & Small entrepreneurs Skill / ResourceSourceProduct / service IdeaOperational capabilityTeamLocal market knowledgeFlexibilityCapital fundingStrategic supportEntrepreneurOutside source
30Role of VCsVCs should demonstrate that private capital can be used to support the growth of these enterprisesTarget 32% per investment return while furthering developmentOverall fund return should entice other private sources to enter rural and semi-urban IndiaNumbers from the World Bank’s India Country Strategy, published September 2004
32SIDBI Venture Capital Ltd. (SVCL) Wholly Owned Subsidiary of SIDBIEstablished to carry out business of setting up, advising and managing Venture Capital fundsProfessionally managed AMCCurrently managing Rs.600 cr of VC funds as Investment Manager
33National Venture Fund for Software and IT Industry (NFSIT) Set up as a Trust Fund registered with SEBIInaugurated by the Hon’ble Prime Minister in December 19991st fund with Government contributionTenure - 10 years (close ended)Corpus - Rs.100 croreContributors - SIDBI, MCIT (GoI) and IDBIAMC – SIDBI Venture Capital Ltd.Trustee – SIDBI Trustee Company Ltd.
34NFSIT Rs.100 cr corpus Dedicated to Software & IT Industry Investment by way of equity/ equity type instrumentsSeveral hundred business plans examinedCo-investment with other fundsInvestments in software services, products, ITES, Internet initiatives etc.
36Role of SVCL SMEs require high level of handholding Active management participation by SVCLNominee directors appointed on all investee cos.Quarterly internal audit by outside CA firm, progress reports and visitsHelp create systems, provide strategic input for key functional areasHelp in resource mobilisation and fund raising
37SIDBI Growth FundStructured as a unit scheme of SIDBI SME Venture Fund, registered under Trusts Act and with SEBICorpus size Rs.500 croreInitial corpus of Rs.100 crore committed by SIDBIBalance Rs.400 cr contributed by commercial banks.8-year close-ended fund.Registered with SEBI.
38SIDBI Growth FundTo meet the long term risk capital of SME units and to provide mentoring supportFocus on growth sectors like –Biotech,IT,Pharma,Food processing,Retailing,Service sector projectsLight Engineering etc
39SIDBI Growth Fund Proven technology or business model Sound Management TeamSustainable competitive IPR and a well differentiated market positioningClear exit plans for VC investorsPotential of being market leader