Venture Capital in Developing
Countries: Challenges
Dr.Akhil Goyal
Nims University-IMC
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Venture Capital
oVenture capital means funds made available for start-up firms and small businesses with
exceptional growth potential
oVenture capital is money provided by professionals who alongside management invest in young
rapidly growing companies that have the potential to develop into significant economic
contributors
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Features of Venture Capital
oLong time horizon
oLack of liquidity
oHigh risk
oHigh tech
oEquity participation and capital gains
oParticipation in management
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Advantages of Venture Capital
oThey can provide large sum of equity finance
oAble to bring wealth and expertise to your company
oEasier to secure future funding from other sources
oThe business is not obligated to repay the money
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Disadvantages of Venture Capital
oLengthy and complex process (needs detailed business plan, financial projection and Etc.)
oIn the deal negotiation stage, you will have to pay for legal and accounting fees
oInvestors become part owner of your business – founder loss of autonomy or control
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Stages and Risk of Financing
Financial Stage Period (funds locked in years0 Risk Perception Activity to be financed
Seed Money 7-10 Extreme For supporting a concept or
idea or R&D for product
development
Start Up 5-9 Very High Initializing operations or
developing prototypes
First Stage 3-7 High Start commercial production
and Marketing
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Stages and Risk of Financing
Financial Stage Period (funds locked in years) Risk Perception Activity to be financed
Second Stage 3-5 Sufficiently High Expand market and growing
capital need
Third Stage 1-3 Medium Market expansion, acquisition
and product development for
profit making company
Fourth Stage 1-3 Low Facilitating public issue
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VC Investment Process
Deal Screening Due Deal Post Exit Plan
Origination Diligence structuring Investment
(Evaluation) Activity
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Methods of Venture Financing
The financing pattern of the deal is most important element.
Following are the various methods of venture financing:
•Equity
•Conditional loan
•Income note
•Participating debentures
•Quasi equity
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Exit Route
•Initial public offers
•Trade sale
•Promoter buy back
•Acquisition by another company
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VC in Developing countries : Challenges
•Inadequate deal flow for venture capital
•Shrinking risk appetite of investors and fund managers
•Lack of global awareness about local start-ups
•Start-up founders’ mind-set
•Lack of local success stories and big hits
•Bureaucratic barriers to entry for foreign investment
•Inadequate structure/precedence for structuring venture investments
•Lack of support from government to encourage venture capital
•Lack of trust in local judicial process for dispute resolution
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Comparison of Developed countries and
Developing countries Venture Capital firms
Activity Developing Countries VC Firms Developed Countries VC Firms
Fund Structure Corporation & Limited Limited Partnership
Partnership
Capital Sources Pension Funds, Corporations, Pension Funds, Corporations,
Insurance Companies, High Net Insurance Companies, High Net
Worth Individuals, Government Worth Individuals
& Non Governmental
Organizations
Types of investments: Traditionally Privatizations, Corporate High-technology, Early-stage,
Restructuring, Strategic Alliances, High growth firms
Infrastructure Funds
Types of investments: Recently Indigenous Technology in Developing Trend towards Late-stage
Countries
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Comparison of Developed countries and
Developing countries Venture Capital firms
Activity Developing Countries VC Firms Developed Countries VC Firms
Deal Origination Low number of attractive Focus on quality of
investments, Focus on quality of management
management, Problems of country
risk, Corruption, Exchange rate
risk
Deal Structuring Common stock and debt Common stock, several classes
of preferred stock, debt and
convertible preferred stock
Pricing the Deal Difficulty in assessing the value of Higher level of transparency
an investee company – lack of
transparency
Exit Strategy Sale to third parties, co-investors, Initial public offering (IPO)
investee firm’s management
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Venture Capital Funding in India
Promoted by
All India State level
Commercial Private Sector
Financial Financial
Banks Institutions
Institutions Institutions
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Venture Capital Funds in India
VCFs in India can be categorized into following five groups
1) Those promoted by the central Government controlled development finance institutions. For
example:
ICICI Venture funds Ltd.
IFCI Venture Capital Funds Ltd.
SIDBI Venture Capital Ltd.
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Cont..
2). Those promoted by State Government Controlled Development Financial Institutions.
For Example:
Punjab InfoTech Venture Fund
Gujrat Venture Finance Ltd.
3). Those Promoted by Public Banks
For Example:
SBI Capital Market Ltd.
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4). Those Promoted by Private Sector Companies
For Example:
IL&FS Trust Company Ltd.
Infinity Venture India Fund
5). Those established as an Overseas Venture Capital Fund
For Example:
HSBC Private Equity
Walden International Investment Group
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Rules by SEBI
VCFs are regulated by the SEBI (Venture Capital Fund) Regulations, 1996.
The following are the various provisions.
A venture capital fund may set up by a company or a trust, after a certificate of registration is
granted by SEBI on an application made to it. On receipt of the certificate of registration, it shall
be binding on the venture capital fund to abide by the provisions of SEBI Act, 1992.
A VCF may raise money from any investor Indian, Non-Resident Indian or foreign, provided the
money accepted from any investor is not less than Rs. 5 Lakhs. The VCF shall not issue any
document or advertising inviting offers from the public for subscription of it’s security or units.
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Rules by SEBI
SEBI regulations permit investment by venture capital funds in equity or equity related
investments of unlisted companies and also in financially week and sick industries whose shares
are listed or unlisted
At least 80% of the funds should be invested in venture capital companies and no other limits
are prescribed
SEBI Regulations don’t provide for any sectorial restrictions for investment except investment in
companies engaged in financial services.
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Challenges of VC in India
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Challenges of VC in India
• Lack of Scientific and Technical Research
• Inadequate Technology advancement
• Attraction limited to top cities (Mumbai, Chennai, Pune, Delhi, Hyderabad and Bangalore)
• Fiduciary duty owed by the directors
•Capital market related issues
•Longer Pay back period
•Uncertainty regarding success of the product in the market
• The size of the market
• Major Competitors and their Market Share
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