INSTITUTE OF MANAGEMENT STUDIES

Private Placements And Venture Capital

Submitted To: Submitted By:

Miss Deepika Batra Anuradha Dwivedi

Leesha Jain

Pinky Kriplani

Sagarica Baser

2

Financial

Stage

Period

Risk Percepti

on

Activity to be financed

Seed Money

7-10 ExtremeFor supporting a concept or idea or R&D for

product development

Start Up 5-9 Very HighInitializing operations or developing

prototypes

First Stage

3-7 HighStart commercials production and marketing

Second Stage

3-5 Sufficiently high

Expand market and growing working capital need

Third Stage

1-3 Medium

Market expansion, acquisition & product development for profit making company

Fourth Stage

1-3 Low Facilitating public issue

Risk at each stage

Roadblocks to new businesses

Lack of business experienceSeveral ways to fail with only a few roads to

successExtreme amounts of required commitmentFierce competitionScarcity of capital

Primary Market

Public Issue

Right Issue

Bonus Share

Private Placement

Private Placement A private placement is an agreement for equity

investment in a business made directly between the business and the investor.

PRIVATE PLACEMENTS are, in the simplest terms, a way for businesses to raise capital by selling securities to private investors. Rather than making shares in a company available to the general public (as with an initial public offering).

A private placement makes shares available to only a limited number of suitable individuals.

doesn’t require underwriters or registration with the Securities Exchange Board of India.

While often used by small companies, private placement is equally beneficial to companies of all sizes because they require less time and expense than a public offering.

Things to be notedThe securities issuance in India is dominated by

Private Placement. Private placement is a sale of securities to a relatively small number of select investors as a way of raising capital. In other words, it is a funding round of securities which are sold without an initial public offering usually to a small group of private investors. The securities are NOT available for sale in the open market.

Private placement refers to non-public offering of shares in a public company.

Private placement(non-public offering)is a funding round of securities which are sold not through a private offering, but through private offering, mostly to a small number of selected investors.

They are often a cheaper source of capital than a public offering.

PIPE(private investment n public equity)deals are one type of Private placement.

SEDA(standby equity distribution agreement)is also another form of Private placement.

Types of Placements

Traditional

Structured

• Traditional private placements act as long-term loans from a separate or groups of investors. These investors receive

•their investment money back,• plus the agreed upon additional profit percentage, as soon as the company reaches the required profit margin and can pay them.

• Structured private placements offer investors the opportunity to make additional income as the stock prices increases, while protecting them if the stock price falls. That protection, sometimes called a reset, allows shareholders to gain additional stock up to the value of their original investment if the stock price falls.

Things to be notedPrivate Placements:1. Can be used for either private (not publicly traded)

stock offerings or other ownership shares of a business.

2. For a formal private placement, the investor must be an accredited investor.

3. Private placement memorandum – similar to a prospectus, details the risks of an offering, business officers, actual and pro forma financial standards, and related material.

4. Subscription agreement – a contract between the business and the investors requiring the investor to provide the agreed upon capital.

Advantages

Private placements provide several advantages over public offerings or venture capital for both large and small companies.

Staying private allows your company to choose its own investors, unlike a public offering which is open to the general public.

It saves your company the time and money required to make a public offering and maintain the financial records for the SEBI.

Because private investors often are more patient than public investors, with a private placement you can take more time to arrive at the agreed upon return.

The options for type and amount of funding give you more flexibility and get you capital much faster than searching for venture capitalists, or waiting for your shares to sell on the public market.

BENEFITS

An obvious benefit of private placements is that they do not have to be registered with the Securities and Exchange Board of India.

Recent legislation has been passed to make private placements a more viable form of capital raising and to make private capital more readily available to owners of small businesses who might otherwise find raising capital too difficult..

Drawbacks

Private placement, especially when structured, can have disadvantages in both the long and short term.

If only a few investors are interested, and don’t want to invest a large amount of money it becomes difficult to raise the required amount of capital.

Sometimes, private investors only buy in when the shares cost substantially less than the projected cost of the company, requiring you to sell more shares for the same amount of income.

The reset feature of structured private placement allows private investors to gain additional shares, thereby reducing the number of shares you can sell to new investors, especially if you decide to go public in the future.

Nonetheless, businesses that offer private placements must be careful to follow the many rules that continue to govern private offerings. To ensure that the process goes smoothly and passes legal muster, businesses should be sure to work with an accountant and attorney who are familiar with the legal and financial requirements of private placements.

Process of Private Placement

1. Announcement

2. Offering

3. Subscription

4. PPM

5. Agreement

Venture Capital

Venture Capital

Meaning – VC is long term risk capital to finance high technology projects which involve risks but at the same time has strong potential for growth .Venture capitalist are professional investors , who pool their resources including managerial abilities to assist new entrepreneurs in early years of project.

Definition – “A financing institution which joins an entrepreneur as a co-promoter in a project & share the risks & rewards of enterprise.”

Indian Venture Capital Association

Association was established in 1993 and is based in New Delhi , the capital of India. IVCA is a member based national organization that - represents Venture capital and Private equity firms, promotes the industry within India and throughout the world and encourages investment in high growth companies.

History of Venture Capital in India-

1. Venture Capital functions were run by development financial institutions such as the IDBI  ICICI Bank, and State Financial corporations. Publicly raised funds were the main source of Venture Capital

  2. Year 1988 marked the establishment of the Technology Development and Information Company of India Ltd. ,promoted by the ICICI and UTI & was immediately followed by the Gujarat Venture Finance Ltd.

3. In the year 1996, SEBI introduced the Foreign Venture Capital and Private Equity Funds investing in India

Some Venture Capitalists..EXIM bankIDBIICICI venture fund management company

limitedIFCI venture capital funds LtdSIDBI venture fundUTI venture fund management companyIntel capitalPunjab InfoTech venture fundVCF of commercial banksPrivate sector VCFNational venture fund for software and

information technology industry

APPROACHING VENTURE CAPITALIST venture capitalist may be introduced through quality

introduction which refers to contacting VC through lawyer, banker, accountant. This procedure of approach is required as VC may not take interest in new project of unknown person.

Entrepreneur before approaching VC should be very well aware about his own business. He should contact VC who suits entrepreneurs business which includes VC who deals in similar product or idea.

After choosing VCF to finance the business, entrepreneur is required to send his business plan to entrepreneur, after evaluating business plan, understanding its plans potential and credibility VC chooses to invest in the business.

22

Forms of Venture Capital investments

Debt• Loan contract between the business and the venture capital firm high interest rates

Equity• Venture capital firm purchases an ownership share of the business generally in the form of private placement stock

Preferred stock• The favored type of venture capital investment provides interest yields and seniority to capital in the event that the firm fails, but with an equity interest if the firm succeeds.

Sources of Venture Capital Funding

Partnerships

Business owned by individuals specifically to provide venture capital for other businesses

Limited Liability Corporations a cross between a partnership and a corporation, does not have the restrictions on making investments in publicly traded corporations.

Investment Management Firms An investment manager making decisions concerning which venture capital projects to fund

Features of Venture Capital Investment by venture capital firms are made in high

tech areas using new technology or producing innovative goods by using new technology.

Venture capitalist invest in long term start up costs to high risk, high reward project. Technology used in the projects undertaken by the venture capitalist in new and unproven projects.

Return on venture capital investment is illiquid. Return period may vary from seven to ten years. Investment of venture capitalist is neither repayable, return is possible only when share of company is sold at market price.

Conti…Venture capitalist not only invest in equity shares of

company but also participate in management affairs of business. So venture capitalist not only participate in business but also build business.

Venture capitalist use their wide contact with the experts in technology and management areas and provide strategic input to entrepreneurial team in order to reduce uncertainties.

Venture capitalist firm encourages, nurture and help the entrepreneur grow because he has limited resources, high level of risk. Venture capitalist also help entrepreneurs to market company products.

Conti..

Investment by VCF are predominantly made in equity as shares because the dividends can be delayed till the company starts making profit.

VCF act as co partner in entrepreneur business , share success and failure proportionate to equity investment by venture capitalist

Venture capitalists typically assist at four stages in the company's development:

• Idea generation• Start-up• Ramp up• Exit

PROCESS

The Process

VC Investment Process Deal origination-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.

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

Due Diligence-Due diligence is the industry jargon for all the activities. The venture capitalists evaluate the quality of entrepreneur before appraising characteristics of the product, market or technology 1. Preliminary evaluation 2. Detailed evaluation

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

Post Investment Activities- 1.direction of the venture 2.day-to-day operation of the venture 3. install a new management teamExit- 1. Initial Public Offerings (IPOs)

2. Acquisition by another company3. Purchase of the venture capitalist's

shares by the promoter, or4. Purchase of the venture capitalist's

share by an outsider

Exit IPO Promoters buyback Trade sale Buy back of equity by

company

Post investment activities

Deal structuring

Evaluation

Screening

Deal origination

VENTURE CAPITAL PROCESS

Venture Capital Exit Options

33

The Process

Methods of venture financing

Advantages

i. Venture capitalists generally have expertise in guiding new firms, can help with management

ii. Venture capitalists can provide substantial funds for business development

iii. A venture capital firm’s investment in a business can give the business a “stamp of legitimacy”

i. The venture capital firm often requires some control over the business’ operations

ii. Venture capital money is expensive – the venture capitalists expect to obtain investment returns commensurate with their risk of loss of capital

Disadvantages

Risks In Venture Capital Funding Product Risk: The products concerned may have little or no track record in

the markets as they are largely untested and usually have high obsolescence rates.

Entrepreneur risk: another of the disadvantages of venture capital funding is that it is difficult to evaluate the new management and new business application without any prior track record

Concentration risk: Focusing on small market, which can relate to either the product or in geographical terms, raises exposure to sectoral downturn

Technology risk: hard to assess new technology on small set of products Duration risk: Generally a longer long-gestation period for funding is needed. Asset risk: Due to a high percentage of fixed assets with high obsolescence,

along with a high fraction of human capital, there is a lack of collateralizable assets, which is one of the drawbacks in venture capital funding