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Venture Capital Funding
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Venture Capital Funding

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    Venture Capital Funding Venture Capital Funding Presentation Transcript

    • Venture Capital Funding Ajay Kumar Kapur, CEO SIDBI Venture Capital Ltd.
    • Different forms of financing Equity Capital Debt Capital Markets, “Public Equity” LARGE BUSINESSES Term loan of “Private Equity” Banks/ FIs SMEs Venture Capital Mezzanine Debt and quasi- MICRO BUSINESSES equity (VC) Microcredit Businessmen, Friends, Family and “Angel” Investors Friends, IDEAS Relatives Venture Capital is one of the most appropriate ways of financing start-ups
    • Project Funding  Own Funds  Equity  Internal Accruals  Borrowed Funds  Term Loans  Debentures / Bonds  Lease / HP
    • SOURCES -- Borrowed Funds  Term Loans  Banks, SIDC / SFC, FIs  Debentures  Public Issue / Private placement  Lease & Hire Purchase  NBFCs
    • Factors Governing Debt Comp.  DEBT SERVICING CAPACITY (DSCR)  SECURITY AVAILABLE (MARGIN)  COST of FUND
    • SOURCES - Equity Fund - Promoters and family - Associates - Institutions = PVT EQUITY = VENTURE FUND - Public
    • Factors Governing Equity Comp . -PROFITABILITY (EPS) -EXIT CONSIDERATION  STRIKE BALANCE BETWEEN DEBT AND EQUITY
    • Role of VC… Venture Capitalist fills this gap by providing “Value Added Finance”
    • 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
    • CONVENTIONAL V/S V.C FUNDING  Security backed  Unsecured /need based  Passive role  Active role  Fixed obligation  Performance linked return  Equity / Quasi equity  Term loans  High risk appetite  Risk averse  Long term  Short and medium term perspective  High growth business  Conventional business
    • Risk Profile Risk VC PVT EQ / MF DEV FIN Reward
    • 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
    • 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”
    • 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
    • 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.
    • 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 .
    • 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.
    • 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
    • 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
    • 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
    • SME Growth Fund  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
    • 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