SIDBI Venture Capital

Venture capital or equity funding from institutions for MSME businesses is a relatively new and upcoming area. Indian entrepreneur's typically start a business with own funds, and those borrowed from banks. Hence, SMEs have conventionally been dependent on bank finance for expansion and working capital necessities. Nevertheless, in the recent past, bankers have shortened lending to SMEs due to the greater hazard of non-performing assets (NPAs) in a downturn. Therefore, even though many SMEs have money-making projects and expansion plans, they find it complicated to get finance for their projects, as bankers may perhaps not be keen to fund high risk projects. In order to make available financial support to such entrepreneurial talent and business skills, the notion of venture capital emerged. Venture capital is a method of equity financing for rapidly-growing private companies. Finance may perhaps be necessary for the start-up, expansion or purchase of a company. Venture capitalists include professionals in different fields. They supply funds (known as Venture Capital Fund) to these firms after cautiously scrutinizing the projects. Their major intention is to earn higher returns on their investments, but their methods are dissimilar from the traditional moneylenders. They take dynamic part in the management of the company and provide the expertise and qualities of good bankers, technologists, planners along with managers. In this article, we look at SIDBI Venture Capital in detail.

Venture Capital for MSMEs

Venture Capitalists in India have refrained from the MSME sector. The non-corporate structure and small size of majority of MSMEs in India renders the Venture Capitalists and Private Equity Players unwilling to investing in them owing to higher transaction costs and difficulties in exits out of such investments. Nevertheless, the VC scenario in India is quickly changing. Alternative funding like VC is improving in India, inclusive of in the MSME sector. Furthermore, the VCs are expanding their reach into areas apart the traditional VC sectors like Information Technology (IT); these days interest in sectors such as clean energy, healthcare, pharmaceuticals, retail, media, etc. is also developing. In recent years, the government controlled financial institutions have also started positive and progressive means to offer MSMEs access to funds at a rational and affordable costs and without any common hurdles. Venture capital funding institutions have been created to introduce funds at low cost, contribute to the risk management and to make available management and technology up gradation support to these enterprises. Government-funded schemes exist at equally the national and the state levels.

SIDBI VC Fund

The Small Industries Development Bank of India (SIDBI) is a major Indian public financial institution involved in providing VC funds for MSMEs. SIDBI operates by means of completely owned subsidiary, SIDBI Venture Capital Limited (SVCL). It co-finances state-level funds, and sometimes co-invests with private sector VCs on an individual basis. Venture capital offered by SIDBI VC has a huge number of advantages over other forms of finance:

It injects long term equity finance which presents a solid capital base for potential growth.
The venture capitalist is a business partner, managing both the risks and rewards. Venture capitalists are rewarded by business accomplishment and the capital gain.
The venture capitalist is capable to present practical advice and assistance to the company based on past knowledge with other companies which were in comparable situations.
The venture capitalist also has a group of contacts in many areas that can include value to the company, such as in hiring important personnel, providing contacts in international markets, introductions to strategic partners, and if required co-investments with other venture capital firms when supplementary rounds of financing are required.

Note: Venture capital funds can only invest in Private Limited Companies, as it allows for equity participation.

Venture Capital Funds Operated by SIDBI

SIDBI manages various venture capital funds as follows:

National Venture Fund for Software and Information Technology (NFSIT)

The National Venture Fund for Software and Information Technology Industry (NFSIT) has been set up by Small Industries Development Bank of India (SIDBI) in association with Ministry of Information Technology (MIT). It is a close ended 10 year fund with a corpus of Rs. 1 billion. SIDBI, Ministry of Information Technology (MIT), Govt. Of India and IDBI are the initial contributors to the fund. The fund is almost fully divested.

SME Growth Fund (SGF)

The SME Growth Fund (SGF) has been set up by Small Industries Development Bank of India (SIDBI) in association with other leading commercial banks such as Punjab National Bank, State Bank of India, Bank of Baroda, Bank of India, Central Bank of India, Union Bank of India, Oriental Bank of Commerce and Corporation Bank. It is a close ended 8 year fund dedicated to SME sector with a corpus of Rs. 5 billion. The Fund commenced its operations in 2004-2005. The fund is presently in the divestment stage.

India Opportunities Fund (IOF)

India Opportunities Fund is close ended fund with a life of 10 years established in August 2011. The contributors of IOF include leading Indian Public Sector Banks and Insurance Companies. IOF is a sector agnostic fund focused mainly on growth capital needs of India’s growing and unlisted MSMEs operating in emerging sectors such as light engineering, clean-tech, agro-based industries, logistics, infrastructure, educational services, IT/ITES etc.

Samridhi Fund (SF)

The Department for International Development (DFID), United Kingdom, in association with Small Industries Development Bank of India (SIDBI), has envisaged the creation of the Samridhi Fund to provide capital to social enterprises which can deliver both financial and social returns, in Bihar, Uttar Pradesh, Madhya Pradesh, Orissa, Chattisgarh, Jharkhand, Rajasthan and West Bengal Samridhi Fund is close ended fund with a life of 7 years and had its initial closing on June 18, 2013. Target sectors shall include, but not be limited to:

Water & Sanitation
Affordable Healthcare
Agriculture &Allied services
Clean Energy
Financial Inclusion
Education
Skill Building, etc.

TEX Fund (TF)

TEX Fund is a close ended fund with a life of 7 years established in June 2014. The initial contributors of TEX Fund are Government of India, Ministry of Textiles (MoT) and SIDBI. The primary objective of the fund is to contribute to the development of the powerloom and related textile sectors. The TEX Fund’s investment focus will be early and growth stage investments in Small Enterprises, as defined under the MSMED Act, 2006, and as amended from time to time. Each investment will be limited to 3 crore. The Fund shall look for investing in companies involved in new and emerging fields in the textile industry and allied products and services. The TEX Fund would inter alia invest in areas such as development of textile production machinery and automation, technical textiles for various applications, coated textiles, textiles for defence applications, sportswear, weaving and processing. Related products and services such as chemicals and materials also offer scope for venture investment. Innovative marketing is an area which could add value to the country’s textile products.

Maharashtra State Social Venture Fund (MS Fund)

Maharashtra State Social Venture Fund (“MS Fund”), an Alternative Investment Fund (“AIF”), was established on September 15, 2015 as a close ended unit scheme of Maharashtra Laghu Vikas Trust (“Trust”). SIDBI Venture Capital Limited (“SVCL/Investment Manager”) is the Investment Manager and SIDBI Trustee Company Limited (“STCL/Trustee”) is the sole Trustee of MS Fund. The Fund announced its Initial Closing on January 04, 2016. The tenure of the Fund is 7 years. The Fund is registered with Securities & Exchange Board of India (SEBI) under the SEBI (AIF) Regulations, 2012 as a Category-I AIF under the sub category of Social Venture Fund. The primary investment focus of MS Fund is to identify and invest in profitable and scalable business ventures including innovative business model or new products & technologies which would have potential to provide social benefits (economic and/or societal and/or environmental) to the people of Maharashtra.

West Bengal MSME VC Fund

West Bengal MSME VC Fund (WB Fund) is a close ended fund with a life of 6 years established in November 2015. The Fund is registered with Securities & Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012 as a Category-I Venture Capital Fund. The WB Fund investment focus is to invest in start-ups, emerging or early growth stage investments in West Bengal MSMEs both manufacturing and services. The Fund is sector agnostic, however, preference will be given to MSMEs promoted by women entrepreneurs. Each investment will be limited to 9 crore. The fund looks for investing in companies with innovative business model or new products and technologies which have potential to bring superior value proposition in India and globally to the customers and clients and high growth in earnings and profitability.

Applying to SIDBI Venture Capital Fund

A well drafted business plan or project report is a must to apply for bank loan or venture capital funds. While submitting a proposal to SIDBI Venture Capital funds, it is recommended that a detailed business plan with the following areas be submitted:

Executive summary giving brief details of the project and levels of financing required
Resume and references on the promoters and management team
Details of subsidiary/ associate companies of the chief promoters. Details of credit facilities, if any, enjoyed by the associate companies from any bank/ FI
Detailed shareholding pattern of the company (existing and proposed) with brief write up on the extent of interest of each of the major shareholder/ promoter in the company
Human resource and requirement in future. Details of ESOP scheme, if any
Details of performance of the company during the preceding 3 years (where applicable) covering financial performance, nature/ type of operation, projects completed, products developed, competitive strengths etc.
Details of technical tie-up/ collaborations
Technological strengths vis-a-vis competitors.
Quality systems adopted and milestones achieved in obtaining Quality Certifications
Marketing Strategy
Key clients, major orders executed for them
Details of ratings (if any) of major foreign clients. Other relevant information on the clients like ‘DUN’ number etc. may be given
Details of overseas site offices, representative offices, subsidiary/ associate companies set up abroad for marketing/ offshore development
Cost of venture and proposed means of finance
Present status of the proposed project
Financial projections with underlying assumption
Implementation schedule
Risk Analysis
Clearly laid out exit plan
Contact persons at your company, with e-mail address and website, if any.

The above information can be submitted by email to info@sidbiventure.co.in