Presented by: Tuba Tariq

Student ID :12777

Venture Capitalism

Also known as ‘Private Equity’They partner with investors like - Pension Fund - Insurance Companies - Family OfficesGoal : To improve the companies they buy over time and then sell

them at a profit to generate good investment returns for these investors. They usually get a return after 5-10 years.

How does the investor reap profits? - Initial Public Offering (IPO) - Selling the company to a strategic investor

What is Venture Capital?

J.P Morgan’s acquisition of the Carnegie steel company in 1901 is the earliest recorded buy out.

Modern venture capitalism took place after WW II, 1946 5 Venture pioneers of 1946: a) J.H Whitney Company b) Rockefeller Brothers c) American Research and Development (ARD) d) Industrial Capital Corp. e) Pacific Coast Enterprises Father of Venture Capitalism : Georges Doriot of ARD Aim: To encourage private sector investments in businesses run by soldiers

who were returning from World War IIHow was it different from others? : Raised capital from sources other than

wealthy families Success story of 1957: Investment of $70,000 in Digital Equipment

Corporation (DEC) would be valued at over $355 million after the company's initial public offering in 1968.

History of Venture Capitalism:

1) The Promising Enterprise: These are poised for growth and expansion Example, an innovative software company has a bright future but it’s still a small

company. It needs Growth Capital The right strategy Experienced Managers Venture capitalist firm will provide the growth capital to make strategic business

decisions to fuel its expansion along with the knowledge of the experienced managers. This will help manage the growing pains of the software firm that holds other companies back.

2) The Fixer Upper: Think of a local company that has been shedding jobs, is falling behind its competitors and struggling with rising energy cost. It still makes a great product but needs Change in strategy A capital infusion Venture capitalist firm will provide working capital needed to help the company

grow better than its competitors.

Types of firms Venture Capitalists buy

1) Find out what type of VC funding your company needs. Seed financing – the initial capital used to start a business. Funding while you

research and develop a project or concept until you are ready to launch a company. Start-up financing - to help you develop a product and market it for the first time.

VC investors join your company to help bring the product to market. Expansion and development - investment is used to increase production capacity

and sales activity.

2) Provide details to the investor audited accounts for the past two years evidence of current performance profit-and-loss forecast for next year business bank statements for the past six months profiles of each partner or director in your business3) Data Confidentiality: a letter of confidentiality is issued. This should be signed both by your business and the potential investors before you send them your full business plan.

Venture Capital: The process

Dynamic growing companiesMore jobsBetter productsVenture capital funding is committed and long termYou retain management control of your businessNo need for collateral (personal assets)No repayments or interest on the VC funding (not a loan but

investment)

Pros of Venture Capitalism

Control – You may lose it, depending on how much cash you accept and how early on in the process you acquire the venture capital.

Profit Share – The very nature of taking money from outside sources means you will see a drastic cut in the percentage of the profits your company will keep for itself if it does succeed.

Stipulations and restrictions in composition of the start-up's management team, employee salary and other factors.

Cons of Venture Capitalism

1) Apple Inc.The first venture investors were Venrock Associates and Markkulla12th December 1980 IPO when Apple sold 4.6 million shares to the

public at $22 a share.Today it is valued at approximately $627 billion dollars 2) Radian6 Social media monitoring tools, social media engagement softwareHummer Venture Partners acquired Radian6 in 2011 Initial investment of $9-million and later worth more than $300-

million.

Cases of VC in USA

USA has a long and thorough process of identifying and qualifying prospective investors

USA is combative so they are much stricter about intellectual property and employment agreements.

US venture capital market is well developed. Operating since the 1940’s The National Venture Capital Association (NVCA) is an efficient

government regulatory body A vibrant market where its young new companies can exit via initial

public offerings (IPOs). US stock markets are eager to trade the shares of new companies Investment comes through pension funds and insurance companies,

doesn’t just rely on commercial banks retention of highly qualified employees in VC funding stable taxes on capital gains and personal protection in case of

bankruptcy Cultural reason: Americans are risk takers

Why is VC funding successful in USA?

1) US Seeding Venture Capital and Private Equity in Pakistan US is providing $80 million to create multiple VC and PE funds in Pakistan The funds will focus on investing in small and medium entrepreneurial

companies Hoffman, Pincus and Kraus invested in Monis Rahman, a Pakistani-American

who left Intel for entrepreneurship. Rahman had successfully launched and sold a start-up in the Bay Area, eDaycare.com.

2) TMT Ventures TMT Ventures was created in 2000 stands for Technology, Media and

Telecommunication TMT started as a private owned division within AKD Securities and has

grown to a company managing Rs. 250 million Incubation Fund. Y-Evolve, a web development company, became the first ever VC backed

company in 2000 when TMT provided a very small amount of Rs. 400,000. TMT Ventures took on by committing to provide funds of about Rs. 3 million

Cases of VC in Pakistan

In 2001, AKD Securities and TMT Ventures helped the SECP to frame the rules for VC

Rs 25 million investment of propriety AKD capital was raised to a Rs 250 million institutional fund

3) The Resource Group (TRG)manages the call centre business. the firm has operations in Africa, Europe and North AmericaThe company is the venture of Pakistani entrepreneur Zia Chishti.

The profits and gains generated by Venture capital companies registered under The Private Equity and Venture Capital Fund Regulations, 2008 with SECP as NBFC are exempted from income tax under the clause 101 of Part 1 of the Income Tax Ordinance, 2001 up to June 30th, 2014

Tax Status of Venture firms in Pakistan

Inadequate deal flow of venture investments: In order to hedge their bets, investors typically look for a market where there is a large pool of good companies to select from. Pakistani developing markets lack this

Shrinking risk appetite for investors: Pakistan’s 10 years return of VC funds averaged - 4.6%. All this has resulted in VCs flocking to ‘safer’ markets.

Security and geo-political risks (some real and most perceived) associated with developing countries like Pakistan tend to ward off investors

Lack of global awareness about Pakistani startups: Investment is mostly taken up by Indian and Middle eastern markets

General lack of trust and perception of inadequate legislation for protection of intellectual property

Challenges of VC funding in Pakistan

In grained fear of failure. The education system and culture in developing nations like Pakistan generally doesn’t encourage failure.

Lack of local expertise to value technological venturesBureaucratic Barriers to Entry for Foreign Investment Lack of Trust in Local Judicial Processes for Dispute Resolution inadequate Structure/Precedence for Structuring Venture

Investments Lack of Local Success Stories and Big HitsVenture capital firms or Fund Management companies are required

to renew their license from SECP on annual basis

Pakistan needs to assess the venture capital structure and policies of the countries where venture capital firms are operating successfully

The regulatory restrictions by SECP on the insurance companies and pension funds refraining them from investing in venture capital firms should be relaxed.

The Government should stringently monitor the Intellectual Property Protection (IPP) rights across the industry

SECP and SBP should work on to improve the loan recovery procedure in the country. Pakistan Venture Capital Limited exited from the industry as it was faced with serious issue of default risks

Recommendations

There is a need to identify more areas on the demand side along with the IT, Media and Telecom sector where there exists potential for venture capital investments

Co-financing investments with international venture firms and investors

Pakistan SBIC Program (Small Business Investment Company as in USA) would aim to improve the availability of risk capital to start-ups facing the equity gap, by bringing more ‘entrepreneurial investors' into the management of funds

Thank You