VENTURE CAPITAL FINANCING

VENTURE CAPITAL – Some Views General Georges Doriot – father of US Venture Capital “Venture Capital is Patient and Brave Money that seeks new and growing companies and invests for long haul” Gombers & Lerner: Venture capital at crossroads “Independently managed dedicated pools of capital that focus on Equity or Equity linked investments in a privately held, high growth companies”

VENTURE CAPITAL Long-term Equity / QUASI Equity finance in businesses with high growth and profit potential Return through capital gains Risk-reward sharing in nature Not synonymous to high-tech finance

VENTURE CAPITAL IS NOT Development Finance Term Loan Conventional Financing Passive Equity investment support R&D funding sources

CONVENTIONAL FINANCING TERM LOANS SECURITY BACKED PASSIVE FIXED OBLIGATIONS RISK AVERSE SHORT-TO-MEDIUM TERM PERSPECTIVE PREFERENCE FOR LARGE AND STABLE BUSINESSES VENTURE CAPITAL EQUITY / QUASI EQUITY UNSECURED ACTIVE PAYMENT RELATED TO PERFORMANCE WILLING TO ASSUME RISKS LONG TERM CONSIDERATION PREFERENCE FOR SMALLER START UPS

VENTURE CAPITAL IN INDIA STARTED IN MID EIGHTIES BY THREE ALL INDIA FINANCIAL INSTITUTIONS AND A PRIVATE COMPANY. IN 2002 VENTURE CAPITAL FUNDS INVESTED $ MILLION IN INDIAN COMPANIES. INDUSTRY HUBS :MUMBAI, DELHI, BANGALORE. IN 2002, INDIA RANKED AS THE SECOND MOST ACTIVE VC MARKET IN ASIA PACIFIC (EXCLUDING JAPAN). Major VC Companies in India: ICICI Venture, Gujarat Venture Finance Limited, UTI ventures, SIDBI Ventures Etc.

Stages of Company Evolution & Primary External Finance Source Public Issue Mezzanine /Private Equity Venture Capital Funds Angel Investors Personal Savings Incubators SEED START-UP EARLY GROWTH SUSTAINED GROWTH

STAGES OF INVESTMENT SEED TO GET A COMPANY STARTED. THE PRODUCT MAY BE IN A R&D PHASE, IT MAY JUST BE AN IDEA. START UP GOES TO COMPANIES, WHICH HAVE A PRODUCT BUT MUST DO SOMETHING WITH IT. FIRST ROUND GOES TO COMPANIES WHICH HAVE USUALLY PROGRESSED BEYOND A START-UP – USUALLY TO PROMOTE GROWTH.

Contd… SECOND ROUND  ALSO CALLED “SUBSEQUENT ROUND” - FOR PROMOTING OR SUSTAINING GROWTH. IT MAY ALSO BE A “SAVING INVESTMENT” OR “BAIL OUT” IF THE COMPANY HAS NOT PERFORMED UPTO EXPECTATION. BRIDGE/ MEZZANINE FINANCING  THIS IS ALSO CALLED “MEZZANINE FINANCING”. THIS CAPITAL IS GIVEN FOR A SPECIFIC PURPOSE, EG., TO COVER EXPENSES INCIDENTAL TO THE RECEIPT OF LARGE PRODUCT ORDER.

VC PROCESS DEAL SOURCING INITIAL EVALUATION DUE DILIGENCE & APPRAISAL DEAL STRUCTURING MONITORING & NURTURING EXIT

Establish fund & Target investment opportunities Raise Capital for Investment Due diligence & Appraisal Deal Structuring Monitoring & Nurturing Exit Generate deal flow. Identify new & Young companies with high potential Screen & Evaluate deals

WHAT A VENTURE CAPITALIST LOOKS FOR Promoter of repute and integrity. Team. An idea that will address large markets. Attractiveness of technology and fit. Upside potential and down side exposure. Anticipated growth rate. Age and stage of development. Fund requirement. Goal congruence. Additional round of funds. Returns. Exit.

FINANCIAL STRUCTURING -TO MATCH EVERY NEED FINANCING THROUGH –EQUITY –QUASI EQUITY - PREFERENCE SHARE CONVERTIBLE PREFERENCE SHARE CONVERTIBLE DEBENTURES –SUBORDINATED UNSECURED DEBTS INCOME NOTES, CONDITIONAL LOANS CONVERTIBLES ARE PREFERRED DILEMMA OF PRICING IS SOLVED ENTREPRENEUR GETS REWARDED FOR HIS HARD WORK EXIT IS SIMPLER

FINANCIAL STRUCTURING OBJECTIVE COMPENSATE PROMOTER PROVIDE FOR CASH BURN MANY ROUNDS OF FINANCING EXIT POSSIBLE MEANS PREFERENCE SHARE CONVERTIBLES WARRANTS DIFFERENTIAL PRICING / SWEAT EQUITY PREFERENCE SHARE CONVERTIBLE PREFS CONVERTIBLE INCOME NOTES INCOME NOTES OPTIONALLY CONVERTIBLE RIGHTS

FINANCIAL STRUCTURING - CONSIDERATIONS OF A VENTURE CAPITALIST MAXIMISING FINANCIAL RETURNS GIVEN THE LEVEL OF RISK PERCENTAGE OF HOLDING TO HAVE EFFECTIVE SAY FOR DEVELOPMENT OF THE COMPANY THROUGH BOARD REPRESENTATION MANAGEMENT’S RELATIVE CONTRIBUTION TO CAPITAL TO ASSURE THAT MANAGERS HAVE MORE AT STAKE THAN JUST THEIR EGOS MINIMIZATION OF TAXES TO INVESTORS FUTURE LIQUIDITY VOTING CONTROL PROTECTION AGAINST LOSSES IN CASE OF LIQUIDATION OR DOWN SIZING EXIT

FINANCIAL STRUCTURING - CONSIDERATIONS FOR AN ENTREPRENEUR CONTINUE TO HOLD THE BUSINESS THAT THEY HAVE CREATED FINANCIAL REWARDS ADEQUATE RESOURCES NEEDED TO ACHIEVE THEIR GOAL MINIMIZATION OF TAX EXPOSURE FOR BUYING CHEAP STOCK VALUE ADDITION BY THE VENTURE CAPITALIST COMMON CONSIDERATION FOR BOTH FLEXIBILITY FOR GROWTH OF THE COMPANY RETENTION OF KEY EMPLOYEES THROUGH ADEQUATE PARTICIPATION AND REWARD.

VALUE ADDITION BY VENTURE CAPITAL BUILDING UP SYSTEMS & PROCEDURES, LEGAL & STATUTORY COMPLIANCES NEGOTIATION FOR TECHNOLOGY TRANSFER & TIE-UPS KEY PERSONNEL RECRUITMENT & TEAM BUILDING MARKETING TIE-UPS NETWORKING RESOURCE MOBILIZATION APPOINTMENT OF EXPERTS & CREATION OF ADVISORY BOARDS CORPORATE GOVERNANCE HELPING COMPANIES PARTICIPATE IN VARIOUS FORUMS ORGANIZING TRAINING, WORKSHOPS FOR COMPANIES

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