Venture Capital Funding


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Venture Capital Funding

  1. 1. Venture Capital Funding Ajay Kumar Kapur, CEO SIDBI Venture Capital Ltd.
  2. 2. 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
  3. 3. Project Funding  Own Funds  Equity  Internal Accruals  Borrowed Funds  Term Loans  Debentures / Bonds  Lease / HP
  4. 4. SOURCES -- Borrowed Funds  Term Loans  Banks, SIDC / SFC, FIs  Debentures  Public Issue / Private placement  Lease & Hire Purchase  NBFCs
  6. 6. SOURCES - Equity Fund - Promoters and family - Associates - Institutions = PVT EQUITY = VENTURE FUND - Public
  8. 8. Role of VC… Venture Capitalist fills this gap by providing “Value Added Finance”
  9. 9. 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
  10. 10. 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
  11. 11. Risk Profile Risk VC PVT EQ / MF DEV FIN Reward
  12. 12. 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
  13. 13. 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”
  14. 14. 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
  15. 15. 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.
  16. 16. 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 .
  17. 17. 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.
  18. 18. 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
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. 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