A Profile of Venture Capital in India-B.V.Raghunandan, SVS College, Bantwal-Karnataka-India

Dr.Veerendra Patil College, Bangalore

Karnataka-India

October 21, 2011

Definitions of Venture Capital

• Venture Capital is, “finance for young developing firm in areas of high technology”-William Davis

• VC is, "money put up by financial institutions or wealthy individuals to back risky commercial venture. This can be at the beginning of the venture’s life, or it can be later in its life” -Tim Hindle

Definitions of VC…continued• VC is, “an equity or equity-

featured capital seeking investment in new companies, new products, new processes,

or new service, that offer the potential of high return on investment” -I F C

• VC is, “an equity related investment in a high growth business in return for a minority shareholding in the business or the irrevocable right to acquire it”

Features of Venture Capital1. Form of Investment

2. New Companies

3. Turn-around Cos

4. High Risk-Return

5. Long-term Asscn

6. Exit Schedule

7. Participation in Mgt

8. Benchmarks

9. Taking Control

10.Technocrat Customers

Form of Investment

• Equity Form of Financing

• Gestation Period• Avoiding Debt Trap• Mega Projects• Risky Projects• Ownership cum

Management cum Consultancy

• Finance with Responsibility

New Companies• Companies Operating in

High Growth Industry• Sunrise Industry• Service Industry

• Technology Content• New Graduates• Industry Requiring

Professionalism

Turn Around Companies

• Sick Companies• Failed Companies• Poorly Managed Companies• Restructured Companies• Changed Product Profile

High Risk-Return Ventures• Expectation of a High Level of

Returns• A High Risk Profile of Ventures• Conventional Cost Curves are

Avoided• Projects of Blue Ocean

Strategies• Aiming at First Mover

Advantage• Ability in Timely Project

Completion• Evaluation of Project

Completion

Long Term Association

• Relation Lasting for a Period of around 7 years or more

• Intimate Association• Creation of a Data Base• Basis for Promoting other Projects• Creation of a Database

Exit Schedule• Target Period-5 to 7

years• Makes the Company

Profitable• Makes the Company

to Issue an IPO• VC sells off all the

Shares & Gets out• Makes the VC highly

liquid

Participation in Management

• Close Watch of Project Implementation• Technical and Business Consultancy• Helps the VC to understand the behind-the schedule

implementation• Finance cum Entrepreneur• Draws the Collaboration from other Projects financed

in the present and in the past

Benchmarks of Performance

• Benchmarks are established• Close Supervision of project implementation• Analysis of Causes for Project Delays• Entrepreneurial Qualities of the VC make the analysis

more understandable and realistic

Taking Control of VC Unit

• VC can take-over the VC Unit• Happens in case of consistent under-performance• Bring in another management team through MBI• Finances the other Group to buy the stake from the

Original Promoter

Technocrat Customers

• Professional Promoters• Techno-Savvy Promoters• Avoiding Family Owned Business• Promoting the Projects of Fresh Graduates

Factors leading to VC Financing• Free Licensing

Policy• Well Developed

Capital Market• New Projects• Taxation Policy• Professional

Promoters• Surplus Funds• High Risk Funding• Enterprise Culture

Venture Capital Vs Private Equity

Venture Capital• New Projects• Manage Initial Problems

• Investment Horizon-5 to 7 years

• Longer Gestation

Private Equity• Existing Projects• No need to manage initial

problems• Investment Horizon is 3 to 5

years• Shorter Gestation Period

Investment Process1) Seed Financing

2) Start-up Financing

3) First Stage Financing

4) Second Stage Financing

5) Mezzanine Financing

7) Bridge Financing

8) Management Buyouts

9) Management Buyin

10) Turn-around Finance

VC Financing in India • Term Lending

Institutions• Commercial Banks

• Private Sector• Foreign Funds

Term Lending Institutions

• Venture Finance without participation in management or exit schedule

• ICICI set up Technology Development & Information India Limited in 88-89

• IFCI set up Risk Capital and Technology Finance corporation Ltd

• IDBI set up IDBI-VCF• IL&FS set up IL&FS Venture Corporation

Commercial Banks

• Since April 1999, banks are allowed to enter VC sector

• Maximum investment in corporate securities limited to 5%, but stands enhanced to the extent VC finance

• Many banks entered on their own or as a joint venture

Private Sector

• Not many until 2000• Many IT Companies are entering the VC

sector through their surplus funds• Indus Venture Capital Fund, Credit Capital

Venture Fund, Marigold Capital Management Limited

• Most of the IT Professionals like Narayana Murthy (Catamaran) and Azim Premji are entering VC Financing

Foreign Funds• HSBC Pvt

Equity India Ltd• Temasek• Draper

International• Underbridge• Overbridge• General Atlantic

Partners• New Vernon

Emerging Trends

• Avoiding Exits• VCs forming Limited Liability

Partnership • Funded Units become the Limited

Companies under the control of the LLP• In India, more attention to SME Sector• More Attention towards fresh Graduates

THANK YOU