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  • 2.  Once your company has decided to explore the venture capital funding route, it is very important for your company to follow the appropriate process to raise funds.  In India, the typical venture capital fund raising process involves the following steps:
  • 3. IDENTIFYING THE RIGHT INVESTMENT BANKER  Very good understanding of venture capital business  Good understanding of company’s industry and business  Ability to tell a good and true story about the company  Experience of dealing with the VCs  Good network in the VC community Skill Sets
  • 4. INVESTMENT MEMORANDUM AND FINANCIAL MODEL Investment Memorandum (IM) • captures the company’s business in such a manner that it addresses most of the investor’s key questions and helps the investor make his mind about the company. Financial Model (FM) • captures various business variables like revenue drivers, cost drivers, capital expenditure etc. in a Microsoft Excel file and projects the company revenues, profitability, cash flows and fund requirements for next 5 to 7 years.
  • 5.  Short listed investors should be comfortable with the company’s industry, stage of business (seed stage, early stage, growth stage, pre-IPO etc.), and the company’s fund requirements. Short listing and approaching the venture capital funds
  • 6. MEETING THE VENTURE CAPITAL FUNDS  The investment banker approaches the venture capital funds and starts making presentation to them.  The purpose of these presentations is to get the first meeting between the promoters of the company and the investors.  In the follow-up meetings, the company tries to convince the investors about the investment.  Once the investors are convinced then they issue a Term Sheet.
  • 7. SIGNING THE TERM SHEET  A Term Sheet (TS) covers the key terms of the investment.  Two of the most important terms in the TS are the valuation of the company (price) and the transaction structure.  There are a number of other important terms related to investor’s exit, board memberships etc, which are also covered in the Term Sheet.  Once there is an agreement on all the terms, a non- binding Term Sheet is signed between the company and the investors.
  • 8. Generally investor’s due diligence process focuses on the following aspects of the company and its expansion plans:  a. Financial  b. Business  c. Technological Due Diligence by the Investors
  • 9. SIGNING THE SHAREHOLDER’S AGREEMENTS AND FUNDS TRANSFER  Once the investors are satisfied with the outcome of the due diligence process, they issue a Shareholder’s Agreement (SHA).  SHA covers all the terms of the Term Sheet and, in addition, it has a number of other important terms and conditions regarding dispute resolution, non-compete, lock-in, share transfer process etc.  Generally lawyers from the company’s side and the investor’s side also get involved in this process.  Once there is an agreement, all the shareholders of the company and the investors sign the SHA and investor transfers funds to the company.
  • 10. OBLIGATIONS OF VENTURE CAPITAL FUND  Venture Capital fund shall not carry out any other activity than that of venture capital fund  Venture capital shall disclose investment strategy at the time of making investments  VCF shall disclose the duration of the life cycle of the fund  VCF shall not get its units listed on any recognized stock exchange till the expiry of three years from the date of issuance of units by VCF  VCF cannot invite offers from the public for subscribing for its units and shall only receive monies by the way of private placement of the units  VCF shall enter into the placement memorandum and subscription agreement which contains terms and conditions subject to which monies is proposed to be raised from the investors.  A copy of the placement memorandum and subscription agreement will be placed with the Board along with the actual money collected  VCF shall maintain its books of accounts, records and documents for a period of 8 years
  • 11. MINIMUM INVESTMENT IN VENTURE CAPITAL  Venture Capital Fund may raise money from Indian, foreign, non-resident Indian, by way of issue of units  Investments below Rs.5 lakhs from any investor shall not be accepted other than employees, principal officer, directors of venture capital fund or employees of fund manager or asset management company  Venture capital fund shall invest minimum of Rs.5 crores in each of the schemes launched or fund set up
  • 12. INVESTMENT RESTRICTIONS Not more than 25% corpus can be invested in one VCU Investment in securities of foreign companies subject to RBI and SEBI guidelines No investment in associated companies
  • 13. INVESTMENT RESTRICTIONS Investment Structure At least 66.67% of investible funds in unlisted equity shares or equity linked instruments of VCUs. Not more than 33.33% of investible funds Subscribe to IPO of a VCU proposed to be listed Debt instrument of a VCU which the VCF already has equity investment Preferential allotment of equity shares of listed company subjected to 1 year lock in Equity shares or equity linked instruments of financially weak company or sick company-listed SPV