financing the venture

7/25/2019 Financing the venture

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Venture capital means funds made available

for startup firms and small businesses with

exceptional growth potential.

Venture capital is money provided by

professionals who alongside management invest

in young, rapidly growing companies that have

the potential to develop into significant economic

contributors.


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Venture Capitalists generally:

Finance new and rapidly growing companies

Purchase equity securities

ssist in the development of new products or

services

dd value to the company through active

participation.


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!he "#$% has defined Venture Capital Fundin its &egulation '(() as *a fund

established in the form of a company or

trust which raises money through loans,

donations, issue of securities or units asthe case may be and ma+es or proposes

to ma+e investments in accordance with

the regulations.


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-ong time horion

-ac+ of liquidity

/igh ris+

#quity participation

Participation in management


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%t in0ects long term equity finance which provides

a solid capital base for future growth.

!he venture capitalist is a business partner,

sharing both the ris+s and rewards. Venturecapitalists are rewarded by business success and

the capital gain.

!he venture capitalist is able to provide practicaladvice and assistance to the company based on

past experience with other companies which were

in similar situations.


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!he venture capitalist also has a networ+ of contacts inmany areas that can add value to the company.

!he venture capitalist may be capable of providing

additional rounds of funding should it be required tofinance growth.

Venture capitalists are experienced in the process ofpreparing a company for an initial public offering 1%P23

of its shares onto the stoc+ exchanges or overseasstoc+ exchange such as 4"56.!hey can also facilitate a trade sale.


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'. "eed 7oney:

-ow level financing needed to prove a new idea.

8. "tart9up:

#arly stage firms that need funding for expensesassociated with mar+eting and productdevelopment.

. First9&ound:

#arly sales and manufacturing funds.;. "econd9&ound:


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=. !hird9&ound:

lso called 7eanine financing, this is

expansion money for a newly profitable

company

). Fourth9&ound:

lso called bridge financing, it is intended

to finance the >going public> process


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Financial

Stage

Period (Funds

locked in

years)

Risk

Perception

Activity to be

financed

"eed 7oney ?9'@ #xtremeFor supportinga concept or

idea or &A5 forproduct

development

"tart Bp =9( Very /igh%nitialiing

operations or

developingprototypes

First "tage 9? /igh"tart

commercialsproduction and

mar+eting


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Financial

Stage

Period (Funds

locked in

years)

Risk

Perception

Activity to be

financed

"econd "tage 9= "ufficiently high#xpand mar+etand growing

wor+ing capitalneed

!hird "tage '9 7edium

7ar+etexpansion,

acquisition Aproduct

developmentfor profitma+ing

company

Fourth "tage '9 -ow Facilitatingpublic issue


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5eal origination

"creening

5ue diligence1#valuation3

5eal structuring

Post investmentactivity

#xit plan


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!he financing pattern of the deal is themost important element. Following are the

various methods of venture financing:

#quityConditional loan%ncome noteParticipating debentures6uasi equity


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%nitial public offer1%P2s3!rade salePromoter buy bac+cquisition by another company


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!he concept of venture capital was formally

introduced in %ndia in '(? by %5$%.

!he government levied a = per cent cess on all

+now9how import payments to create the venturefund.

%C%C% started VC activity in the same year

-ater on %C%C% floated a separate VC

company 9 !5%C%


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VCFs in %ndia can be categoried intofollowing five groups:

'3!hose promoted by the Central

Dovernment controlled developmentfinance institutions. For example:

9 %C%C% Venture Funds -td.

9 %FC% Venture Capital Funds -td 1%VCF3 9 "%5$% Venture Capital -td 1"VC-3


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83 !hose promoted by "tate Dovernment

controlled development finance institutions.For example: 9 Pun0ab %nfotech Venture Fund 9 Du0arat Venture Finance -td 1DVF-3

9 Eerala Venture Capital Fund Pvt -td.

3 !hose promoted by public ban+s.For example:

9 Canban+ Venture Capital Fund 9 "$% Capital 7ar+et -td


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;3!hose promoted by private sector

companies.For example: 9 %-AF" !rust Company -td 9 %nfinity Venture %ndia Fund

=3!hose established as an overseas venture capitalfund.For example:

9


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" P#& "#$%

" P#& %4C27# ! C!,'()'


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VCF are regulated by the "#$% 1Venture

Capital Fund3 &egulations, '((). !he following are the various provisions:

venture capital fund may be set up by a

company or a trust, after a certificate of

registration is granted by "#$% on an

application made to it. 2n receipt of thecertificate of registration, it shall be binding

on the venture capital fund to abide by the

provisions of the "#$% ct, '((8.


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VCF may raise money from any investor,%ndian, 4on9resident %ndian or foreign,

provided the money accepted from any

investor is not less than &s = la+hs. !heVCF shall not issue any document or

advertisement inviting offers from the

public for subscription of its security or

units


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"#$% regulations permit investment byventure capital funds in equity or equity

related instruments of unlisted companies

and also in financially wea+ and sic+industries whose shares are listed or

unlisted


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t least @G of the funds should beinvested in venture capital companies and

no other limits are prescribed.

"#$% &egulations do not provide for any

sectoral restrictions for investment except

investment in companies engaged in

financial services.


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VCF is not permitted to invest in theequity shares of any company or

institutions providing financial services.

!he securities or units issued by a venture

capital fund shall not be listed on any

recognied stoc+ exchange till the expiry

of ; years from the date of issuance .


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"cheme of VCF set up as a trust shall bewound up

1a3 when the period of the scheme if any, isover

1b3 %f the trustee are of the opinion that thewinding up shall be in the interest of theinvestors

1c3 ?=G of the investors in the scheme passa resolution for winding up or,

1d3 %f "#$% so directs in the interest of theinvestors.


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!he %ncome !ax ct provides tax

exemptions to the VCFs under "ection

'@18F3 sub0ect to compliance with

%ncome !ax &ules.

&estrict the investment by VCFs only in

the equity of unlisted companies.

VCFs are required to hold investment for a

minimum period of years.


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!he %ncome !ax &ule until now providedthat VCF shall invest only upto ;@G of thepaid9up capital of VCB and also notbeyond 8@G of the corpus of the VCF.

fter amendment VCF shall invest onlyupto 8=G of the corpus of the venturecapital fund in a single company.

!here are sectoral restrictions under the%ncome !ax Duidelines which provide thata VCF can ma+e investment only inspecified companies.


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%t was established in '(( and is based in

5elhi, the capital of %ndia

%t is a member based national organiation that 9 represents venture capital and private

equity firms

9 promotes the industry within %ndia and

throughout the world 9 encourages investment in high growth

companies and

9 supports entrepreneurial activity and

innovation.


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%VC members comprise venture capitalfirms, institutional investors, ban+s,

incubators, angel groups, corporateadvisors, accountants, lawyers,government bodies, academic institutionsand other service providers to the venture

capital and private equity industry.

7embers represent most of the activeventure capital and private equity firms in

%ndia. !hese firms provide capital for seedventures, early stage companies and laterstage expansion.


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Venture capital firms typically source the ma0orityof their funding from large investmentinstitutions.

%nvestment institutions expect very high &2%

VCs invest in companies with high potentialwhere they are able to exit through either an %P2or a mergerHacquisition.

!heir primary &2% comes from capital gainsalthough they also receive some return throughdividend.


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Percentage calculated on the total VC investment- 14,234 USB (fig of 2!!"#


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CITIES SECTRS

7B7$% "oftware services, $P2, 7edia,Computer graphics, nimations,Finance A $an+ing

$4D-2 ll %P led companies, %! A %!#",$io9technology

5#-/% "oftware services, %!#" , !elecom

C/#44% %! , !elecom

/I5#&$5 %! A %!#", Pharmaceuticals

PB4# $io9technology, %! , $P2


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!he regulatory, tax and legal environment should play an

enabling role as internationally venture funds have evolved

in an atmosphere of structural flexibility, fiscal neutrality

and operational adaptability. &esource raising, investment, management and exit should

be as simple and flexible as needed and driven by globaltrends.

Venture capital should become an institutionalied industry

that protects investors and investee firms, operating in an

environment suitable for raising the large amounts of ris+

capital needed and for spurring innovation through start9upfirms in a wide range of high growth areas.


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%n view of increasing global integration and mobility of

capital it is important that %ndian venture capitalfunds as well as venture finance enterprises are ableto have global exposure and investment opportunities

%nfrastructure in the form of incubators and &A5 needto be promoted using government support and private

management as has successfully been done bycountries such as the B", %srael and !aiwan. !his is

necessary for faster conversion of &A5 andtechnological innovation into commercial products.


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!he down mar+et virtually closed the %P2 mar+et

for emerging companies.


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Venture capital 1VC3 and private equity 1P#3 funds

are li+ely to ta+e up to two years to regain their

8@@=9@? level.


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!he increase in weighted deduction of in

house &A5 will boost up investment in

health care.

;)G of the total investment is going to

infrastructure development which is a

positive sign for investors.


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VC can help in the rehabilitation of sic+ units.VC can assist small ancillary units to upgrade

their technologiesVCFs can play a significant role in developing

countries in the service sector including

tourism, publishing, health care etc.!hey can provide financial assistance to

people coming out of universities, technical

institutes, etc thus promoting entrepreneurial

spirits


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$y sectorso $an+ing A financial services

o Customer services

o #nergy

o #ngineeringo/ospitality

o %nternet

o %!H%!#"

o

-ogisticso7anufacturing

o &etail

o !extiles


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financing the venture

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