Venture Capital, Private Equity and Angel Investment Divya Raman Corporate Department Altacit Global Email: firstname.lastname@example.org Website: www.altacit.com
Venture Capital Money provided by investors to startup firms and small businesses with perceived long-term growth potential. Typically entails high risk for the Investor but has the potential of above-average returns. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. Venture capitalists usually get a say in company decisions, in addition to a portion of the equity.
Private Equity Equity securities of companies that are not listed on a public exchange. Private equity investments are primarily made by private equity firms, venture capital firms, or angel investors, each with their own set of goals, preferences, and investment strategies, yet each providing working capital to a target company to nurture expansion, new product development, or restructuring of the company’s operations, management, or ownership.
Angel Investment An angel investor or angel (also known as a business angel or informal investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. An individual who provides capital to one or more startup companies. The individual is usually affluent or has a personal stake in the success of the venture. Such investments are characterized by high levels of risk and a potentially large return on investment.
Venture Capital in India In India, the need for Venture Capital was recognized in the 7th five year plan and long term fiscal policy of GOI. In 1973 a committee on Development of small and medium enterprises highlighted the need to faster VC as a source of funding new entrepreneurs and technology. VC financing really started in India in 1988 with the formation of Technology Development and Information Company of India Ltd. (TDICI) - promoted by ICICI and UTI.
Venture Capital Investments in India The venture capital investment in India till the year 2001 was continuously increased and thereby drastically reduced.
SEBI Venture Capital Funds (VCFs) Regulations, 1996 A Venture Capital Fund means a fund established in the form of a trust/company; including a body corporate, and registered with SEBI which (i) has a dedicated pool of capital raised in a manner specified in the regulations and (ii) invests in venture capital undertakings (VCUs) in accordance with these regulations. All VCFs must be registered with SEBI and pay Rs.25,000 as application fee and Rs. 5,00,000 as registration fee for grant of certificate.
The Venture Capital Investment Process: 1. Deal origination 2. Screening 3. Due diligence Evaluation) 4. Deal structuring 5. Post-investment activity 6. Exist
Various Stages of Investment for Private Equity Funds in India PE firms may consider entering a firm at an early stage as a venture capital fund, later it may prefer to go for growth capital/late stage investing and even consider investing into a company after it lists on a stock exchange i.e. it may enter into a Private Investment in Public Equity (PIPE) deal. According to a study4 in 2006, over 90% of private equity funds are invested in late stage initiatives by mature firm.
Exit Strategies of Private Equity Direct Sale to investors seeking a shareholding in a firm acquired by the fund. The initial public offering (IPO) is a preferred exit option in developed PE markets. Even Black and Gilson  argue that well developed equity markets are a necessary condition for venture capital investing to work, because venture investors rely on the ability to exit their investments through initial public offerings (IPOs).
Post-purchase listing of the company permitting sale of equity through the stock market. Sale to another private equity firm, referred to as a secondary buyout. Mergers and acquisitions: As the Indian economy's growth has kept a steady pace, industry-wide consolidations are an attractive route for a PE investor to make an exit.
Regulations for Private Equity Investors The important statutes that require compliances for private equity investment in India are the Companies Act, 1956 (the "Act"), the Foreign Exchange Management Act, 2000 and the Securities and Exchange Board of India Act, 1992 along with the rules and regulation therein. Private investment in public equity (PIPE) deals are also governed by the SEBI DIP Guidelines, which deals with the regulations relating to QIBs and Preferential Placement.
India's Ranking in PE Investment according to various parameters India has carved out a niche for itself in the Global private equity market. India ranks number one in terms of the compound average growth rate of 79% followed by Malaysia (67%) and Denmark (56%).In terms of ranking based on high-tech investment, India was ranked 3rd after USA and UK while in terms of expansion investment trends India was ranked 2nd after USA.
Why PE Investments in India? Indian economy is one of the fastest growing economies of the world. The strong fundamentals of India such as average GDP growth of 8.5% for last five years, increasing saving and investment rate, its stable democratic government, well educated population, abundance of English language speakers have caught the attention of the PE players and have brought it on the priority list of all PE funds.
Angel Investment in India In India Angel Investor are hard to find. To bring Angel Investors and Innovators together, Indian Innovators Association made arrangements with selected Angels to examine the Business Plans of Indian Innovators. Innovators looking for angel investment may contact the association with an executive summary of their business plan. Detailed plans can be submitted to the interested Angel after the Preliminary examination.
Delhi-based Indian Angel Network, earlier known as Band of Angels Band of Angels opened shop in Delhi. Started in April 2006, the Band of Angels is a unique concept which brings together highly successful entrepreneurs and CEOs from India and around the world who are interested in investing in startup / early stage ventures which have the potential of creating disproportionate value.
Delhi Based contd…. The Band, in addition to money, provides constant access to high quality mentoring, vast networks and inputs on strategy as well as execution. The Band members, because of their background are better able to assess the potential and risks at the early stage.
Investment by Angel Investors Typically, the investments made by these angels could be as low as Rs 1 crore (Rs 10 million) and can go up to Rs 5 crore (Rs 50 million) and they stay invested for a period of 3-6 years. Also one of the angels who has invested or co-invested with other angels get a board seat on the startup. More importantly, angels provide advice, mentoring and help the budding entrepreneurs to have an access to their vast and valuable network of business contacts apart from the money itself.
Future Prospects Private equity in India has delivered higher returns over a longer time frame and has outstripped other investment avenues. Private equity has entered the economic mainstream and has gained a lot of momentum over the past few years. As the report of the Planning Commission on 'Technology Innovation and Venture Capital" mentions, VC/PE funding is a percentage of our FDI inflow, it should be nurtured and encouraged further as it creates new ventures and new employment and is invested for the long term and is not that can be pulled out at short notices.