Venture Capital Financing

Investment Banking # Seminar

Venture Capital Financing

Venture Capital Financing  Venture

capital is a means of financing fastgrowing private companies. Finance may be required for the startup, development / expansion or purchase of a company via a mechanism such as in a management buyout.

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venture capital, the venture capitalist acquires an agreed proportion of the equity of the company in return for the requisite funding.

Merchant Banking 

Merchant banking  

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a financial intermediation that matches entities that need capital and those having capital. Thus, facilitate the flow of capital in the market.

Changing role of a merchant banker 

In the past… a financial intermediary facilitating the flow of capital among the concerned parties.

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Today… plays multiple roles which include those of an entrepreneur, a management advisor, a transaction broker,etc

Merchant Bankers Role in VCF     

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Assist venture proposals of entrepreneurs, with high risk, to seek assistance from VCF. Acts as fiscal advisers to entrepreneurs, owners and managers of undertakings, Analyze financial requirements, advise on how to structure balance sheets, arrange for sources of capital to finance expansions and acquisitions, Structure a variety of different financial instruments to provide the financing a company needs including Formal Venture Capital, To act as temporary CFO, running their client’s trade and taking control for a period of about 18 months to three years (take about a third of their client’s profits, which includes the accounts receivable) To vet businesses to make sure that their finances are in order; management has a proven track record in a niche business; there's a strong demand for the company's products; customers are creditworthy; and the business's gross profit margins are between 25% and 30%. looking for new high-growth issues to launch to the market. play an important role in the process of "going public" by advising on the terms and price of public issues and by arranging underwriting when necessary.

SEBI regulations – investment conditions and restrictions 

Minimum investment in a venture capital fund A venture capital fund may raise monies from any investor whether Indian, foreign or non-resident Indians. No venture capital fund set up as a company or any scheme of a venture capital fund set up as a trust shall accept any investment from any investor which is less than five lakh rupees.

Each scheme launched or fund set up by a venture capital fund shall have firm commitment from the investors for contribution of an amount of at least Rupees five crores before the start of operations by the venture capital fund.  venture capital fund shall disclose the investment strategy at the time of application for registration.  venture capital fund shall not invest more than 25% corpus of the fund in one venture capital undertaking.

SEBI regulations – investment conditions and restrictions(cont) 

venture capital fund shall make investment in the venture capital undertaking as enumerated below: (i) at least 75% of the investible funds shall be invested in unlisted equity shares or equity linked instruments. (ii) Not more than 25% of the investible funds may be invested by way of (a) subscription to initial public offer of a venture capital undertaking whose shares are proposed to be listed subject to lock-in period of one year. (b) debt or debt instrument of a venture capital undertaking in which the venture capital fund has already made an investment by way of equity.

SEBI regulations – obligations and responsibilities 

The venture capital fund shall issue a placement memorandum which shall contain details of the terms and conditions subject to which monies are proposed to be raised from investors.

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The Venture Capital Fund shall file with the Board for information, the copy of the placement memorandum or the copy of the contribution or subscription agreement entered with the investors along with a report of money actually collected from the investor.

SEBI regulations – contents of placement memorandum Details of the trustees or trustee company of the venture capital fund. The proposed corpus of the fund and the minimum amount to be raised for the fund to be operational and the provision for refund of monies to investor in the event of non receipt of minimum amount Manner of subscription to the units of the venture capital fund. The period of maturity. Manner in which the benefits accruing to investors in the units of the trust are to be distributed. Details of the fund manager or asset management company if any, and the fees to be paid to such manager. investment strategy of the fund.

How Venture Capital works ?  VCF

typically source most of their funding from large investment institutions.  Invest this amount in companies with high growth potential or in companies which have the ability to quickly repay.  Exit - through the company listing on the stock exchange, selling to a trade buyer or through a management buyout.

How Venture Capital works ?(contd…) 

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VCF - in the business of promoting growth in the companies they invest in and managing the associated risk to protect and enhance their investors' capital. A typical VC allocates its time in the following fashion:      

–Deal flow and solicitation…10% –Screening and evaluation…10% –Terms and negotiation…5% –Board meetings and monitoring…25% –Consulting, recruiting and assisting…45% –Exiting…5%

What does the Investment Process entail ? 

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.

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Preliminary Screening The initial meeting provides an opportunity for the venture capitalist to meet 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 the management team to demonstrate their understanding of their business and ability to achieve the strategies outlined in the plan. The venture capitalist will look carefully at the team's skills and backgrounds.

What does the Investment Process entail ? (cont) 

Negotiating Investment This involves an agreement between the venture capitalist and management of the terms of the memorandum of understanding. The venture capitalist will then study the viability of the market to estimate its potential. Often they use market forecasts that have been independently prepared by industry experts who specialize in estimating the size and growth rates of markets and market segments. The venture capitalist also studies the industry carefully to obtain information about competitors, entry barriers, the potential to exploit substantial niches, product life cycles, distribution channels and possible export potential. The due diligence continues with reports from accountants and other consultants.

What does the Investment Process entail ? (cont) 

Approvals and Investment Completed The process involves exhaustive due diligence and disclosure of all relevant business information. Final terms can then be negotiated and an investment proposal submitted to the board of directors. If approved, legal documents are prepared. A shareholders' agreement is prepared containing the rights and obligations of each party. This could include, for example, veto rights by the investor on remuneration and loans to executives, acquisition or sale of assets, audit, listing of the company, rights of co-sale and warranties relating to the accuracy of information enclosed. The investment process can take up to three months, and sometimes longer.

ACC refractories - ICICI Venture 

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The refractories business of ACC, which makes heat resistant cement products, was doing quite well, with sales volumes rising by 34 per cent during the last financial year. ASSOCIATED Cement Companies (ACC) sold its refractory business to ICICI Venture Funds for Rs 257 crore. From the point of view of the buyer, this would be the first time in India that a venture fund would be getting into managing a manufacturing business through a 100 per cent buyout. ICICI Venture Funds is planning to work with the management of the refractories business in its operations and sell it at later stage. I-Sec was the sole advisor to ICICI Ventures in this deal which took six months in the making.

Recent Deals 3i

Nimbus Communications

$45 mn

Media Content Provider

ICICI Ventures

Refractory business of ACC

$60 mn

Refractory

Sequioa Capital+WestBridge

Indiatimes.com

$36 mn

Web media and content

General Atlantic

Jubilant Organosys

$24 mn

Healthcare

$26 mn

Media and Content

$100mn

Truck and equip. funding

Gen Atlantic European Inv

Newbridge Capital

NDTV

Shriram Holdings

Recent Exits

Warburg Pincus

5.4% stake in Bharti Televentures

Vodaf one

Citigroup Ven Cap Fund

41% stake in i-Flex Solutions

Oracle $593 mn

$810 mn

Recent Exits by IPO

YES Bank

CVC International, ChrysCapital, Russell Asian Infrastructure Fund Banking

Jun-05

$73.3mn

Shopper's Stop

ICICI Ventures, IL&FS VC

Retail

Apr-05

$39.5mn

ICICI Ventures, Intel Capital, Actis, Kothari Pioneer, TDA Capital

Financial Servic es Apr-05

$22mn

Nectar CVC International Lifescien ces

Pharmace uticals Jun-05

$20.9mn

Allsec Technol ogies

ITES

$9.9mn

India Infoline

Kotak Mahindra, Eurindia

Apr-05

Recent funds

Investment Banking # Seminar

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