Venture Capital

Difference between conventional financing & Venture Capital

Primary focus Collateral Risk Target Return Exit Period of Investment Participation Level

Genesis of Venture Capital Stages of Financing

Seed Capital Start-up Capital

How Venture Capital works

Captive Fund Semi-Captive Fund Independent Fund

Primary investors
Financial Institutions (All India Level/State Level) Commercial Banks Insurance companies Corporate sector Mutual funds Multilateral Development Agencies FIIs NRIs Public

Structure of Venture Capital Industry

Sponsored by All India Development Financial Institutions ICICI Ventures, Risk Capital Fund, Risk Capital & Technology Finance Corporation Ltd. Promoted by State Level Development Financial institutions Kitven Fund, APVCL, GVFL, HITVEL Sponsored by public sector banks and their subsidiaries Canbank, SBI Capital Markets Limited Set up by Indian or foreign private sector institutions ANZ Grindlays, IL & FS Trust Company Limited Set up as Overseas venture capital fund Walden International Investment Group, SEAF Indai Investment & Growth Fund, BTS India Private Equity Fund Limited

Some instances of doomed investments: e-ventures wrote off its $10 million investment in Chaitime Citibank Private Equity & Edelweiss Capital shut down Icleo, a portal for women and wrote off Rs. 1 crore

India Development Fund

First fund in 2004 of IDFC private Equity Acquired an amount of Rs. 840 cr. Focus on infrastructure related companies

Second fund in Sept. 2005 Corpus of Rs 1350 cr. Investment in different sectors like power, oil and gas, transportation, telecom, industrial and commercial infrastructure etc. Companies like GMR Energy, Hotel Leelaventures, Chalet Hotels, Gujarat Pipav Port and Gujarat State Petroleum Corporation

India Growth Fund

Kotak Mahindra Private Equity in partnership with SEAF Management LLC, USA Corpus of Rs 400 to 450 cr. Focus on sectors like Life Sciences, Media & Entertainment, Specialized Retailing, Light Engineering, Information Technology and infrastructure related services such as Healthcare, Logistics & Distribution

Stages in an Investment Cycle

[A] Business Plan [B] Screening of Proposal

[C] Valuation Methods

Conventional Venture Capitalist Valuation Method 2. First Chicago Method 3. Revenue Multiplier Method M = V = (1+r)n x a x p R (1+d)n Where a=expected after tax profit margin percentage at the time of exit p= expected price earnings ratio at exit time r= expected annual growth of revenue d= appropriate discount rate for a venture investment at this stage, risk R= annual revenue level V= present value of VCU
1.

[D] Structuring of deals/methods of financing

Equity instruments Cumulative convertible preference shares Conditional loan Income notes Partially convertible debentures

[E] Value addition and nurturing

Exit Strategies
1. 2. 3. 4. 5. 6.

Mergers and acquisitions Sale to other venture fund Initial public offer Buyback of VCs stake by promoters Sale on the OTC market Management buyout of VCs stake

Legal and regulatory framework

Registration Investment conditions and restrictions Restriction on investment by VCFs Prohibition on listing

Current Scenario
India experiencing a huge inflow of capital As per research by Goldman Sachs, India is expected to be fourth largest economy by 2025 and third largest by 2050 Deregulation of sectors like aviation, insurance & telecom Liberalisation of norms

Investments by VCs
IT & IT-enabled services Software Products Wireless/Telecom/Semiconductor Banking PSU Disinvestments Media/Entertainment BioTechnology Pharmaceuticals Electronic Manufacturing Retail

Some top deals

Newbridge capital & Temasek Holdings (direct co. of Singapore Govt., the second largest foreign equity investor in India) in MATRIX LAB, Hyderabad based pharmaceutical co. for 14% stake @ Rs. 1500 per share, P/E ratio 15 Invest. of 607 crores Warburg Pincus, Indias largest private equity investor in Radhakrishna Food Land, Mumbai based fast food chain Invest. of 230 crores CDC (Now called Actis) in Punjab Tractors, a state govt. owned co. - Invest. of 262 crores Travel guru.com- Funded by Sequoia Capital & Battery Ventures Bharti Airtel Funded by Warburg Pincus

ICICI Ventures
50% stake in Tata Infomedia - Invest. of 115 crores 15% stake in Samtel Colour, Indias top colour picture tube maker (for future capacity expansion programme) - Invest. of 50 crores Glaxo Real Estate - Invest. of 30 crores Welspun India (Textile Sector) - Invest. of 75 crores