VENTURE CAPITAL FINANCING

1. VENTURECAPITAL FINANCING

2. VENTURE CAPITAL – Some Views General Georges Doriot – father of US Venture Capital “Venture Capital is Patient and Brave Money that seeks new and growing companies and invests for long haul” Gombers & Lerner: Venture capital at crossroads “Independently managed dedicated pools of capital that focus on Equity or Equity linked investments in a privately held, high growth companies”

3. VENTURE CAPITAL • Long-term Equity / QUASI Equity finance in businesses with high growth and profit potential • Return through capital gains • Risk-reward sharing in nature • Not synonymous to high-tech finance

4. VENTURE CAPITAL IS NOT • Development Finance • Term Loan • Conventional Financing • Passive Equity investment support • R&D funding sources

5. CONVENTIONAL FINANCING TERM LOANS SECURITY BACKED PASSIVE FIXED OBLIGATIONS RISK AVERSE SHORT-TO-MEDIUM TERM PERSPECTIVE PREFERENCE FOR LARGE AND STABLE BUSINESSES VENTURE CAPITAL EQUITY / QUASI EQUITY UNSECURED ACTIVE PAYMENT RELATED TO PERFORMANCE WILLING TO ASSUME RISKS LONG TERM CONSIDERATION PREFERENCE FOR SMALLER START UPS

6. VENTURE CAPITAL IN INDIA • STARTED IN MID EIGHTIES BY THREE ALL INDIA FINANCIAL INSTITUTIONS AND A PRIVATE COMPANY. • IN 2002 VENTURE CAPITAL FUNDS INVESTED $590.21 MILLION IN INDIAN COMPANIES. • INDUSTRY HUBS :MUMBAI, DELHI, BANGALORE. • IN 2002, INDIA RANKED AS THE SECOND MOST ACTIVE VC MARKET IN ASIA PACIFIC (EXCLUDING JAPAN). • Major VC Companies in India: ICICI Venture, Gujarat Venture Finance Limited, UTI ventures, SIDBI Ventures Etc.

7. Stages of Company Evolution &Primary External Finance Source Public Issue Mezzanine /Private Equity Venture Capital Funds Angel Investors Incubators Personal Savings SEED EARLY GROWTH START-UP SUSTAINED GROWTH

8. STAGES OF INVESTMENT SEED • TO GET A COMPANY STARTED. • THE PRODUCT MAY BE IN A R&D PHASE, IT MAY JUST BE AN IDEA. START UP • GOES TO COMPANIES, WHICH HAVE A PRODUCT BUT MUST DO SOMETHING WITH IT. FIRST ROUND • GOES TO COMPANIES WHICH HAVE USUALLY PROGRESSED BEYOND A START-UP – USUALLY TO PROMOTE GROWTH.

9. Contd… SECOND ROUND ·ALSO CALLED “SUBSEQUENT ROUND” - FOR PROMOTING OR SUSTAINING GROWTH. IT MAY ALSO BE A “SAVING INVESTMENT” OR “BAIL OUT” IF THE COMPANY HAS NOT PERFORMED UPTO EXPECTATION. BRIDGE/ MEZZANINE FINANCING ·THIS IS ALSO CALLED “MEZZANINE FINANCING”. THIS CAPITAL IS GIVEN FOR A SPECIFIC PURPOSE, EG., TO COVER EXPENSES INCIDENTAL TO THE RECEIPT OF LARGE PRODUCT ORDER.

10. VC PROCESS • DEAL SOURCING • INITIAL EVALUATION • DUE DILIGENCE & APPRAISAL • DEAL STRUCTURING • MONITORING & NURTURING • EXIT

11. Generate deal flow. Identify new & Young companies with high potential Screen & Evaluate deals Establish fund & Target investment opportunities Raise Capital for Investment Due diligence & Appraisal Deal Structuring Monitoring & Nurturing Exit

12. WHAT A VENTURE CAPITALIST LOOKS FOR • Promoter of repute and integrity. • Team. • An idea that will address large markets. • Attractiveness of technology and fit. • Upside potential and down side exposure. • Anticipated growth rate. • Age and stage of development. • Fund requirement. • Goal congruence. • Additional round of funds. • Returns. • Exit.

13. FINANCIAL STRUCTURING -TO MATCH EVERY NEED • FINANCING THROUGH • EQUITY • QUASI EQUITY - • PREFERENCE SHARE • CONVERTIBLE PREFERENCE SHARE • CONVERTIBLE DEBENTURES • SUBORDINATED UNSECURED DEBTS • INCOME NOTES, CONDITIONAL LOANS • CONVERTIBLES ARE PREFERRED • DILEMMA OF PRICING IS SOLVED • ENTREPRENEUR GETS REWARDED FOR HIS HARD WORK • EXIT IS SIMPLER

14. OBJECTIVE COMPENSATE PROMOTER PROVIDE FOR CASH BURN MANY ROUNDS OF FINANCING EXIT POSSIBLE MEANS PREFERENCE SHARE CONVERTIBLES WARRANTS DIFFERENTIAL PRICING / SWEAT EQUITY PREFERENCE SHARE CONVERTIBLE PREFS CONVERTIBLE INCOME NOTES INCOME NOTES OPTIONALLYCONVERTIBLE RIGHTS FINANCIAL STRUCTURING

15. FINANCIAL STRUCTURING - CONSIDERATIONS OF A VENTURE CAPITALIST • MAXIMISING FINANCIAL RETURNS GIVEN THE LEVEL OF RISK • PERCENTAGE OF HOLDING TO HAVE EFFECTIVE SAY FOR DEVELOPMENT OF THE COMPANY THROUGH BOARD REPRESENTATION • MANAGEMENT’S RELATIVE CONTRIBUTION TO CAPITAL TO ASSURE THAT MANAGERS HAVE MORE AT STAKE THAN JUST THEIR EGOS • MINIMIZATION OF TAXES TO INVESTORS • FUTURE LIQUIDITY • VOTING CONTROL • PROTECTION AGAINST LOSSES IN CASE OF LIQUIDATION OR DOWN SIZING • EXIT

16. FINANCIAL STRUCTURING - CONSIDERATIONS FOR AN ENTREPRENEUR • CONTINUE TO HOLD THE BUSINESS THAT THEY HAVE CREATED • FINANCIAL REWARDS • ADEQUATE RESOURCES NEEDED TO ACHIEVE THEIR GOAL • MINIMIZATION OF TAX EXPOSURE FOR BUYING CHEAP STOCK • VALUE ADDITION BY THE VENTURE CAPITALIST COMMON CONSIDERATION FOR BOTH • FLEXIBILITY FOR GROWTH OF THE COMPANY • RETENTION OF KEY EMPLOYEES THROUGH ADEQUATE PARTICIPATION AND REWARD.

17. VALUE ADDITION BY VENTURE CAPITAL • BUILDING UP SYSTEMS & PROCEDURES, LEGAL & STATUTORY COMPLIANCES • NEGOTIATION FOR TECHNOLOGY TRANSFER & TIE-UPS • KEY PERSONNEL RECRUITMENT & TEAM BUILDING • MARKETING TIE-UPS • NETWORKING • RESOURCE MOBILIZATION • APPOINTMENT OF EXPERTS & CREATION OF ADVISORY BOARDS • CORPORATE GOVERNANCE • HELPING COMPANIES PARTICIPATE IN VARIOUS FORUMS • ORGANIZING TRAINING, WORKSHOPS FOR COMPANIES

18. THANK YOU