Venture Capital Funding

Ajay Kumar Kapur,

CEO
SIDBI Venture Capital Ltd.
Different forms of financing
Equity Capital Debt
Capital Markets,
“Public Equity” LARGE BUSINESSES
Term loan of
“Private Equity” Banks/ FIs

SMEs

Venture Capital Mezzanine

Debt and quasi-
MICRO BUSINESSES equity (VC)
Microcredit

Businessmen, Friends, Family and

“Angel” Investors Friends,
IDEAS Relatives

Venture Capital is one of the most appropriate

ways of financing start-ups
Project Funding
 Own Funds
 Equity
 Internal Accruals
 Borrowed Funds
 Term Loans
 Debentures / Bonds
 Lease / HP
SOURCES -- Borrowed Funds

 Term Loans
 Banks, SIDC / SFC, FIs
 Debentures
 Public Issue / Private placement
 Lease & Hire Purchase
 NBFCs
Factors Governing Debt Comp.

 DEBT SERVICING CAPACITY (DSCR)

 SECURITY AVAILABLE (MARGIN)

 COST of FUND
SOURCES - Equity Fund
- Promoters and family
- Associates
- Institutions
= PVT EQUITY
= VENTURE FUND
- Public
 Factors Governing Equity Comp .
-PROFITABILITY (EPS)

-EXIT CONSIDERATION

 STRIKE BALANCE BETWEEN DEBT AND EQUITY

Role of VC…

Venture Capitalist fills this gap by

providing “Value Added Finance”
VENTURE CAPITAL
….Characteristics

“ BUSINESS OF BUSINESSES”

 Spirit of partnership
 Risk - Reward sharing
 Active participation and value addition
 Long term perspective
 Investment and not assistance
 Returns linked to performance
 Expects high returns
CONVENTIONAL V/S V.C FUNDING

 Security backed  Unsecured /need based

 Passive role  Active role
 Fixed obligation  Performance linked return
 Equity / Quasi equity
 Term loans  High risk appetite
 Risk averse  Long term
 Short and medium term
perspective  High growth business
 Conventional business
Risk Profile

Risk

VC

PVT EQ / MF

DEV FIN Reward

Why Venture Capital

 Has the potential to finance start-ups as

venture capitalists are generally willing to
accept high levels of risks for high potential
profits
 Do not require collateral nor charge interest
payments
 Long-term or at least medium term capital
 Contribute to the management of the firm
Value Addition

 Value addition and nurturing by VC essential for any

start-up’s success

 Alongwith Capital, start-ups need intelligent direction,

strategic partnerships and flexibility critical for their
sustenance and growth.

 Collaborative management approach - "Healthy

relationship between Promoter and VC critical to
success of the venture”
Risks in start-ups/early stage companies
 Concentration risk: Focus on small market (either
product or geographic) segment raises
vulnerability to sectoral downturn
 Product Risk: Products may have little or no track
record, are largely untested in markets, and
usually have high obsolescence rates.
 Duration risk: May need long-gestation period
raises period for which funding is needed.
 Small deal size; hence not found economic by
most investors
Risks in start-ups/early stage companies
 Asset risk: Lack of collateralizable assets, due
to a high proportion of fixed assets with high
obsolescence, and a high proportion of
human capital
 Entrepreneur risk: hard to evaluate new
management and/or new business proposal
without track record
 Technology risk: hard to evaluate new
technology and are focused on small set of
products

Risks drive the innovative way for financing for start-ups.

What VC’s Look For

 Core Management Team - Venture Funds back

entrepreneurs and the team .
 Market Size, Opportunity and scalability -
Competitive advantage today or potentially; the
potential to change the rules of the game. The
opportunity and capability to play globally.
 Intellectual Capital - today or potentially, in the
form of brand, intellectual property,
methodologies , processes ,network, customers,
etc apart from Human Capital which determine
valuations .
What VC’s Look For

 Clean structure - Most preferred is a single

company, no cross-holding, no subsidiary
structure. Transparency.
 Valuations and appropriate stake offered in the
company.
 Returns on Investment potential.
 Coinvestment and Future Investment potential
with value add .
 Exit opportunity.
SIDBI’s VC strategy

 SIDBI General Fund started in 1994

 SIDBI’s three tier VC strategy
 Has supported many state level VC funds
 Focussed on software/IT and knowledge based
industries
 Assisted 2 Incubators at IIT, Kanpur and BIT,
Ranchi
SIDBI Venture Capital Ltd.

 Wholly Owned Subsidiary of SIDBI

 Established to carry out business of setting up,
advising and managing Venture Capital funds.
 Professionally managed AMC
 Currently managing two national level funds, viz.
NFSIT & SME Growth Fund
Role of SVCL

 Start-ups require high level of handholding

 Active management participation by SVCL
 Nominee directors appointed on all investee
cos.
 Help create systems, provide advise through
industry experts
 Help in second round fund raising
SME Growth Fund
 A 8 years (close ended) fund established in
2004 with a corpus of Rs.500 crore focused on
SMEs in diverse sectors
 Set up by SIDBI in association with leading
Public Sector Banks in India
 Fund objective: To meet the long term risk
capital of SME units
 Sector agnostics. Focus on growth sectors such
as
 Life sciences
 Services
 Engineering
 Textiles
National Venture Fund for Software and
IT Industry (NFSIT)
 A 10 years (close ended) fund with a corpus
of Rs.100 crore set up in 1999
 Contributed by SIDBI, MCIT (GoI) and IDBI
 Fund objective: Meet fund requirement of
software & IT companies with focus on
SMEs
 Invested in 31 Companies from Software
services, products, ITES & Internet sectors
 Co-investment with International, Private
and State level funds