VENTURE CAPITAL

Concepts & Characteristics of venture capital

Guidelines for venture capital.
Venture Capital in India.

Venture Capital - Concept
Venture Capital is a form of "risk capital". In other words, capital that
is invested in a business where there is a substantial element of risk
relating to the future creation of profits and cash flows. Risk capital is
invested as shares (equity) rather than as a loan and the investor
requires a higher "rate of return" to compensate him for his risk.

Venture Capital provides long-term, committed share capital, to help
unquoted companies grow and succeed. If an entrepreneur is looking
to start-up, expand, buy-into a business, buy-out a business in which
he works, turnaround or revitalize a company, venture capital could
help do this. Obtaining venture capital is substantially different from
raising debt or a loan from a lender. Lenders have a legal right to
interest on a loan and repayment of the capital, irrespective of the
success or failure of a business. As a shareholder, the venture
capitalist's return is dependent on the growth and profitability of the
business. This return is generally earned when the venture capitalist
"exits" by selling its shareholding in the business.
Venture Capital -History
History of Venture Capital in India dates back to 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. Such companies either did not get any
financial support or the funding was inadequate which resulted into their early mortality. The committee
recommended starting of Venture Capital industry in India. 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. These
guidelines were very restrictive and following a very narrow definition of VC. They required Venture Capital
to be invested in companies based on innovative technologies started by first generation entrepreneur. This
made VC investment highly risky and unattractive. Nonetheless many private initiatives were taken. At the
same time World Bank selected 6 institutions to start VC investment in India. This included TDICICI (ICICI),
GVFL, Canbank Venture Capital Fund, APIDC, RCTC (now known as IFCI Venture Capital Funds Ltd.) and ILF
(now known as Pathfinder).

In 1995, Govt of India permitted Foreign Finance companies to make investments in India and many
foreign VC private equity firms entered India. In 1996, government announced guidelines to regulate the VC
industry. Though there were many shortcomings these guidelines were the starting point.

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.
Indian VC's which were so far investing in all the sectors changed their focus to IT and telecom industry.

The 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.
Currently, just a few firms are taking the risk of investing into the start-up technology based companies..
Venture capital (VC) investments surged during the first half of 2014,
reflecting optimism about India's entrepreneurial ecosystem and the
potential of the country's market.

According to data from audit and advisory firm E&Y, investments in early-
stage companies and startups rose nearly 40% to 121 deals with the
transaction value jumping 66% to $605 million (Rs 3,630 crore), compared
with the same period in 2013.

Venture capital investments are at their highest level for the first half since
2010, when $663 million (Rs 3,978 crore) was invested across 51 deals.

"The 15 years I have been involved in India, this is the most healthy
venture ecosystem I have ever seen," said Avnish Bajaj of Matrix Partners
India, who founded e-commerce venture Baazee in 2000 before becoming
a VC in 2006.
Venture Capital - Need
Innovation is the mantra for rapid economic growth.
Certain business ideas are worth exploring.
Will die if not supported by necessary funds and technical expertise.
Untried technology and innovative projects have high risk &
mortatility rate.
Traditional credit institution (banks, dev. Fin institutions) are risk
averse .
Also, not fair to involve general investing public in such ventures.
Therefore, a need for separate institutional set up that can nurture
new business ideas.
Such organizational set up has come to be known as venture capital
firms.



Venture Capital
New technology based projects are highly risky and high returns
yielding too.
Even in developed countries 40% of such projects have failed.
But high returns on successful projects more than offset the losses in
failed projects.
Besides funds, VC firms use their business development skills &
managerial expertise to make the projects successful.
Venture Capital-Defined




Venture Capital is an investment in equity share capital or
long term debt capital of an unlisted enterprise that is looking
to start up, expand or buy out a business.
According to SEBI (Venture Capital Funds) Regulations, 1996 :
Venture Capital Fund is an a fund established in the form
of a trust or a company including a body corporate &
registered under these regulations that has a dedicated
pool of capital raised in a manner, specified in the
regulations and invests in accordance with these
regulations.
Comparison of VC with Conventional Financing
Equity Capital through shareholders:
Compliance with SEBI regulations on listing and periodic reporting.
Shareholders do not have managerial competence.

Loan Capital from Banks & Financial Institutions:
Requirement of collateral, guarantees.
Primary concern: Interest and repayment of principal.

Venture Capital:
Participate and earn through growth of a firm.
VC loans may be secured or unsecured.
Loans carry interest higher than bank interest rate.


Private Equity
Venture Capital is a subset of PE.
VC is an investment made in early stages of business.
PE investment is made at later stages (growth & maturity).
PE firms not only provide capital, but also talent & strategy for
improving mgt. capabilities.
PE funds for specific investment purpose and introduced through
pvt. Placement.
PE funds can be private partnerships or government owned equity
funds.
Asset reconstruction companies floated by govt. are examples of PE
funds.
CERSAI (central registry of Securitisation Asset Reconstruction & Security Interest)
Asset Reconstruction Company (India) Limited (Arcil) is India's first and largest asset
reconstruction company, to commence business of resolution of Non-Performing Assets (NPAs)
upon acquisition from Indian banks and FIs.
HNIs, pension funds, insurance firms are major contributors of PE funds.




India Agribusiness FUND Ltd., is the first private
equity FUND focused on the Indian food and agribusiness
sector. Conceptualized and sponsored by Rabobank, the Fund
has a committed capital of USD 120million. Besides the fund
sponsor, Rabobank, other investors include premiere institutions
such as IFC (part of the World Bank Group), DEG (member of
KfW Group & owned 100% by the Government of Germany),
FMO (a Dutch development institution owned by the Dutch
Government), CDC (a UK based development institution owned
by the British Government) and some premiere private
institutional investors such as Capvent. The Fund was launched
in November 2008.
Venture Capital-Characteristics
VC is the risk capital. Risk is assumed by participation in equity or quasi
equity investment in a project.
Provide continuous assistance till the commercial production or until its
exit.
Long term stake in business.
Virtual partner in the firm.
Provide management expertise for production, marketing & other
functions.
VC is patient capital i.e. gains from long term capital appreciation.
Assistance in making strategic alliances.
Invested funds cannot be demanded back any time.
VC firms finance not high technology projects, but also low technology and
service firms.
Venture capitalists disinvest when equity shares of forms get listed on
Stock exchange.
Value added function of VC distinguishes it from conventional finance.



Stages of Project Life Cycle & VC Financing
The venture capital recognises different stages of financing, namely:-
Early stage financing - This is the first stage financing when the firm is undertaking production and
need additional funds for selling its products. It involves seed/ initial finance for supporting a
concept or idea of an entrepreneur. The capital is provided for product development, R&D and
initial marketing.

Expansion financing - This is the second stage financing for working capital and expansion of a
business. It involves development financing so as to facilitate the public issue.

Acquisition/ buyout financing - This later stage involves:-

Acquisition financing in order to acquire another firm for further growth

Management buyout financing so as to enable the operating groups/ investors for acquiring an existing product
line or business and

Turnaround financing in order to revitalise and revive the sick enterprises.
In India, the venture capital funds (VCFs) can be categorised into the following groups:-
Those promoted by the Central Government controlled development finance institutions, for
example:-
ICICI Venture Funds Ltd.
IFCI Venture Capital Funds Limited (IVCF)
SIDBI Venture Capital Limited (SVCL)




Those promoted by State Government controlled development finance institutions, for
example:-

Gujarat Venture Finance Limited (GVFL)

Kerala Venture Capital Fund Pvt Ltd.

Punjab Infotech Venture Fund

Hyderabad Information Technology Venture Enterprises Limited (HITVEL)

Those promoted by public banks, for example:-

Canbank Venture Capital Fund

SBI Capital Markets Limited

Those promoted by private sector companies, for example:-

IL&FS Trust Company Limited

Infinity Venture India Fund

Those established as an overseas venture capital fund, for example:-

Walden International Investment Group

SEAF India Investment & Growth Fund

BTS India Private Equity Fund Limite



Structure & Source of VC Funds
Sources of VC Funds:
VC fund can be structured as a company or a trust & accordingly finances can be
raised through issue of securities, units, loans or donations.
Independent VC Funds: No investor holds majority stake.
Captive VC funds: Few investors contribute majority funds.
They can be subsidiaries of banks, FIs or industrial organizations
Funds are managed by fund managers of asset mgt. co. (AMC).
VC funds have fixed life.
Within this period the money is invested & investors get their returns at the end of
the period.
Main sources of funds: HNIs, ANGEL INVESTORS, PENSION FUNDS.
SEBI guideline: VC can raise money from any investor whether Indian, Foreign or
NRI.
Min. Investment from individual investor not to be less than 500,000 INR.
Firm commitment from investors for contribution of at least 5 crores before start of operations of
VC fund.
Units of VC funds cannot be listed on Stock exchange before expiry of 3 years from the date of
issuance of units.


Investments of VC Firms

1. Venture Capitalists may subscribe to various kinds of securities.

2. VC firm will examine the following factors in relation to the client firm
a. The Entrepreneur
b. The management
c. Products
d. Financial Structure
e. Target Return

Process of Venture Capital Financing

1. Project Valuation

2. Valuation of Venture Capital Investments

3. Monitoring Investments: Participation in management is through
hands on, hand off and hand holding.

4. Exit Routes:
IPO, Buyback, Sale of Project, Liquidation

Venture Capital Financing in India

Aided by reforms undertaken by the Central
government in the recent past, private equity
(PE) investment in India is likely to touch $12
billion in 2014, according to Indian Private
Equity and Venture Capital Association (IVCA).
1. Easy for large scale industries to raise funds.
2. Organized financial support for technological development was missing prior
to 1970s.
3. Talent, skill of local entrepreneurs unutilized due to lack of risk capital.
4. 1975- Committee on development of small & medium enterprises stressed on
Venture Capital as a source of financing new technology & entrepreneurship.
5. 1975-RCF (Risk Capital Foundation) was set up by IFCI.
6. 1986: GOI set up Venture Capital Fund managed by IDBI.
7. ICICI set up Technology Development & Infrastructure Corporation of India (
TDICI).
8. Credit Capital Venture Fund India Ltd was the first private Venture Capital
Fund.
9. VC & PE have registered a phenomenal growth in India.
10. Aided by reforms undertaken by the Central government in the recent past,
private equity (PE) investment in India is likely to touch $12 billion in 2014,
according to Indian Private Equity and Venture Capital Association (IVCA).


Venture Capital Financing in India

IFCI Venture Capital Fund Ltd. (IVCF) :
IFCI established Risk Capital Foundation as a society in 1975.
1988- RCF was converted into RCTC ( Risk Capital & Technology Finance Corporation
Ltd.) for financing indigenous technology.
2000- RCTC was renamed IVCF.

Since its inception IFCI Venture has provided the start-up capital and venture funding
to over 400 entrepreneurs.
Green India Venture Fund
India Enterprise Development Fund
India Automotive Components Manufacturers Private Equity Fund
SIDBI VENTURE CAPITAL LTD.
ICICI Ventures: A subsidiary of ICICI bank. Its focus is Private equity, buyouts,
mezzanine financing.

(top 10 VC firms in News file)



Major Venture Capital Firms

ICICI Venture Business: ICICI Private Equity business
currently manages three capital
funds:
India Advantage Fund Series 1
India Advantage Fund Series 2
India Advantage Fund Series 3

Venture Capital Financing in India
Reliance Venture (Reliance Venture Asset Management Ltd) is a
corporate venture capital company based
in Mumbai, Maharashtra.
[4][5]
It has been promoted by the Reliance ADA
Group. It has advised and invested in deals to the tune of over $4 billion
in various companies. It has invested in companies such as India's
largest online travel portal,Yatra.com, Suvidhaa Infoserve, Stoke Inc,
Pelago Inc, Sequans Communications, E-Band Communications,
Seedfund and two MIT-startups, Dhama Innovations and Scalable
Display Technologies.
[6]
It was recently ranked 30th in the Red Herring
Top 100 Global Venture Capital Firms in 2009.
[7][8]

Reliance Venture Asset Management Ltd
Type Public
Industry Venture capital
Founded 2006
[1]

Founders Anil Ambani
Headquarters Mumbai, Maharastra, India
[2]

Key people Anil Ambani (Chairman)
Harshal Shah, CEO
[3]

Products Venture capital, Growth capital
Parent Reliance Anil Dhirubhai Ambani
Group
Website RelianceVenture.com
SEBI (Venture Capital Fund) (Amendments) Regulations, 2006.
1.venture capital fund means a fund established in the form of a trust or a
company including a body corporate and registered under these
regulation which
(i) has a dedicated pool of capital;
(ii) raised in a manner specified in the regulations; and
(iii) invests in accordance with the regulations;] V

2. Venture Capital Undertaking (in which VCF invests) is to be a domestic unlisted company ,
engaged in providing services or manufacture of articles or things, excluding such items specified
in the negative list by SEBI.
3. VCF may raise money from any investor, whether Indian, foreign or NRI, by way of issue of
units.
4. Investment amount accepted from any investor shall not be less Rs. 5 lakh. This condition is
not applicable to employees, directors, trustees of the fund established as a trust or asset
management company.
5. Each scheme set up by VCF shall have a firm commitment from investors of an amount of at
least Rs.5 crore before the start of the operations of VCF.
6. VCF should disclose all investment strategy at the time of applying for registration.
7. The VCF should invest not more than 25% of the funds corpus in one Venture capital
undertaking.
8. A VCF should not invest in associated companies.
9. A VCF should invest at least 66.67 per cent of corpus in unlisted equity shares.
SEBI (Venture Capital Fund) (Amendments) Regulations, 2006.
10. Not more than 33.33% of the investible funds may be invested by way of:
(a) subscription to initial public offer of a venture capital undertaking whose shares
are proposed to be listed (b) debt or debt instrument of a venture capital
undertaking in which the venture capital fund has already made an investment by
way of equity. (c)preferential allotment of equity shares of a listed company
subject to lock in period of one year; (d) the equity shares or equity linked
instruments of a financially weak.
11. A VCF should not disclose the duration of the life cycle of the fund.
12. Prohibition on listing: No venture capital fund shall be entitled to get its units listed on
any recognized stock exchange till the expiry of three years from the date of the issuance of
units by the venture capital fund.
13. No venture capital fund shall issue any document or advertisement inviting offers from
the public for the subscription or purchase of any of its units.
14. A venture capital fund may receive monies for investment in the venture capital fund
only through private placement of its units.
15. VCF to submit quarterly report.
16. SEBI has the right to investigation & inspection of books of accounts of VCF on receipt
of any complaint.

SEBI (Foreign Venture Capital Investors) Regulations, 2000

Deferred equity shares:
a type of stock, usually held by founding members of a company, often with a higher
dividend that is only paid after other stockholders have received their dividends and, in
some cases, only when a specific level of profit has been achieved.