VENTURE CAPITAL FUNDING. Entrepreneurs as problem solvers The most difficult problems in the world...
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Transcript of VENTURE CAPITAL FUNDING. Entrepreneurs as problem solvers The most difficult problems in the world...
VENTURE CAPITAL FUNDING
Entrepreneurs as problem solvers The most difficult problems in the world do not have obvious
solutions They require creativity and tenacity
Entrepreneurs have the necessary traits: Vision Determination Resourcefulness Creativity A willingness to change direction when necessary
What is Venture Capital
U.S. – 30 years in existence Fairly new term in Asia (until the last 2-3 years) Earliest venture capital firm in Asia began in 1963 in
Japan Refers to investments in young, rapidly growing
companies (particularly high-tech related) in the U.S. Serves as an intermediary between investors looking for
high returns and entrepreneurs in need of capital Wider meaning in Asia ------- generally refers to equity
investments in growing, unlisted companies. Private Equity Direct Investments
Sources of Funding
What are they? Self Friends & Family Debt Grants, contracts – NIH, SBA, DARPA, etc. Angels Venture funds Crossover funds Strategic (other companies) Public markets
Where does the money comes from?
Fund investors:
Insurance companies Pension funds University endowment funds Family trusts Government Treasury / Agencies Listed corporations / Private companies Wealthy high net worth individuals (>US$1 million)
Nature of Venture Capital
Debt Financing
Public Market
Objective: generation of long term capital gains
Horizon: 2-7 years
Liquidity: low
Risk: High
Instruments: shares, convertible bonds, options, warrants
Critical factor(s): Management team and market potential, rather than collateral
Value-added services/advantages
◈ Financial and strategic planning ◈ Recruitment of key personnel ◈ Access to international markets and technology ◈ Introduction to strategic partners and acquisition targets ◈ Obtain a public listing
Industry Preference/Classifications
◈ Telecom ◈ Construction/Mining
◈ Media ◈ Agriculture/Fisheries
◈ IT ◈ Infrastructure
◈ Leisure/Entertainment ◈ Financial Services
◈ Electronics ◈ BioTech/Life Sciences
◈ Travel/Hospitality ◈ Real Estates
◈ Manufacturing/ Consumer Products
What are VC looking for in return?
Big equity upside from appreciation in the value of the Company.
Return target – normally in the range of IRR 15%-25%
Investment Process· Sourcing/Marketing Exits:
◈ IPOs Sale back◈ ◈ Trade sale to Strategic investors
· Initial evaluation & terms Put Option◈
· Due diligence · Monitoring ◈ viable business plan board seat◈ ◈ proprietary technology financial performance◈ ◈ enforceable legal structure ◈ accounting/financial integrity
· Documentation/Completion/Funding ◈ legal structure ◈ valuation
· Final negotiation/term sheet ◈ Shareholders’ Agreement ◈ Subscription Agreement
Issues with venture capital
No alignment with vision, mission, goals Enter with an intention to get out Demand – supply gap in funds Improper model Loss of control
Exit Strategy
Preferred exit route – IPO Strategic investor Buy back M&As Bigger VC Fund investing etc.
Venture Capital Investment Process
Screening Due diligence Evaluation Deal structuring Post-investment activity Exit
Stages of VC financing
1. Seed stage financing - The venture is still in the idea formation stage and its product or
service is not fully developed. Money may also be spent on marketing research, patent application.
- Capital provided for a business idea; usually supports product development and market research.
CONTD..
2. Early Stage
Start Up:
First Stage:
Second Stage:
CONTD..
3. Mezzanine Stage Also known as Bridge Financing.
- Capital provided for expansion of a profitable company for going public ( IPO).
Traditional Bank Finance vsVenture Capital Focus on entrepreneur, project and growth
prospects rather than security High risk, high return & high failure scenario Instruments – Debt vs Equity In case of failure – returns nil/negligible Time horizon for returns – Long Asset based financing vs Strength of Idea Focus on security vs Growth Prospects
VC in the business lifespan
Initial Idea, Business Formation
Business Growth
Maturing business
Larger sustainable enterprise
•Entrepreneur conceives idea•Often a small proprietorship•Generally micro or sub-micro in size
•Entrepreneur works with team
•Business plan to grow business past micro stage•Requires more infrastructure, addition of new products and services•Increase in headcount
•VC provides financial support•VC provides business building support
•Business growth slows•Focus on profit and efficiency
•VC provides strategic and operational support
•Business enters small stage•Pursues growth opportunities to get to medium and large size
•Other investors join
World Market Conditions
“Fear” is high Global credit
crunch/recession Uncertainty about size
and extent of problem Companies most
affected have bad balance sheets
VSX Volatility Index Sept 2000- Sept 2008
Data courtesy of SV Life Sciences LLP
Effect on Private Companies
Relatively limited impact on Indian companies Reduced access to public markets for exit or
financing Reduced availability of credit and increased
financing costs Potentially longer time period to exit and lower
exit valuations
So…
Financial markets are a mess India is a great place to be in these times Funding is still available, but…
Bar is raised for new investments Valuations are down Each type of funding is affected differently
Impact of the crisis on venture capital
Limited impact in the short term – in 95% of cases, funds will continue Quality VCs raise money from quality, long-term Limited
Partners (LPs) VCs have not typically used debt … fortunately
Potentially dramatic impact in the long term Exits – Definitely delayed significantly
VC investment criteria will be more conservative Early-stage VCs will still invest in early-stage companies but
hurdles will increase More sensitive on capital needs, time to market etc.
Asian Direct Investments: Past Excessive valuations
Plenty of capital available
Tightly - controlled enterprises → family business → allow only passive investments
Limited Government support for foreign investors → legal reforms → → corporate governance (transparency)
Risks associated with currency, political stability and credit
Situation in India• Growth in India has been disproportionately concentrated in industry and services • Rural and semi-urban India is lagging behind the rest of the country
- These regions are afflicted with poor infrastructure, low levels of education, lack of literacy, among other problems
•Private capital is the only source large enough to meet the scale of India’s need
- Social capital markets too small- Government does not understand private business sufficiently and is often compromised by political concerns
VC in India
India - Perhaps no better place to be driving innovation Buyers less affected by acute economic turmoil Insatiable demand Demographics
Lot’s of money still out there … the bar is much higher but great opportunities and great teams will get funded Take a strategic approach to fund raising. Target the best
sources of money given your opportunity and stage of development
Expect to spend a lot of time raising money
Needs of Micro & Small entrepreneurs
Skill / Resource Source
Product / service Idea
Operational capability
Team
Local market knowledge
Flexibility
Capital funding
Strategic support
•Entrepreneur
•Entrepreneur
•Entrepreneur
•Entrepreneur
•Entrepreneur
•Outside source
•Outside source
Role of VCs
•VCs should demonstrate that private capital can be used to support the growth of these enterprises
•Target 32% per investment return while furthering development
• Overall fund return should entice other private sources to enter rural and semi-urban India
SIDBI Venture Capital Ltd. (SVCL)
Wholly Owned Subsidiary of SIDBI Established to carry out business of setting
up, advising and managing Venture Capital funds
Professionally managed AMC Currently managing Rs.600 cr of VC funds
as Investment Manager
National Venture Fund for Software and IT Industry (NFSIT) Set up as a Trust Fund registered with SEBI Inaugurated by the Hon’ble Prime Minister in
December 1999 1st fund with Government contribution Tenure - 10 years (close ended) Corpus - Rs.100 crore Contributors - SIDBI, MCIT (GoI) and IDBI AMC – SIDBI Venture Capital Ltd. Trustee – SIDBI Trustee Company Ltd.
NFSIT Rs.100 cr corpus Dedicated to Software & IT Industry Investment by way of equity/ equity type
instruments Several hundred business plans examined Co-investment with other funds Investments in software services, products,
ITES, Internet initiatives etc.
Role of SVCL
SMEs require high level of handholding Active management participation by SVCL Nominee directors appointed on all investee cos. Quarterly internal audit by outside CA firm, progress
reports and visits Help create systems, provide strategic input for key
functional areas Help in resource mobilisation and fund raising
SIDBI Growth Fund
Structured as a unit scheme of SIDBI SME Venture Fund, registered under Trusts Act and with SEBI
Corpus size Rs.500 crore Initial corpus of Rs.100 crore committed by SIDBI Balance Rs.400 cr contributed by commercial banks. 8-year close-ended fund. Registered with SEBI.
SIDBI Growth Fund
To meet the long term risk capital of SME units and to provide mentoring support
Focus on growth sectors like – Biotech, IT, Pharma, Food processing, Retailing, Service sector projects Light Engineering etc
SIDBI Growth Fund
Proven technology or business model Sound Management Team Sustainable competitive IPR and a well
differentiated market positioning Clear exit plans for VC investors Potential of being market leader