project report on venture capital in india

7/28/2019 Project Report on venture capital in India

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FINAL REPORT

ONSTUDY OF VENTURE CAPITAL

IN INDIA

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Acknowledgement

I am deeply indebted to my Project Coordinator Prof for her valuablesuggestion, able guidance and constant encouragement throughout theProject.

I would also like to thank all others who helped me directly andindirectly during this project.

.-

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DECLARATION

I, hereby declare that the project work titled To Study theventure capital in India is original work done by me and submittedto the Punjab Technical University for the fulfillment ofrequirements for the award of Master of Business Administration(finance) is a record of original work done under the supervision of

prof

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Certificate by the Guide

This is to certify that the project work titled To Studyof venturecapital in india is a bonafide work of . is carried out in a partialfulfillment for the award of Master of Business AdministrationManagement of Punjab Technical University under my guidance. This

project has not been submitted earlier for the award of any degree/diploma of any other Institute/ University.

Place:Date:

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CONTENTS:

PARTICULARS PAGE NO

Introduction 6-26

Venture capital India 27-33

Literature Survey 35-36

Research methodology 38

Objectives 39-46

Findings 48

Limitations 50

Suggestions 52

Conclusion 54

Bibliography 55

Annexure

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Introduction

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INTRODUCTION

VENTURE:

A business project or activity specially one that involves risk.

CAPITAL:

Fund employed in any business activity.Most important factor of production.

No economic entity can function without capital.

VENTURE CAPITAL:

Venture capital is a type ofprivate equity capital typically provided byprofessional, outside investors to new, growth businesses

VENTURE CAPITALISTS:

A venture capitalist (VC) is a person who makes such investments,these include wealthy investors, investment banks, other financialinstitutions other partnerships.

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Venture capital is a means of financing fast-growing private companies.Finance may be required for:

The start up,

Development/ expansion, &Modernization

Of a company. Growing businesses always require capital. There are anumber of different ways to fund growth.

These include the owner's own capital, arranging debt finance orseeking an equity partner, as is the case with venture capital.With venture capital, the venture capitalist acquires an agreed proportion ofthe equity of the company in return for the requisite funding. Equity finance

offers the significant advantage of having no interest charges. It is patientcapital that seeks a return through long-term capital gain rather thanimmediate and regular interest payments.

Venture capital investors are exposed, therefore, to the risk of thecompany failing. As a result the venture capitalist have to invest incompanies that have the ability to grow very successfully and give higher-than-average returns to compensate for the risk.

Venture Capital may be a viable source of financing for a business.

While they generally invest in businesses that are more established andongoing, some do fund start-ups. In general they tend to invest in high-technology businesses such as research and development, electronics andcomputers. Venture Capitalists deal more in large sums of money,numbering into the millions of dollars, so they are generally well suited to

businesses that are going grand from the start or have grown and requiregigantic expansion

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TASKS OF VENTURE CAPITALISTS:

When venture capitalists invest in a business they :

Become part-owners and typically require a seat on the

company's board of directors.

They tend to take a minority share in the company and

usually do not take day-to-day control.

Professional venture capitalists act as mentors and aim to

provide support and advice on a range of managementand technical issues.

Assist the company to develop its full potential.

The management support is the most importantcontribution of a venture capitalist. There are manysources of capital, but only a venture capitalist can

provide experienced management input gained byhelping many other companies successfully conquer theinevitable problems and growing pains.

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HISTORY

Beginnings of modern venture capital:

The earliest origins of venture capital can be traced back to the medievalIslamic mudaraba partnership. In terms of protecting the entrepreneur,sharing the risks, losses and profits the two systems of finance areremarkably similar.

General Georges Doriot is considered to be the father of the modernventure capital industry.

In 1946, Doriot co-founded American Research and

Development Corporation (AR&DC) with RalphFlanders, Karl Compton and others, the biggest successof which was Digital Equipment Corporation.

When Digital Equipment went public in 1968 it providedAR&DC with 101% annualized Return on Investment(ROI). AR&DCs $70,000 USD investment in DigitalCorporation in 1957 grew in value to $355 million USD.

It is commonly accepted that the first venture-backed

startup is Fairchild Semiconductor, funded in 1959 byVenrock Associates. Venture capital investments, beforeWorld War II, were primarily the sphere of influence ofwealthy individuals and families.

Small Business Administration 1958. One of the firststeps toward a professionally-managed venture capitalindustry was the passage of the Small BusinessInvestment Act of 1958. The 1958 Act officially allowedthe U.S. Small Business Administration (SBA) to license

private "Small Business Investment Companies" (SBICs)to help the financing and management of the small

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entrepreneurial businesses in the United States. Passageof the Act addressed concerns raised in a Federal ReserveBoard report to Congress that concluded that a major gap

existed in the capital markets for long-term funding forgrowth-oriented small businesses. Facilitating the flow ofcapital through the economy up to the pioneering smallconcerns in order to stimulate the U.S. economy was andstill is the main goal of the SBIC program today.

Generally, venture capital is closely associated with technologicallyinnovative ventures and mostly in the United States. Due to structuralrestrictions imposed on American banks in the 1930s there was no private

merchant banking industry in the United States, a situation that was quiteexceptional in developed nations.

As late as the 1980s Lester Thurow, a noted economist, decried theinability of the USA's financial regulation framework to support anymerchant bank other than one that is run by the United States Congress inthe form of federally funded projects. These, he argued, were massive inscale, but also politically motivated, too focused on defense, housing andsuch specialized technologies as space exploration, agriculture, andaerospace.

US investment banks were confined to handling large M&Atransactions, the issue of equity and debt securities, and, often, the breakupof industrial concerns to access theirpension fund surplus or sell offinfrastructural capital for big gains.

Not only was the lax regulation of this situation very heavily criticized atthe time, this industrial policy differed from that of other industrializedrivalsnotably Germany and Japanwhich at that time were gainingground in automotive and consumer electronics markets globally. However,

those nations were also becoming somewhat more dependent on centralbank and elite academic judgment, rather than the more diffuse way thatpriorities were set by government and private investors in the United States.

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ROLES WITHIN A VENTURE CAPITAL

FIRM

1. Venture capital general partners: (Also known in this case as "venturecapitalists" or "VCs") are the executives in the firm. In other words theinvestment professionals. Typical career backgrounds vary, but VCs comefrom either an operational or a finance background.

VCs with an operational background tend to be former chiefexecutives at firms similar to those which the partnership finances and othersenior executives in technology companies.VCs with finance backgroundscome from investment banks, M&A firms, and other firms in the corporateinvestment and finance space.

2. Limited partners: Investors in venture capital funds are known as limitedpartners. This constituency comprises both high net worth individuals andinstitutions with large amounts of available capital, such as state and private

pension funds, insurance companies, and pooled investment vehicles,called fund of funds ormutual funds.

3. Venture partners and entrepreneur-in-residence (EIR): Otherpositions at venture capital firms include venture partners andentrepreneur-in-residence (EIR).Venture partners "bring in deals" andreceive income only on deals they work on (as opposed to general partners

who receive income on all deals).

EIRs are experts in a particular domain and perform due diligence onpotential deals. EIRs are engaged by VC firms temporarily (six to 18months) and are expected to develop and pitch startup ideas to their hostfirm (although neither party is bound to work with each other). Some EIR's

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move on to roles such as Chief Technology Officer (CTO) at a portfoliocompany.

4. Associate: The "associate" is the typical apprenticewithin a venture capital firm. After a few successfulyears, an associate may move up to the "seniorassociate" position. The next step from seniorassociate is "principal," typically a partner track

position. Alternatively, there are many pre-MBAassociate roles that are used solely for the purpose ofdeal sourcing, and the associate is usually expected tomove on after two years.

.

STRATEGIC ROLES

Serving BoardBusiness ConsultantFinancier

NETWORKING ROLES

Management recruiter

Professional contact

Industrial contact

SOCIAL/ SUPPORTIVE

Coach/ Mentor

Conflict resolver

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FEATURES OF VENTURE CAPITAL

The main features of venture capital are:

Long-time horizon: In general, venture capital undertakings take a longertime say, 5-10 years at a minimum to come out commerciallysuccessful; one should, thus, be able to wait patiently for the outcome of theventure.

Lack of liquidity: Since the project is expected to run at start-up stage forseveral years, liquidity may be a greater problem.

High risk: The risk of the project is associated with management, productand operations.

Unlike other projects, the ones that run under the venture finance may besubject to a higher degree of risk, as their result is uncertain or, at best,

probable in nature.

High-tech: Venture capital finance caters largely to the needs of first-generation entrepreneurs who are technocrats, with innovative technological

business ideas that have not so far been tapped in the industrial field.

However, a venture capitalist looks not only for high-technology but the

innovativeness through which the project can succeed.

Equity participation and capital gains: A venture capitalist invests hismoney in terms of equity or quasi-equity. He does not look for any dividendor other benefits, but when the project commercially succeeds, then he canenjoy the capital gain which is his main benefit. Otherwise, he will be losinghis entire investment.

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Participation in management: Unlike the traditional financier or banker,the venture capitalist can provide managerial expertise to entrepreneurs

besides money. Since many innovations and inventions cannot be

commercialized due to lack of finance, venture capital finance acts as astrong impetus for entrepreneurs to develop products involving newertechnologies and to commercialize them.

Factor to be consider by venturecapitalist iselection of Investmentproposal

.Therearebasicallyfourelementsinfinancingofventureswhicharestudiedindepthbytheventurecapitalists.Theseare:

1.Management

: Thestrength,expertise&unityofthe keypeopleontheboardbringSignificantcredibilitytothecompany.Themembersaretobemature,Experienced possessingworking

knowledgeof businessandcapableof taking potentially

high risks.

2.Potential of capital gain

Anaboveaveragerateof returnof about3040%is requiredbyventurecapitalists.Therateof returnalsodependsuponthestageof the businesscyclewherefundsarebeing deployed.Earlier stage, higher istherisk andhencethereturn.

3.RealisticFinancialRequirementandProjections:Theventurecapitalistrequiresarealisticviewaboutthepresenthealth of theorganizationaswellasfuture projectionsregardingscope,natureandperformancethecompanyintermsof scaleof operations,op

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eratingprofitandfurther costsrelatedtoproductdevelopmentthroughResearch&Development.

4.Owner'sFinancialStake:

Thefinancialresourcesowned&committedbytheEntrepreneur/owner inthebusinessincludingthefundsinvested

byfamily,friendsandrelativesplayaveryimportantroleinincreasingtheviabilityof the Business.ItisanimportantavenuewheretheventureCapitalistkeepsanopeneye.

ACCESSING THE VENTURE CAPITAL

Venture capital has been in India for quite some time. The rejection ratio is very high,out of a 100 proposals received only 1 gets funded. The standard parameters used byventure capitalists are very similar to any investment decision. The only differencebeing exit. If one buys a listed security, one can exit at a price but with an unlistedsecurity, exit becomes difficult. The key factors which they look for in

1. The Management

2. The Idea3. Valuation4. Exit

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KEY FACTORS FOR THE

SUCCESS:

The key factors for the success of any project under the consideration of aventure capitalist are:

Clear and objective thinking;

Operational experience, especially in a start-up;

Firm grasp of numbers of numbers;

People management skills;

Ability to spot technology and market trends;

Wide network of contacts;

Knowledge of all facets of business marketing,

Finance and HR;

Judgment to evaluate them on the basis of integrity andability;

Patience to pursue the final goal;

Drive to guide budding entrepreneurs; and

Empathy with entrepreneurs.

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ADVANTAGES OF VENTURE CAPITAL

Venture capital has made significant contribution to technologicalinnovations and promotion of entrepreneurism. Many of the companies likeApple, Lotus, Intel, Micro etc. have emerged from small business set up by

people with ideas but no financial resources and supported by venturecapital. There are abundant benefits to economy, investors and entrepreneurs

provided by venture capital.

Economy Oriented-

Helps in industrialization of the country

Helps in the technological development of the country

Generates employment

Helps in developing entrepreneurial skills

Investor oriented-

Benefit to the investor is that they are invited to invest

only after company starts earning profit, so the risk is lessand healthy growth of capital market is entrusted.

Profit to venture capital companies.

Helps them to employ their idle funds into productive

avenues.

Entrepreneur oriented:

Finance - The venture capitalist injects long-term equity

finance, which provides a solid capital base for futuregrowth. The venture capitalist may also be capable of

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providing additional rounds of funding should it berequired to finance growth.

Business Partner - The venture capitalist is a business

partner, sharing the risks and rewards. Venture capitalistsare rewarded by business success and the capital gain.

Mentoring - The venture capitalist is able to provide

strategic, operational and financial advice to the companybased on past experience with other companies in similarsituations.

Alliances - The venture capitalist also has a network of

contacts in many areas that can add value to thecompany, such as in recruiting key personnel, providing

contacts in international markets, introductions tostrategic partners and, if needed, co-investments withother venture capital firms when additional rounds offinancing are required.

Facilitation of Exit - The venture capitalist is experienced

in the process of preparing a company for an initialpublic offering (IPO) and facilitating in trade sales.

ADVANTAGES

ENTREPRENEUR ECONOMYORIENTED

INVESTOR

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WHAT DO VENTURE CAPITALISTS

LOOK FOR WHILE INVESTING?

1. A GROWING MARKET: The venture capitalists see whether thecompany is targeting a substantial and rapidly growing market. Does thecompany have a reasonable chance to successfully enter the market andobtain a strong market position?

2. A UNIQUE PRODUCT: Is the company having a proprietary ordifferentiated product? Does the product offer benefits over existing

products? Does it have patent or other proprietary protection to forestallcompetitors?

3.IPO CANDIDATE OR ACQUISITION TARGET: Whether the companyhas the possibility of growing quickly and becoming an attractive acquisitiontarget or IPO candidate? Venture capitalists are concerned about how theywill realize liquidity and receive value for their investment.

4.SOUND BUSINESS PLAN: Is the company's strategy and business plan

sound? Venture capitalists expect to see a well-thought-out, coherentbusiness plan.

5.SIGNIFICANT GROSS PROFIT MARGINS: Can the product or servicegenerate significant gross profit margins (40 percent or more)? Large profitmargins give a company room for error and enhance its attractiveness for a

possible IPO or acquisition.

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6. HOME RUN POTENTIAL: Finally, the venture capitalist wants to seethe possibility of hitting a "home run" by investing in the company. Mostventure capitalists won't be interested unless the company can grow to at

least $25 million in sales within five years.

.

METHODS OF VENTURE FINANCING

A pre-requisite for the development of an active venture capital industryis the availability of a variety of financial instruments which cater to thedifferent risk-return needs of investors. They should be acceptable toentrepreneurs as well.

Venture capital financing in India took four forms:-

Equity

Conditional Loan

Convertible Debentures

Cumulative Convertible Preference Share

Equity:-

All VCFs in India provides equity. When a venture capitalist contributesequity capital, he acquires the status of an owner, and becomes entitled to ashare in the firms profits as much as he is liable for losses.

The advantage of the equity financing for the company seeking venturefinance is that it does not have the burden of serving the capital, as dividends

will not be paid if the company has no cash flows.The advantage to the VCFs is that it can share in the high value of theventure and make capital gains if the venture succeeds.

Conditional Loans:-

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A conditional loan is repayable in the form of a royalty after the ventureis able to generate sales. No interest is paid on such loans. In India, VCFscharged royalty ranging between 2-15%.

Convertible Debentures & Cumulative Convertible Preference Shares:-

Convertible Debentures and Convertible Preference Shares require anactive secondary market to be attractive securities from the investors pointof view.

In the Indian context, both VCFs and entrepreneurs earlier favored afinancial package which has a higher component of loan. This was becauseof the promoters fear of loss of ownership and control to the financier and

because of the traditional reluctance and conservation of financier to share inthe risk inherent in the use of equity.Cumulative Convertible Preference Shares are particularly attractive in theIndian context since CPP shareholders do not have a right to vote. They are,however, entitled to voting if they do not receive dividend consequently fortwo years.

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PROCESS OF VENTURE CAPITAL

Venture capital investment activity is a sequential process involving fivesteps:

1. Deal origination2. Screening3. Evaluation or due diligence4. Deal structuring5. Post-investment activities and exit

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1. Deal origination A continuous flow of deals is essential for the venturecapital business. Deals may originate in various ways. Referral system is animportant source of deals. Deals may be referred to the VCs through their

parent organizations, trade partners, industry associations, friends etc.

The venture capital industry in India has become quite proactive in itsapproach to generating the deal flow by encouraging individuals to come upwith their business plans. Consultancy firms like Mckinsey and Arthur

Anderson have come up with business plan competitions on an all Indiabasis through the popular press as well as direct interaction with premiereducational and research institutions to source new and innovative ideas.The short listed plans are provided with necessary expertise through peoplewho have experience in the industry.

DEAL ORIGINATION

SCREENING

DUE DILIGENCE

DEAL STRUCTURING

POST INVESTMENT

ACTIVIES/ EXIT

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2. Screening VCFs carry out initial screening of all projects on the basis ofsome broad criteria. For example the screening process may limit projects toareas in which the venture capitalist is familiar in terms of technology, or

product, or market scope. The size of investment, geographical location andstage of financing could also be used as the broad screening criteria.

3. Evaluation or due diligence Once a proposal has passed through initialscreening, it is subjected to a detailed evaluation or due diligence process.Most ventures are new and the entrepreneurs may lack operating experience.Hence a sophisticated, formal evaluation is neither possible nor desirable.

The VCs thus rely on a subjective but comprehensive, evaluation. VCFsevaluate the quality of the entrepreneur before appraising the characteristicsof the product, market or technology. Most venture capitalists ask for a

business plan to make an assessment of the possible risk and expected returnon the venture. Following points are taken into consideration while

performing due diligence. These include-

BACKROUND

MARKET AND COMPETITORS

TECHNOLOGY AND MANUFACTURING

MARKETING AND SALES STRATEGY

ORGANIZATION AND MANAGEMENT

FINANCE AND LEGAL ASPECT

Investment Valuation The investment valuation process is aimed atascertaiing an acceptable price for the deal. The valuation process goesthrough the following steps:

Projections on future revenue and profitability

Expected market capitalization

Deciding on the ownership stake based on the return

expected on the proposed investment

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The pricing thus calculated is rationalized after taking in toconsideration various economic scenarios, demand and supply ofcapital, founder's/management team's track record, innovation/

unique selling propositions (USPs), the product/service size ofthe potential market, etc.

4. Deal Structuring Once the venture has been evaluated as viable, theventure capitalist and the investment company negotiate the terms of thedeal, i.e. the amount, form and price of the investment. This process istermed as deal structuring.

The agreement also includes the protective covenants and earn-outarrangements. Covenants include the venture capitalists right to control theinvestee company and to change its management if needed, buy backarrangements, acquisition, making initial public offerings (IPOs) etc, Earn-out arrangements specify the entrepreneur's equity share and the objectivesto be achieved.

Venture capitalists generally negotiate deals to ensure protection of theirinterests. They would like a deal to provide for:

A return commensurate with the risk

Influence over the firm through board membership Minimizing taxes

Assuring investment liquidity

The right to replace management in case of consistent

poor managerial performance.

The investee companies would like the deal to be structured in such away that their interests are protected. They would like to earn reasonablereturn, minimize taxes, have enough liquidity to operate their business and

remain in commanding position of their business.

There are a number of common concerns shared by both the venturecapitalists and the investee companies. They should be flexible, and have astructure, which protects their mutual interests and provides enoughincentives to both to cooperate with each other.

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The instruments to be used in structuring deals are many and varied. Theobjective in selecting the instrument would be to maximize (or optimize)venture capital's returns/protection and yet satisfy the entrepreneur's

requirements. The different instruments through which a Venture Capitalistcould invest a company include: Equity shares, preference shares, loans,warrants and options.

5. Post-investment Activities and Exit Once the deal has been structuredand agreement finalized, the venture capitalist generally assumes the role ofa partner and collaborator. He also gets involved in shaping of the directionof the venture. This may be done via a formal representation of the board ofdirectors, or informal influence in improving the quality of marketing,

finance and other managerial functions.

The degree of the venture capitalists involvement depends on his policy.It may not, however, be desirable for a venture capitalist to get involved inthe day-to-day operation of the venture. If a financial or managerial crisisoccurs, the venture capitalist may intervene, and even install a newmanagement team.

Venture capitalists typically aim at making medium-to long-term capitalgains. They generally want to cash-out their gains in five to ten years after

the initial investment. They play a positive role in directing the companytowards particular exit routes. A venture capitalist can exit in four ways:

Initial Public Offerings (IPOs)

Acquisition by another company

Repurchase of the venture capitalist ? share by the

investee company

VENTURE CAPITAL SCENARIO IN INDIA

1972: The Committee on Development of Small and MediumEntrepreneurs, under the chairmanship of Mr. R. S. Bhatt, first highlightedventure capital financing in India.

1975: venture capital financing was introduced in India by thefinancial institutions with the inauguration of Risk Capital Foundation

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(RCF), sponsored by IFCI with a view to encouraging technologists andprofessionals to promote new industries.

1976: The seed capital scheme was introduced by IDBI.

1983: The Technology Policy statement of the Government set theguidelines for technological self-reliance by encouraging thecommercialization and exploitation of technologies developed in thecountry. Till 1984 venture capital took the form of risk capital and seedcapital.

1986: ICICI launched a venture capital scheme to encourage newtechnocrats in the private sector in emerging fields of high-risk technology.

1986-87: the Government levied a 5 per cent cess on all know-howpayments to create a venture capital fund by IDBI. ICICI also became apartner of the venture capital industry in the same year.

1988-89:

The first attempt to frame comprehensive guidelines

governing venture capital funds was. Even under these

guidelines, only all India financial institutions, allscheduled banks including foreign banks operating inIndia, and the subsidiaries of the above were eligible toset up venture capital funds/companies.

IFCI sponsored RCF was converted into the Risk Capital

and Technology Finance Corporation of India Ltd.

Unit Trust of India sponsored venture capital unit

schemes. State Bank of India has a venture capitalscheme operated through its subsidiary SBI Caps.

ICICI flagged off a new venture capital company called

TechnologyDevelopment and Information Company ofIndia with the objective of encouraging new technocratsin the private sector in high-risk areas.

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The first scheme floated by Canara Bank had

participation by World Bank. About the same time, twoState level corporations, viz., Andhra Pradesh andGujarat also took initiatives to promote venture capitalfunds and could obtain World Bank assistance. A foreign

bank set up a Venture Capital Fund in 1987. In addition,other public sector banks have participated in the equityshare capital of venture capital companies or invested inschemes of venture capital funds.

Several venture capital firms are incorporated in India and they arepromoted either by financial institutions, such as IDBI, ICICI, IFCI, State-

level financial institutions and public sector banks, or promoted by foreignbanks/private sector financial institutions such as Indus Venture CapitalFund, Credit Capital Venture Fund, and so on. Hence, the total pool ofIndian venture capital today stands over Rs 5,000 crore.

VENTURE capital, the new-age finance, is gaining importance in theIndian economy as traditional financial institutions and commercial banksare hamstrung by inadequacy of equity capital, focus on low-risk ventures,conservative approach, and delays in project evaluation.

Venture capital is also often described as "the early stage financing ofnew and young enterprises seeking to grow rapidly".

The Indian government sets up a venture

capital fund

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The Indian government has reiterated its commitment to the Indian software-driven ITindustry by creating a National Venture Capital Fund for the Software and IT Industry(NFSIT). NFSIT, set up in association with various financial institutions and the industry,operates under the umbrella of the Small Industries Development Bank of India (SIDBI).The objective of the fund is to encourage entrepreneurship in the areas of software,services, dot.com and other IT related sectors in which India has inherent as well asacquired competency. The fund was launched by prime minister Atal Behari Vajpayee,who has emerged as a strong proponent of India's software-driven IT industry. The fundis expected to be a key component in addressing the rapidly growing demand for venturecapital in India. The fund will be looking at supporting entrepreneurship in high growthsectors.Many state governments have already set up venture capital funds for the ITsector in partnership with local state financial institutions and SIDBI. These includeAndhra Pradesh, Karnataka, Delhi, Kerala and Tamil Nadu.

STRUCTURE OF VENTURE CAPITAL

INDUSTRY

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The Venture capital firms in India can be categorized into the following four

groups:

All India Developmental Financial Institutions sponsored VentureCapital Funds promoted by the all-India development financial institutions such asTechnology Development and Information Company of India Limited(TDICI) byICICI, Risk Capital Technology Financial Corporation Limited (RCTCF) by IFCI andRisk Capital Fund by IDBI.

State Finance Corporations sponsored Venture Capital Fundspromoted by the state-level developmental financial institutions such as GujaratVenture Capital Limited (GVCL) and Andhra Pradesh Industrial DevelopmentCorporations, Venture Capital Limited (APIDC-VCL).

Bank-sponsored Venture Capital Funds promoted by public sectorbanks such as Can finance and SBI Caps.

Private Venture Capital Funds promoted by the foreignbanks/private sector companies and financial institutions such as Indus Venture CapitalFunds, Credit Capital Venture Funds and Grindlays India Development Fund.

Objectives of VCFs in India

The objective of Indian venture Capital Funds are:

financing and development of high technology businesses,

to provide financial assistance for attaining commercial application ofindigenous technology or adapting imported technology for widerdomestic application,

to provide risk capital to first generation entrepreneurs for setting up industrialprojects and to accelerate the pace and quality of technological innovations forproducts having application in industry, agriculture, health, energy and other areasbeneficial to the development process in India.

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Major player of venture capital India

IDBI Venture Capital Fund

This was established in1986 with the objective to finance projects whoserequirements range between Rs. 5 lakhs to 2.5 crores. The promotersstake should be at least 10percent for the ventures below Rs. 50 lakhs and15percent for those above 50 lakhs. Financial assistance is extended in theform of unsecured loans involving minimum legal formalities. Interest atconcessional rate of 9percent is charged during technology developmentand trial run of production stage and it will be 17percent once the productis commercially traded in the market by the financially assisted firm. IDBIventure capital funds extends its financial assistance to the ventures likely

to be engaged in the fields of chemicals, computer software, electronics,bio-technology, non-conventional energy, food products, refractories andmedical equipments.

Technology Development and Information Company of India

Limited (TDICI)

This venture Capital fund was jointly floated by Industrial Credit &Investment Corporation of India (ICICI) and Unit Trust of India (UTI) to

finance the projects of professional technocrats who take initiative indesigning and developing indigenous technology in the country.Technology Development and Information Company of India Limited(TDICI) was launched with an authorized capital base of Rs. 20 crores andthe same was targeted to be increased to Rs. 40 to 50 crores. TDICIfavours the firms seeking financial assistance for developing informationtechnology, management consultancy, pharmaceutical, veterinarybiological, environmental, engineering, non-conventional sources ofenergy and other innovative services in the country.

Unit Trust of India (UTI)

In 1988-99 UTI set-up a venture capital fund of Rs. 20 crores incollaboration with ICICI for fostering industrial development. TDICIestablished by UTI jointly with ICICI acts as an advisor and manager ofthe fund. UTI launched venture capital unit scheme (VECAUS-I) to raiseresources for this fund. It has set up a second venture capital fund in

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March 1990 with a capital of Rs. 100 crores with the objective offinancing green field ventures and steering industrial development.

Risk Capital and Technology Finance Corporation Ltd. (RCTFC)

IFCI had sponsored in 1985, Risk Capital Foundation (RCF) to givepositive encouragement to the new entrepreneurs. RCF was converted intoRCTFC on 12th January, 1988. It provides both risk capital andtechnology finance and roof to innovative entrepreneurs and technocratsfor their technology oriented ventures.

Small Industrial Development Bank of India (SIDBI)

Small Industrial Development Bank of India (SIDBI)has decided to set-up

a venture capital fund in July 1993, exclusively for support toentrepreneurs in the small sector. Initially a corpus has been created bysetting apart Rs. 10 crores. The fund would be augmented in future,depending upon requirements.

Andhra Pradesh Industrial Development Corporation (APIDC)

APIDC Venture Capital Ltd. (APIDC-VCL) was promoted by APIDCwith an authorized capital of Rs.2 million on 29th August 1989. Its main

objective is to encourage technology-based ventures particularly thosestarted by first generation technocrat entrepreneurs and ventures involvinghigh risk in the state of Andhra Pradesh.

Gujarat Venture Finance Limited(GVFL)

GVFL has been promoted by the Gujarat Industrial InvestmentCorporation Limited (GIIC) in 1990, to provide financial support to theventures whose requirements range between 25 lakhs and 2 crores. Totalcorpus of Rs. 24 crores of the referred venture capital fund was co-financed by GIIC, state financial corporation, some private corporates andWorld Bank. The firms engaged in biotechnology, surgical instruments,conservation of energy and food processing industries are financed byGVFL.

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Commercial Banks Sponsored Venture Capital Funds

State Bank of India, Canara Bank, Grindlays Bank and many other banks haveparticipated in the venture capital fund building Industry in order to provide financialassistance to the projects associated with high risks. SBI venture capital is monitoredthrough SBI capital markets. Canbanks venture capital functions through Canbank.Financial services and India Investment Fund represents the venture capital launched byGrindlays Bank

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Literature Review

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Literature Review

AccordingtoChary,(September2005)

Therehasbeenaplethoraof literatureonventurecapitalfinance,whichishelpingthe practitionersviz.,venturecapitalfinancecompaniesandfundmanagefor

better understandingtheroleof venturecapitalineconomicdevelopment.Therear

enumber of studiesontheventurecapitalandactivitiesof venturecapitalistsindevelopedcountries.

AccordingtoVijayalakshman&Dalvi,((Jan., 2006)

Whenever Indianpolicymakershavetoencourageanyindustry.Theusualpracticeistograntthattheindustrytaxbreaksfor alimitedperiod.Thisdefinitelyactsasa positiveincentivefor thatindustry.However,whatisrequiredisathroughunderstandingof theindustryrequirementframingandimplementationof aggregativestr

ategyfor itsdevelopment.VCfundsarenotevenregisteredwithSEBIinspiteof allthebenefitavailable.VCindustryisone,whichwilltodayprepareabasefor astrongtomorrow.Whatisneedfor thedevelopmentof VCindustryisnotonlytax breaksbutsimpler procedureslegislationfor simplifiedexitforminvestment,moretransparencyandlegalbackingtoparticipateinbusinessamongstotherthings.

AccordingtoKumar,(July, 2005)

Oneof theintegralaspectsof venturefundingisventurecapitalist'sinvolvementwiththeentrepreneurialteam.TherelationshipthroughbroadinteractionwasexploredbyRosenstein(1988).Acomparisonwasdrawnbetweensmallandlargefirmswithregardtoboardinteraction.Whileitisimportantinlargefirmstherelative

power of smallconventionalfirms,boardinteractiongenerallyisundermined.Rosensteinet.a.(1993)studiedthefiner aspectsof boardsintheventurefundedcompaniesintheUSA.From98candidatesinthesample,thestudyattemptedtobringoutt

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hechangesintheboardsize,boardcompositionandcontrolandtheir relationtovalueaddedtothefundedunit.Theempiricalanalysisyieldedresultswhereinthesizeof theboardincreasedafter venturefunding,indicatingmoretransparencyinboard

operations.ThroughacasebasedapproachLloydet.al.(1995)exploredtheaspectof dealstructuringandpostinvestmentstagingof venturecapitaliststhrough

venture

AccordingtoMishra,(July2004)

Thereisabundantempiricalresearchconductedindevelopedcountrieswhichaddre

sstherelativeinvestmentevaluationcriteriatakenintoaccountinthescreeningprocessfor newventureinvestmentproposals.Zopunidis(1994)providesausefulsummaryof thepreviousresearchinthisfield.Theidentificationof selectioncriteriahasbeenresearchedusingdifferentmethodologiessuchassimpleratingof criteria(perpetualanddealspecificresponses)Knight,1986;Dixon,1991;HallandHofer,1993;Rah,JungandLee,1994), constructanalysis(FriedandHisrich,1994),verbalprotocols(ZhacharakisandMeyer,1998),andquantitativecompensatorymodels(Muzyka,BirleyandLeleux,1996;Shepherd,1999).Multimethods(caseanalysis,studyof administrativerecords,publishedinterviews,questionnaireandpersonali

nterviews)approachhasalsobeenused(Riquelme,1994)toenhanceunderstandingof investmentcriteriaandalsoextendittoother aspectsof investmentprocesslikedealstructuringanddivestment.

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RESEARCH

METHODOLOGY

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Research Methodology

Acc. to Kerlinger,

R e s e a r c h d e s i g n i s t h e p l a n s t r u c t u r e &s t r a t e g y o f investigation conceived so as to obtain answers toresearch questions and to control varianc

Researchdesign:- Exploratory research

Data collection: - secondary data

SecondarydataisthedatawhichisalreadycollectedbysomeoneandcompliedFor differentpurposeswhichareusedinresearchfor thisstudy.Itincludes:-

Internet

Magazine

Journal

Newspaper

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Objective of the Study

TofindouttheventurecapitalinvestmentvolumeinIndia.

TostudytheproblemfacedbyventurecapitalistinIndia.

Tostudythefutureprospectsof venturecapitalfinancing

OBJECTIVE NO 1

To find out the venture capital investment vol in india Method of financing

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Instrument Rs million %

equity share 6318.12 63.8Redeemable preference share 2154.46 21.54

Nonconvertible debt 873.01 8.73

Convertible instrument 580.02 5.8

Other instrument 75.85 0.75

Total 10,000.46 100

Interpretation:

Thisdiagramshowstheventurecapitalfinancinginequityshareandsecondlytheyinvestinredeemablepreferencesharestogethigher returns

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Contributor of funds

Contributor Rs mm %

Foreign institution investor 13426.47 52.46All India financial institution 6252.90 24.43

MultilateralDevelopment agencies 2133.64 8.34

Other banks 1541 .00 6.02

Private sector 412.53 1.61

Foreign investor 570 2.23

Public sector 324.44 1.27

Nationalized bank 278.67 1.09

Non resident 235.5 0.92

Sate financial institution 215 0.84

Other public 115.52 0.45

Insurance co 85 0.33

Mutual funds 4.5 0.02

Total 25595.17 100.00

Interpretation:Thistableshowsthehighestcontributionof fundFIIandsecondlyAIFItodeveloptheIndustry.Financing by investment stage

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Investment in industry

Investment by Industry

As in the previous year, the maximum investment has been made in industrial productsand machinery followed by investment in computer software and service. There is aninteresting change here compared to the previous year. In 1998 the total of theinvestments in computer software and hardware put together exceeds investments in

industrial products and machinery. In the previous year, the total investment inindustrial products and machinery exceeded that in the computer industry. This is aclear indication that investment in the IT industry, as a whole is attracting greaterattention, compared to other industries. This is in keeping with global trends.

Contributors Rs.

Million

%

Industrial Products andMachinery

2,956.67 23.54

Computer Software Service 2,508,87 19.98

Consumer Related 1,381.49 10.20Medical 817.48 6.50

Computer Hardware System 735.41 5.86

Food and Food Processing 718.56 5.72

Tel. and DataCommunication

417.89 3.33

Biotechnology 448.77 3.56

Other Electronics 426.06 3.39

Energy Related 229.56 1.82

Others 1,865.09 18.85

Total 12,559.85 100

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Investment by Stages of Financing

A sum of Rs.5, 146.40 million, which is almost 41 percent of the totalventure capital investment of Rs. 12,559.85 million, has been invested instart-up projects, followed by Rs. 4,478.60 million in later stage projects,Rs. 2,208.39 million in other early stage projects, Rs. 643.51 million inseed stage projects and only Rs. 82.95 million in turnaround projects.

Industry wise Investment

Investment Stages

Rs. MillionStart-up Stage

5,146.40

Later Stage 4,478.60

Other Early Stage 2,203.39

Seed Stage 643.51

Turnaround Financing 82.95

Total 12,559.85

The average amount of investments per project makes an interesting study.It is Rs. 8.04 million per project in the seed stage, Rs. 9.21 million perproject in the turnaround stage Rs. 14.50 million per project in the start-up stage, Rs. 18.72 million per project in the other early stage and Rs.26.98 million per project in the later stage. This shows that the averageinvestment per project is the maximum in the later stage. This is asexpected, since later stage projects generally require larger amounts offinance. Seed stage investments generally require smaller investments perprojects. These averages also show that not only are the number ofinvestments in turnaround projects minimal, the amounts of investments insuch projects are also very little, further supporting the theory that venturecapitalists are generally not keen to fund turnaround projects.

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OBJECTIVE NO 2

The problem faced by venture capitalist

LicenseRajandTheIPOBoom

Tillearly90s,under thelicenserajregime,onlycommoditycentricBusinessesthrivedinadeficitsituation.Tofundacementplant,venturecapitalisnotneeded.Whatwasneededwasabilitytogetalicenseandthen

gettheprojectfundedbythe banksandDFIs.Inmostcases,thepromoterswerewellestablishedindustrialhouses,withnoapparentneedfor funds.Mostof theseentitieswerecapableof raisingfundsfromconventionalsources,includingtermloansfrominstitutionsandequitymarkets.

Scalabilit

TheIndiansoftwaresegmenthasrecordedanimpressivegrowthover thelastfewyearsandearnslargerevenuesfromitsexportearnings,yetourshareintheglobalmarketislessthan1per cent.Withinthesoftwareindustry,thevaluechainrangesfrombodyshoppingatthebottomtostrategicconsultingatthetop.Higher valueadditionandprofitabilityaswellassignificantmarketpresencetakeplaceatthehigher endof thevaluechain.If theindustryhastogrowfurther andsurvivethefluxitwouldonlybethroughinnovation.For anyventureideatosucceedthereshouldbeaproductthathasagrowingmarketwithascalablebusinessmodel.TheITindustry(whichismostsuitedfor venturefundingbecauseof its"ideas"nature)inIndiatillrecentlyhadaservicecentricbusinessm

odel.Productsdevelopedfor Indianmarketslack scale.Mindsets

VenturecapitalasanactivitywasvirtuallynonexistentinIndia.Mostventurecapitalcompanieswanttoprovidecapitalonasecureddebtbasis,toestablishedbusinesseswithprofitableoperatinghistories.Mostof theventurecapitalunitswereoffshootsof financialinstitutionsandbanksandthelendingmindse

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tcontinued.Trueventurecapitaliscapitalthatisusedtohelplaunchproductsandideasof tomorrow.Abroad,thisproblemissolvedbythepresenceof `angelinvestors.Theyaretypicallywealthyindividualswhonotonlyprovide

venturefinancebutalsohelpentrepreneurstoshapetheir businessandmaketheir venturesuccessful.

Returns,TaxesandRegulations

Thereisamultiplicityof regulatorslikeSEBIandRBI.Domesticventurefundsaresetupunder theIndianTrustsActof 1882asper SEBIguidelines,whileoffshorefundsroutedthroughMauritiusfollowRBIguidelines.Abroad,suchfundsaremadeunder theLimitedPartnershipAct,whichbringsadvantagesintermsof taxation.Thegovernmentmustallowpensionfundsandinsu

rancecompaniestoinvestinventurecapitalsasinUSAwherecorporatecontributionstoventurefundsarelarge.

Exit

TheexitroutesavailabletotheventurecapitalistswererestrictedtotheIPOroute.Beforederegulation,pricingwasdependentontheerstwhileCCIregulations.Ingeneral,allissueswereunder priced.EvennowSEBIguidelinesmakeitdifficultfor pricingissuesfor aneasyexit.GiventhefailureoftheOTCEIandtherevisedguidelines,smallcompaniescouldnothopefor a

BSE/NSElisting.Giventhedullmarketfor mergersandacquisitions,strategicsalewasalsonotavailable.Valuation

Therecentphenomenonisvaluationmismatches.Thankstothesoftwareboom,most promotershaveskyhighvaluationexpectations.Giventhis,itisdifficultfor dealstoreachfinancialclosureaspromotersdonotagreetoavaluation.Thiscoupledwiththefancyfor softwarestocksintheboursesmeansthatmostcompaniesarepreponingtheir IPOs.Consequently,thenumber andqualityof dealsavailabletotheventurefundsgetsreduced

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OBJECIVE NO 3

To study the future prospect of venture capital

financing

Withtheadventof liberalization,Indiahasbeenshowingremarkablegrowthintheeconomyinthepast1012years.Thegovernmentispromotinggrowthcapacityutilizationof availableandacquiredresourcesandhenceentrepreneurdevelopment,byliberalizingnormsregardingventurecapital.Whileonlyeigh

domesticventurecapitalfundswereregisteredwithSEBIduring19961998,14fundshavealreadybeenregisteredin1999 -2000.Institutionalinterestisgrowingandforeignventureinvestmentsarealsoontherise.Manystategovernmentshavealsosetupventurecapitalfundsfor theITsector inpartnershipwiththelocalstatefinancialinstitutionsandSIDBI.TheseincludeAndhraParadesh,Karnataka,Delhi,KeralaandTamilNadu.Theother statesaretofollowsoon.Intheyear 2000,thefinanceministryannouncedtheliberalizationof taxtreatmentfor venturecapitalfundsto

promotethem&toincreasejobcreation.ThisisexpectedtogiveastrongboosttothenonresidentIndianslocatedintheSiliconValleyandelsewhere

toinvestsomeof their capital,knowledgeandenterpriseintheseventures.ABangalorebasedmediacompany,G r a y c e l l Ltd.,hasrecentlyobtainedVCinvestmenttotalingabout$1.7mn.Thecompanywouldbecreatingandmarketing brandedwebbasedconsumer productsinthenear future.Thefollowingpointscanbeconsideredastheharbingersof VCfinancinginIndia:-

a.Existenceof agloballycompetitivehightechnology.

b.Globallycompetitivehumanresourcecapital.

c.SecondLargestEnglishspeaking,scientific&technicalmanpower intheworld.

d.Vastpoolof existingandongoingscientificandtechnicalresearchcarriedbylargenumber of researchlaboratories.e.InitiativestakenbytheGovernmentinformulatingpoliciestoencourageinvestorsandentrepreneurs.

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Findings

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Findings

Duringthepreparationof myreportIhaveanalyzedmanythingswhicharefollowing:-

Anumber of peopleinIndiafeelthatfinancialinstitutionarenotonlyconservativesbuttheyalsohaveabiasfor foreigntechnology&theydonotTrustontheabilitiesof entrepreneurs.

Venture Capital Financing is still not regarded as commercial activity.

Restricted scope of Venture Capital in India to hi-tech project

Ambiguous government policy towards inter-corporate investment and

issue of shares to the entrepreneurs at below per value or in the form of a guest equity.

. Focus on specific industry

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Limitations

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Limitations of Study

1. Thebiggestlimitationwastime

2.Thedatarequiredwassecondary&thatwasnoteasilyavailable.

3. Studybyitsnatureissuggestive&notconclusive.

4. Expenseswerehighincollecting&searchingthedata

5. Major limitation of the project has been theunavailability of current data

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Suggestions

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Suggestions

The investment should be made in the later stage

The government allow or encourage pension fund

and insurance company to make investment in the venturecapital

The entry of private sector should be encourage

Tax concession and exemption given to the

investor

The government offer attractive opportunity to

foreign investor to invest in Indian venture capital firms

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Conclusion

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ConclusionVenturecapitalcanplayamoreinnovationanddevelopmentroleinadevelopingcountrylikeIndia.Itcouldhelptherehabilitationof sickunitthroughpeoplewithideasandturnaroundmanagementskill.Al

argenumber of smallenterprisesinIndia becausesick unitevenbeforethecommencementof productionof production.Venturecapitalistcouldalsobeinlinewiththedevelopmentstakingplaceintheir

parentcompay.Yetanother areawherecanplayasignificantroleindevelopingco

untriesistheservicesector includingtourism,publishing,healthcareetc.theycouldalsoprovidefinancialassistancetopeoplecomingoutof theuniversities,technicalinstitutesetc.whowishtostarttheir ownventurewithor withouthightechcontent,but involvinghighr isk.This wouldencouragetheentrepreneurialspirit.Itisnotonlyinitialfundingwhichisneedfromtheventurecapitalists,buttheshouldalsosimultaneously providemanagementandmarketingexpertisearealcriticalaspectof venturecapitalists,buttheyalsosimultaneouslyprovi

demanagementandmarketingexpertisearealcriticalaspectof venturecapitalindevelopingcountries. Whichcanimprovetheir effectivenessbysettingupventurecapitalcellinR&Dandother scientificgeneration,providingsyndicatedor consortiumfinancingandacingas

businessincubators

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Bibliography1.JOURNALS

APPLIEDFINANCEVENTURESTAGEINVESTMENTPREFERENCEININDIA,VINAYKUMAR,MAY, 2004.

ICFAIJOURNALOFAPPLIEDFINANCEMAY-JUNE

VIKALPAVOLULMLE28,APRIL-JUNE2003

ICFAIJOURNALOFAPPLIEDFINANCE,JULY-AUG.

2 . B O O K S

I.M.Panday-venturecapitaldevelopmentprocessinIndia

I. M.Panday-venturecapitaltheIndianexperience,

3.VARIOUSNEWSP A P E R S 4 . I N T E R N E T

www.indiainfoline.com

www.vcapital.com

www.investopedia.comwww.vcinstitute.com

57
http://www.indiainfoline.com/http://www.vcapital.com/http://www.investopedia.com/http://www.indiainfoline.com/http://www.vcapital.com/http://www.investopedia.com/


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APPENDIX-

List of Venture Capital Companies in India

1.

20th Century Finance Corporation LimitedCentre Point

Dr.Ambedkar Road

Parel

Mumbai - 400012

2. AIG Investment Corporation (Asia) LimitedIndia - Representative Office2634 Oberoi TowersNariman PointMumbai - 400021

3. Acuity Strategic Financials Private Limited14 Santosh, 2nd floor242 Lady Jamshedji RoadMumbai - 400028

4. AIA Capital India Private Limited9B Hansalaya

Barakhamba RoadNew Delhi - 110001

5.

Alliance DLJ Private Equity Fund

404 / 405 Prestige Centre Point7 Edward RoadBangalore - 560052

6. Alliance Venture Capital Advisors Limited

58
http://www.dljindia.com/http://www.dljindia.com/http://www.dljindia.com/


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607 Raheja ChambersFree Press Journal Road, Nariman PointMumbai - 400021

7. APIDC Venture Capital Limited1102 Block A, 11th floorBabukhan Estate, BasheerbaghHyderabad - 500001

8. Canbank Venture Capital Fund Limited2/F Kareem Towers, 11th floor19/5 -19/6 Cunningham Road

Bangalore - 560052

9. Draper International (India) Private LimitedV203 Prestige Meridian -1M.G. RoadBangalore - 560001

10. eVentures India(Consultair Investments Private Limited)

Khetan Bhavan8 Jameshedji Tata RoadChurchgateMumbai - 400020

11. GE Capital Services India LimitedAIFACS Building1 Rafi MargNew Delhi - 110001

12. Gujarat Venture Finance LimitedPremchand House Annexe, 1st floor

Behind Popular HouseAshram RoadAhmedabad - 380009

13. HSBC Private Equity Management Mauritius LimitedAshoka Estate, 3rd floor24 Barakhamba RoadNew Delhi - 110001

59
http://www.draperintl.com/http://www.eventures.com/http://www.gecapitalindia.com/http://www.gvfl.com/http://www.hsbc.com/http://www.draperintl.com/http://www.eventures.com/http://www.gecapitalindia.com/http://www.gvfl.com/http://www.hsbc.com/


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14. ICICI Securities and Finance Company Limited41/44 Strand PalaceM.Desai MargColaba

Mumbai - 400005

15. ICICI Venture Funds ManagementCompany Limited (formerly TDICI)Raheja Plaza, 4th floor17 Commissariat RoadD'Souza CircleBangalore - 560025

16. IFB Venture Capital Finance Limited8/1 Middletown RowCalcutta - 700071

17. Industrial Development Bank of IndiaIDBI Tower Cuffe ParadeMumbai - 400005

18. Small Industries Development Bank of India (SIDBI)SIDBI Venture Capital Limited

Nariman Bhavan227 Vinay K. Shah MargNariman PointMumbai - 400021

19. Tata Investment Corporation LimitedEwart House, 3rd floorHomi Modi Street Fort

Mumbai - 400001

20. Templeton India Private Equity Fund125 Free Press HouseNariman PointMumbai - 400021

21. Vista Ventures

60
http://www.isecltd.com/http://www.icici.com/cb_venfnd/index.htmhttp://www.icici.com/cb_venfnd/index.htmhttp://www.icici.com/cb_venfnd/index.htmhttp://www.icici.com/cb_venfnd/index.htmhttp://www.idbi.com/http://www.sidbi.com/http://www.templeton.com/http://www.vistaventures.com/http://www.vistaventures.com/http://www.isecltd.com/http://www.icici.com/cb_venfnd/index.htmhttp://www.icici.com/cb_venfnd/index.htmhttp://www.idbi.com/http://www.sidbi.com/http://www.templeton.com/http://www.vistaventures.com/


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DBS Corporate Club26 Cunningham RoadBangalore - 560052

22. Walden-Nikko India Management Company LimitedOne Silverstone294 Linking RoadKhar (West)Mumbai - 400052
http://www.wiig.com/http://www.wiig.com/http://www.wiig.com/

project report on venture capital in india

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