Venture Capital Funding

Ajay Kumar Kapur, CEOSIDBI Venture Capital Ltd.

Different forms of financing

IDEAS

SMEs

MICRO BUSINESSES

LARGE BUSINESSES

Equity Capital Debt

Businessmen, Friends, “Angel” Investors

Family and Friends, Relatives

Term loan ofBanks/ FIs

Venture Capital

Capital Markets, “Public Equity”

“Private Equity”

Microcredit

Mezzanine Debt and quasi-equity (VC)

Venture Capital is one of the most appropriate ways of financing start-ups

Project Funding

Own Funds Equity

Internal Accruals

Borrowed Funds Term Loans

Debentures / Bonds

Lease / HP

SOURCES -- Borrowed Funds

Term Loans Banks, SIDC / SFC, FIs

Debentures Public Issue / Private placement

Lease & Hire Purchase NBFCs

Factors Governing Debt Comp.

DEBT SERVICING CAPACITY (DSCR)

SECURITY AVAILABLE (MARGIN)

COST of FUND

SOURCES - Equity Fund

- Promoters and family

- Associates

- Institutions = PVT EQUITY

= VENTURE FUND

- Public

Factors Governing Equity Comp .

-PROFITABILITY (EPS)

-EXIT CONSIDERATION

STRIKE BALANCE BETWEEN DEBT AND EQUITY

Role of VC…

Venture Capitalist fills this gap by providing “Value Added Finance”

VENTURE CAPITAL ….Characteristics

“ BUSINESS OF BUSINESSES”

Spirit of partnership Risk - Reward sharing

Active participation and value addition Long term perspective Investment and not assistance Returns linked to performance Expects high returns

CONVENTIONAL V/S V.C FUNDING

Security backed

Passive role

Fixed obligation

Term loans

Risk averse

Short and medium term perspective

Conventional business

Unsecured /need based

Active role

Performance linked return

Equity / Quasi equity

High risk appetite

Long term

High growth business

Risk Profile

VC

PVT EQ / MF

DEV FIN Reward

Risk

Why Venture Capital

Has the potential to finance start-ups as venture capitalists are generally willing to accept high levels of risks for high potential profits

Do not require collateral nor charge interest payments

Long-term or at least medium term capital

Contribute to the management of the firm

Value Addition

Value addition and nurturing by VC essential for any start-up’s success

Alongwith Capital, start-ups need intelligent direction, strategic partnerships and flexibility critical for their sustenance and growth.

Collaborative management approach - "Healthy relationship between Promoter and VC critical to success of the venture”

Risks in start-ups/early stage companies

Concentration risk: Focus on small market (either product or geographic) segment raises vulnerability to sectoral downturn

Product Risk: Products may have little or no track record, are largely untested in markets, and usually have high obsolescence rates.

Duration risk: May need long-gestation period raises period for which funding is needed.

Small deal size; hence not found economic by most investors

Risks in start-ups/early stage companies Asset risk: Lack of collateralizable assets, due

to a high proportion of fixed assets with high obsolescence, and a high proportion of human capital

Entrepreneur risk: hard to evaluate new management and/or new business proposal without track record

Technology risk: hard to evaluate new technology and are focused on small set of products

Risks drive the innovative way for financing for start-ups.

What VC’s Look For

Core Management Team - Venture Funds back entrepreneurs and the team .

Market Size, Opportunity and scalability -Competitive advantage today or potentially; the potential to change the rules of the game. The opportunity and capability to play globally.

Intellectual Capital - today or potentially, in the form of brand, intellectual property, methodologies , processes ,network, customers, etc apart from Human Capital which determine valuations .

What VC’s Look For

Clean structure - Most preferred is a single company, no cross-holding, no subsidiary structure. Transparency.

Valuations and appropriate stake offered in the company.

Returns on Investment potential.

Coinvestment and Future Investment potential with value add .

Exit opportunity.

SIDBI’s VC strategy

SIDBI General Fund started in 1994

SIDBI’s three tier VC strategy

Has supported many state level VC funds

Focussed on software/IT and knowledge based industries

Assisted 2 Incubators at IIT, Kanpur and BIT, Ranchi

SIDBI Venture Capital Ltd.

Wholly Owned Subsidiary of SIDBI Established to carry out business of setting up,

advising and managing Venture Capital funds. Professionally managed AMC Currently managing two national level funds, viz.

NFSIT & SME Growth Fund

Role of SVCL

Start-ups require high level of handholding

Active management participation by SVCL

Nominee directors appointed on all investee cos.

Help create systems, provide advise through industry experts

Help in second round fund raising

A 8 years (close ended) fund established in 2004 with a corpus of Rs.500 crore focused on SMEs in diverse sectors

Set up by SIDBI in association with leading Public Sector Banks in India

Fund objective: To meet the long term risk capital of SME units

Sector agnostics. Focus on growth sectors such as Life sciences Services Engineering Textiles

SME Growth Fund

National Venture Fund for Software and IT Industry (NFSIT)

A 10 years (close ended) fund with a corpus of Rs.100 crore set up in 1999

Contributed by SIDBI, MCIT (GoI) and IDBI Fund objective: Meet fund requirement of

software & IT companies with focus on SMEs

Invested in 31 Companies from Software services, products, ITES & Internet sectors

Co-investment with International, Private and State level funds