Welcome into the World of Venture Capital and Private Equity

Venture Capital and Private Equity in India

Contents Definition Need for Venture Capital (VC) Why firm requires VC Requirement of funds at different stage of life cycle Characteristic of VC firm Financial and corporate VC Source of funds for VC Venture Captalist VC investment in India

Venture capital  Invested in a firm with an Innovative concept or un- proven technology  Venture capital is a type of private equity capital typically provided by professional, outside investors to new, growth businesses.private equity  Venture Capital is sub-set of Private equity.  High risk bearing Capital  Venture capital can also include managerial and technical expertise  Gestation period is very large  Soft money to develop enterprise

Contd…  It is different from other institutional capital because its provision is customized to the needs of the receiver and the skills of the provider and requires close, ongoing, face-to- face interaction.  Venture capital investments are generally made as cash in exchange for shares in the invested company.  Venture capital funding is much more of a partnership than the standard modes of institutional financing. Those who have the technology concepts Those who have the entrepreneurial capacity to implement these concepts in the market Those who have the funds to finance this exercise come together. This is called ecosystem

Need of Venture capital  The opening of the economy to greater domestic and international competition.  Tequire a capacity to innovate and bring innovations to the market.  Technological progress involves improvement in skills, better capital equipment and the introduction of new products, processes and business methods.  It requires investment in education and research and in technology extension.  Expenditure on R & D was about 0.74 per cent of GNP in  Which amounts to a little less than $ 4 billion a year

Why Firm requires VC Funds  Many enterprises cannot go to the capital market and raise finance through the issue of publicly traded debt and equity. Some enterprises may be too small to bear the cost of a public issue. The field of activity is too risky even for the adventurous market player. The field of activity has tended to operate in an un incorporated environment, as is the case with real estate development etc.

Requirements of funds at different stages of life cycle  Seed financing: to the technologist/entrepreneur to prove a concept  Start-up financing: for product development and initial marketing to a few customers.  First stage financing: to initiate commercial production and marketing.  Second stage financing: for expansion to scale.  Later stage financing: for expansion of an enterprise that is already profitable.  Bridge/Mezzanine financing: as a preparation for going public or for buyout/takeover.

Characteristic of VC firm  Financial Factors Intangible asset like value of the idea and the qualification of entrepreneur. The VC firm dependent on its own performance for internal funds generated and is dependent on the returns and information provided by it for external factor. Can not be subjected to Credit rating. VC firm is finance entirely or to the major extend by equity. Venture capitalist has an active involvement in the investment and controls the functioning of the investment. Capital employed have high gestation period.

Characteristic of VC firm  Production factors An innovative product. Untestified Technology for commercial success. VC firm with an innovative idea and new product can set precedent in the market. VC firm can set high standard for others to replicate. They don’t have to face competitive pressure.  Marketing factors Marketing strategies are niche strategies. Interested in high margin instead of high growth.

Contd.. Target sustain expand and safeguard the niche through its efforts like R&D efforts Business plane Product differentiation Creating barriers to entry High focus on marketing skimming activity to get maximum returns so that Venture capitalist can exit out of deal. Performance would fetch handsome results for investor.  Short-term target

Contd…  Operational factors Risk involved in decision making depends upon the mindset of organization. Formulate strategies to meet the time bond target. Managers of the firm are direct partners. They take decision as per returns available and reduce the perceived risk through More of information R&D efforts  Organizational factors VC Institution comprise of firm, the financial intermediary and the market.

Contd… Returns are to be worked out by considering risk involved. Risk is countered with more of information. Organic organization structure having Flexibility Decentralization Result oriented organization culture which focus on Goal setting Achieving these goal on time. Innovations and creativity so as to survive. Employs opportunities of the firm are planned with a short term prospective. Rules and regulation are flexible and situational dependent. Managers actively involved in commercialization of the idea.

Financial VC and Corporate VC  Financial VC Only give financial advices on management decision and best practices. It is an active investor.  Corporate VC Sometimes called as passive investor Supported by large corporate house. Helps to expand market share and sector presence with support of their “Brand Equity”. Helps company to get better talent, expand product portfolio and network better in the industry. Increases employee morale The company can get ready customer based.

Example of Corporate VC’s Intel Capital. Google Venture. Adobe Capital. Cisco Venture. IBM Yahoo

Case’s of Corporate VC’s. Cisco and Adobe invested as a corporate VC in Indiagames. Later Adobe Flash platform for mobile space and Cisco IPTV and Gaming focus helped Indiagames to expand and diversify. Google and Reliance is invested in independent VC firms like Seedfund and Erasmic Ventures and called Fund to Fund approach. Microsoft and IBM are interested in investing in new concept.

Source of Funds of Venture Capital Venture Capital funds are highly risky and high return funds. Most Venture Capital raise their “funds” from institutional investors,such as pension funds, insurance companies, foundations and high net worth individuals. The investor who invest in venture capital funds are referred to as “limited partners”.

Venture Capitalist Venture capitalists, who manage the funds are referred to as “general partners”. They are from Finance and Operation background with rich experience. They get 2% of the fund as a fee for managing it and share of profit if it’s above 20% on annual basis.

Golden Rule of Venture Capital Venture Capitalist always invest in a new innovative concept. Therefore the firm enjoys very high profit margin at initial stage, but as competitor enters the market, profit margin start decreasing and that is the high time for the Venture capital to exit from the firm with high valuation.

Three strategies to exit from the Venturefirm 1.IPO 2.Merger 3.Acquisition

Registration and Regulation of VC in India Trusts registered under the Indian Trusts Act and Venture Capital companies. The Securities and Exchange Board of India (SEBI) regulates venture capital by both domestic venture capital funds (DVCF) and foreign venture capital investors (FVCIs).

Worlds Famous VC/PE Association Worldwide Indian Venture Capital Association China Venture Capital Association British Venture Capital Association European Venture Capital Association Hong Kong Venture Capital & Private Equity Association Swiss Private Equity & Corporate Finance Association

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