The Early Stage Opportunity in India

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The Early Stage Opportunity in India

Background

Definition

Venture capital (VC) is financial capital provided to early-stage, high-potential, growth startup companies. The venture capital fund makes money by owning equity in the companiesit invests in, which usually have a novel technology or business model in high technologyindustries, such as biotechnology, IT, software etc. The typical venture capital investmentoccurs after the seed funding round as growth funding round (also referred as Series A round)in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company.

In addition to angel investing and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the publicmarkets and have not reached the point where they are able to secure a bank loan or completea debt offering. In exchange for the high risk that venture capitalists assume by investing insmaller and less mature companies, venture capitalists usually get significant control over

company decisions, in addition to a significant portion of the company's ownership (andconsequently value).

Venture capital is also associated with job creation (accounting for 21% of US GDP),[1]

theknowledge economy, and used as a proxy measure of innovation within an economic sector or geography.

Explanation of Basics of Venture Capital Financing

The basics of venture capital financing provide that venture capital financing is done to provide capital to companies that have started to do business.

The venture capital financing is done mainly by rich investors as well as financialorganizations like investment banks.

Purposes of Venture Capital Financing

The main purpose behind venture capital financing is to make some profits as far as theinvestors are concerned. From the point of view of the companies that are being invested in,the main aim is to generate some capital for the purposes of operating the business.

Venture Capitalists and Venture Capital Funds

The venture capitalists and venture capital funds are the sources of venture capital. The



venture capitalists are individual professional investors and the venture capital funds are thefund pools where third party investors put their money in.

Implications of Venture Capital Financing

The process of venture capital financing has diverse implications for the various participants.As far as the investors are concerned, they can make some income from the dividends and

may also have some ownership as well as some chances to take part in a business.

Venture capital is a type of private equity financing that is provided to those companies that are

starting out on their business operations. The beneficiaries of venture capital services also find it

difficult to generate capital by issuing debt financing instruments.

On Venture Capital

Venture capital may be described as the money that is provided by investors to businesses that are

starting to assist them in their business operations. Venture capital can also be called a type of

private equity capital. The venture capital services are provided on a professional basis.

The companies that provide venture capital services do so in exchange of the ownership of a certain

percentage of the company. It has been observed that, normally, the investors who provide venture

capital services are economically well off. Venture capital services may also be provided by financial

institutions like investment banks for example.

Popularity of Venture Capital

Venture capital is a viable option for generation of funds and is a widely availed option by the

organizations that are new in the business circuit. These companies generally find it hard to generate

money by issuing debt financing instruments. The entities that deal in providing venture capital

services also prefer this form of equity capital as it is financially rewarding. They also receive the

opportunity to participate in the business activities of a company.

Venture Capitalists

The investors who deal in putting money in new business enterprises are known as venture

capitalists. The venture capitalists operate on a professional basis and could be regarded as being

one of the primary sources of equity financing.

Venture Capital Fund

The venture capital fund is basically an investment pool where third-party investors put their money

for investing in companies that may not receive bank loans or finance from the conventional money

markets as a result of the amount of risk involved with them. The venture capital funds may also belimited partnerships.

2.1 Venture Capital in India during Pre -liberalization period

The earliest discussion of venture capital in India came in 1973 when the government appointed acommission to examine strategies for fostering small and medium-sized enterprises (Nasscom 2000).In 1983, a book titled ³Risk Capital for Industry´ was written and published in India with the support of the Economic and Scientific Research Foundation of India. This book showed how difficult to raise



³risk capital´ for new ventures in the Indian financial system¶s operation that existed during that timeand proposed various measures to liberalize and deregulate the financial market. Later, it led topolitical discussions on the difficulties India had in encouraging entrepreneurship and the generalmalfunctioning of the Indian financial system.India did not have any policies toward venture capital prior to 1988. In fact, there was no formalventure capital before 1988. The Indian government issued its first guidelines to legalize venturecapital operations in 1988 (Ministry of Finance 1988). These guidelines were aimed at the state-

controlled banks to establish venture capital subsidiaries. It was also possible for other investors tocreate venture capital firm. When the Indian government realized the potential of venture capital,World Bank was also interested in encouraging economic liberalization in India. So, the governmentannounced an institutional structure for venture capital (Ministry of Finance 1988). Thus, the firstventure capital company, Technology Development & Information Company of India Ltd. (TDICI) wasestablished in August 1988 and was run by Mr. Kiran Nadkarni. TDICI was formed by Industrial Creditand Investment Corporation of India (ICICI) and Unit Trust of India (UTI) to primarily focus ontechnologies. Both ICICI and UTI were state-controlled institutions. It was the World Bank fundedexperimental project. Since the government controlled every aspect of the economy, it was notsurprising that the first formal venture capital organization began in the public sector.

3 POST ECONOMIC LIBERALIZATION - AFTER 1990

Even though, the venture capital operation was highly constrained and bureaucratically controlled,TDICI was the most successful early stage government venture capital operation. TDICI wasestablished in Bangalore because technology companies such as Wipro Technologies, PSI Data, andInfosys were based there. The research activities of state-owned firms such as Indian TelephoneIndustries (ITI), Hindustan Aeronautics Limited (HAL), Indian Space Research Organization (ISRO),Defense Research Development Organization (DRDO), and India¶s best research university, IndianInstitute of Science (IISc) are also centralized there.Several established software firms received funds from TDICI, including Wipro for developing a³ruggedized´ computer for army use. There were several successes, including several firms whichwent public, such as VXL, Mastek Software Systems, Microland, and Sun Pharmaceuticals.

Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment inIndia Page 4 of 19



In 1990, another venture capital company Gujarat Venture Finance Limited (GVFL) started operationswith a 240 million rupee fund with investments from the World Bank and other state and central banksand private institutions. Since that fund was sufficiently successful, GVFL started another fund in 1995and raised 600 million rupees. In 1997, it raised a third fund to target the IT sector.The other two venture funds were formed by Andhra Pradesh Industrial Development Corporation(APDIC) and CanBank (the only bank-operated venture capital subsidiary) formed by a nationalizedbank Canara Bank. The performance was marginal.

By 1995, even though some fund performance was disappointing, there came a realization that thereactually were viable investment opportunities in India, and a number of venture capitalists hadreceived training.

3.1 India Venture Capital History

Although the venture capital environment in India is recent and new, there are four phases in theIndian venture capital history. They are:Phase I ± Formation of Technology Development and Information Company of India (TDICI) in 1988 ±formed by ICICI and UTIPhase II ± Entry of Foreign Venture Capital funds between 1995 and 1999Phase III ± Emergence of successful India-centric VC firmsPhase IV ± US VC¶s increasing appetite to invest in India

3.2 Visibility of Indian entrepreneurs¶ Success in Silicon Valley (SV)

The success of Indian entrepreneurs in Silicon Valley that began in 1980s became more visible in the1990s. This created a notion in the United States that India might have more possible entrepreneurs.This notion brought the Foreign Investors¶ attention toward India. Following are some of the venturecapital firms started operations in India after this realization:

Draper International started operations in India in 1995 Walden-Nikko in 1996 JumpStartup e4e Chrysalis Infinity

In 1993, the Indian Venture Capital Association (IVCA) was formed to create conducive environmentin India for venture capital and entrepreneurship. It consisted of nine members:1. TDICI2. GVFL3. IDBI¶s venture division4. RCTC5. APIDC6. CanBank7. Credit Capital Corporation8. Grindlays (acquired by Standard Charted Bank)9. British venture 3i Corporation




Between 1988 and 1996, the government relaxed the regulations further on venture capitaloperations. So, only in 1996, overseas and truly private domestic venture capitalists began investing.

Indian government realizedthe potential benefits of healthy venture capital sector in the late 1990s. In 1999, thegovernment announced a

number of new regulations.This included a significantregulation liberalizing theability of various financialinstitutions to invest in venturecapital. As a result, thenumber of venture capitalfirms has radically increasedas shown in the followingtable: Year

# of VCfirms

Before 1994 111998 182001 402005 More than

100The bureaucratic obstacles to the free operation of venture capital remained significant. Therecontinued to be a confusing array of newly created statutes. The following statutes govern venturecapital in India:

Stock Exchange Board of India¶s (SEBI) 1996 Venture Capital Regulations The 1995 Guidelines for Overseas Venture Capital Investments issued by the Department of

Economic Affairs in the Ministry of Finance The Central Board of Direct Taxes¶ (CBDT) 1995 Guidelines for Venture Capital Companies

(later modified in 1999)

In early 2000, domestic venture capitalists were regulated by three government bodies: The Securities and Exchange Board of India (SEBI) The Ministry of Finance The CBDT.

For foreign venture capital firms there was even greater regulation in the form of: The Foreign Investment Promotion Board (FIPB), which approves every investment The Reserve Bank of India (RBI), which approves every disinvestment.

The following regulations did not create an inviting environment for investors. Income tax rules provided that venture capital funds may invest only up to 40 percent of the

paid-up capital of a recipient firm, and also not beyond 25 percent of their own funds. All investors in the venture capital fund had limited liability, and there was no f lexibility in risk

sharing arrangements. There were no standard control arrangements, so they had to be determined by negotiation

between management and investors in the fund. Limited life funds were not recognized. So, it was relatively easy to terminate a trust, but this

meant that the entire firm was closed rather than a specific fund within the firm. Therefore,

each fund had to be created as a separate trust or company. This process is administrativelyand legally time-consuming. Terminating a fund is even more cumbersome, as it requirescourt approval on a case-by-case basis.

For firms with more than 50 non-employee shareholders, India¶s corporate law does not provideflexibility in using equity to reward employees. While this may be satisfactory for early-stageventure capital investors, it could discourage later-stage investors who invest as parts of aconsortium.




Tax restrictions on corporations require that corporations paying dividends must pay a 10

percent dividend±distribution tax on the aggregate dividend. On the other hand, trustsgranting dividends are exempt from dividend tax.

The tax code in 2001 was disadvantageous from the viewpoint of the international venturecapital investor. Earnings from an international venture capital investor are taxed even if it is atax exempt institution in its country of origin.

3.3 Drivers of Venture Investing in India

Knowledge based industries growing fast and mostly global and are less affected by domesticissues

World class engineers, professionals, entrepreneurs - success evident in the US as well 2nd largest English speaking population with emphasis on science and mathematics among

Indian students India has advanced rapidly in the 90¶s, catching up with global markets in many sectors.

Evidence of this in the US as well 25% of small IT companies in the US have Indian founders Disproportionately large presence of Indians (1 million+) in the US Software Sector 50% of all H1 visas issued to Indians

3.4 BSE Sensex Journey from 1000 to 9000

Bombay Stock Exchange (BSE), the oldest stock exchange of India was established in 1875. TheBSE Sensex comprises 30 stocks. BSE crossed 9000 mark for the first time in its history on Nov 28,2005. Following is the timeline:1000 ± July 25, 19902000 ± Jan 15, 19923000 ± Feb 29, 19924000 ± Mar 30, 19925000 ± Oct 8, 19996000 ± Feb 11, 20007000 ± Jun 20, 20058000 ± Sep 8, 2005

9000 ± Nov 28, 2005Businesses and consumers are very bullish on Indian Economy. Economic liberalization andRegulation of Venture Capital Operations paved the way for Mergers and Acquisitions (M&A). Associated Chambers of Commerce and Industry of India (Assocham) estimates M&A activities inIndia will touch $17B in 2005. The hot sectors in M&A are banking, pharmaceutical, IT, media andtelecom.

3.5 State of Venture Capital in India

Despite there was no venture capital firm in India until 1988, India jumped to 15th

position world wide

in 2001 and 12th

position in 2002 based on investment. India ranked #1 when it was based onCompound Annual Growth Rate (CAGR). India¶s CAGR was 82% for the period 1998-2002. The

following table illustrates the fact along with other countries¶ positions.

State of Venture Capital ± Top 20 Countr ies in 2002 ± Based on Investment

(Source: IVCA andInfinity Ventures)

2002 Rank

Country 2001 Rank CAGRGr owth

1998-02 (%)

1 USA 1 <12 UK 2 53 France 5 294 Italy 7 24



5 Japan 6 316 Germany 3 27 Korea 10 398 Netherlands 11 89 Canada 4 910 Sweden 9 5711 Australia 14 39

12 India 15 8213 Israel 12 1414 Spain 17 2215 Hong Kong 8 -16 Indonesia - -17 Finland - 1918 South Africa - -19 China 13 1120 Belgium 19 4

3.11 Supportive regulatory Environment

Indian Government irrespective of the party that ruled India since 1990 is highly supportive of growth in technology and knowledge based sectors

Strong and supportive legal frameworkInformation Technology ActVC normsESOPs




Copyright, etc

Government controlled telecom being fully deregulated Capital Market system amongst most advanced in Asia Electronic trading ± through National Stock Exchange (NSE) and Bombay Stock Exchange

(BSE)

3.12 Entrepreneurship in IndiaGlobal entrepreneurship monitor (GEM), a joint research by Babson College and London BusinessSchool, quantifies various factors that determine entrepreneurial activity globally. Its findings are:

o India fares fairly well on the entrepreneurship scale:o Small entrepreneurial new firms created 33 million new jobs in 2003

Parameters for measur ing entrepreneur ial activity

Global Avg India

TEA * Index ± Overall 9 17.9TEA Index ± Men 13.3 19.46TEA Index ± Women 8.5 9.62Ratio of impact of start-up vsentrepreneurial activity of existingfirms

5 10

Level of necessity start-up activity(%) 33.3 27

A global study says India is an enterprising nation. Global Entrepreneurship Monitor (GEM) findingsshow that in India, there are more than 107 million people seeking actively to establish 85 million newbusinesses. In the period 2000-2004, an average of 15 out of every 100 Indians was aiming to be anentrepreneur.

3.13 Trends influencing high -tech entrepreneurship in India

o The rapid pace of globalization and the fast growth of Asian economies present tremendousopportunities and challenges for India

o Increasing outsourcing to India not just for services but also for core businesses, engineeringactivities & cutting edge R&D work

o IT off-shoring industry has spawned market for number of ancillary industries likeentertainment, media, transportation, hospitality, infrastructure, etc

o ³Micro-Multinational´ model gaining popularity providing globalization of talent, markets,business models & capital

o Migration of number of Business Unit functionso World class knowledge of technology, markets, systems; adhering to global quality standards

o Strong US linkages especially with Silicon Valley (SV), known for its entrepreneurial cultureo More than 50% of SV VC portfolio leverages India connectivity, in some cases being a pre-

requisite for investment

3.14 The VC ³Hotbeds´

The VC Hotbeds are Bangalore, Delhi and Bombay. Other cities such as Chennai, Hydrabad,Pune, Calcutta and Trivandram are also emerging. All IP-led companies, IT and IT enabledservice companies are in Bangalore. Delhi has Software and IT enabled services and Telecom.Software and IT enabled services, Media, Computer Graphics, Animation and Banking sectors

are strong in Bombay.




Apart from the above mentioned sectors, VCs invest in the following hot sectors:

Software Products (Mainly Enterprise-focused) Wireless/Telecom/Semiconductor PSUDisinvestments Media/Entertainment Bio Technology/Bio Informatics Pharmaceuticals

Electronic Manufacturing Retail

3.15 Issues and challenges

Indian VC yet to be established as a sustainable asset class among institutional investors Limited amount of true ³risk-capital´ will impact entrepreneurial activity. Mr. Ganapathy

Subramanian of Jumpstartup said ³It is still very difficult for the entrepreneurs to raise lessthan $5M.´

Exit challenges ± shallow capital markets and dull M&A environment for small companies Beyond services, India is yet to create a brand-name for IP-led companies, like Israel has

successfully done McKinsey & Company survey shows two skill gaps in most Indian start-ups:

o Entrepreneurial (how to manage business risks, build a team, identify and get funding)o Functional (product development know-how, marketing skills, etc.)

Indian entrepreneurs have very little access to ³Risk´ capital.o Various educational institutions like Indian Institute of Technology (IIT) and

International Scholl of Business (ISB) provide right skills that promoteentrepreneurship and also incubate start-ups

o Seed/ angel funding VCs increasingly seeking opportunities

4 CONCLUSION

India has advanced very rapidly since economic liberalization in 1990 and is catching up with other developed markets quickly. The environment for venture capital has improved many folds since 1990.This is evident from the fact that while the amount invested in India in 1996-97 was just $20M, theamount invested is estimated to be $2B in 2005. This has resulted in Indian companies acquiring

foreign companies and become true global companies and allowed foreign companies to invest inIndian companies directly. Assocham estimates that the total M&A activities in India will touch $17B in2005. Indian venture capital industry has entered into its fourth phase now, i.e. US firms are investingdirectly in companies headquartered in India. Despite there are some issues and challenges in theIndian VC industry compared to other developed markets such as the US, India is catching up withother markets very quickly. VC operations in India will be regulated further in the future to create evenmore conducive environment for venture capital operations and entrepreneurship. Global EnterpriseMonitor research showed that India is an enterprising nation and 15% of the Indians were aiming tobe entrepreneurs in 2003-2004. Small entrepreneurial firms created 33 million jobs in 2003. Theoverall environment for venture capitalists and entrepreneurs in India is very good. It can only getbetter in the coming years.

This paper proposes to outline the concept and origin of Venture Capital, trace its

growth, and highlight the ventu re capital regulations. It has briefly explained about the

Chandra Sekhar Committee recommendations, various types of Venture Capital Fundsand the venture capital process in India. A simple case on first Venture Capital Fund inIndia, Technology Development & Information Company Of India Ltd., has alsodeveloped with concluding remarks.

Introduction

The venture capital investment helps for the growth of innovative entrepreneurships inIndia. Venture capital has developed as a result of the need to provide non-conventional,



risky finance to new ventures based on innovative entrepreneurship. Venture capital isan investment in the form of equity, quasi-equity and sometimes debt - straight orconditional, made in new or untried concepts, promoted by a technically or professionallyqualified entrepreneur. Venture capital means risk capital. It refers to capital investment,

both equity and debt, which carries substantial risk and uncertainties. The risk envisagedmay be very high may be so high as to result in total loss or very less so as to result in

high gains

The concept of Venture Capital

Venture capital means many things to many people. It is in fact nearly impossible tocome across one single definition of the concept.

Jane Koloski Morris, editor of the well known industry publication, Venture Economics,

defines venture capital as 'providing seed, start-up and first stage financing' and also

'funding the expansion of companies that have already demonstrated their businesspotential but do not yet have access to the public securities market or to credit oriented

institutional funding sources.

The European Venture Capital Association describes it as risk finance for

entrepreneurial growth oriented companies. It is investment for the medium or longterm return seeking to maximize medium or long term for both parties. It is a

partnership with the entrepreneur in which the investor can add value to the companybecause of his knowledge, experience and contact base.

The Origin of Venture Capital

In the 1920's & 30's, the wealthy families of and individuals investors provided the start

up money for companies that would later become famous. Eastern Airlines and Xerox are

the more famous ventures they financed. Among the early VC funds set up was the oneby the Rockfeller Family which started a special fund called VENROCK in 1950, to finance

new technology companies. General Doriot, a professor at Harvard Business School, in

1946 set up the American Research and Development Corporation (ARD), the first firm,

as opposed to a private individuals, at MIT to finance the commercial promotion of advanced technology developed in the US Universities. ARD's approach was a classic VC

in the sense that it used only equity, invested for long term, and was prepared to livewith losers. ARD's investment in Digital Equipment Corporation (DEC) in 1957 was a

watershed in the history of VC financing. While in its early years vc may have beenassociated with high technology, over the years the concept has undergone a change

and as it stands today it implies pooled investment in unlisted companies.

Venture Capital in India

In India the Venture Capital plays a vital role in the development and growth of innovative entrepreneurships. Venture Capital activity in the past was possibly done bythe developmental financial institutions like IDBI, ICICI and State Financial Corporations.

These institutions promoted entities in the private sector with debt as an instrument of funding. For a long time funds raised from public were used as a source of VentureCapital. This source however depended a lot on the market vagaries. And with theminimum paid up capital requirements being raised for listing at the stock exchanges, itbecame difficult for smaller firms with viable projects to raise funds from public. In India,

the need for Venture Capital was recognised in the 7th five year plan and long termfiscal policy of GOI. In 1973 a committee on Development of small and mediumenterprises highlighted the need to faster VC as a source of funding new entrepreneursand 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. The first private VC fund was sponsored by Credit Capital FinanceCorporation (CFC) and promoted by Bank of India, Asian Development Bank and theCommonwealth Development Corporation viz. Credit Capital Venture Fund. At the sametime Gujarat Venture Finance Ltd. and APIDC Venture Capital Ltd. were started by state

level financial institutions. Sources of these funds were the financial institutions, foreigninstitutional investors or pension funds and high net-worth individuals. The venture

capital funds in India are listed in Annexure I.

Venture Capital Investments in India

The venture capital investment in India till the year 2001 was continuously increased

and thereby drastically reduced. Chart I shows that there was a tremendous growth byalmost 327 percent in 1998-99, 132 percent in 1999-00, and 40 percent in 2000-01

there after venture capital investors slow down their investment. Surprisingly, there was

a negative growth of 4 percent in 2001-02 it was continued and a 54 percent drasticreduction was recorded in the year 2002-2003.

Chart I

Venture Capital Investments

Source: The Economic Times

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.

A Venture Capital Undertaking means a domestic company (i) whose shares are notlisted on a recognised stock exchange in India and (ii) which is engaged in the business

of providing services/production/manufacture of articles/things but does not include suchactivities/sectors as are specified in the negative list by SEBI with government approval-

namely, real estate, non-banking financial companies (NBFCs), gold financing, activitiesnot permitted under the industrial policy of the Government and any other activity whichmay be specified by SEBI in consultation with the Government from time to time.

Registration

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.

Recommendations of SEBI (Chandrasekhar) Committee, 2000 SEBI appointed the

Chandrasekhar Committee to identify the impediments in the growth of venture capitalindustry in the country and suggest suitable measures for its rapid growth. Its report

was submitted in January, 2000. The recommendations pertain to



1. Harmonisation of multiplicity of regulations2. VCF structures3. Resource raising4. Investments

5. Exit6. SEBI regulations

7. Company law related issues and

8. Other related issues.

Types of Venture Capital Funds

Generally there are three types of organised or institutional venture capital funds:

venture capital funds set up by angel investors, that is, high net worth individual

investors; venture capital subsidiaries of corporations and private venture capital firms/funds. Venture capital subsidiaries are established by major corporations, commercial

bank holding companies and other financial institutions. Venture funds in India can beclassified on the basis of the type of promoters.

1 . VCFs promoted by the Central govt. controlled development financialinstitutions such as TDICI, by ICICI, Risk capital and Technology Finance Corporation

Limited (RCTFC) by the Industrial Finance Corporation of India (I FCI) and Risk CapitalFund by IDBI.

2. VCFs promoted by the state government-controlled development finance

institutions such as Andhra Pradesh Venture Capital Limited (APVCL) by AndhraPradesh State Finance Corporation (APSFC) and Gujarat Venture Finance Company

Limited (GVCFL) by Gujarat Industrial Investment Corporation (GIIC)

3. VCFs promoted by Public Sector banks such as Canfina by Canara Bank and SBI-Cap by State Bank of India.

4. VCFs promoted by the foreign banks or private sector companies and

financial institutions such as Indus Venture Fund, Credit Capital Venture Fund andGrindlay's India Development Fund.

The Venture Capital Investment Process:

The venture capital activity is a sequential process involving the following six steps.

1. Deal origination

2. Screening

3. Due diligence Evaluation)4. Deal structuring

5. Post-investment activity

6. Exist



Venture Capital Investment Process

Deal origination:

In generating a deal flow, the VC investor creates a pipeline of deals or investment

opportunities that he would consider for investing in. Deal may originate in various ways.

referral system, active search system, and intermediaries. Referral system is animportant source of deals. Deals may be referred to VCFs by their parent organisaions,

trade partners, industry associations, friends etc. Another deal flow is active search

through networks, trade fairs, conferences, seminars, foreign visits etc. Intermediaries isused by venture capitalists in developed countries like USA, is certain intermediaries who

match VCFs and the potential entrepreneurs.

Screening:

VCFs, before going for an in-depth analysis, carry out initial screening of all projects on

the basis of some broad criteria. For example, the screening process may limit projectsto areas in which the venture capitalist is familiar in terms of technology, or product, or

market scope. The size of investment, geographical location and stage of financing couldalso be used as the broad screening criteria.

Due Diligence:

Due diligence is the industry jargon for all the activities that are associated with

evaluating an investment proposal. The venture capitalists evaluate the quality of

entrepreneur before appraising the characteristics of the product, market or technology.

Most venture capitalists ask for a business plan to make an assessment of the possiblerisk and return on the venture. Business plan contains detailed information about the

proposed venture. The evaluation of ventures by VCFs in India includes;

Preliminary evaluation: The applicant required to provide a brief profile of the proposedventure to establish prima facie eligibility.

Detailed evaluation: Once the preliminary evaluation is over, the proposal is evaluated in

greater detail. VCFs in India expect the entrepreneur to have:- Integrity, long-termvision, urge to grow, managerial skills, commercial orientation.



VCFs in India also make the risk analysis of the proposed projects which includes:Product risk, Market risk, Technological risk and Entrepreneurial risk. The final decision istaken in terms of the expected risk-return trade-off as shown in Figure.

Deal Structuring:

In this process, the venture capitalist and the venture company negotiate the terms of

the deals, that is, the amount, form and price of the investment. This process is termedas deal structuring. The agreement also include the venture capitalist's right to control

the venture company and to change its management if needed, buyback arrangements,

acquisition, making initial public offerings (IPOs), etc. Earned out arrangements specifythe entrequreneur's equity share and the objectives to be achieved.

Post Investment Activities:

Once the deal has been structured and agreement finalised, the venture capitalist

generally assumes the role of a partner and collaborator. He also gets involved inshaping of the direction of the venture. The degree of the venture capitalist'sinvolvement depends on his policy. It may not, h owever, be desirable for a venturecapitalist to get involved in the day-to-day operation of the venture. If a financial or

managerial crisis occurs, the venture capitalist may intervene, and even install a newmanagement team.

Exit:

Venture capitalists generally want to cash-out their gains in five to ten years after the

initial investment. They play a positive role in directing the company towards particularexit routes. A venture may exit in one of the following ways:

1. Initial Public Offerings (IPOs)2. Acquisition by another company

3. Purchase of the venture capitalist's shares by the promoter, or

4. Purchase of the venture capitalist's share by an outsider.

Methods of Venture Financing

Venture capital is typically available in three forms in India, they are:

Equity : All VCFs in India provide equity but generally their contribution does not exceed49 percent of the total equity capital. Thus, the effective control and majority ownership

of the firm remains with the entrepreneur. They buy shares of an enterprise with anintention to ultimately sell them off to make capital gains.

Conditional Loan: It is repayable in the form of a royalty after the venture is able to

generate sales. No interest is paid on such loans. In India, VCFs charge royalty ranging

between 2 to 15 percent; actual rate depends on other factors of the venture such asgestation period, cost-flow patterns, riskiness and other factors of the enterprise.

Income Note : It is a hybrid security which combines the features of both conventionalloan and conditional loan. The entrepreneur has to pay both interest and royalty on

sales, but at substantially low rates.

Other Financing Methods: A few venture capitalists, particularly in the private sector,have started introducing innovative financial securities like participating debentures,

introduced by TCFC is an example.



A Case on Technology Development & Information Company Of India Ltd.

TDICI was incorporated in January 1988 with the support of the ICICI and the UTI. The

country's first venture fund managed by the TDICI called VECAUS ( Venture Capital UnitsScheme) was started with an initial corpus of Rs.20 crore and was completely committed

to 37 small and medium enterprises. The first project of the TDICI was loan and equity

to a computer software company called Kale Consultants.

Present Status: At present the TDICI is administering two UTI ±mobilised funds under

VECAUS-I and II, totaling Rs.120 crore. the Rs.20 crore invested under the first fund,

VECAUS-I, has already yielded returns totaling Rs. 16 crore to its investors.

Some of the projects financed by the TDICI are discussed below.

MASTEK , a Mumbai based software firm, in which the TDICI invested Rs.42 lakh inequity in 1989, went public just three years later, in November 1992. It showed an

annual growth of 70-80 percent in the turnover.

TEMPTATION FOODS, located in PUNE, which exports frozen vegetables and fruits,

went public in November 1992. The TDICI invested Rs.50 lakh in its equity.

R ISHABH INSTRUMENTS of Nasik got Rs.40 lakh from the TDICI. It manufactures arange of meters used in power stations in collaboration with the ABB Metra Watt of

Germany. After making cash losses totaling Rs.25 lakh in two bad years, it turnedaround in 1989 and showed an increase of over 70 percent in the turnover.

SYNERGY ART FOUNDATION, which runs art galleries in Mumbai and Chennai andplans to set up in Pune and Delhi too, had received Rs.25 lakh from the TDICI as

convertible loans which were converted into equity on march 31, 1994. Most of thismoney has been used for the company's innovative art library scheme at least paintings

to corporate clients.

Conclusion

In recent years the growth of Venture Capital Business has been drastically decreasing

due to many reasons. The regulator has to liberalize the stringent policies and pave theway to the venture capital investors to park their funds in most profitable ventures.Though an attempt was also made to raise funds from the public and fund new ventures,

the venture capitalists had hardly any impact on the economic scenario for the next fewyears. At present many investments of venture capitalists in India remain on paper as

they do not have any means of exit. Appropriate changes have to be made to theexisting systems in order that venture capitalists find it easier to realize their

investments after holding on to them for a certain period of time.

(The author acknowledges Prof. R K Mishra, Director, Institute of Public Enterprise,

Osmania University, Hyderabad, for his immense help and encouragement and Dr. S S SKumar, Assistant Professor, Finance and Accounting Area, Indian Institute of

Management, Kozhikode, for his motivation and inspiration)

Annexure I

Some important Venture Capital Funds in India

1. APIDC Venture Capital Limited ,1102, Babukhan Estate, Hyderabad 500 001

2. Canbank Venture Capital Fund Limited, IInd Floor, Kareem Towers, Bangalore



3. Gujarat Venture Capital Fund 1997, Ashram Road, Ahmedabad 380 0094. Industrial Venture Capital Limited, Thyagaraya Road, Chennai 600 0175. Auto Ancillary Fund Opp. Signals Enclave, New Delhi 110 0106. Gujarat Venture Capital Fund 1995 Ashram Road Ahmedabad 380 009

7. Karnataka Information Technology Venture Capital Fund Cunningham Rd Bangalore8. India Auto Ancillary Fund Nariman Point, Mumbai 400 021

9. Information Technology Fund, Nariman Point, Mumbai 400 021

10. Tamilnadu Infotech Fund Nariman Point, Mumbai 400 02111. Orissa Venture Capital Fund Nariman Point Mumbai 400 021

12. Uttar Pradesh Venture Capital Fund Nariman Point, Mumbai 400 02113. SICOM Venture Capital Fund Nariman Point Mumbai 400 021

14. Punjab Infotech Venture Fund 18 Himalaya Marg, Chandigarh 160 017

15. National Venture Fund for Software and Information Technology Industry, NarimanPoint,Mumbai 400 021

History

Definitions

Inves tment s

The industries in which the investments were made were classified into 9 categories. Investments were further

classified as Early, Late, Pre-IPO, PIPE (Private Investment in Public Equity) and Buyout Deals, based on the

stage of

investment. Table 3.1 and Table 3.2 provide details of these classifications.

Table 3.1: Classification of investments on type of industry

S. No. Industry class Sectors included

1 IT & ITES

IT & ITES / Software / Internet/ Computer Hardware / Semiconductors /

Electronics

2 Healthcare

Healthcare / Pharmaceuticals / Medical services / Life sciences /

Biotechnology

3 Manufacturing

Light & Heavy manufacturing / FMCG / Foods & Beverages / Consumer &

Business products

4

Engineering &

Construction

Engineering / Capital goods / Construction / Real estate / Energy / Oil &

Gas / Infrastructure

5 Telecom & Media Telecommunications & ISPs / Print & Electronic Media / Entertainment

6 Transportation & Logistics Shipping & Logistics / Distribution / Transportation

7 Financial services Banking / Financial Services / Insurance

8 Non-Financial ServicesAdvertising & Marketing / Education / Hotels & Resorts (Hospitality) /

Travel & Tourism / Leisure / Sports & Fitness

9 Others

Agriculture / Retail & Wholesale / Mining & Metals / Textiles & Garments

/ Chemicals

Table 3.2: Classification based on stage of investment

S. No. Financing stage Type of funding

1 Early Seed Capital / R&D / Start-up / Early Stage

2 Growth Expansion / Growth Capital (< 10 yrs old)



3 Late

Expansion / Growth capital at later stages / Rapid growth towards liquidity /

Special Purpose Vehicles (SPV)

4 Pre-IPO Mezzanine / Pre-IPO funding / Bridge Loan

5 PIPE Private investments in Public Equity / Private placements

6 Buyout Buy-outs (MBO / MBI / LBO) / Acquisition of controlling or significant stake

Classifying the investors and investments into different categories helped in getting a better understanding of

the

underlying trends during analysis.

Around the World

A few Notable Cases

Recent Cases

The rise in the number of startups and startup ecosystem

How does the VC industry

About Venture Capital (VC)

Starting and growing a business always require capital. There are a number of alternativemethods to fund growth. These include the owner or proprietor¶s own capital, arranging debtfinance, or seeking an equity partner, as is the case with private equity and venture capital.

Private equity is a broad term that refers to any type of non-public ownership equitysecurities that are not listed on a public exchange. Private equity encompasses both earlystage (venture capital) and later stage (buy-out, expansion) investing. In the broadest sense, itcan also include mezzanine, fund of funds and secondary investing.

Venture capital is a means of equity financing for rapidly-growing private companies.Finance may be required for the start-up, development/expansion or purchase of a company.

Venture Capital firms invest funds on a professional basis, often focusing on a limited sector

of specialization (eg. IT, infrastructure, health/life sciences, clean technology, etc.).

The goal of venture capital is to build companies so that the shares become liquid (through

IPO or acquisition) and provide a rate of return to the investors (in the form of cash or shares)that is consistent with the level of risk taken.

With venture capital financing, the venture capitalist acquires an agreed proportion of theequity of the company in return for the funding. Equity finance offers the significant



advantage of having no interest charges. It is "patient" capital that seeks a return throughlong-term capital gain rather than immediate and regular interest payments, as in the case of

debt financing. Given the nature of equity financing, venture capital investors are thereforeexposed to the risk of the company failing. As a result the venture capitalist must look to

invest in companies which have the ability to grow very successfully and provide higher thanaverage returns to compensate for the risk.

When venture capitalists invest in a business they typically require a seat on the company's board of directors. They tend to take a minority share in the company and usually do not takeday-to-day control. Rather, professional venture capitalists act as mentors and aim to providesupport and advice on a range of management, sales and technical issues to assist thecompany to develop its full potential.

Venture capital has a number of advantages over other forms of finance, such as:

y It injects long term equity finance which provides a solid capital base for futuregrowth.

y The venture capitalist is a business partner, sharing both the risks and rewards.

Venture capitalists are rewarded by business success and the capital gain.y The venture capitalist is able to provide practical advice and assistance to the

company based on past experience with other companies which were in similar situations.

y The venture capitalist also has a network of contacts in many areas that can add valueto the company, such as in recruiting key personnel, providing contacts ininternational markets, introductions to strategic partners, and if needed co-investmentswith other venture capital firms when additional rounds of financing are required.

y The venture capitalist may be capable of providing additional rounds of fundingshould it be required to finance growth.

How does the VC industry work

Venture capital firms typically source the majority of their funding from large investmentinstitutions such as fund of funds, financial institutions, endowments, pension funds and

banks. These institutions typically invest in a venture capital fund for a period of up to tenyears.

To compensate for the long term commitment and lack of both security and liquidity,

investment institutions expect to receive very high returns on their investment. Thereforeventure capitalists invest in either companies with high growth potential where they are ableto exit through either an IPO or a merger/acquisition. Although the venture capitalist may

receive some return through dividends, their primary return on investment comes from capitalgains when they eventually sell their shares in the company, typically between three to five

years after the investment.

Venture capitalists are therefore in the business of promoting growth in the companies theyinvest in and managing the associated risk to protect and enhance their investors' capital.



Selecting the VC investors

The members of the Indian Private Equity and Venture Capital Association comprise a

number of venture capital firms in India. The IVCA Directory of Members provides basicinformation about each member's investment preferences and is available from the

Association.

Prior to selecting a venture capitalist, the entrepreneur should study the particular investment preferences set down by the venture capital firm. Often venture capitalists have preferencesfor particular stages of investment, amount of investment, industry sectors, and geographicallocation.

An investment in an private, unlisted company has a long-term horizon, typically 4-6 years. Itis important to select venture capitalists with whom it is possible to have a good workingrelationship. Often businesses do not meet their cash-flow forecasts and require additionalfunds, so an investor's ability to invest in additional financing rounds if required is alsoimportant.

Finally, when choosing a venture capitalist, the entrepreneur should consider not just theamount and terms of investments, but also the additional value that the venture capitalist can

bring to the company. These skills may include industry knowledge, fund raising, financialand strategic planning, recruitment of key personnel, mergers and acquisitions, and access tointernational markets and technology. Entrepreneurs should not hesitate to ask for referencesfrom investors.

What do VC's look for

Venture capitalists are higher risk investors and, in accepting these risks, they desire a higher return on their investment. The venture capitalist manages the risk/reward ratio by onlyinvesting in businesses which fit their investment criteria and after having completedextensive due diligence.

Venture capitalists have differing operating approaches. These differences may relate tolocation of the business, the size of the investment, the stage of the company, industryspecialization, structure of the investment and involvement of the venture capitalists in the

companies activities.

The entrepreneur should not be discouraged if one venture capitalist does not wish to proceedwith an investment in the company. The rejection may not be a reflection of the quality of the

business, but rather a matter of the business not fitting with the venture capitalist's particular investment criteria. Often entrepreneurs may want to ask the venture capitalist for other firmsthat might be interested in the investment opportunity. Venture capital is not suitable for all

businesses, as a venture capitalist typically seeks : Superior Businesses Venture capitalistslook for companies with superior products or services targeted at large, fast growing or untapped markets with a defensible strategic position such as intellectual property or patents.

Quality and Depth of Management Venture capitalists must be confident that the firm has thequality and depth in the management team to achieve its aspirations. Venture capitalists



seldom seek managerial control, rather they want to add value to the investment where theyhave particular skills including fund raising, mergers and acquisitions, international

marketing, product development, and networks.

Appropriate Investment Structure As well as the requirement of being an attractive businessopportunity, the venture capitalist will also seek to structure a deal to produce the anticipated

financial returns to investors. This includes making an investment at a reasonable price per share (valuation).

Exit Opportunity Lastly, venture capitalists look for the clear exit opportunity for their investment such as public listing or a third party acquisition of the investee company.

Once a short list of appropriate venture capitalists has been selected, the entrepreneur can proceed to identify which investors match their funding requirements. At this point, theentrepreneur should contact the venture capital firm and identify an investment manager as aninitial contact point. The venture capital firm will ask prospective investee companies for

information concerning the product or service, the market analysis, how the companyoperates, the investment required and how it is to be used, financial projections, and

importantly questions about the management team.

In reality, all of the above questions should be answered in the Business Plan. Assuming theventure capitalist expresses interest in the investment opportunity, a good business plan is a

pre-requisite.

The Business Plan

Venture capitalists view hundreds of business plans every year. The business plan musttherefore convince the venture capitalist that the company and the management team have theability to achieve the goals of the company within the specified time.

The business plan should explain the nature of the company¶s business, what it wants toachieve and how it is going to do it. The company¶s management should prepare the plan andthey should set challenging but achievable goals.

The length of the business plan depends on the particular circumstances but, as a general rule,it should be no longer than 25-30 pages. It is important to use plain English, especially if youare explaining technical details. Aim the business plan at non-specialists, emphasising itsfinancial viability.

Avoid jargon and general position statements. Essential areas to cover in your business plan

Executive Summary This is the most important section and is often best written last. Itsummarises your business plan and is placed at the front of the document. It is vital to givethis summary significant thought and time, as it may well determine the amount of consideration the venture capital investor will give to your detailed proposal.

It should be clearly written and powerfully persuasive, yet balance "sales talk" with realism

in order to be convincing. It should be limited to no more than two pages and include the keyelements of the business plan.



1. Background on the company Provide a summary of the fundamental nature of the companyand its activities, a brief history of the company and an outline of the company¶s objectives.

2. The product or service Explain the company's product or service. This is especially

important if the product or service is technically orientated. A non-specialist must be able tounderstand the plan.

y Emphasise the product or service's competitive edge or unique selling point.y Describe the stage of development of the product or service (seed, early stage,

expansion). Is there an opportunity to develop a second-generation product in duecourse? Is the product or service vulnerable to technological redundancy?

y If relevant, explain what legal protection you have on the product, such as patentsattained, pending or required. Assess the impact of legal protection on themarketability of the product.

3. Market analysis The entrepreneur needs to convince the venture capital firm that there is areal commercial opportunity for the business and its products and services. Provide the reader a combination of clear description and analysis, including a realistic "SWOT" (strengths,

weaknesses, opportunities and threats) analysis.

y Define your market and explain in what industry sector your company operates. Whatis the size of the whole market? What are the prospects for this market? Howdeveloped is the market as a whole, i.e. developing, growing, mature, declining?

y How does your company fit within this market? Who are your competitors? For what proportion of the market do they account? What is their strategic positioning? Whatare their strengths and weaknesses? What are the barriers to new entrants?

y Describe the distribution channels. Who are your customers? How many are there?What is their value to the company now? Comment on the price sensitivity of themarket.

y Explain the historic problems faced by the business and its products or services in themarket. Have these problems been overcome, and if so, how? Address the currentissues, concerns and risks affecting your business and the industry in which itoperates. What are your projections for the company and the market? Assess future

potential problems and how they will be tackled, minimised or avoided.

4. Marketing Having defined the relevant market and its opportunities, it is necessary toaddress how the prospective business will exploit these opportunities.

y Outline your sales and distribution strategy. What is your planned sales force? Whatare your strategies for different markets? What distribution channels are you planningto use and how do these compare with your competitors? Identify overseas market

access issues and how these will be resolved.y What is your pricing strategy? How does this compare with your competitors?y What are your advertising, public relations and promotion plans?

5. The management team

Demonstrate that the company has the quality of management to be able to turn the business plan into reality.



y The senior management team ideally should be experienced in complementary areas,such as management strategy, finance and marketing, and their roles should be

specified. The special abilities each member brings to the venture should beexplained. A concise curriculum vitae should be included for each team member,

highlighting the individual¶s previous track record in running, or being involved with,successful businesses.

y Identify the current and potential skills gaps and explain how you aim to fill them.Venture capital firms will sometimes assist in locating experienced managers wherean important post is unfilled - provided they are convinced about the other aspects of your plan.

y List your advisers and board members.y Include an organisation chart.

6. Financial projections

The following should be considered in the financial aspect to your business plan:

y Realistically assess sales, costs (both fixed and variable), cash flow and working

capital. Produce a profit and loss statement and balance sheet. Ensure these are easy toupdate and adjust. Assess your present and prospective future margins in detail,

bearing in mind the potential impact of competition.y Explain the research undertaken to support these assumptions.y Demonstrate the company's growth prospects over, for example, a three to five year

period. What are the costs associated with the business? What are the sale prices or fee charging structures?

y What are your budgets for each area of your company's activities?y Present different scenarios for the financial projections of sales, costs and cash flow

for both the short and long term. Ask "what if?" questions to ensure that key factorsand their impact on the financings required are carefully and realistically assessed.For example, what if sales decline by 20%, or supplier costs increase by 30%, or

both? How does this impact on the profit and cash flow projections?

y If it is envisioned that more than one round of financing will be required (often thecase with technology based businesses in particular), identify the likely timing andany associated progress "milestones" or goals which need to be achieved.

y K eep the plan feasible. Avoid being overly optimistic. Highlight challenges and showhow they will be met.

Relevant historical financial performance should also be presented. The company¶s historicalachievements can help give meaning, context and credibility to future projections.

7. Amount and use of finance required and exit opportunities State how much finance is

required by your business and from what sources (i.e. management, venture capital, banksand others) and explain the purpose for which it will be applied.

Consider how the venture capital investors will exit the investment and make a return.Possible exit strategies for the investors may include floating the company on a stock exchange or selling the company to a trade buyer.

Investment Process



The investment process begins with the venture capitalist conducting an initial review of the proposal to determine if it fits with the firm's investment criteria. If so, a meeting will be

arranged with the entrepreneur/management team to discuss the business plan.

Preliminary Screening The initial meeting provides an opportunity for the venture capitalistto meet with the entrepreneur and key members of the management team to review the

business plan and conduct initial due diligence on the project. It is an important time for themanagement team to demonstrate their understanding of their business and ability to achievethe strategies outlined in the plan. The venture capitalist will look carefully at the team'sfunctional skills and backgrounds.

Negotiating Investment This involves an agreement between the venture capitalist andmanagement of the terms of the term sheet, often called memorandum of understanding(MoU). The venture capitalist will then proceed to study the viability of the market toestimate its potential. Often they use market forecasts which have been independently

prepared by industry experts who specialise in estimating the size and growth rates of

markets and market segments.

The venture capitalist also studies the industry carefully to obtain information aboutcompetitors, entry barriers, potential to exploit substantial niches, product life cycles, and

distribution channels. The due diligence may continue with reports from other consultants.

Approvals and Investment Completed The process involves due diligence and disclosure of all relevant business information. Final terms can then be negotiated and an investment

proposal is typically submitted to the venture capital fund¶s board of directors. If approved,legal documents are prepared.

The investment process can take up to two months, and sometimes longer. It is importanttherefore not to expect a speedy response. It is advisable to plan the business financial needsearly on to allow appropriate time to secure the required funding.

Startup Numbers

EcoSystem

Biz Plan competitions, startup events, Angel Groups, Angels, Incubators, Govt.encouragement, Funding

Career Trend



The Changing Quality Equation

How Start

<<The Quality of startups has been getting better by the day as more and more Young

Indians dare to produce products for the world and not just the local markets>>

The Investments Scenario

<<Will talk about the no. and size of VC Funds, Angel Groups and Investments made bythem>>

News

KOLKATA/BANGALORE: Nearly $1 billion of venture capital is expected to flow into India next year onthe back of strong domestic economic growth and rising profits from successful exits by risk capital

investors. There has been a steady increase in risk capital inflows this year with $446 million coming

in the first 10 months of this year, across 83 deals. This marked a near 40% increase from the level of

82 deals, which brought in $320 million in 2009.

I expect VC investments to be around $1 billion next year. There was a strong resurgence along

with capital allocation in 2010 and that should continue to flow next year, said Sanjeev Aggarwal,

MD, Helion Advisors , an India-focused fund that manages a corpus of around

$350 million. Industry observers say the emerging scenario of right valuation, where fewer funds

now chase quality deals at reasonable valuations, is one of the leading factors for a revival in fund

inflow.

The year 2008-09 was a period of excesses in terms of deals, there was an all-prevailing irrational

exuberance in terms of investment outlook, said Harshal J Shah, CEO, Reliance Venture Asset

Management , who feels the valuations of companies world-over plummeting last year has brought

more sanity and clarity into the investing scenario.

We follow the (investing) model, where you can make three time returns in a period of five years

before making an exit, said Mr Aggarwal of Helion Advisors, which had a successful public listing of

portfolio company, MakeMyTrip.com.

Such successful exits for investors have reaffirmed the viability of the venture business in India. The

year 2010 has been very good for exits and funds have seen significant returns on their early stageinvestments such as MakeMyTrip and SKS Microfinance, this brings renewed interest in the Indian

VC story, said Rohit Madan, associate director-private equity, KPMG. Post recession, one of the

favoured sectors for VC investments technology investing is also expected to see increased

activity.

As the Indian ecosystem develops, we are seeing more product and IP companies worth investing in

and not just IT services companies, said Sudhir Sethi, MD of early stage technology fund, IDG

Ventures . The Indian technology venture market will absorb over $7 billion in funding from 2010 to



2015, he added. IDG, which invests out of a $150-million fund in India, typically puts in between $3-

19 million in a company as an early or growth stage investor.

Rising interest by Indian high net worth individuals (HNI) in risk capital investing is also proving to be

a spur for greater fund flow. For instance, Navam Capital has received funds from HNIs, said

Rajeev Mantri, executive director, Navam Capital. As more India-focused funds raise capital, India

could emerge as an important element of the global fund flow, said Mr Shah of Reliance Venture.

http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/finance/VCs-may-bring-1-billion-into-India-next-year/articleshow/6891549.cms

MUMBAI: A sustained recovery in the stock market and a pervasive belief that the rise in share

prices is too good to last are giving private equity (PE) and venture capital (VC) companies strong

cues to exit investments. The scramble for the door among PE firms has seen the valuation of exit

deals soaring to $2.47 billion in 2010, past last years $1.79 billion, says a recent study by Delhi-

based research agency Four-S Services.

At 59, the number of exits by PE and VC firms so far this year is sniffing at the 63 deals recorded in2009, says the study.

Many first-generation funds are now looking to sell after the recent rise in equity markets, said JM

Financial executive director Anant Kulkarni.

Typically, PE firms invest in unlisted enterprises and nurture them over three to five years until they

are ripe for a stock offering. In such deals, promoters buy back the stake held by PE investors. Or,

sensing greater potential in the company, peer investors purchase the stake owned by a PE firm.

In companies that have gone public, PE investors buy stocks when share prices are trading at a

discount and exit when there is a significant rise in the stock price. In market parlance, such

transactions are known as private investment in public equity, or PIPE.

The two trends are currently playing out. Since January, the benchmark Sensex has risen 1.75%. The

BSE 500, a wider basket of companies from 20 industries, grew 4.3% in seven months to end-July.

Likewise, a string of firms, including those from communications and real estate sector, have filed

with market regulator Sebi for an IPO. A substantial number of investments have been PIPE deals

and as the secondary market has gone up, so have the exits, said Mr Kulkarni. The private equity

unit of Rabobank sold its stake in Yes Bank through the open market for $215 million. Peepul Capital

and SAIF Partners sold their stake in technology company Intelligroup for $199 million.

There has been a surfeit of buyback deals this year. Symphony Capital, for example, sold its holding

in DLF Assets for $696 million last month. In May, Siva Ventures, the financial services arm of high

profile investor C Sivasankaran, sold its stake in Aamby Valley for $323 million.

Buyback deals made up nearly 47%, or $1.15 billion, of the exits by PE firms, said the Four-S Services

study. The open market staged 29%, or $715.7 million of the deals while IPOs paved the way for 6%



exits totalling $149.3 million. The remaining 18% exits were strategic sales M&A and

secondary sales to PE counterparts.

All these exits have their genesis in 2006-07, which was a dream year for PE investments, said SMC

Capital equity head Jagannadham Thunuguntla. The ascendance of the benchmark index this year

has been modest compared to the spectacular levels of 2009, but investors are guarded againstwaiting further, said a number of people associated with the private equity sector.

One reason for the haste in exiting companies is that the sharp plunge in equity markets in 2008 is

still fresh in the minds of private equity investors. In 2009, the Sensex rocketed by 76% but during

the previous year, the index had plunged 110% in the aftermath of the liquidity crisis.

While it is true that many firms may think that this is the best opportunity to sell their investments

and get out, its also a fact that nobody can time the market accurately, said Mr Thunuguntla.

http://economictimes.indiatimes.com/markets/analysis/Soaring-market-valuations-trigger-PE-

VC-exits/articleshow/6245908.cms

NEW DELHI: More private equity and venture capital-funded companies will float initial public offers

in the coming weeks as valuations soar and investors look to rake in profits.

After a lull last year when valuations were low, private equity (PE) investors are now lining up mass

exits as the recovery in the domestic economy leads to increased valuation of companies, say

analysts tracking the sector.

So far, this calendar year PE firms encashed over $3.8 billion from 77 investment exits, more than

double of $1.7 billion collected over 44 exits in the same period last year, according to data collated

by Venture Intelligence , a research firm.

We have focused on exits for the past year since valuations appear to be fair and these exits enable

us to rebalance our portfolio and reduce the number of companies in it, said Luis Miranda,

president & chief executive officer, IDFC Private Equity , a firm focused on infrastructure investments

that manages a total corpus of Rs 60 billion across three funds.

Some of the companies that are ripe for exits include Ashoka Buildcon, a company engaged in

construction business of roads and bridges, local search engine JustDial and healthcare firm Arch

Pharmalabs, according to investment bankers who are familiar with the companies plans.

All three of these companies are expected to float initial public offers. ET could not independently

verify these plans. An email sent to executives of Arch Pharmalabs did not elicit any response.

Many companies in our portfolio have accrued value and with public market window opening up,

we are sure to get good returns from them. said Sandeep Singhal, MD at Sequoia Capital. He,

however, refused to divulge the names of companies which they are looking to exit. Sequoia Capital

is an investor in JustDial.

Most of these investors are looking to exit investments made around five years ago in a bid to rake

in profits as the recovery in the domestic economy leads to increased valuation of companies. PE

firms normally exit by way of trade sale, public listing, recapitalisation and secondary sale.



Trade sale is the most common exit for private equity investments as trade buyers in the same

industry are often more likely to realise synergies with the business and are therefore the most

natural buyers of the business.

Typically public listing takes place during positive market conditions as prevailing at present. PE

investors, especially those who invested during the 2004-2005 period, will be looking to makeprofitable exits in the next few months as rich valuations in the public markets and favourable

environment for initial public offering are fetching significant returns, says Arun Natarajan, MD,

Venture Intelligence.

http://economictimes.indiatimes.com/markets/ipos/fpos/rights-issues/PE--VC-funded-cos-line-up-public-offers/articleshow/6576922.cms

The Exits Scanario

<<Will talk about most big and small exits in the market. Who made money, how much andwhy. Should also talk about who lost money and how much and why>>

Highlights:

-The year 2010 saw $8.05 billion of capital invested across 369 private equity and venturecapital deals, a noteworthy jump of 79.5.% as against the $4.48 billion invested in 2009across 329 deals.

-Growth capital/private equity investments saw 84% more capital being invested compared to2009 levels.

-The median deal amount increased 67% from $6mm in 2009 to $10mm in 2010. Theaverage deal value increased from $16 million to $26 million during the same period.

-Financials sector received the maximum private equity investment of $2 billion across 81deals, followed by Utilities and Industrials.

-Private Equity exits for the year are pegged at $5 billion, nearly 63% of the fresh $8 billionof private equity capital infused over the course of the year.

-Consumer Discretionary, Industrials, and Information Technology sectors saw the maximumexits with private equity investors realizing returns across 34 deals each, mostly through openmarket sales.

-On the fund raising front, 16 funds raised a cumulative $2.42 billion of capital commitmentsfrom limited partners, a dip of 19% from the capital raised in 2009.

-M&A deal value climbed to $64.3 billion in 2010 from $16.8 billion in 2009.



-Cross-border M&A¶s amounted to $46.91 billion, 5.3x the value of $8.8 billion seen incalendar year 2009.

-The Energy sector saw the maximum M&A value, followed by Telecommunication Services

and Healthcare.

Who are the Investors in Indian Startups

<<Should be able to generally profile the various typical sources of funds for the startups andVC¶s. This is to help give perspective to the investor in this fund on how they relate/compareto them>>

Name

Fund/Company/Network/Association

Seeders

i2IndiaGrowVC

Hyderabad Angels

Mumbai Angels

TIE Angels

IDG Ventures

Canaan

Ojas Ventures

Helion Venture partners

IndoUs Venture Partners

VenturEast

Norwest Venture PartnersFoot Print ventures

Aquarian group

Indian Angel Network

Alliance Venture Capital Advisors Ltd

BAO Consultancy Services

CDC Advisors Pvt. Ltd.

Chrys Capital Fund

Cipher Capital Advisors Ltd

2i Capital (India) Pvt. Ltd

Dawn Consulting

Global technology Ventures

Hivetel

IVF Ventures

IFB Ventures

IFCI Venture Capital Funds Ltd.

Peepul Capital

IL&FS Venture Corporation Ltd.

Infinity venture



Jumpstartup Fund Advisors Pvt. Ltd.

Nova Star

SeedFund

Sicom Capital Mgt. Ltd.

Morpheus Venture Partners

Global Executive Talent

Brain League

Venture Bean Consulting

Core Objects

Dolphin Advisory

Viedea Capital Advisors

Kalozal

Aavishkar

Aavishkar Goodwell

Indavest

Springboard Ventures

RedClays CapitalBlue Run Ventures

Global India Venture Capital Association

Documents

The Early Stage Opportunity in India