Venture Capital Master-class July 21, 2012

MasterclassContents
Basics ofPrivateCapital EvolutionofPrivate CapitalinIndia VentureCapital:HistoricDealValueandVolume IssuesandChallenges 2 6 7 9

WhatisPrivateEquity?
PrivateEquity Publicequity Stockmarket listed companies

Buyouts, Laterstagefinancing, Secondaries

Venturecapital Earlystage/Angel financing

Bydefinition:PrivateEquityistheprovisionofequitycapitalbyfinancialinvestors overthe mediumorlongterm tononquotedcompanieswithhighgrowthpotential Privateequityisilliquid,ownershipisconcentrated,valuationisdifficult,intermediariestendtobe small,financeisaccompaniedbycontrolandmentoring Publicequityisliquid,ownershipisdispersed,valuationisrelativelyeasy,intermediariesarelarge, financeisoftendivorcedfromcontrolandmentoring VentureCapital,isasubset ofPrivateEquityandreferstoequityinvestmentsmadefor:

Thelaunch Earlydevelopment Orexpansionofabusiness

VentureCapitalfocusesprimarilyonentrepreneurialundertakingsratherthanonmaturebusinesses Theessentialdifferencebetweenthetwoisthe stageofinvestment

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CorporateDevelopmentandPrivateEquity
Lastfinancingroundprior toaninitialpublicoffering ofacompany Financingtheexpansionof growthcompanies Providingworkingcapital fundingandrequired financingforyoungfirms duringgrowthperiod Financingthe commercializationand productionofproducts Providingcapitalrequired forproductdevelopment andinitialmarketing activities Providingsmallsumsof capitalnecessaryto developabusinessidea
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IPO/M&A

Private Equity

ThirdStage

SecondStage

FirstStage

Venture Capital Angel Funding

Startup Financing

Seed Financing

CompanyLifecycleandInvestmentSizes
Slow Growth Late Growth
Size>$20mm Readyforthenext growthorbit Buyout/restructuring opportunities

Hyper Growth Early Growth Seed Fund

Promotersown money Friends/Family/Rel atives/Wellwishers Angelinvestors VentureCapital Size<$10mm GrowthCapital Sizebetween$10and20 mm

Investmentsizestendto increasealongthiscurve PEstendtobeactive investorsinearlystage companiesandpassivein moreevolvedcompanies

Inception

Growth

Maturity

EvolutionofPrivateCapitalinIndia

ThefirstgenerationventurecapitalfundswerelaunchedbyfinancialinstitutionslikeICICI andIFCI 1984:ICICIlauncheditVCschemetoencouragestartupventuresintheemerging technologysectors IFCIandCanaraBankfollowedbylaunchingtheirowntechnologyorientedVCfunds Between19952000severalforeignfundslikeBaringPEpartners,CDCCapital,Draper International,HSBCPrivateEquityandWarbug Pincus hadsetfoodinIndia ThefirstsetofregulationsaroundVCstartedcominginthemid90s:

SEBIintroducedtheSEBIVentureCapitalFundsRegulations,1996 TheseregulationswerefurtheramendedbasedontherecommendationsoftheK.B. Chandrashekhar Committeein2000

Thetechnologybustin2000sawaPEslowdown,whenmanyforeigninvestorsfledIndia duringthatperiod Today,globalPEfirmscontinuetodominatetheIndianmarket,appearingin9ofthetop10 dealsbyvalueinQ42011

VentureCapital:HistoricalDealValueandVolume

LastthreeyearshaveseenatremendousamountofinterestinIndiawithinvestmentsinUS$million:

AngelFunding=24 VentureCapital=2,106 PrivateEquity=21,698 Dealvalues&volumesatalltimehigh Euphoriaaroundecommerce,acrossmobile,internetandrelatedverticals EvidentfromrecentdealsofInMobi,Fashionandyou,Snapdeal

Year2011hadbeenrecordyearforearlystageVentureCapitalinvesting

500 450 400 350 300 250 200 150 100 50 0

Thenextfewyearswilldistinguishtheseriousandlongtermplayers,fromtheothers
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Breakdown Volume
382

286 185 122 18 2006 154 207 142 27 2008

313 270 156 44

133 16 2010

19 2007 Angel/Seed

23 2009

2011

Breakdown Value($mm) $20,000 $18,484 $18,000 $16,000 $13,151 $14,000 $12,000 $9,944 $10,000 $7,922 $7,167 $8,000 $6,000 $3,832 $4,000 $659 $1,034 $891 $2,000 $670 $564 $16 $556 $14 $10 $5 $5 $13 $0 2006 2007 2008 2009 2010 2011
Angel/Seed Venturecapital PrivateEquity
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Venturecapital

PrivateEquity
Source:VCCEdge

Top5VentureCapitalDealsin2011
Target HappiestMindsTechnologies Fashionandyou.com Buyer IntelCapital CanaanPartners Sequoia CapitalIndia NorwestVenture Partners IntelCapital NokiaGrowthPartners IndoUS VenturePartners NexusVenturePartners BessemerVenture Partners CanaanPartners SiliconValley Bank NewEnterpriseAssociates SAIFPartners GSHomeShopping Value(US$mm) 45 40

SnapDeal.com

40

Naaptol OnlineShopping

25

TV18Home Shopping

22.25

Source:VCCircle.com
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Thepureandsimpletruthisrarelypureandneversimple.

TheEngagement

Preinvestmentphase Postinvestmentphase Managingexit

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Preinvestmentphase:Theprenuptials

Valuation:ValueversusPrice Projections:SustainableGrowth Diligence RightsandTerms Dilution Buildingaconnect

Rational/logicalconnect Emotionalconnect

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Postinvestmentphase:ASuccessfulPartnership

SharedVision Maintainingyourbusinessstatistics Managingconflictsofinterest Creatingagovernanceframework DivertingorDiversification Finally,NoSurprises

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Managingexit

ManagingDurationMismatch Markettimingisimportant IPOcantakeaminimumoneyeartimeframe

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Tipsforasuccessfulpartnership

DonotchooseaVCplayerbasedonbrandreputationbutlookattheVCfirmsfit withtheorganisation Valuationisnoteverything.Longtermalignmentandcomfortareequally important CarefullyunderstandtheVCfirmsValueAddmodelandseeifthesamealigns wellwithyourorganisationneed Donotrushthroughtheprocess Shareyoursuccessesbutalsobetransparentabouttheweaknesses/ improvementareas.Nastysurprisesintheshortterm(postinvestment)willdoa lotofdamagetotherelationship. DonotoutsourceassignmentstotheVCfirm.Theyarenotthepilotsofthe business PromotersexpectVCstotakequickdecisions VCshouldnotendupasanoptionoflastresortforpromoterswhentheyare unabletotapthepublicordebtmarkets
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Beforetheinvestment Theentrepreneurhasthevisionandtheinvestorhasthemoney

Aftertheinvestment Theinvestorhasthevisionandtheentrepreneurhasthemoney
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