venture capital funding
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Venture Capital Funding
Ajay Kumar Kapur, CEOSIDBI Venture Capital Ltd.
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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
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Project Funding
Own Funds Equity
Internal Accruals
Borrowed Funds Term Loans
Debentures / Bonds
Lease / HP
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SOURCES -- Borrowed Funds
Term Loans Banks, SIDC / SFC, FIs
Debentures Public Issue / Private placement
Lease & Hire Purchase NBFCs
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Factors Governing Debt Comp.
DEBT SERVICING CAPACITY (DSCR)
SECURITY AVAILABLE (MARGIN)
COST of FUND
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SOURCES - Equity Fund
- Promoters and family
- Associates
- Institutions = PVT EQUITY
= VENTURE FUND
- Public
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Factors Governing Equity Comp .
-PROFITABILITY (EPS)
-EXIT CONSIDERATION
STRIKE BALANCE BETWEEN DEBT AND EQUITY
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Role of VC…
Venture Capitalist fills this gap by providing “Value Added Finance”
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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
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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
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Risk Profile
VC
PVT EQ / MF
DEV FIN Reward
Risk
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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
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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”
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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
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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.
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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 .
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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.
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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
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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
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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
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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
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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
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