venture capital-final presenation

8/7/2019 VENTURE CAPITAL-FINAL PRESENATION

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VENTURE CAPITAL



INTRODUCTIONINTRODUCTION

VentureVenture capitalcapital isis moneymoney providedprovided byby professionalsprofessionals whosewhose investinvest

alongsidealongside managementmanagement inin youngyoung rapidlyrapidly growinggrowing companiescompanies..

VentureVenture capitalcapital isis anan importantimportant sourcesource of of equityequity ±± forfor startstart--upupcompaniescompanies.. VentureVenture capitalcapital isis basicallybasically equityequity financefinance inin relativelyrelatively newnewcompaniescompanies whenwhen itit isis tootoo earlyearly toto gogo toto thethe capitalcapital marketmarket toto raiseraisefundsfunds..

TheThe modusmodus operandioperandi hashas shiftedshifted fromfrom technologytechnology--orientedorientedmanufacturingmanufacturing organizationsorganizations toto beingbeing veryvery closeclose toto ³private³private equityequityclass´ class´ forfor unlistedunlisted newnew companiescompanies inin allall sectorssectors of of thethe economy,economy,irrespectiveirrespective of of thethe naturenature of of theirtheir projectsprojects..

VentureVenture capitalcapital cancan alsoalso bebe mademade inin thethe formform of of loanloan financefinance //convertibleconvertible debtdebt toto ensureensure aa runningrunning yieldyield onon thethe portfolioportfolio of of ventureventurecapitalistscapitalists..

ItIt essentiallyessentially involvesinvolves thethe financingfinancing of of smallsmall andand mediummedium--sizedsized firmsfirmsthroughthrough earlyearly stagesstages of of theirtheir developmentdevelopment untiluntil theythey areare establishedestablishedandand areare ableable toto raiseraise financefinance fromfrom thethe conventional,conventional, industrialindustrial financefinancemarketmarket..



Investment PhilosophyInvestment Philosophy

TheThe basicbasic principalprincipal underlyingunderlying ventureventure capitalcapital ±± investinvest inin highhigh ±±riskrisk projectsprojects withwith thethe anticipationanticipation of of highhigh returnsreturns..

TheseThese fundsfunds areare thenthen investedinvested severalseveral fieldingfielding enterprises,enterprises,whichwhich requirerequire fundingfunding butbut areare unableunable toto accessaccess throughthroughconventionalconventional sourcessources suchsuch asas banksbanks andand FISFIS typicallytypically firstfirstgenerationgeneration entrepreneursentrepreneurs startstart suchsuch enterprisesenterprises..

AllAll projectsprojects dodo notnot givegive highhigh returnsreturns..

TheThe investmentinvestment howeverhowever isis aa longlong termterm riskrisk capitalcapital asas suchsuchprojectsprojects normallynormally taketake 33 toto 77 yearsyears toto generategenerate substantialsubstantial

returnsreturns..

If the venture fails the entire amount gets written off.If the venture fails the entire amount gets written off.

Probably that is one reason why venture capitalists assesProbably that is one reason why venture capitalists assesseveral projects and invest only in a handful after carefulseveral projects and invest only in a handful after carefulscrutiny of the management and marketability of project.scrutiny of the management and marketability of project.



Venture capitalists generallyVenture capitalists generally

Finance new and rapidly growing companies.Finance new and rapidly growing companies.

Purchase equityPurchase equity

Assist in development of new products or services.Assist in development of new products or services. Add value to the company through active participation.Add value to the company through active participation.

Take higher risks with the expectation of higher rewardsTake higher risks with the expectation of higher rewards

Have a long term orientation.Have a long term orientation.



What Do VC¶s Want to See?What Do VC¶s Want to See?

Venture capitalists tend to focus on five specific areas

when evaluating a company:

Areas of Focus:Areas of Focus:

ManagementManagement

MarketplaceMarketplace

CompetitionCompetition

Business EconomicsBusiness Economics

RisksRisks



STEPS OF VENTURE CAPITAL STEPS OF VENTURE CAPITAL FINANCINGFINANCING

Selection of InvestmentSelection of Investment

Business planBusiness plan

Feasibility studiesFeasibility studies

Track record of the entrepreneurTrack record of the entrepreneur

Market potential studyMarket potential study Projection of future turnoverProjection of future turnover

Financial AnalysisFinancial Analysis

Financial InstrumentsFinancial Instruments

Investment and Nurturing/AftercareInvestment and Nurturing/Aftercare Valuation method for Investment PortfolioValuation method for Investment Portfolio

ExitExit



Investment ProcessInvestment Process·· Sourcing/MarketingSourcing/Marketing Exits:Exits:

IPOsIPOs Sale backSale back Trade sale to Strategic investorsTrade sale to Strategic investors

·· Initial evaluation & termsInitial evaluation & terms

·· Due diligenceDue diligence ·· MonitoringMonitoring

viable business planviable business plan board overviewboard overview proprietary technologyproprietary technology financial performancefinancial performance enforceable legal structureenforceable legal structure accounting/financial integrityaccounting/financial integrity

··Documentation/Completion/FundingDocumentation/Completion/Funding

legal structurelegal structure valuationvaluation

·· Final negotiation/term sheetFinal negotiation/term sheet

Shareholders¶ AgreementShareholders¶ Agreement Subscription AgreementSubscription Agreement



Stages of FinancingStages of Financing

A.A. Early StageEarly Stage

�� Seed capital/preSeed capital/pre--startstart--upup

PrePre--commercialization research projectcommercialization research project PrototypePrototype productproduct testingtesting CommercializationCommercialization LessLess FundingFunding ByBy Vci¶sVci¶s

�� StartStart--upup

Product development and initial marketingProduct development and initial marketing New projectsNew projects

��

Second round financing..

Second round financing..

This represents the stage at which the product has already beenThis represents the stage at which the product has already beenlaunched in the market but the business has not, yet, becomelaunched in the market but the business has not, yet, becomeprofitable enough for public offering to attract new investors. Theprofitable enough for public offering to attract new investors. Thepromoter has invested his own funds but furtherpromoter has invested his own funds but further

STAGES OF FINANCINGSTAGES OF FINANCING



B.B. LaterLater stagestage::

FinancingFinancing involvesinvolves establishedestablished businessesbusinesses

Development CapitalDevelopment Capital

Bridge/ExpansionBridge/Expansion

TurnaroundsTurnarounds



Description of Description of stagestage

PeriodPeriodinvolvedinvolved

Degree of Degree of RiskRisk

Finance forFinance forthe Activitythe Activity

involvedinvolved

Early stage investmentEarly stage investment

Seed capitalSeed capital 77--1010 ExtremeExtreme MA & ResearchMA & Research

Start upStart up 55--1010 Very highVery high

Business InitialBusiness InitialMarketingMarketing

Second roundSecond round 33--77 HighHighMarginalMarginalprocessprocess



Description of Description of

stagestage

PeriodPeriod

involvedinvolved

Degree of Degree of

RiskRisk

Finance for theFinance for theActivityActivity

involvedinvolved

Later stage investmentLater stage investment

Development FinanceDevelopment Finance 11--33 MediumMedium ExpansionExpansionfinancefinance

Replacement FinanceReplacement Finance 11--33 LowLow Planned exitPlanned exit

Buy outsBuy outs 11--33 LowLowNewNew

managementmanagement

Turn a roundTurn a round 33--55Medium toMedium to

highhighRescue financeRescue finance



TOOLS OF INVESTMENTTOOLS OF INVESTMENT

Equity Instrument Equity Instrument

Debt Instrument Debt Instrument

Conditional LoanConditional Loan

Conventional LoansConventional Loans

Income NotesIncome Notes

NonNon--convertible Debentures (NCDs)convertible Debentures (NCDs)

Partly Convertible Debentures (PCDs)Partly Convertible Debentures (PCDs)



Investment Nurturing / AftercareInvestment Nurturing / Aftercare

StylesStylesHands onHands on

constant involvement constant involvement

Useful in early stage financingUseful in early stage financing

longlong--term business planning & technology development term business planning & technology development

Expertise is provided by the inExpertise is provided by the in--house expertise or by a corehouse expertise or by a coregroup of external advisors/expertsgroup of external advisors/experts

Hands off Hands off

passive rolepassive role appropriate after the initial planappropriate after the initial plan

Hand holdingHand holding reactive approach.reactive approach.



ExitExit

Disinvestments of Equity /Disinvestments of Equity /

Going Public / Initial Public OfferingGoing Public / Initial Public Offering

Sale of Shares to Entrepreneurs / EmployeesSale of Shares to Entrepreneurs / Employees

Trade SalesTrade Sales

Sales to a New Investor / Takeout Sales to a New Investor / Takeout

LiquidationLiquidation

Exit of Debt InstrumentsExit of Debt Instruments



ConstraintsConstraints

Most funds target large investmentsMost funds target large investmentsHigh tech, early stage and SME are notHigh tech, early stage and SME are not

adequately serviced.adequately serviced.

Problems for exit for SMEProblems for exit for SMEExit success stories are fewExit success stories are few Industry growth limited to softwareIndustry growth limited to software

and technologyand technology

Second round funding deficiencies.

Second round funding deficiencies.

Fund raising difficult for VC fundsFund raising difficult for VC funds



SEBI venture capital fundsSEBI venture capital funds

regulations,1996regulations,1996

RegistrationRegistration

Investment condition and restrictions: investment in VCFInvestment condition and restrictions: investment in VCF

Restriction on investment by VCFRestriction on investment by VCF

Prohibition on listingProhibition on listing

General obligations and responsibilitiesGeneral obligations and responsibilities

Placement memorandum/subscription agreementPlacement memorandum/subscription agreement



Contd«..Contd«..

Maintenance of books/recordsMaintenance of books/records

WindingWinding--upup

Inspection and investigationInspection and investigation

Obligations of VCFsObligations of VCFs

Action incase of defaultAction incase of default

Suspension of registrationSuspension of registration Cancellation of registrationCancellation of registration

Action against intermediariesAction against intermediaries



Sequoia Capital India

Ventureast

Intel Capital

Helion VenturePartners

DFJ India

Nexus India Capital

NEA IndoUS Ventures

IDG India Ventures

Kleiner Perkins

Norwest VenturePartners

Canaan Partners

Inventus CapitalPartners

TOP 10 VC FIRMS¶ IN INDIATOP 10 VC FIRMS¶ IN INDIA



Financial AnalysisFinancial Analysis

Valuation methodsValuation methods

Conventional venture capitalist valuation method:Conventional venture capitalist valuation method:in this method venture capitalist only consider two factors related to tome. i.e.in this method venture capitalist only consider two factors related to tome. i.e.

entry time and exit time valuation. They dont calculate what happen inentry time and exit time valuation. They dont calculate what happen inbetween.between.

The first Chicago method:The first Chicago method: this method in as improvement in thethis method in as improvement in the

conventional method, it also considers the value of the business during theconventional method, it also considers the value of the business during theinvestment period.investment period.

Revenue multiplier method:Revenue multiplier method: this method calculates the annualthis method calculates the annualrevenue of the company using following formula.revenue of the company using following formula.

V/R = (1+r)V/R = (1+r)n (a) (p)n (a) (p)//(1+d)(1+d)nn

V = PV of the company, R = Annual revenue level, r = expected annual rate of growth of V = PV of the company, R = Annual revenue level, r = expected annual rate of growth of revenue, n = no. of years of investment, a = expected after tax profit margin tillrevenue, n = no. of years of investment, a = expected after tax profit margin till

investment, p = expected price earning ratio, d = appropriate discount rateinvestment, p = expected price earning ratio, d = appropriate discount rate

venture capital-final presenation

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