Venture Capital

Anjana Vivek
anjana@bizkul.com

1
What is VC?
 Investment in

High risk projects
 High return potential projects
 Equity related instruments

Unlisted companies

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Types of risk financiers


Regular VCs
 Corporate VCs
 Angel investors

Incubators

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Stages of VCs
investment

 Seed Stage
 Early stage
 Later stage
 Turnaround

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US environment
 Gap not met by debt recognised in late
1940s
 Industry - institutes initiatives Less of
regulatory hurdles, Stanford, Harvard
etc

SBICs most successful
 Entrepreneriul spirit encouraged, ie
failure not negative for next round of
financing

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Other countries

Israel - strong US tie

Singapore - initiatives like NSTB
 Other countries in Europe, Asia
trying to replicate success in US
recognising the role played by VC
investment in promoting growth of
economy

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Changing trends
 Successful entrepreneurs in US turned
financiers, TiE

Successful Indians
 Foreign VCs directly investing in India
 NRI entrepreneurs tapping Indian VC
funds
 Banks and other institutions also
looking at innovative ways to fund SMEs

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VC investment & exit
Promoters
with
Project Prelimnary Term Sheet Due
Initial Project Signed by Diligence
Meetings Review by Venture Review of
Venture Capitalist & Project
Capitalist Promoters
Venture
Capitalist
with Funds

Promoters
Divestment Mentoring Investment Legal
& Exit & made by Documents
from Monitoring Venture /Agreement
Project of Project Capitalist Signed
in Project

Venture
Capitalist

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What a project must
have
 High upside potential

Potential for extraordinary returns
to investor
 Exit route plan

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VC looks for

Team – leadership,
multidisciplinary, integrity,
competence, domain knowledge
 Project, product, USP
 Market, opportunity, growth
expected, barriers to competition

Exit avenue

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Business Plans
Business plans…

are to be forward looking, based
on past knowledge of promoters
and their work experience in the
existing or new company

Must discount revenues expected,
account for all expected costs and
project expected cash flows

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Due diligence reviews
 Investment decision based on DDR

Business

Market
 Accounting
 Tax and Legal

Technical

HR
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Term Sheet

Term sheet is a letter of intent and
may or may not be legally binding
 Term sheet terms give a summary
of proposed principal terms of
investment

Term sheet is usually subject to
satisfactory completion of due
diligence reviews

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Term Sheet extract
Amount of investment Rs. 100 million

Type of security Equity Shares

Pre-money valuation Rs. 300 million

Post-money valuation Rs. 400 million

Equity shareholding of Existing holders of a 15%

the company post equity b 15%
investment c 10%
d 10%
e 5%
f 5%

Stock options pool 15%

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VC Investor Limited 25% 14
Post VC investment
 Is a partner in the project

Mentors and monitors the project

Hand holds through the
investment

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Post VC investment
 Networks on behalf of the
investee, provides contacts, opens
doors…
 flip side could be perceived as
interfering, this depends on
VC/entrepreneur relationship

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What a VC does
 Each fund manager mentors only
a handful of projects

While fund size is big, no. of
investments cannot be too much,
hence project size increases

Unlike debt/other investor, VC is
not silent spectator,often is on the
Board of investee company

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VC investment
 Some VCs therefore have separate
persons to look at investment and
others to look at post investment,
monitoring as the skill sets can be
different

Others have the same fund
manager looking at project from
day one of receiving proposal thru
exit from investment
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Mature markets

Different VCs may target different
industries such as:
– IT further split into niche areas
– Agri related
– Bioinformatics
– Manufacturing - new materials
– Service

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Future of VC in India
 Industry has not grown to meet needs
of a variety of entrepreneurs
 Too much money chasing too few
projects, in select industries, not in the
majority

Move towards consortium financing,
risks spread for a smaller piece of pie
 Many have dropped out and many
coming in - churn is there, as players
are to get established
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Future of VC in India
 Potential is there, needs to be tapped
 Lack of appropriately trained persons to
manage funds

General public, including others like
bank staff, CAs, legal advisors etc. not
completely aware of finer points of such
funding
 The entrepreneurial ecosystem is yet to
develop, of course some cities like
Bangalore are slowly having a variety of
experts in this space
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Future VCs in India
 There are limited takers for smaller
projects
 Real early stage, high growth, high
risk projects, finding it difficult to raise
funding
 There are issues of exit and other
related issues

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Future VCs in India
 In the recent times some groups have
showed interest in getting together those
who need funds on the one hand and
those who want to invest on the other,
including high net worth individuals etc.
 This includes industry groups, academic
institutions and other groups

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Evolving scenario

Review of projects includes going back
to cash flow
 Gap between PAT and free cash flow
analysed

Detailed due diligence review
 Business perspective and not audit
perspective
 Looking at the India + global story
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Evolving scenario

Are we going to see more global
Indian brands in the future?
 Will VCs help us create these
brands?

Time will tell

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