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An Overview of Venture Capital in India by Dhanpal Jhaveri
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An Overview of Venture Capital in India by Dhanpal Jhaveri


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StartupCentral Venture Capital Masterclass, July 2012

StartupCentral Venture Capital Masterclass, July 2012

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  • 1. Venture Capital Master-classJuly 21, 2012
  • 2. Master‐class ContentsBasics of Private Capital 2Evolution of Private Capital in India 6Venture Capital: Historic Deal Value and Volume 7Issues and Challenges 9 2
  • 3. What is Private Equity? Private Equity Public equity Stock market  listed companies Buy‐outs, Venture capital Later stage financing, Early stage/Angel  Secondaries financing By definition: “Private Equity is the provision of equity capital by financial investors – over the  medium or long term – to non quoted companies with high growth potential” Private equity is illiquid, ownership is concentrated, valuation is difficult, intermediaries tend to be  small, finance is accompanied by control and mentoring Public equity is liquid, ownership is dispersed, valuation is relatively easy, intermediaries are large,  finance is often divorced from control and mentoring  Venture Capital, is a sub‐set of Private Equity and refers to equity investments made for: – The launch – Early development – Or expansion of a business Venture Capital focuses primarily on entrepreneurial undertakings rather than on mature businesses The essential difference between the two is the stage of investment 3
  • 4. Corporate Development and Private Equity  Last financing round prior  to an initial public offering  IPO/M&A of a company Financing the expansion of  growth companies Private  Third Stage Equity Providing working capital  funding and required  Second Stage financing for young firms  during growth period Financing the  First Stage commercialization and  production of products Venture Providing capital required  Start‐up  Capital Financing for product development  and initial marketing  activities Seed  Angel Financing Providing small sums of  capital necessary to  Funding develop a business idea 4
  • 5. Company Lifecycle and Investment Sizes Slow Growth Late • Buy‐out/restructuring  Growth opportunities • Size > $20 mm • Ready for the next  growth orbit • Investment sizes tend to increase along this curve Hyper • PEs tend to be active  Growth investors in early stage  • Growth Capital companies and passive in  Early  • Size between $10 and 20  Growth mm more evolved companies Seed  • Venture Capital Fund • Size < $10 mm• Promoter’s own  money• Friends/Family/Rel atives/Well‐wishers Inception Growth Maturity• Angel investors 5
  • 6. Evolution of Private Capital in India The first generation venture capital funds were launched by financial institutions like ICICI  and IFCI 1984: ICICI launched it VC scheme to encourage start‐up ventures in the emerging  technology sectors IFCI and Canara Bank followed by launching their own technology oriented VC funds Between 1995‐2000 several foreign funds like Baring PE partners, CDC Capital, Draper  International, HSBC Private Equity and Warbug Pincus had set food in India The first set of regulations around VC started coming in the mid‐90s: – SEBI introduced the SEBI Venture Capital Funds Regulations, 1996 – These regulations were further amended based on the recommendations of the K.B.  Chandrashekhar Committee in 2000 The technology bust in 2000 saw a PE slow down, when many foreign investors fled India  during that period Today, global PE firms continue to dominate the Indian market, appearing in 9 of the top 10  deals by value in Q4 2011 6
  • 7. Venture Capital: Historical Deal Value and Volume Last three years have seen a tremendous amount of interest in India with investments in US$ million: – Angel Funding = 24 – Venture Capital = 2,106 – Private Equity = 21,698 Year 2011 had been record year for early‐stage Venture Capital investing – Deal values & volumes at all time high – Euphoria around e‐commerce, across mobile, internet and related verticals – Evident from recent deals of InMobi, Fashionandyou, Snapdeal The next few years will distinguish the serious and long‐term players, from the others500 Breakdown – Volume $20,000 Breakdown – Value ($ mm) 435 $18,484450 $18,000400 382 $16,000350 313 $14,000 $13,151 286 270300 $12,000 $9,944250 207 $10,000 185 $7,922200 154 156 $8,000 $7,167 142 133150 122 $6,000100 $3,832 44 $4,000 50 18 19 27 23 16 $1,034 $659 $891 $2,000 $564 $16 $670 $556 $13 $10 $5 $5 $14 0 $0 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 Angel/Seed Venture capital Private Equity Angel/Seed Venture capital Private Equity Source: VCCEdge 7
  • 8. Top 5 Venture Capital Deals in 2011Target Buyer Value (US$ mm)Happiest Minds Technologies Intel Capital 45 Canaan Sequoia Capital India 40 Norwest Venture Partners Intel Capital Nokia Growth IndoUS Venture Partners 40 Nexus Venture Partners Bessemer Venture PartnersNaaptol Online Shopping Canaan Partners 25 Silicon Valley Bank New Enterprise AssociatesTV18 Home Shopping SAIF Partners 22.25 GS Home ShoppingSource: 8
  • 9. The pure and simple truth is rarely pure and never simple.  9
  • 10. The Engagement Pre‐investment phase Post‐investment phase Managing exit 10
  • 11. Pre‐investment phase: The pre‐nuptials Valuation: Value versus Price Projections: Sustainable Growth Diligence Rights and Terms Dilution Building a connect  – Rational / logical connect – Emotional connect 11
  • 12. Post‐investment phase: A Successful Partnership Shared Vision Maintaining your business statistics Managing conflicts of interest Creating a governance framework Diverting or Diversification Finally, “No Surprises” 12
  • 13. Managing exit Managing Duration Mismatch Market timing is important IPO can take a minimum one year time frame 13
  • 14. Tips for a successful partnership Do not choose a VC player based on brand reputation but look at the VC firm’s fit  with the organisation Valuation is not everything. Long term alignment and comfort are equally  important Carefully understand the VC firm’s ‘Value Add’ model and see if the same aligns  well with your organisation need Do not rush through the process Share your successes but also be transparent about the weaknesses /  improvement areas. Nasty surprises in the short term (post investment) will do a  lot of damage to the relationship. Do not ‘outsource’ assignments to the VC firm. They are not the ‘pilots’ of the  business Promoters expect VC’s to take quick decisions VC should not end up as an option of last resort for promoters when they are  unable to tap the public or debt markets 14
  • 15. Before the investmentThe entrepreneur has the vision and the investor has the money After the investmentThe investor has the vision and the entrepreneur has the money 15