IE and IFS

Unit 38
VENTURE CAPITAL
VENTURE CAPITAL

• Private institutional investment made in start-up companies at early stage

is called Venture Capital (VC).

• The investments are made generally in small and medium businesses that
have potential for high growth, and are high risk / high return
opportunities,

• When an entrepreneur is a new and unknown technocrat, and lacks his own
capital, banks generally don't finance such investments.

• Venture capital is usually provided in the form of equity, or seed capital,

apart from conditional and conventional loans. Thus venture capitalists
are not only financiers, but bear the risk also.
VENTURE CAPITAL
EVOLUTION OF VENTURE CAPITAL IN INDIA:

• Bhatt Committee (Committee on Development of Small and Medium

Enterprises), 1972, suggested creation of VC in India to help new
entrepreneurs and technologists in setting up industries.

• Risk Capital Foundation, 1975, started by IFCI to supplement promoters'

equity and encourage technologists & professionals to promote new
industries.

• Seed Capital Scheme, 1976 of IDBI, with the same objective.

• Official patronage for VC funds GOI announced "Technology Policy

Statement" in 1983 for achieving technological self-reliance.
 VENTURE CAPITAL
• IFCI is a Systematically Important Non Deposit Taking Non Banking Finance Company (NBFC-ND-SI) in the

public sector. Established in 1948 as a statutory corporation, IFCI is a public limited company listed on BSE

and NSE. IFCI has six number of subsidiaries and one associate under its fold.

• IFCI is having mandate to provide financial support for the diversified growth of Industries across the

spectrum. The financing activities cover various kind of projects such as airports, roads, telecom, power, real

estate, manufacturing, services sector and such other allied industries. During its 75 years of existence, mega

projects like Adani Mundra Ports, GMR Goa International Airport, Salasar Highways, NRSS Transmission,

Raichur Power Corporation, to name a few, have been setup with financial assistance of IFCI.

• The Govt. of India has placed a Venture Capital Fund of Rs.200 crore for Scheduled Castes (SC) with IFCI with

an aim to promote entrepreneurship among the Scheduled Castes (SC) and to provide concessional finance. IFCI

has also committed a contribution of Rs.50 crore as lead investor and Sponsor of the Fund. IFCI Venture Capital

Funds Ltd., a subsidiary of IFCI Ltd., is the Investment Manager of the Fund. The Fund has been

operationalized since FY 2014-15 and IVCF is continuously making efforts for meeting the stated objective of

the scheme.
 VENTURE CAPITAL
• Venture Capital Scheme, 1986 of ICICI encouraging new technocrats in
private sector, entering new fields of high technology.

• Program for Application of Commercial Technology (PACT), set up by

ICICI, aided by USAID, with initial grant of USD 10 Million. To aid
Corporate Sector.

• Technology Development and Information Company of India Ltd. (TDICI)

of ICICI for taking over the VC operations of ICICI w.e.f. July 1, 1988.

• RCF of IFCI was converted into Risk Capital and Technology Finance
Corporation Ltd. (RCTFC) In 1988.Indian venture capital ecosystem got
USD 17.2 Billion investment from VC firms during January-July 2021.
VENTURE CAPITAL

CHARACTERISTICS:

• Largely in the form of equity, or risk capital, which is long term in

nature. It is generally done in innovative ventures, like start-ups in
technology, biotechnology etc. when the investee company is unable to
float its shares.

• Venture capitalist does not intend to act as owner, and not participate
in day-to-day management of the enterprise. But, he provides guidance
and expertise, where required, and nurtures it.
VENTURE CAPITAL

• The investments are made on long term basis and involve a high degree of
risk, as the profitability of the venture is uncertain.

• He can participate in management of the company, if desired.

• Venture capitalist does not intend to retain the investment forever, but
intends to divest his shares when it becomes profitable.

• Venture capitalist intends to earn largely by way of capital gains, rather

than regular returns by way of dividends.

• He also provides conditional loans, which entitles him to earn royalties on

sales. Such loan is waived fully or partly if the business is unable to succeed.
VENTURE CAPITAL
Early Stage Financing:

• Seed capital stage: Primary stage associated with R & D. The concept, idea and
process pertaining to high technology or innovation are tested on a laboratory
trial, based on which a prototype product development is carried out. As the risk
perception of investment is quite high at this stage, only a few venture capital
funds invest at this stage.

• Start-up stage: This refers to launching or beginning a new activity, which may
be the one taken from R&D stage of a company, or a laboratory, or may be based
on transfer of technology from abroad, which has been selected for commercial
production. VC funds assess the managerial ability, capacity and commitment of
entrepreneurs, and if needed, provide managerial skills, experience and
competence and supervise the implementation to achieve success.
VENTURE CAPITAL

• Second Round Financing: As the business is yet to become profitable, it is

difficult to get conventional sources of financing. At this stage, it is
comparatively less risky and VC funds provide debt financing also.

Later stage financing:

• VC funds prefer this type of financing as the product/service has already

been launched, and they anticipate income at a shorter duration and
capital gains later. It may take the following forms:

• Expansion Finance: May be needed by an enterprise for additional

production capacity/acquisition/takeover etc. Venture capital needed
would depend on whether it is. organic or inorganic growth.
VENTURE CAPITAL

• Replacement Finance: Venture capitalist purchases the shares from

existing shareholders of the company, who are willing to exit. Venture
capitalist perceives growth of the company over 3-5 years, and expects to
earn capital gain at a much shorter time.

• Turnaround: The enterprise, after the initial phase, might want to bring
change in its operations by modernizing, reorganizing its staff or
undertaking aggressive marketing of its products etc. Additional capital
needed for these is called turnaround finance, which is riskier. Hence,
the venture capitalist has to judge the prospects of the enterprise
thoroughly and take a decision.
VENTURE CAPITAL
• Buyout Deals: A management buyout means that the shares and
management o shareholders are purchased by another set of shareholders.
Such shareholders may need. funds, which, when provided by the venture
capitalist, is called buyout financing.

Process of VC Financing:

• Deal origination. Referral by promoters, their friends, business partners

etc.

• Screening. Venture capitalist scrutinizes different projects available for

investing based on market scope, technology or product, size of investment,
location, stage of financing etc. Brief profile of the venture or face to face
meeting of the promoters and venture capitalist form part of screening.
VENTURE CAPITAL

• Evaluation: Short-listed proposals are evaluated after screening and

carrying out a detailed study. Project profile, promoters' track record,
future prospects etc. Entrepreneurial skills, technical competence,
manufacturing & marketing capabilities are considered, and a thorough
risk management study is done.

• Deal Negotiation: Once venture capitalist has decided to invest, terms

and conditions of the deal are negotiated on favourable terms for both
the entrepreneur and the venture capitalist. Amount of investment,
percentage of profit for both, rights of the venture capitalist &
entrepreneur are some of the factors of negotiation.
VENTURE CAPITAL
• Post Investment Activity: Post investment, venture capitalist takes up
certain duties and responsibilities. He does not take part in day to day
activities of the firm, but oversees to ensure that the enterprise is
operating as per the plan.

• Exit Plan: This is the last stage, which will be based on the nature of
investment, extent and type of financial stake etc. The exit plan is made in
order to minimize losses & maximize profits. The exit may be through IPOs,
acquisition by another company, purchase of his share by the promoter or
an outsider. In case of debt financing, the process is self-liquidating in
nature, as principal and interest are repaid over a specified period of time.
In case the venture cannot succeed, the exit will be winding up process
through court proceedings.
VENTURE CAPITAL

REGULATORY ASPECTS:

• In 1995, SEBI Act was amended, empowering SEBI to register and regulate
venture capital funds in India. The latest guidelines, as amended in 2000,
are as follows:

• A VCF is one established as a trust or a company including a body

corporate & registered. with SEBI, which has a dedicated pool of capital,
raised in a specified manner, and invests in venture capital undertakings.

• A venture capital undertaking means a domestic company whose shares are

not listed on a recognized stock exchange in India, and engaged in a
business or service not in the negative list of SEBI.
VENTURE CAPITAL

• Negative list includes real estate, non-banking financial services, gold

financing, activities not permitted in GOI's Industrial Policy etc

• Registration of VC funds: Memorandum of Association (MOA) of the

company must indicate its main objective as venture capital fund.

• It is prohibited by its MOA & Articles of Association (AOA) from making

an invitation to the public to subscribe to its securities.

• Its director, principal officer or employee is not involved in any litigation

connected with the securities market, or at any time convicted of an
offence involving moral turpitude or any economic offence. The applicant is
a "fit and proper" person.
VENTURE CAPITAL

Resources for VCF:

• They may raise money from any investor - Indian, foreign or NRI by way
of issue of units (minimum Rs. 5 lacs). This restriction does not apply to
the employees, principal officer or directors of VCF, or NRIs/OCIS.

• But, VCF shall not issue any document or advertisement inviting offers
from the public for subscription to securities.

• Each scheme launched or fund set up by a VCF shall have firm

commitment from the investors to contribute a minimum of Rs. 5 cr.
before the start of its operations.
VENTURE CAPITAL
• Modes of VC financing:

• Equity instruments like ordinary and preference shares

• Debt instruments like conditional loans (carrying no interest, but are repayable in the form
of royalty); convertible loans (into equity at the option of the lender) & conventional loans
(term loans repayable in instalments over a number of years).

• Advantages & disadvantages of venture capital financing: It is advantageous to the

promoters as finance from conventional sources is difficult. Investments are made on long
term basis and the amount is large..

• For the investor, the process is lengthy and involves high degree of risk, profitability is
uncertain, though the returns may be huge.

• There is loss of control and autonomy for the promoter (entrepreneur).