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Venture Capital Master-classJuly 21, 2012
Master‐class Contents
Basics of Private Capital 2
Evolution of Private Capital in India 6
Venture Capital: Historic Deal Value and Volume 7
Issues and Challenges 9
2
What is Private Equity?
By definition: “Private Equity is the provision of equity capital by financial investors – over the medium or long term – to non quoted companies with high growth potential”
Private equity is illiquid, ownership is concentrated, valuation is difficult, intermediaries tend to be small, finance is accompanied by control and mentoring
Public equity is liquid, ownership is dispersed, valuation is relatively easy, intermediaries are large, finance is often divorced from control and mentoring
Venture Capital, is a sub‐set of Private Equity and refers to equity investments made for:– The launch– Early development– Or expansion of a business
Venture Capital focuses primarily on entrepreneurial undertakings rather than on mature businesses The essential difference between the two is the stage of investment
3
Private Equity
Buy‐outs,Later stage financing,
Secondaries
Venture capitalEarly stage/Angel
financing
Public equityStock market
listedcompanies
Corporate Development and Private Equity
IPO/M&A
Third Stage
Second Stage
First Stage
Start‐up Financing
4
Last financing round prior to an initial public offering of a company
Financing the expansion of growth companies
Providing working capital funding and required financing for young firms during growth period
Financing the commercialization and production of products
Providing capital required for product development and initial marketing activities
Providing small sums of capital necessary to develop a business idea
Private Equity
VentureCapital
AngelFunding
Seed Financing
Company Lifecycle and Investment Sizes
5
Early Growth
HyperGrowth
LateGrowth
SlowGrowth
Seed Fund
• Venture Capital• Size < $10 mm
• Promoter’s own money
• Friends/Family/Relatives/Well‐wishers
• Angel investors
• Growth Capital• Size between $10 and 20
mm
• Size > $20 mm• Ready for the next
growth orbit
• Buy‐out/restructuring opportunities
• Investment sizes tend toincrease along this curve
• PEs tend to be active investors in early stage companies and passive in more evolved companies
Inception Growth Maturity
Evolution of Private Capital in India
The first generation venture capital funds were launched by financial institutions like ICICI and IFCI
1984: ICICI launched it VC scheme to encourage start‐up ventures in the emerging technology sectors
IFCI and Canara Bank followed by launching their own technology oriented VC funds Between 1995‐2000 several foreign funds like Baring PE partners, CDC Capital, Draper
International, HSBC Private Equity and Warbug Pincus had set food in India The first set of regulations around VC started coming in the mid‐90s:
– SEBI introduced the SEBI Venture Capital Funds Regulations, 1996– These regulations were further amended based on the recommendations of the K.B.
Chandrashekhar Committee in 2000
The technology bust in 2000 saw a PE slow down, when many foreign investors fled India during that period
Today, global PE firms continue to dominate the Indian market, appearing in 9 of the top 10 deals by value in Q4 2011
6
Venture Capital: Historical Deal Value and Volume
7
18 19 27 23 1644
122154
185142 133
156
286
435
382
207
270313
050100150200250300350400450500
2006 2007 2008 2009 2010 2011
Angel/Seed Venture capital Private Equity
$13 $16 $10 $5 $5 $14$564 $670 $1,034$556
$659 $891
$7,167
$18,484
$13,151
$3,832
$7,922$9,944
$0$2,000$4,000$6,000$8,000$10,000$12,000$14,000$16,000$18,000$20,000
2006 2007 2008 2009 2010 2011
Angel/Seed Venture capital Private Equity
Source: VCCEdge
Breakdown – Value ($ mm)Breakdown – Volume
Last three years have seen a tremendous amount of interest in India with investments in US$ million:– Angel Funding = 24– Venture Capital = 2,106– Private Equity = 21,698
Year 2011 had been record year for early‐stage Venture Capital investing– Deal values & volumes at all time high– Euphoria around e‐commerce, across mobile, internet and related verticals– Evident from recent deals of InMobi, Fashionandyou, Snapdeal
The next few years will distinguish the serious and long‐term players, from the others
Top 5 Venture Capital Deals in 2011
Target Buyer Value (US$ mm)
Happiest Minds Technologies Intel CapitalCanaan Partners
45
Fashionandyou.com Sequoia Capital IndiaNorwest Venture PartnersIntel CapitalNokia Growth Partners
40
SnapDeal.com IndoUS Venture PartnersNexus Venture PartnersBessemer Venture Partners
40
Naaptol Online Shopping Canaan PartnersSilicon Valley BankNew Enterprise Associates
25
TV18 Home Shopping SAIF PartnersGS Home Shopping
22.25
8
Source: VCCircle.com
9
The pure and simple truth is rarely pure and never simple.
Pre‐investment phase
Post‐investment phase
Managing exit
10
The Engagement
Valuation: Value versus Price Projections: Sustainable Growth Diligence Rights and Terms Dilution Building a connect
– Rational / logical connect– Emotional connect
11
Pre‐investment phase: The pre‐nuptials
Shared Vision
Maintaining your business statistics
Managing conflicts of interest
Creating a governance framework
Diverting or Diversification
Finally, “No Surprises”
12
Post‐investment phase: A Successful Partnership
Managing Duration Mismatch
Market timing is important
IPO can take a minimum one year time frame
13
Managing exit
Do not choose a VC player based on brand reputation but look at the VC firm’s fit with the organisation
Valuation is not everything. Long term alignment and comfort are equally important
Carefully understand the VC firm’s ‘Value Add’ model and see if the same aligns well with your organisation need
Do not rush through the process Share your successes but also be transparent about the weaknesses / improvement areas. Nasty surprises in the short term (post investment) will do a lot of damage to the relationship.
Do not ‘outsource’ assignments to the VC firm. They are not the ‘pilots’ of the business
Promoters expect VC’s to take quick decisions VC should not end up as an option of last resort for promoters when they are unable to tap the public or debt markets
14
Tips for a successful partnership
Before the investmentThe entrepreneur has the vision and the investor has the money
15
After the investmentThe investor has the vision and the entrepreneur has the money