venture capital funding and private equity in india

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Class room discussion on VC, PE funding in India, Institutions, Regulations, SEBI Committee headed by KB Chandrasekhar on Venture Capital, SIDBI schemes and funds, etc., for MBA Students by Prof Chowdari Prasad, Bangalore

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Venture Capital Financing & Private EquityFinancial Services and Markets04/24/09 Venture Capital Finance 1

ET April 03, 2007 VC / PE investments cross $2 bn in Q1 $2.4 bn in 78 deals ($1.4 bn across 69 last year) This does not include real estate investments! With new funds coming in, total investments during the year 2007 likely to cross $ 10 bn mark Segments are IT, Mfg, Financial Services, Engg. & Construction, Transport & Logistics Source: Venture Intelligence India04/24/09 Venture Capital Finance 2

$500 mn NYSE, GOLDMAN, General Atlantic and SOFTBANK in NSE Rs. 820 Cr Khazanah National hiked its stake in IDFC to 9.95% Rs 100 Cr Kotak Mahindra Banks Private Equity Group invested in DRS Logistics $82 mn ADM invested for a 10% stake in SKNL Rs. 125 Cr RAMKY Infra raised from IL&FS Investment Managers & SABRE-ABRAAJ Fund04/24/09 Venture Capital Finance 3

BIG DEALS

TiE- The IndUS Entrepreneurs How & when it all started? Indian Professionals waiting in Airport lounge for a Dignitary in 1992 TiE is not for VCF but Angel Investing ! Members 600 with Chapters in Boston, Austin and Los Angeles 20 institutions - leading Silicon Valley Venture Capital Investors, law firms, accounting firms and banks

50 % Business Plans in S Valley from Indians! Vinod Dham, Sailesh Mehta, Kanwal Rekhi, et al 04/24/09 Venture Capital Finance 4

The Entrepreneurial Connection East Meets West in Silicon Valley by Gurmeet Naroola Tata McGraw-Hill publication-2001 Prakash Bhalerao (Ambit Design Systems), Sabeer Bhatia (Hotmail, Arzoo), K B Chandrasekhar (Exodus), Deepak Chopra ( Chopra Centre for Well Being), Desh Deshpande (Cascade Communications), Vinod Dham (Intel, NextGen, Silicon Spice), Prabhu Goel ( Gateway Design, Ipolicy), Rajat Gupta (McKinsey), Vinod Khosla (KPC & Byers), et al (25 in all)04/24/09 Venture Capital Finance 5

The first Entrepreneur - Venture? 1492 A.D.: Europes period of Liberalization Voyage to discover a sea route to China, Japan Sail West, with active support of the monarch King of Portugal and his Committee rejected ! Project was patronised by the Spanish Monarch About six years, many rounds of deliberations Supported by Queen Isabella, a new direction Christopher Columbus could launch his voyage !04/24/09 Venture Capital Finance 6

Venture Capital Development after Second World War Shift from Tech-oriented Mfg Orgns Unlisted Companies Finance to Non-conventional units Risky financing to new ventures based on innovative entrepreneurship Started in USA, UK, European countries Followed in East - Japan, Singapore, etc04/24/09 Venture Capital Finance 7

What is Venture Capital ? Money provided by Professionals or Wealthy High Networth Individuals (HNIs) or Institutions like FIIs, FIs, etc who invest alongside management in young rapidly growing companies that have the potential to grow into significant economic contributors Its an important source of equity for start up cos04/24/09 Venture Capital Finance 8

VC Firms Generally private limited liability partnerships Or closely held corporations funded by : Private & public pension funds Endowment funds Foundations Corporations Wealthy individuals Foreign investors and Venture Capitalists..04/24/09 Venture Capital Finance 9

VCF in the West New, tech-based professionals Untried areas ventured by entrepreneurs Inadequate investment VC and Entrepreneurs work as partners High risk, High returns (capital gains) No Security or Collateral High growth rate expectedVenture Capital Finance 10

04/24/09

Some novel Ventures Federal Express Corpn - Courier industry was revolutionized with overnight delivery! Edwin H. Land - initially failed to convince Detroit Auto Industry with polarizing headlights - Then, invented Polaroid Camera ! Haloid Corporation funded inventor of Xerox - Mr. Chester Carlson for Photocopying !04/24/09 Venture Capital Finance 11

Features of VC Equity Participation Long Term Investment Participation in Management04/24/09 Venture Capital Finance 12

VC in USA Post War - 1946 : Formulation of American Research and Development Corporation (ARDC) in Boston : Gen. Georges Doroit, a French-born military man considered as Father of VC Taught Risk Capital at HARVARD BS J H Whitneys Minute Maid (1946) Orange Juice Rockfellers VENROCK in 1950 Eastern Airlines SBIC Act, 1958 for financing VCs Tax Incentives to VCFs Reduction in Capital Gains Tax in 197804/24/09 Venture Capital Finance 13

Growth of VC in USA 01. Favourable Public Attitude 02. Dynamic Financial System 03. Government Support04/24/09 Venture Capital Finance 14

VCs in Europe Started in the Eighties - Slow growth European Venture Capital Assn-1983 Change in Public Policy & Economic conditions Banks, Govt, Insurance Cos, Pension Funds and Corporate Investors Focus on Industrial, Consumer and Electronic Products04/24/09 Venture Capital Finance 15

VC in UK Largest VC industry outside USA Steady growth of finance and talent Demonstration Effect of high profitability Tax incentives for investments in VCF Business Expansion Scheme to motivate Increase in Management Buy Outs Involvement ofVenture Capital Finance Bankers Merchant 04/24/09

16

VC in Other Countries France - 50 % fiscal incentives from 1972 More tax incentives from 1983

Netherlands - fast growing VC market Owned and supported by Banks/Govt

Germany - 75 % Family owned Cos Change in attitude since 198504/24/09 Venture Capital Finance 17

VC in Asia Initially supported by friends, relatives etc Japan started Small Business Investment Companies in Sixties Australia launched VC in seventies Hong Kong, Singapore, South Korea and Taiwan in the beginning of eighties Government Policy favourable to VCs04/24/09 Venture Capital Finance 18

VC - Defined .. An equity/equity-related investment in a growth-oriented small/medium business to enable investees to accomplish corporate objectives, in return for minority share-holding in the business or the irrevocable right to acquire it.04/24/09 Venture Capital Finance 19

Who is an process ? Angel An important link in the Who supports an enterprise At a very early stage An experienced individual Who is a Professional with High Net Worth Provides First Round finance With less money orientation04/24/09 Venture Capital Finance 20

Steps in VC Financing 01. Selection of Investment 02. Stages of Financing 03. Financial Analysis 04. Structuring the Deal 05. Investment Nurturing/Aftercare 06. Valuation of Portfolio 07. ExitVenture Capital Finance 21

04/24/09

01. Selection of Investment Evaluate Business Plan of VCU (promoter) Similar to Project Appraisal by DFIs Track record of the Entrepreneur Market Potential Study and Projects Profitability Study Likely threats to project o/a technological obsolescence/ competition04/24/09 Venture Capital Finance 22

02. Stages of Financing Early Stage Financing Seed Capital/pre-Start Up Start up Second round financing

Later Stage Financing 04/24/09

Mezzanine/Development Capital Bridge/Expansion Buy Outs - MBOs and MBIs TurnaroundsVenture Capital Finance 23

03. Financial Analysis Idea-based and growth-based ventures ? 01. Conventional VC Valuation Method Evaluates VCU at starting and exit time

02. The First Chicago Method Evaluates entire earnings stream

03. Revenue Multiplier Method Annual revenue is estimated thro Multiplier04/24/09 Venture Capital Finance 24

04. Structuring the Deal Equity Instruments Debt Instruments Conditional Loan Conventional Loans Income Notes, NCDs, PCDs Zero Interest/Coupon Bonds/Debentures Secured Premium Notes, Deep Disc BondsVenture Capital Finance 25

04/24/09

05. Investment Nurturing/ Aftercare Styles Hands-on Nurturing Hands-off Nurturing Hands-holding Nurturing

Objectives of Aftercare Techniques - Personal Discussions, Plant Visits, Feedback thro Nominee Directors, Periodic Reports, Commissioned Studies04/24/09 Venture Capital Finance 26

06. Valuation of Portfolio Equity Investments Cost Method, Market Value Method, Quoted Market Value Method, Fair Market Method,etc

Debt Instruments Convertible Debt, Market Value Method, Fair Value Method, Non-Convertible Debt, Fixed Interest Non-Convertible Debt, Highly leveraged Investments04/24/09 Venture Capital Finance 27

07. Exit Last stage in VC Financing To make profits or minimise losses ! Timing decided in advance / well planned Timing depends on 04/24/09

Nature of Venture Extent and type of finance state of competition market conditions, etcVenture Capital Finance 28

Disinvestment Channels VOLUNTARY Going Public Sale of Shares to Entrepreneurs /Employees Trade Sales / Sale to another company Selling to a new investor

INVOLUNTARY Liquidation / Receivership04/24/09 Venture Capital Finance 29

VC in India

An equity finance in new companies As loan / convertible debt for capital gains Long Term investment in growth oriented small / medium firms to help them grow rapidly Active involvement of VCs to promoters extending hands-on approach / management High-risk-return; Compensation for other losses Not a technology-finance; early stage support04/24/09 Venture Capital Finance 30

Indian VC History VC financing 1975 IFCI-sponsored Risk Capital Foundation (now IFCI Venture Capital Funds Ltd.)

1976 Seed Capital Scheme Industrial Development Bank of India (IDBI).

Till 1984 - risk and seed capital Need felt during 1985-investors burnt their fingers 1985 - VC fund Government of India (GoI)04/24/09 Venture Capital Finance 31

Indian VC Scenario Need felt in 1985 - F

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