STATUS OF VENTURE CAPITAL IN INDIA

8/22/2019 STATUS OF VENTURE CAPITAL IN INDIA

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WINTER PROJECT REPORT

ON

STATUS OF VENTURE CAPITAL IN INDIA

Submitted To

KUMAUN UNIVERSITY, NAINITAL

For partial fulfillment of the degree of

Master of Business Administration

PROJECT GUIDE SUBMITTED BY-

Dr. L.K SINGH LALIT MOHAN SANGURI

ASSOCIATE PROFESSOR MBA-IV SEM

DMS , BHIMTAL Roll no.112588

DEPARTMENT OF MANAGEMENT STUDIES,

KUMAUN UNIVERSITY CAMPUS, NAINITAL


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Students declaration

This project has been undertaken as a partial fulfillment of the requirement for the

award of the degree of MASTER BUSINESS ADMINISTRATION OF KUMAUN

UNIVERSITY NANITAL.

The project was executed during 4th semester of MBA programme under the guidance

of Dr. L.K.SINGH.

I declare that this project is my original work and the analysis and findings are for

academic purpose only. This study has not been presented in any seminar or submitted

elsewhere for the award of any degree or diploma.

Counter signed by: - LALIT MOHAN SANGURI

Dr. L.K. SINGH Roll No. - 112588

(Faculty of DMS)


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ACKNOWLEDGEMENT

No learning is proper& effective without proper guidance

Every study is incomplete without having a well plan and concrete exposure to the

student. studies are not exception scope of the project at this level is very wide

ranging .on the other hand it provide second basis to adopt the theoretical knowledge

and on the other hand it gives an opportunities for exposure to real time situation. This

study is an internal part of our MBA programmed and to do this project in a short period

was a heavy task.

Intention, dedication, concentration and hard work are very much essential to complete

any task. But still it need a lot of support, guidance, assistance, cooperation of people to

make it successful.

I bear to imprint of my people who have given me their precious idea and time to enable

me to complete the research and project report .I want to thanks for their continuous

support in my research & writing efforts.

I wish to record my thanks and indebtedness to Dr. L.K.SINGH (Faculty DMS CAMPUS,

BHIMTAL) whose inspiration, dedication and helping nature provided me the kind of

guidance necessary to complete this project.

I am extremely grateful to department of management studies campus Bhimtal for

granting me permission to be part of this college.

LALIT MOHAN SANGURI

M,B,A, 4TH SEM


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PREFACE

Practical knowledge is an important suffix to theoretical knowledge; one can not merely

rely upon the theoretical knowledge. Classroom make the fundamental concept clear,

but practical survey has significant role play in subject of business management for

development managerial skills. It is necessary that we combine our classrooms

learning with the knowledge of real business environment.

I am extremely happy to present this research report before the esteemed

teacher/management. It has not only helped me to enhance my knowledge about

STATUS OF VENTURE CAPITAL IN INDIA but also gave new dimensions to my

knowledge about venture capital.


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EXECUTIVE SUMMARY

This First: The abundance of talent is available in the country. The low cost high quality

Indian workforce that has helped the computer users world wide inY2K project is

demonstrated asset.

Second: A good number of successful Indian entrepreneurs in Silicon Valley should

have a demonstration effect for venture capitalists to invest in Indian talent at home.

Third: the opening up of Indian economy and its integration with the world economy is

providing a wide variety of niche market for Indian entrepreneurs to grow and prove

themselves. The topic deals with a specific aspect of business especially small

business and the provision of risk- capital so essential to their birth, survivaland profitable growth. It is not concerned with the banking instruments for short term

finances e.g. overdrafts and loans. The topic concentrates on the provision of

permanent or equity type capitals i.e. venture capital. In the broad terms, venture capital

means long term risk equity finance where the primary reward for its provider is

eventual capital gain and not the interest/dividend yield. India is on the threshold of a

high technology revolution and growth. Slow growth of significant institutional set up

to provide much needed venture capital has hampered the growth of the economy. A

radical change in the existing framework of venture capital financing in India is a must to

achieve high economic growth.


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Contents

DECLARATION

PREFACE

ACKNOWLEDGEMENT

EXECUTIVE SUMMARY

Chapter-1.(6-17)

INTRODUCTION(7-15)

Literature Review(16-17)

Chapter-2.(18-20)

Research Methodology .(19-20)

Chapter-3..(21-39)

Conceptual Framework of Venture Capital ..(22-39)

Chapter-4.(40-52)

Regulatory Environment of Venture Capital.(41-52

Chapter-5.(53-67)

Data Analysis & Interpretation..(54-67)

Chapter-6 (68-69)Conclusions & Suggestions.(69)

BIBLIOGRAPHY


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INTRODUCTION-

Venture capital (VC) is financial capital provided to early-stage, high-potential, high

risk, growth startup companies. The venture capital fund makes money by owning

equity in the companies it invests in, which usually have a novel technology orbusiness

model in high technology industries, such as biotechnology, IT, software, etc. The

typical venture capital investment occurs after the seed funding round as growth funding

round (also referred to as Series A round) in the interest of generating a return through

an eventual realization event, such as an IPO or trade sale of the company. Venture

capital is a subset ofprivate equity. Therefore, all venture capital is private equity, but

not all private equity is venture capital.[1]

In addition to angel investing and other seed funding options, venture capital is

attractive for new companies with limited operating history that are too small to raise

capital in the public markets and have not reached the point where they are able to

secure a bank loan or complete a debt offering. In exchange for the high risk that

venture capitalists assume by investing in smaller and less mature companies, venture

capitalists usually get significant control over company decisions, in addition to a

significant portion of the company's ownership (and consequently value).

Venture capital is also associated with job creation (accounting for 2% of US GDP),[2]

the knowledge economy, and used as a proxy measure of innovation within an

economic sector or geography. Every year, there are nearly 2 million businesses

created in the USA, and 600800 get venture capital funding[citation needed]. According to

the National Venture Capital Association, 11% of private sector jobs come from venture

backed companies and venture backed revenue accounts for 21% of US GDP.[3]

Evolution of VC Industry in India

The first major analysis on risk capital for India was reported in 1983. It indicated that

new companies often confront serious barriers to entry into capital market for raising

equity finance which undermines their future prospects of expansion and diversification.

It also indicated that on the whole there is a need to revive the equity cult among the

masses by ensuring competitive return on equity investment. This brought out the
http://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Growth_investinghttp://en.wikipedia.org/wiki/Startup_companyhttp://en.wikipedia.org/wiki/Collective_investment_schemehttp://en.wikipedia.org/wiki/Equity_%28finance%29http://en.wikipedia.org/wiki/Business_modelhttp://en.wikipedia.org/wiki/Business_modelhttp://en.wikipedia.org/wiki/Biotechnologyhttp://en.wikipedia.org/wiki/Information_technologyhttp://en.wikipedia.org/wiki/Softwarehttp://en.wikipedia.org/wiki/Seed_fundinghttp://en.wikipedia.org/wiki/Series_A_roundhttp://en.wikipedia.org/wiki/Initial_public_offeringhttp://en.wikipedia.org/wiki/Mergers_and_acquisitionshttp://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Venture_capital#cite_note-PrivCo-1http://en.wikipedia.org/wiki/Venture_capital#cite_note-PrivCo-1http://en.wikipedia.org/wiki/Venture_capital#cite_note-PrivCo-1http://en.wikipedia.org/wiki/Angel_investinghttp://en.wikipedia.org/wiki/Seed_fundinghttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Financial_riskhttp://en.wikipedia.org/wiki/Venture_capital#cite_note-2http://en.wikipedia.org/wiki/Venture_capital#cite_note-2http://en.wikipedia.org/wiki/Venture_capital#cite_note-2http://en.wikipedia.org/wiki/Knowledge_economyhttp://en.wikipedia.org/wiki/Innovationhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/National_Venture_Capital_Associationhttp://en.wikipedia.org/wiki/Venture_capital#cite_note-3http://en.wikipedia.org/wiki/Venture_capital#cite_note-3http://en.wikipedia.org/wiki/Venture_capital#cite_note-3http://en.wikipedia.org/wiki/National_Venture_Capital_Associationhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Innovationhttp://en.wikipedia.org/wiki/Knowledge_economyhttp://en.wikipedia.org/wiki/Venture_capital#cite_note-2http://en.wikipedia.org/wiki/Financial_riskhttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Seed_fundinghttp://en.wikipedia.org/wiki/Angel_investinghttp://en.wikipedia.org/wiki/Venture_capital#cite_note-PrivCo-1http://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Mergers_and_acquisitionshttp://en.wikipedia.org/wiki/Initial_public_offeringhttp://en.wikipedia.org/wiki/Series_A_roundhttp://en.wikipedia.org/wiki/Seed_fundinghttp://en.wikipedia.org/wiki/Softwarehttp://en.wikipedia.org/wiki/Information_technologyhttp://en.wikipedia.org/wiki/Biotechnologyhttp://en.wikipedia.org/wiki/Business_modelhttp://en.wikipedia.org/wiki/Business_modelhttp://en.wikipedia.org/wiki/Equity_%28finance%29http://en.wikipedia.org/wiki/Collective_investment_schemehttp://en.wikipedia.org/wiki/Startup_companyhttp://en.wikipedia.org/wiki/Growth_investinghttp://en.wikipedia.org/wiki/Financial_capital


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institutional inadequacies with respect to the evolution of venture capital. In India, the

Industrial finance Corporation of India (IFCI) initiated the idea of VC when it established

the Risk Capital Foundation in 1975 to provide seed capital to small and risky projects.

However the concept of VC financing got statutory recognition for the first time in the

fiscal budget for the year 1986-87.The Venture Capital companies operating at

present can be divided into four groups:

Promoted by All India Development Financial Institutions

Promoted by State Level Financial Institutions

Promoted by Commercial banks

Private venture Capitalists.

Promoted by all India development financial institutions

The IDBI started a VC fund in 19876 as per the long term fiscal policy of government

of India, with an initial capital of Rs. 10 Cr which raised by imposing access of 5% on

all payments made for the import of technology know- how projects requiring funds

fromrs.5 Lakhs to Rs 2.5 Cr were considered for financing. Promoters contribution

ranged from this fund was available at a concessional interest rate of 9% (during

gestation period) which could be increased at later stages. The ICICI provided the

required impetus to VC activities in India 1986 , it started providing VC finance in 1998 it

promoted, along with the Unit Trust of India (UTI) Technology Development and

Information Company of India (TDICI) as the first VC company registered under the

companies act, 1956. The TDICI may provide financial assistance to venture capital

undertakings which are set up by technocrat entrepreneurs, or technology information

and guidance services. The risk capital foundation established by the industrial finance

corporation of India (IFCI) in 1975, was converted in 1988 into the Risk Capital and

Technology Finance company (RCTC) as a subsidiary company of the IFCI the RCTC

provides assistance in the form of conventional loans, interestfree conditional loans on

profit and risk sharing basis or equity participation in extends financial support to high

technology projects for technological up gradations. The RCTC has been renamed as

IFCI Venture Capital Funds Ltd. (IVCF)


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Promoted by State Level Financial Institutions

In India, the State Level financial institutions in some states such as Madhya Pradesh,

Gujarat, Uttar Pradesh, etc., have done an excellent job and have provided VC to a

small scale enterprises. Several successful entrepreneurs have been the beneficiaries

of the liberal funding environment. In 1990, the Gujarat Industrial Investment

Corporation,

56 promoted the Gujarat Venture Financial Ltd.(GVFL) along with other promoters such

as the IDBI, the World Bank, etc. The GVFL provides financial assistance to businesses

in the form of equity, conditional loans or income notes for technologies development

and innovative products. It also provides finance assistance to entrepreneurs. The

government of Andhra Pradesh has also promoted the Andhra Pradesh Industrial

Development Corporation (APIDC) venture capital ltd. To provide VC financing in

Andhra Pradesh.

Promoted by commercial banks

Can bank Venture Capital Fund, State Bank Venture Capital Fund and Grind lays

bank Venture Capital Fund have been set up by the respective commercial banks to

undertake VC activities. The State Bank Venture Capital Funds provides financial

assistance for boughtout deal as well as new companies in the form of equity which it

disinvests after the commercialization of the project. Can bank Venture Capital Fund

provides financial assistance for proven but yet to be commercially exploited

technologies. It provides assistance both in the form of equity and conditional loans.


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Private Venture Capital Funds

Several private sector venture capital funds have been established in India such asthe 20

The Can Venture Capital Company, Indus Venture Capital Fund, Infrastructure Leasing

and Financial Services Ltd .Some of the companies that have received funding through

this route include:

Mastek, on of the oldest soft warehouse in India

Rusk an software, Pune based software consultancy

SQL Star, Hyderabad-based training and software development consultancy

Satyam info way, the first private ISP in India

Hindi tron, makers of embedded software

Select, provider of interactive software selection

Yantra, ITL Infosys US subsidiary, solution for supply chain management

Rediff on the Net, Indian website featuring electronic shopping, news, chat etc.

Phase I

-Formation of TDICI in the 80s and regional funds as GVFL & APIDC in the early

90s.The first origins of modern venture capital in India can be traced to the setting up of

a Technology Development Fund in the year 1987-88, through the levy of access on all

technology import payments. Technology Development Fund was started to provide

financial support to innovative and high risk technological programmes through the

Industrial Development Bank of India. The first phase was the initial phase in which the

concept of VC got wider acceptance. The first period did not really experience any

substantial growth of VCs. The 1980swere marked by an increasing disillusionment

with the trajectory of the economic system and a belief that liberalization was needed.

The liberalization process started in 1985 in a limited way. The concept of venture

capital received official recognition in 1988 with the announcement of the venture capital


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guidelines. During 1988 to 1992 about 9 venture capital institutions came up in India.

Though the venture capital funds should operate as open entities, Government of India

controlled them rigidly. One of the major forces that induced Government of India to

start venture funding was the World Bank. The initial funding has been provided by

World Bank. The most important feature of the 1988 rules was that venture capital funds

received the benefit of a relatively low capital gains tax rate which was lower than the

corporate rate. The 1988 guidelines stipulated that VC funding firms should meet the

following criteria:

Introduction growth-

Technology involved should be new, relatively untried, very closely held, in the process

of being taken from pilot to commercial stage or incorporate some significant

improvement over the existing ones in India Promoters / entrepreneurs using the

technology should be relatively new, professionally or technically qualified, with

inadequate resources to finance the project. Between 1988 and 1994 about 11 VC

funds became operational either through reorganizing the businesses or through new

entities. All these followed the Government of India guidelines for venture capital

activities and have primarily supported technology oriented innovative businesses

started by first generation entrepreneurs. Most of these were operated more like a

financing operation. The main feature of this phase was that the concept got accepted.

VCs became operational in India before the liberalization process started. The context

was not fully ripe for the growth of VCs. Till 1995; the VCs operated like any bank but

provided funds without collateral. The first stage of the venture capital industry in India

was plagued by in experienced management, mandates to invest in certain states and

sectors and general regulatory problems. Many public issues by small and medium

companies have shown that the Indian investor is becoming increasingly wary of

investing in the projects of new and unknown promoters. The liberation of the economy

and toning up of the capital market changed the economic landscape. The decisions

relating to issue of stocks and shares was handled by an office namely: Controller of

Capital Issues (CCI). According to 1988 VC guideline, any organization requiring to start

venture funds have to forward an application to CCI. Subsequent to the liberalization of

the economy in 1991, the office of CCI was abolished in May 1992 and the powers were


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vested in Securities and Exchange Board of India. The Securities and Exchange Board

of India Act, 1992 empowers SEBI under section 11(2) thereof to register and regulate

the working of venture capital funds. This was done in1996, through a government

notification. The power to control venture funds has been given to SEBI only in 1995

and the notification came out in 1996. Till this time, venture funds were dominated by

Indian firms. The new regulations became the harbinger of the second phase of the VC

growth.

Phase II

Entry of Foreign Venture Capital funds (VCF) between 1995 -1999The second phase of

VC growth attracted many foreign institutional investors. During this period overseasand private domestic venture capitalists began investing in VCF. The new regulations in

1996 helped in this. Though the changes proposed in 1996 had a salutary effect, the

development of venture capital continued to be inhibited because of the regulatory

regime and restricted the FDI environment. To facilitate the growth of venture funds,

SEBI appointed a committee to recommend the changes needed in the VC funding

context. This coincided with the IT boom as well as the success of Silicon Valley start

ups.

Phase III

(2000 onwards) - VC becomes risk averse and activity declines :

Not surprisingly, the investing in India came crashing down when NASDAQ lost

60%of its value during the second quarter of 2000 and other public markets (including

those in India) also declined substantially. Consequently, during 2001-2003, the VCs

started investing less money and in more mature companies in an effort to minimize the

risks. This decline broadly continued until 2003.

Phase IV

2004 onwards - Global VCs firms actively investing in India Since Indias economy has

been growing at 7%-8% a year, and since some sectors, including the services sector


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and the high-end manufacturing sector, have been growing at 12%-14% a year,

investors renewed their interest and started investing again in 2004.The number of

deals and the total dollars invested in India has been increasing substantially

GLOBAL TREND IN VENTURE CAPITAL INDUSTRY.

The 2007 Global Venture Capital Survey was sponsored by Deloitte &Touch LLP in

conjunction with the National Venture Capital Association and other venture capital

associations* throughout the world. It was administered in April and May 2007 to

venture capitalists (VCs) in the Americas, Asia Pacific, Europe, the Middle East, and

Africa. There were 528 responses from general partners, with 45 percent of

respondents from the United States and 31 percent from Europe.

Investing globally by investing locally.

One way to build a comfort zone for global investing and to take advantage

of opportunities abroad is to invest locally in companies with operations outside

their home country, as opposed to investing directly in foreign countries. This year,

there was a significant increase in the number of respondents who indicated that a

sizeable number of their portfolio companies have a considerable amount of operations

outside the country in which theyre head quartered. A significant number, 88 percent of

U.S. respondents and 82 percent of non-U.S .respondents, indicated that at least some

portion of their portfolio has significant operations outside of the country of headquarters.

Again, moderation is evident as more than half of those indicated that less than 25

percent of their portfolio had significant foreign operations. Nonetheless, these numbers

have increased significantly from prior years and reflect an increased trend in this

method of investment

CURRENT TRENDS-


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The venture capital is growing 43% CAGR. However, in spite of the venture capital

scenario improving, several specific VC funds are setting up shop in India, with the year

2006 having been a landmark year for VC funding in India. The total deal value in 2007

is 14234 USD Million. The NO. of deals are increase year by year. The no. of deals

in 2006 only 56 and now in 2007 it touch the 387deals. The introduction stage of

venture capital industry in India is completed in2003 after that growing stage of Indian

venture capital industry is started. There are 160 venture capital firms/funds in India. In

2006 it is only but in 2007the number of venture capital firms are 146. The reason is

good position of capital market. But in 2008 no. of venture capital firms increase by only

14. the reason is crash down of capital market by 51% from January to November 2008.

The No. of venture capital funds are increasing year by year.

YEAR 2000 2001 2002 2003 2004 2005 2006 2007

NO.OF

VC

FUND

841 77 78 81 86 105 146 160

Venture capital growth and industrial clustering have a strong positive correlation.Foreign direct investment, starting of R&D centres, availability of venture capital and

growth of entrepreneurial firms are getting concentrated into five clusters. The cost of

monitoring and the cost of skill acquisition are lower in clusters, especially for

innovation. Entry costs are also lower in clusters. Creating entrepreneurship and

stimulating innovation in clusters have to become a major concern of public policy

makers. This is essential because only when the cultural context is conducive for risk

management venture capital will take-of. Clusters support innovation and facilitates risk

bearing. VCs prefer clusters because the information costs are lower. Policies for

promoting dispersion of industries are becoming redundant after the economic

liberalization. The venture capital firm invest their money in most developing sectors like

healthcare, IT-ITes, telecom, Bio-technology, Media & Entertainment, shipping &

logistics etc.


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It is also a way in which public and private sectors can construct an institution that

systematically creates networks for the new firms and industries, so that they can

progress. This institution helps in identifying and combining pieces of companies, like

finance, technical expertise, know of marketing and business models. Once integrated,

these enterprises succeed by becoming nodes in the search networks for designing and

building products in their domain.

venture capital (VC) funding rebounded in the first quarter of 2013, raising $16 million in

three deals after the previous quarter saw just one $500,000 VC deal, according to

Mercom Capital Group, llc, a global clean energy communications and consulting firm.

VC deals included Export Development Canada's $7 million financing of Endurance, a

Vancouver-based manufacturer of wind turbines designed for power grid applications.Also receiving financing was Petaluma, a developer of a wind LiDAR (light detection

and ranging) system for remote sensing of wind, which raised $5.5 million from Bright

Capital, Cedar Fund, Evergreen Venture Partners, ABB and Draper Fisher Jurvetson.

Heartland Energy Solutions, a manufacturer of 100 kW wind turbines and blades, on the

other hand, raised $3.9 million.

The report said most of the funding activity this quarter went towards project funding.

Announced project funding in Q1 2013 came to $6.2 billion in 29 deals with someextremely large transactions recorded this quarter. Large-scale onshore wind projects

received over $3.42 billion in 26 deals while offshore wind projects received over $2.74

billion in three deals. In the United States, wind became the most installed energy

generation source in 2012 and has continued that momentum in the first quarter of

2013.

According to Mercom, funding and M&A activity in the Indian wind energy sector in Q1

2013 was active with transactions in project, debt and other funding as well as project

M&A. Notable transactions, according to Mercom, include Continuum Wind Energy

receiving a $164 million loan from State Bank of India for its 175 MW wind project in

Maharashtra, Gujarat Venture Finance picking up an equity stake in a special purpose

vehicle of UK based SITAC group.
http://timesofindia.indiatimes.com/topic/Venture-Capitalhttp://timesofindia.indiatimes.com/topic/Fundinghttp://timesofindia.indiatimes.com/topic/Wind-Energyhttp://timesofindia.indiatimes.com/topic/Financehttp://timesofindia.indiatimes.com/topic/Financehttp://timesofindia.indiatimes.com/topic/Wind-Energyhttp://timesofindia.indiatimes.com/topic/Fundinghttp://timesofindia.indiatimes.com/topic/Venture-Capital


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LITRATURE REVIEW.

AccordingtoSubashandNair,(May2005).

The modern concept of venture capital state during 1946 and how practiced by almost

all economies around the world, there seems to be a slowdown of venture capital

activities after 2000.there may be a long list of reasons for this situation where people

feel more risky to put their money in new and emerging ventures. Hardly 5% of the

venture capital investment globally is given to really stage ventures in all years people

around the world hessen the potentiality of venture capital in promoting different

economies of the world by improving the standard of living of the people by expending

business..

AccordingToKumar,(June2003).

Thisstudyfocusontheindustryshouldconcentratemoreonearlystagebusiness

opportunitiesinsteadof later stage.Itistheexperienceworldover andespeciallyin

theUnitedStatesof Americathattheearlystageopportunitieshavegenerated

exceptionalreturnsfor theindustry.Healsosuggeststhatindividualcapitalistsshouldfollowafocusedinvestmentstrategy.Thespecializationshould beina board

technologysegment.

AccordingtoKumarandKaura,(March2006).

The presentstudyreportsfour factorswhichareused bytheventurecapitalistto

screennewventure proposals.UsingKendallstau-canalysis,thestudy bringsout

strongassociation betweenseveralvariable pair.Broadly,theanalysisf indsthat:

Successfulventureteams putinsustainedeffortsoidentifiedtargetmarkets.

Theyarehighlymeticulouswhileattendingtothedetails.

Theseteamsareadeptatdealingwithrisk becauseof their impeccable past

experience.


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Indianventurecapitalistsdonotseemto bemuchenamoredoftechnology

venturing;atleastsomeofthesuccessfulfundedbythemdonotseemto

showsignsof beinghi-tech.

Thestudy bringsoutfourimportantvariableswhicharehighlyuniqueto

successfulventureinIndia.Theyare:

Abilitytoevaluateandreacttorisk

Attentiontodetails

Marketshare

Profits.Evaluatingrisk seemsto beanareawhereunsuccessfulventurefail.Sinc

e successfulteamsfocusonestablishedmarketsandmeticulouslypursuethese

marketstogainmarketshare,theyachievedesiredprofits.

AccordingtoKumar,(May2004).

The venture capital industry has followed the classical model of venture capital finance.

the early stage financing which includes seed, start-up & early stage investment was

always the major part of the venture investment.

Whenever venture capitalists in venture certain basic preferences play a crucial role in

investment decision. Two such consideration are location preferences and ownership

preferences.

AccordingtoKumar,(March,2004)Theindustryshouldconcentratemoreanearlystage

businessopportunitiesinsteadof later stage.Itistheexperienceworldover andespe

ciallyintheUnitedstatesof Americathattheearlystageopportunitieshavegenerated

exceptionalfor theindustry.Itisrecommendedthattheventurecapitalistsshouldretain

their basicfeaturethattakingretaintheir basicfeaturethatistakinghighrisk.Thepr

esentsituationmaycompelventurecapitaliststooptforless riskyopportunitiesbutitisa

gainstthespritof venturecapitalism.Theestablishedfactisbiggainsarepossiblein

highrisk projects.


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CHAPTER-2


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RESEARCH METHODOLOGY.

The term Research literally means to search diligently, investigate or experiment to

discover facts, revise accepted theories on laws in light of new facts, or to discover a

practical application of new facts, theories or laws. One uses research to get information

to make decisions or implement a plan.

Research process.

DEFINE RESEARCH PROBLEM

REVIEW OF LITERATURE

REVIEW CONCEPTS AND THEORIES

REVIEW PREVIOUS RESEARCH FINDINGS

FORMULATE HYPOTHESIS

DESIGN RESEARCH

COLLECT DATA (EXECUTION)

ANALYSE DATA

INTERPRET AND REPORT

FF FF

FF

SUGGESTIONS AND CONCLUSION


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RESEARCH DESIGN .

The types of research are financial research type. Because financial instruments

research studies are those studies which are concerned with exploratory the

characteristics of a particular instrument.

It includes surveys and fact finding enquires.

SAMPLE :

To conduct any research a scientific method must be followed. The universe of study is

very large in which it is difficult to correct information from all the people. So, the

sampling method has been followed for the study. The analysis is based On secondary

data.

Research Area :.VENTURE CAPITAL INDUSTRY IN INDIA.

DATA COLLECTION- The study is based on secondary data. I have collected data from

different sources. I have collected the data with the help of various which are follow-

Internet

Company magazines

Various newspaper ( Business standard, Times of India, Economic Times)

Past records

Objective of project :

To understand the concept of venture capital

To examine the legal framework & regulations of the venture capital activity inIndia.

To analyse the direction, pattern and growth of venture capital investment in

India

To analyse the relationship between economic growth and venture capital

investment.


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CHAPTER-3


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Conceptual framework

Concept of Venture Capital

The term venture capital comprises of two words that is, Venture andCapital .Venture is a course of processing, the outcome of which is uncertain but to

which is attended the risk or danger of loss. Capital means recourses to start an

enterprise. To connote the risk and adventure of such a fund, the generic name Venture

Capital was coined. Venture capital is considered as financing of high and new

technology based enterprises. It is said that Venture capital involves investment in new

or relatively untried technology, initiated by relatively new and professionally or

technically qualified entrepreneurs with inadequate funds. The conventional financiers,

unlike Venture capitals, mainly finance proven technologies and established markets.

However, high technology need not be pre-requisite for venture capital. Venture capital

has also been described as unsecured risk financing. The relatively high risk of venture

capital is compensated by the possibility of high returns usually through substantial

capital gains in the medium term. Venture capital in broader sense is not solely an

injection of funds into a new firm, it is also an input of skills needed to set up the firm,

design its marketing strategy, organize and manage it. Thus it is a long term association

with successive stages of companys development under highly risk investment

conditions, with distinctive type of financing appropriate to each stage of development.

Investors join the entrepreneurs as co-partners and support the project with finance and

business skills to exploit the market opportunities. Venture capital is not a passive

finance. It may be at any stage of business/production cycle, that is, start up, expansion

or to improve a product or process, which are associated with both risk and reward. The

Venture capital makes higher capital gains through appreciation in the value of such

investments when the new technology succeeds. Thus the primary return sought by theinvestor is essentially capital gain rather than steady interest income or dividend yield.

Definition of Venture capitals-The support by investors of entrepreneurial talent with

finance and business skills to exploit market opportunities and thus obtain

capital gains.Venture capital commonly describes not only the provision of startup

finance or seedcorn capital but also development capital for later stages of business.


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A long term commitment of funds is involved in the form of equity investments, with the

aim of eventual capital gains rather than income and active involvement in the

management ofcustomers business.

Features of Venture Capital.

High Risk

By definition the Venture capital financing is highly risky and chances of failure

are high as it provides long term start up capital to high risk-high reward ventures.Venture capital assumes four types of risks, these are:

Management risk

-Inability of management teams to work together.

Market risk

-Product may fail in the market.

Product risk

- Product may not be commercially viable.

Operation risk

- Operations may not be cost effective resulting in increased cost

decreased gross margins.

High Tech

As opportunities in the low technology area tend to be few of lower order, and hi-

tech projects generally offer higher returns than projects in more traditional areas,

venture capital investments are made in high tech. areas using new technologies or

producing innovative goods by using new technology. Not just high technology, any high

risk ventures where the entrepreneur has conviction but little capital gets venture

finance. Venture capital is available for expansion of existing business or diversification


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to a high risk area. Thus technology financing had never been the primary objective but

incidental to venture capital.

Equity Participation & Capital Gains

Investments are generally in equity and quasi equity participation through direct

purchase of shares, options, convertible debentures where the debt holder has the

option to convert the loan instruments into stock of the borrower or a debt with warrants

to equity investment. The funds in the form of equity help to raise term loans that are

cheaper source of funds. In the early stage of business, because dividends can be

delayed, equity investment implies that investors bear the risk of venture and would

earn a return commensurate with success in the form of capital gains.

Participation In Management

Venture capital provides value addition by managerial support, monitoring and follow up

assistance. It monitors physical and financial progress as well as market development

initiative. It helps by identifying key resource person. They want one seat on the

companys board of directors and involvement, for better or worse, in the major decision .

This is a unique philosophy of hands onmanagement where Venture capitalist acts

as complementary to the entrepreneurs. Based upon the experience other companies, a

venture capitalist advise the promoters on project planning, monitoring, financial

management, including working capital and public issue. Venture capital investor cannot

interfere in day today management of the enterprise but keeps a close contact with the

promoters or entrepreneurs to protect his investment.

Length of Investment.Venture capitalist help companies grow, but they eventually seek to exit the investment

in three to seven years. An early stage investment may take seven to ten years to

mature, while most of the later stage investment takes only a few years. The process of

having significant returns takes several years and calls on the capacity and talent of

venture capitalist and entrepreneurs to reach fruition.


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Illiquid Investment

Venture capital investments are illiquid, that is, not subject to repayment on demand

or following a repayment schedule. Investors seek return ultimately by means of capital

gains when the investment is sold at market place. The investment is realized only on

enlistment of security or it is lost if enterprise is liquidated for unsuccessful working. It

may take several years before the first investment starts to locked for seven to ten years.

Venture capitalist understands this illiquidity and factors this in his investment decisions.

Difference between Venture Capital & Other

2.3.1 Venture Capital Vs Development Funds Venture capital differs from Development

funds as latter means putting up of industries without much consideration of use of new

technology or new entrepreneurial venture but having a focus on underdeveloped areas

(locations). In majority of cases it is in the form of loan capital and proportion of equity is

very thin. Development finance is security oriented and liquidity prone. The criteria for

investment are proven track record of company and its promoters, and sufficient cash

generation to provide for returns (principal and interest). The development bank

safeguards its interest through collateral. They have no say in working of the enterprise

except safeguarding their interest by having a nominee director. They do not play any

active role in the enterprise except ensuring flow of information and proper management

information system, regular board meetings, adherence to statutory requirements for

effective management control where as Venture capitalist remain interested if the

overall management of the project o account of high risk involved I the project till its

completion, entering into production and making available proper exit route for

liquidation of the investment. As against this fixed payments in the form of installment of

principal and interest are to be made to development banks.


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Venture Capital Vs Seed Capital & Risk Capital

It is difficult to make a distinction between venture capital, seed capital, and risk capital

as the latter two form part of broader meaning of Venture capital. Difference between

them arises on account of application of funds and terms and conditions applicable. The

seed capital and risk funds in India are being provided basically to arrange promoters

contribution to the project. The objective is to provide finance and

encourage professionals to become promoters of industrial projects. The seed capital is

provided to conventional projects on the consideration of low risk and security and use

conventional techniques for appraisal. Seed capital is normally in the form of

low interest deferred loan as against equity investment by Venture capital. Unlike

Venture capital, Seed capital providers neither provide any value addition nor participate

in the management of the project. Unlike Venture capital Seed capital provider is

satisfied with low risk-normal returns and lacks any flexibility in its approach. Risk

capital is also provided to established companies for adapting new technologies. Herein

the approach is not business oriented but developmental. As a result on one hand the

success rate of units assisted by Seed capital/Risk Finance has been lower than those

provided with venture capital. On the other hand there turn to the seed/risk capital

financier had been very low as compared to venture capitalist.

BASIS SEED CAPITAL

SCHEME

VENTURE CAPITAL

SCHEME

BENEFICARIES Income or aid Commercial viability

SIZE OF ASSISTENCE Very small entrepreneurs Medium and large

entrepreneurs

AMOUNT OF

ASSISTENCE

15 lakhs

(max)

Upto 40% of promoter

equity

APPRAISAL PROCESS Normal Skilled &specialized

RETURN 20% 30%

EXIT OPTION Sell back Public offer


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Difference between Seed Capital Scheme and Venture capital Scheme

Venture capital was started as early stage financing of relatively small but rapidly

growing companies. However various reasons forced venture capitalists to be more and

more involved in expansion financing to support the development of existing portfolio

companies. With increasing demand of capital from newer business, Venture

capitalists began to operate across a broader spectrum of investment interest. This

diversity of opportunities enabled Venture capitalists to balance their activities in term of

time involvement, risk acceptance and reward potential, while providing on going

assistance to developing business. Different venture capital firms have different

attributes and aptitudes for different types of Venture capital investments. Hence there

are different stages of entry for different Venture capitalists and they can identify and

differentiate between types of Venture capital investments, each appropriate for the

given stage of the investee company, These are:-

1.Early Stage finance

Seed Capital

Startup Capital

Early/First Stage Capital

Later/Third Stage Capital

2. Later Stage Finance

Expansion/Development

Stage Capital Replacement

Finance Management Buy Out and Buy in Turnarounds Mezzanine/Bridge

Finance not all business firms pass through each of these stages in a sequential

manner. For instance seed capital is normally not required by service based ventures. It

applies largely to manufacturing or research based activities. Similarly second round


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finance does not always follow early stage finance. If the business grows successfully it

is likely to develop sufficient cash to fund its own growth, so does not require venture

capital for growth. The table below shows risk perception and time orientation for

different stages of venture capital financing. The characteristics of the seed capital may

be enumerated as follows:

Finance Period(funds

locked in years)

Risk perception Activity to be

finance

Early stage finance

seed

7-10 Extreme or concept

idea for product

For support and R&D

develop

Start up 5-9 Very high Initialization

operation or develop

prototype

First stage 3-7 High Start commercial

production and

marketing

Second stage 3-5 Sufficient Extend market &

growth

Absence of ready product market

Absence of complete management team

Product/ process still in R & D stage Initial period / licensing stage of technology

transfer Broadly speaking seed capital investment may take 7 to 10 years to

achieve realization. It is the earliest and therefore riskiest stage of Venture capital

investment. The new technology and innovations being attempted have equal

chance of success and failure. Such projects, particularly hi-tech, projects sink a

lot of cash and need a strong financial support for their adaptation,


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commencement and eventual success. However, while the earliest stage of

financing is fraught with risk, it also provides greater potential for realizing

significant gains in long term. Typically seed enterprises lack asset base or

track record to obtain finance from conventional sources and are largely

dependent upon entrepreneurs personal resources. Seed capital is provided

after being satisfied that the entrepreneur has used up his own resources and

carried out his idea to a stage of acceptance and has initiated research. The

asset underlying the seed capital is often technology or an idea as opposed to

human assets (a good management team) so often sought by venture capitalists.

Venture capital financing process-

Deal origination:

In generating a deal flow, the VC investor creates a pipeline of deals or

investment opportunities that he would consider for investing in. Deal may

originate in various ways. referral system, active search system, and

intermediaries. Referral system is an important source of deals. Deals may be

referred to VCFs by their parent organizations , trade partners, industry

associations, friends etc. Another deal flow is active search through networks,

trade fairs, conferences, seminars, foreign visits etc. Intermediaries is used by

venture capitalists in developed countries like USA, is certain intermediaries who

match VCFs and the potential entrepreneurs.

Screening: VCFs, before going for an in-depth analysis, carry out initial

screening of all projects on the basis of some broad criteria. For example, thescreening process may limit projects to areas in which the venture capitalist is

familiar in terms of technology, or product, or market scope. The size of

investment, geographical location and stage of financing could also be used as

the broad screening criteria.


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Key considerations

For investor/venture capitalist Ideal entrepreneur

A venture capital (VC) who is financing the firm would as the first necessity

assess and gauge the promoters. Because in the case of start-up where the

product or the technology is yet to be tested, the only thing they can trust and

their investment on the people behind it. While investing in a company what a VC

is essentially looking for is a partnership and therefore the first decision making

criterion is the character and personality of the promoters. However from a

venture capitalists perspective, the ideal entrepreneur,

is qualified in a hot area of interest

Delivers sales or technical advances such as FDA approval

with reasonable probability

Tells a compelling story and is presentable to outside investors,

Recognizes the need for speed to an IPO for liquidity,

Has a good reputation and can provide references that show

competences and skill,

Understand the need for a team with a variety of skill and

therefore sees why equity has to be allocated to other people

Works diligently toward a goal but maintains flexibility

Get along with the investor group

Understands the cost of capital and typical deal structures and is

not offended by them

Is sought after by many VCs

Has a realistic expectation about process and outcome.

Besides the ideal entrepreneur, the investor tries to ensure the following for

himself.

Reasonable reward given in the level of risk.

Sufficient influence on the management of the company through

board representation.. Minimization of taxes.


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VCFs, before going for an in-depth analysis, carry out initial screening of all

projects on the basis of some broad criteria. For example, the screening process

may limit projects to areas in which the venture capitalist is familiar in terms of

technology, or product, or market scope. The size of investment, geographical

location and stage of financing could also be used as the broad screening criteria.

Due Diligence:

Due diligence is the industry jargon for all the activities that are associated with

evaluating an investment proposal. The venture capitalists evaluate the quality

of entrepreneur before appraising the characteristics of the product, market or

technology. Most venture capitalists ask for a business plan to make an

assessment of the possible risk and return on the venture. Business plan

contains detailed information about the proposed venture. The evaluation of

ventures by VCFs in India includes; Preliminary evaluation: The applicant

required to provide a brief profile of the proposed venture to establish prima facie

eligibility. Detailed evaluation: Once the preliminary evaluation is over, the

proposal is evaluated in greater detail. VCFs in India expect the entrepreneur to

have:- Integrity, long-term vision, urge to grow, managerial skills, commercial

orientation. VCFs in India also Smake the risk analysis of the proposed projects

which includes :Product risk, Market risk, Technological risk and Entrepreneurial

risk. The final decision is taken in terms of the expected risk-return trade-off as

shown in Figure.

Deal Structuring:

In this process, the venture capitalist and the venture company negotiate the

terms of the deals, that is, the amount, form and price of the investment. Thisprocess is termed as deal structuring. The agreement also include the venture

capitalists right to control the venture company and to change its management if

needed, buyback arrangements, acquisition, making initial public offerings (IPOs),


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etc. Earned out arrangements specify the entrepreneur's equity share and the

objectives to be achieved.

Post Investment Activities:Once the deal has been structured and agreement finalized , the venture capitalist

generally assumes the role of a partner and collaborator. He also gets involved in

shaping of the direction of the venture. The degree of the venture capitalist's

involvement depends on his policy. It may not, however, be desirable for a venture

capitalist to get involved in the day-to-day operation of the venture. If a financial or

managerial crisis occurs, the venture capitalist may intervene, and even install a new

management team.

Exit:Venture capitalists generally want to cash-out their gains in five to ten years after the

initial investment. They play a positive role in directing the company towards

particular exit routes. A venture may exit in one of the following ways: There are four

ways for a venture capitalist to exit its investment:

Initial Public Offer (IPO)

Acquisition by another company

Re-purchase of venture capitalists share by the investee company

Purchase ofventure capitalists share by a third party

Promoters Buy-back

The most popular disinvestments route in India is promoters buy-back. This

route is suited to Indian conditions because it keeps the ownership and control of

the promoter intact. The obvious limitation, however, is that in a majority of cases

the market value of the shares of the venture firm would have appreciated so

much after some years that the promoter would not be in a financial position to

buy them back .In India, the promoters are invariably given the first option to buy

back equity of their enterprises. For example, RCTC participates in the assisted

firms equity with suitable agreement for the promoter to repurchase it. Similarly,


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Can fina -VCF offers an opportunity to the promoters to buy back the shares of

the assisted firm within an agreed period at a predetermined price. If the

promoter fails to buy back the shares within the stipulated period, Can fina-VCF

would have the discretion to divest them in any manner it deemed appropriate.

SBI capital Markets ensures through examining the personal assets of the

promoters and their associates, which buy back, would be a feasible option.

GVFL would make disinvestments, in consultation with the promoter, usually

after the project as settled down, to a profitable level and the entrepreneur is in a

position to avail of finance under conventional schemes of assistance from banks

or other financial institutions.

Initial Public Offers (IPOs)

The benefits of disinvestments via the public issue route are, improved marketability

and liquidity, better prospects for capital gains and widely known status of the

venture as well as market control through public share participation. This option has

certain limitations in the Indian context. The promotion of the public issue would be

difficult and expensive since the first generation entrepreneurs are not known in the

capital markets. Further,33 difficulties will be caused if the entrepreneurs business

is perceived to be an unattractive investment proposition by investors. Also, the

emphasis by the Indian investors on short-term profits and dividends may tend to

make the market price unattractive. Yet another difficulty in India until recently was

that the Controller of Capital Issues (CCI) guidelines for determining the premium on

shares took into account the book value and the cumulative average EPS till the

date of the new issue. This formula failed to give due weight age to the expected

stream of earning of the venture firm. Thus, the formula would underestimate the

premium. The Government has now abolished the Capital Issues Control Act, 1947

and consequently, the office of the controller of Capital Issues. The existing

companies are now free to fix the premium on their shares. The initial public issue

for disinvestments of VCFs holding can involve high transaction costs because

of the inefficiency of the secondary market in a country like India. Also, this option

has become far less feasible for small ventures on account of the higher listing


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requirement of the stock exchanges. In February 1989, the Government of India

raised the minimum capital for listing on the stock exchanges from Rs 10 million to

Rs 30 million and the minimum public offer from Rs 6 million to Rs 18 million.

Sale on the OTC Market

An active secondary capital market provides the necessary impetus to the success

of the venture capital. VCFs should be able to sell their holdings, and investors

should be able to trade shares conveniently and freely. In the USA, there exist well-

developed OTC markets where dealers trade in shares on telephone/terminal and

not on an exchange floor. This mechanism enables new, small companies which are

not otherwise eligible to be listed on the stock exchange, to enlist on the OTC

markets and provides liquidity to investors. The National Association of Securities

Dealers Automated Quotation System (NASDAQ) in the USA daily quotes over 8000

stock prices of companies backed by venture capital. The OTC Exchange in India

was established in June 1992. The Government of India had approved the creation

for the Exchange under the Securities Contracts (Regulations) Act in 1989. It has

been promoted jointly by UTI, ICICI, SBI Capital Markets, Can bank Financial

Services, GIC, LIC and IDBI. Since this list of market-makers (who will decide daily

prices and appoint dealers for trading) includes most of the public sector venture

financiers, it should pick up fast, and it should be possible for investors to trade in

the securities of new small and medium size enterprises. The other disinvestments

mechanisms such as the management buyouts or sale to other venture funds are

not considered to be appropriate by VCFs in India. The growth of an enterprise

follows a life cycle as shown in the diagram below. The requirements of funds vary

with the life cycle stage of the enterprise. Even before a business plan is prepared

the entrepreneur invests his time and resources in surveying the market, finding and

understanding the target customers and their needs. At the seed stage the

entrepreneur continue to fund the venture with his own or family funds. At this stage

the funds are needed to solicit the consultants services in formulation of business

plans , meeting potential customers and technology partners. Next the funds would

be required for development of the product/process and producing prototypes, hiring


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key people and building up the managerial team. This is followed by funds for

assembling the manufacturing and marketing facilities in that order. Finally the funds

are needed to expand the business and attaint the critical mass for profit generation.

Venture capitalists cater to the needs of the entrepreneurs at different stages of their

enterprises. Depending upon the stage they finance, venture capitalists are called

angel investors, venture capitalist or private equity supplier/investor.

OTC MARKET PLAYERS-

Angels and angel clubs

Angels are wealthy individuals who invest directly into companies. They can form

angel clubs to coordinate and bundle their activities. Besides the money, angel

soften provide their personal knowledge, experience and contacts to support

their investees. With average deals sizes from USD 100,000 to USD 500,000 they


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finance companies in their early stages. Examples for angel clubs are Media Club,

Dinner Club , Angel's Forum.

Small and Upstart Venture Capital Funds

These are smaller Venture Capital Companies that mostly provide seed and start-up

capital. The so called "Boutique firms" are often specialized in certain industries or

market segments. Their capitalization is about USD 20 to USD 50million

(is this deals size or total money under management or money under management

per fund?)

As for the

small and medium Venture Capital funds

strong competition will clear the marketplace. There will be mergers and

acquisitions leading to a concentration of capital. Funds special in

different business areas will form strategic partnerships. Only the more

successful funds will be able to attract new money. Examples

are: Artemis Comaford Abbell Venture Fund Acacia Venture Partners.

Medium Venture Funds

The medium venture funds finance all stages after seed stage and operate in

all business segments. They provide money for deals up to USD 250 million.

Single funds have up to USD 5 billion under management. An example is AcesPartners.

Large Venture Funds

As the medium funds, large funds operate in all business sectors and provide all

types of capital for companies after seed stage. They often operate

internationally and finance deals up to USD 500 million The

large funds will try to improve their position by mergers and acquisitions with

other funds to improve size, reputation and their financial muscle. In addition they

will to diversify. Possible areas to enter are other financial services by means of

M&As with financial services corporations and the consulting business. For the

latter one the funds have a rich resource of expertise and contacts in house. In a

declining market for their core activity and with lots of tumbling companies out


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there is no reason why Venture Capital funds should offer advice and consulting

only to their investees.

o Examples are: AIG American International Group Cap Vest Man 3i

Corporate Venture Funds These Venture Capital funds are set up and owned

by technology companies. Their aim is to widen the parent company's technology

base in an win-win-situation for both, the investor and the investee. In general,

corporate funds invest in growing or maturing companies, often when the

investee wishes to make additional investments in echnology or product

development. The average deals size is between USD 2 million and USD 5

million.

large funds will try to improve their position by mergers and acquisitions withother funds to improve size ,reputation and their financial muscle. In addition they

will to diversify. Possible areas to enter are other financial services by means of

M&As with financial services corporations and the consulting business. For the

latter one the funds have a rich resource of expertise and contacts in house. In a

declining market for their core activity and with lots of tumbling companies out

there is no reason why Venture Capital funds should offer advice and consulting

only to their investees .Examples are: Oracle Adobe Dell Kyocera As an

example, Adobe systems launched a $40m venture fund in 1994 to invest in

companies strategic to its core business, such as Cascade Systems Inc and

Lantana Research Corporation.- has been successfully boosting demand for its

core products, so that Adobe recently launched a second $40m fund.

Financial funds:A solution for could be a shift to a higher secursation of Venture Capital activities.

That means that the parent companies shift the risk to their customers by

creating new products such as stakes in an Venture Capital fund. However, the

success of such products will depend on the overall climate and expectations in

the economy. As long as the sown turn continues without any sign of recovery

customers might prefer less risky alternatives.


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Industry shiftsIt is perhaps no surprise that the contraction is mostly concentrated in information

technology and the business, consumer and retail industries, give the huge

number of companies financed in the technology and Internet boom of 1999-

2000, and the subsequent downturn. The healthcare pool, driven by investment

in biopharmaceuticals and medical devices, has actually grown to some degree

in the different geographies .In United States, the healthcare pool has grown

consistently over the last several years, both in terms of number of companies

and cumulative dollars invested. Key observations on the pool of private

companies by industry:-

The information and technology pool has declined by just 6% since

2002; particularly due to increasing Interest in WEB 2.0 innovations.Since 2003, the IT pool has decreased by 27% in Europe and since 2004

17%in Israel. Cumulative investment has declined in similar amounts.

The business, consumer and retail category has faced the steepest declines

across the board. In US the number had fallen 54% since 2002 and 54% in

Europe since 2003 .In Israel; it dropped 67% since 2004.

The number of healthcare companies has grown in U.S. since 2002 by 27%and

the capital risen 30% in last five years. Capital investment to the pool

of healthcare companies in Europe and Israel has also climbed, although the

number of companies dropped by 9%in Europe since 2003 and 9% in Israel

since 2004.

Clean technology is a small but increasing element of the pool. There were262

clean technology companies with a cumulative invested venture capital of US

$38 billion in 2007.

Mega trends

Several global mega trends will likely have an impact on venture capital in thenext decade:-

Beyond the BRICs: - A new wave of fast growing economies is joining the global

growth leaders like Brazil, China, India, and Russia. The beginning of venture


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capital activity has been seen in others countries such as Indonesia, Korea,

Turkey and Vietnam.

The new multinationals: - A new breed of global company is emerging from

developing countries and redefining industries through low-cost advantage,

modern infrastructure, and vast customer databases in their home countries.

These companies are potential acquirers of developed market companies at all

stages of growth.

Globalization of capital:- Changes in economic and financial landscape are

creating a significant regional shifts in IPO activity. These changes have also

sparked global consolidation alliances among stock exchanges.

Transformation of the CFOs role and function:- With the globalization and

increasingly complex regulatory environment, CFOs have a wider range

of responsibilities and finance function has been transformed to face

broader mandates.

Clean Technology: - Clean technology is poised to become the first

break through sector of 21st

Century. Encompassing energy, air and water treatment, industrial efficiency

improvements, new material and waste management etc are playing very vital

role globally because of which VC investors are enjoying rewards.

Investment by stage-

Need for growth of venture capital in India

In India, a revolution is ushering in a new economy, wherein entrepreneurs mind

set is taking a shift from risk averse business to investment in new ideas which

involve high risk. The conventional industrial finance in India is not of much help

to these new emerging enterprises. Therefore there is a need of financing

mechanism that will fit with the requirement of entrepreneurs and thus it needs

venture capital industry to grow in India.


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CHAPTER-4


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Regulatory and legal framework

Definition of Venture Capital Fund :

The Venture Capital Fund is now defined as a fund established in the form of a Trust, a

company including a body corporate and registered with SEBI which: A. Has a

dedicated pool of capital; B. Raised in the manner specified under the regulations; and

C. To invest in venture capital undertakings in accordance with the regulations."

Definition of Venture Capital Undertaking

Venture Capital Undertaking means a domestic company:-a. Whose shares are not

listed on a recognized stock exchange in India b. Which is engaged in business

including providing services, production or manufacture of articles or things, or does not

include such activities or sectors which are specified in the negative list by the Board

with the approval of the Central Government by notification in the Official Gazette in this

behalf?

The negative list

includes real estate, non-banking financial services, gold financing, activities

not permitted under the Industrial Policy of the Government of India.

Minimum contribution and fund size:the minimum investment in a Venture Capital Fund from any investor will not be less

than Rs. 5 lakhs and the minimum corpus of the fund before the fund can start activities

shall be at least Rs. 5 crores.

Investment Criteria

: The earlier investment criteria has been substituted by a new investment criteria which

has the following requirements :

Disclosure of investment strategy;

maximum investment in single venture capital undertaking not to exceed 25% of the

corpus of the fund;

Investment in the associated companies not permitted;


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At least 75% of the investible funds to be invested in unlisted equity shares or equity

linked instruments.

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 sh

aresare 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.

It has also been provided that Venture Capital Fund seeking to avail benefit under the

relevant provisions of the Income Tax Act will be required to divest from the investment

within a period of one year from the listing of the Venture Capital Undertaking.

Disclosure and Information to Investors; In order to simplify and expedite the

process of fund raising, the requirement of filing the Placement memorandum with SEBI

is dispensed with and instead the fund will be required to submit a copy of Placement

Memorandum/ copy of contribution agreement entered with the investors along with the

details of the fund raised for information to SEBI. Further, the contents of the Placement

Memorandum are strengthened to provide adequate disclosure and information to

investors. SEBI will also prescribe suitable reporting requirement from the fund on

their investment activity.

QIB status for Venture Capital Funds:

The venture capital funds will be eligible to participate in the IPO through book building

route as Qualified Institutional Buyer subject to compliance with the SEBI (Venture

Capital Fund) Regulations.

Relaxation in Takeover Code:

The acquisition of shares by the company or any of the promoters from the Venture

Capital Fund under the terms of agreement shall be treated on the same footing as that

of acquisition of shares by promoters/companies from the state level financial

institutions and shall be exempt from making an open offer to other shareholders.


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Investments by Mutual Funds in Venture Capital Funds:

In order to increase there sources for domestic venture capital funds, mutual funds are

permitted to invest upto5% of its corpus in the case of open ended schemes and up to

10% of its corpus in the case of close ended schemes. Apart from raising the resources

for Venture Capital Funds this would provide an opportunity to small investors to

participate in Venture Capital activities through mutual funds.

Government of India Guidelines:

The Government of India (MOF) Guidelines for Overseas Venture Capital Investment in

India dated September 20, 1995 will be repealed by the MOF on notification of SEBI

Venture Capital Fund Regulations.

The following will be the salient features of SEBI (Foreign Venture Capital

Investors) Regulations, 2000 : Definition of Foreign Venture Capital Investor

Any entity incorporated and established outside India and proposes to make

investment in Venture Capital Fund or Venture Capital Undertaking and registered with

SEBI.

Eligibility Criteria

Entity incorporated and established outside India in the form of investment company,

trust, partnership, pension fund, mutual fund, university fund, endowment fund, asset

management company, investment manager, investment management company or

other investment vehicle incorporated outside India would be eligible for seeking

registration from SEBI. SEBI for the purpose of registration shall consider whether the

applicant is regulated by an appropriate foreign regulatory authority; or is an income tax

payer; or submits a certificate from its banker of its or its promoters track record where

the applicant is neither a regulated entity nor an income tax payer.

Hassle Free Entry and Exit:

The Foreign Venture Capital Investors proposing to make venture capital investment

under the Regulations would be granted registration by SEBI.SEBI registered Foreign

Venture Capital Investors shall be permitted to make investment on an automatic route


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within the overall sectoral ceiling of foreign investment under Annexure III of Statement

of Industrial Policy without any approval from FIPB. Further, SEBI registered FVCIs

shall be granted a general permission from the exchange control angle for inflow

and outflow of funds and no prior approval of RBI would be required for pricing,

however, there would be ex-post reporting requirement for the amount transacted.

Trading in unlisted equity :

The Board also approved the proposal to permit OTCEI to develop a trading window for

unlisted securities where Qualified Institutional Buyers(QIB) would be permitted to

participate.

Methods of Venture Financing

Venture capital is typically available in three forms in India, they are:

Equity

All VCFs in India provide equity but generally their contribution does not exceed49

percent of the total equity capital. Thus, the effective control and majority ownership of

the firm remains with the entrepreneur. They buy shares of an enterprise with an

intention to ultimately sell them off to make capital gains.

Conditional Loan:

It is repayable in the form of a royalty after the venture is able to generate sales. No

interest is paid on such loans. In India, VCFs charge royalty ranging between 2 to 15

percent; actual rate depends on other factors of the venture such as gestation period,

cost-flow patterns, riskiness and other factors of the enterprise.

Income Note:

It is a hybrid security which combines the features of both convention all and

conditional loan. The entrepreneur has to pay both interest and royalty on sales, but at

substantially low rates.

Other Financing Methods:

A few venture capitalists, particularly in the private sector, have started introducing

innovative financial securities like participating debentures, introduced by TCFC is an

example.

Venture financing practices and procedures


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Entrepreneurs who need VC financing for their enterprises should have sufficient

information to be able to choose a VC company or fund suitable for their requirement

and have a broad understanding of the procedures required to be followed for obtaining

financial assistance at different stages of implementation of their projects. Basically they

need to develop a business plan or prototype to get venture finance.

The business plan is document that conveys a companys prospects and growth

potential, and thereby sells the business to potential backers. The process is to be

managed just as most other business task is managed. It requires advance preparation,

delegation , refinement, and disciplines do most important business functions

..Companies are increasingly being called on to provide written business plans,

financial backers, especially VCs and other private investors , have long sought

business plans before making investment decisions. In addition, organization

and individuals considering long term relationships with the companies, large

customers, suppliers and distributors are much more inclined to seek written plans. The

business plan process involves gathering accurate and convincing information as well

as carefully outlining the plan before writing. Executives should also determine what

kind of plan they need, ranging from a summary plan full plan or an operating plan.

Once all these considerations have been formulated, the plan is ready for final rewriting

and presentation. Extensive editing is recommended, along with careful attention

to presentation details like the cover and concerns of its likely readers .perhaps most

important, the plan should be used to guide the company. Thus it should be reviewed

and updated. In project appraisal, feasibility of the project is assessed from different

angels with stress on production process and marketability, as the lending institutions

are backed by the security of movable and immovable assets of the borrower and

chiefly concerned with the return of the investment with interest. In venture capital

financing the venture capitalist has a different approach because of equity participation,

risk sharing and involvement in the management of project. Investment by a venture

capitalist indifferent stage of enterprise calls for an analysis of factors related to each

stage. However, the order of preference followed by the venture capitalists in evaluating

of business is under:1 Analysis of management. 2.


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Analysis of organization pattern.3. Analysis of production process.4. Analysis of mark

eting & sales.5. Financial analysis and projections.6. Analysis of reference information.

Venture capital comparison venture capital and alternative-

1.LeasingYour equipment instead of purchasing it outright.

2. Fund From Operations

Look for ways to tweak your business in order to reduce the cash flowing out and

increase the cash flowing in. Funding found in business operations come free of finance

charges, can reduce future financing charges and can increase the value of your

business. Month-by-month operating and cash projections will show how well we have

planned, how you can optimize the elements of your business that generate cash and

allow you to plan for new investments and contingencies.

3. Licensing

Sell licenses to technology that is non-essential to our company or grant limited

licensing to essential technology that can be shared. Through out licensing we can

generate revenue from up-front fees, access fees, royalties or milestone payments.

4. Vendor Financing

Similar to the trade credit related to bootstrap financing, vendors can splay a big role in

financing your new business. Establish vendor relationships through our trade

association and strike deals to offer their product and pay for it at a date in the near

future. Selling the product in time is up to us. In hopes of keeping you as a customer,

vendors may also be willing to work out an arrangement if we need to finance

equipment or supplies. Just make sure to look for stability when you research a

vendors credentials and reputation before you sign any kind ofagreement. And keep in

mind that many major suppliers (GE Small Business Solutions, IBM Global Financing)

own financial companies that can help you.5. Self Funding

Search between the couch cushions and in old jacket pockets for whatever extra

money you might have lying around and invest it into your business. Obviously loose

change will not be enough for extra business funding, but take a look at your savings,

investment portfolio, retirement funds and employee buyout options from your previous


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employer. You wont have to deal with any creditors or interest and the return on your

investment could be much higher. However, make sure that you consider the risks

involved with using your own resources. How competitive is the market that you are

about to enter into? How long will it take to pay yourself back? Will you be able to pay

yourself back? Can you afford to lose everything that you are investing if your business

were to fail?

Its important that your projected returns are more than enough to cover the risk that you

will be taking.

6. SBIR and STTR Programs

Coordinated by the SBA, SBIR (Small Business Innovation Research) and

STTR (Small business Technology Transfer) programs offer competitive federal funding

awards to stimulate technological innovation and provide opportunities for

small businesses. You can learn more about these programs at SBIRworld.com.

7. State Funding

If youre not having any luck finding funding from the federal government take a look at

what your state has to offer. There is a list of links to state development agencies that

offer an array of grants and financial assistance for small businessessonsAbout.com..8.

8. Community Banks

These smaller banks may have fewer products than their financial institution

counterparts but they offer a great opportunity to build banking relationships and are

generally more flexible with payment plans and interest rates.

9. Microloans

These types of loans can range from hundreds of dollars to low six-figure amounts.

Although some lenders regard microloans to be a waste of time because the amount is

so low, these can be a real boon for a startup business or one that just needs to add

some extra cash flow.

10. Finance Debt

It may be more expensive in the long run than purchasing, but financing

your equipment, facilities and receivables can free up cash in the short term or reduce

the amount of money that you need to raise.


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11. Friends

Ask your friends if they have any extra money that they would like to invest .Assure

them that you will pay them back with interest or offer them stock options or a share of

the profits in return.

12. Family

Maybe you have a rich uncle or a wealthy cousin that would be willing to lend you some

money get your business running or send it to the next level. Again, make it worth their

while by offering interest, stocks or a share of the profits.

13. Form A Strategic Alliance

Aligning your business with a corporation can produce funding from upfront or access

fees to your service, milestone payments and royalties. In addition, corporate partners

may be able to provide research funding, loans and equity investments.

14. Sell Some Assets

Find an interested party to buy some of your assets (computers, equipment, real

estate, etc) and then lease them back to you. This provides an instant source ofcash

and you will still be able to use whatever assets you need.

15. Business Lines of Credit

If your business has positive cash flow and has proven that it will cover its debts then

you may be eligible for a business line of credit. This type of financing is a common

service offered by most business banks and serves as business capital, up to an agreed

upon amount, that you can access at any time.

16. Personal Credit Cards

Using personal credit cards to finance a business can be risky but, if you take the right

approach, they can also give your business a lift. You should only consider using this

type of financing for acquiring assets and working capital. Never consider this to be a

long-term option. Once your company breaks

Documents

STATUS OF VENTURE CAPITAL IN INDIA