venture capital in india

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FOREWORD

Venture Capital in India

FOREWORD

The Venture capital sector is the most vibrant industry in the financial market today. Venture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an important source of equity for start-up companies.

Venture capital can be visualized as your ideas and our money concept of developing business. Venture capitalists are people who pool financial resources from high networth individuals, corporates, pension funds, insurance companies, etc. to invest in high risk - high return ventures that are unable to source funds from regular channels like banks and capital markets. The venture capital industry in India has really taken off in. Venture capitalists not only provide monetary resources but also help the entrepreneur with guidance in formalizing his ideas into a viable business venture.

Five critical success factors have been identified for the growth of VC in India, namely:

The regulatory, tax and legal environment should play an enabling role as internationally

venture funds have evolved in an atmosphere of structural flexibility, fiscal neutrality and operational adaptability.

Resource raising, investment, management and exit should be as simple and flexible as needed and driven by global trends.

Venture capital should become an institutionalized industry that protects investors and investee firms, operating in an environment suitable for raising the large amounts of risk capital needed and for spurring innovation through start-up firms in a wide range of high growth areas.

In view of increasing global integration and mobility of capital it is important that Indian venture capital funds as well as venture finance enterprises are able to have global exposure and investment opportunities

Infrastructure in the form of incubators and R&D need to be promoted using government support and private management as has successfully been done by countries such as the US, Israel and Taiwan. This is necessary for faster conversion of R&D and technological innovation into commercial products.With technology and knowledge based ideas set to drive the global economy in the coming millennium, and given the inherent strength by way of its human capital, technical skills, cost competitive workforce, research and entrepreneurship, India can unleash a revolution of wealth creation and rapid economic growth in a sustainable manner. However, for this to happen, there is a need for risk finance and venture capital environment which can leverage innovation, promote technology and harness knowledge based ideas.

A BRIEF HISTORY

The story of venture capital is very much like the history of mankind. In the fifteenth century, Christopher Columbus sought to travel westwards instead of eastwards from Europe and so planned to reach India. His far fetched idea did not find favour with the King of Portugal, who refused to finance him. Finally, Queen Isabella of Spain, decided to fund him and the voyages of Christopher Columbus are now empanelled in history. And thus evolved the concept of Venture Capital.

The modern venture capital industry began taking shape in the post World War 2. It is often said that people decide to become entrepreneurs because they see role models in other people who have become successful entrepreneurs. Much the same can be said about venture capitalists. The earliest members of the organized venture capital industry had several role models, including these three:

American Research and Development Corporation:

Formed in 1946, whose biggest success was Digital Equipment. The founder of ARD was General Georges Doroit, a French-born military man who is considered "the father of venture capital." In the 1950s, he taught at the Harvard Business School. His lectures on the importance of risk capital were considered quirky by the rest of the faculty, who concentrated on conventional corporate management.

J.H. Whitney & Co:

Also formed in 1946, one of whose early hits was Minute Maid juice. Jock Whitney is considered one of the industrys founders.

The Rockefeller Family:

L S Rockefeller, one of whose earliest investments was in Eastern Airlines, which is now defunct but was one of the earliest commercial airlines.

INTRODUCTION TO VENTURE CAPITAL

Venture Capital is defined as providing seed, start-up and first stage finance to companies and also funding expansion of companies that have demonstrated business potential but do not have access to public securities market or other credit oriented funding institutions.

Venture Capital is generally provided to firms with the following characteristics:

Newly floated companies that do not have access to sources such as equity capital and/or other related instruments.

Firms, manufacturing products or services that have vast growth potential.

Firms with above average profitability.

Novel products that are in the early stages of their life cycle.

Projects involving above-average risk.

Turnaround of companies.

Venture Capital derives its value from the brand equity, professional image, constructive criticism, domain knowledge, industry contacts, they bring to table at a significantly lower management agency cost.

A Venture Capital Fund (VCF) strives to provide entrepreneurs with the support they need to create up-scalable business with sustainable growth, while providing their contributors with outstanding returns on investment, for the higher risks they assume.

The three primary characteristics of venture capital funds which make them eminently suitable as a source of risk finance are:

that it is equity or quasi equity investment

it is long term investment and

it is an active form of investment.

Difference between a Venture Capitalist and Bankers/Money Managers

Banker is a manager of other people's money while the venture capitalist is basically an investor.

Venture capitalist generally invests in new ventures started by technocrats who generally are in need of entrepreneurial aid and funds.

Venture capitalists generally invest in companies that are not listed on any stock exchanges. They make profits only after the company obtains listing.

The most important difference between a venture capitalist and conventional investors and mutual funds is that he is a specialist and lends management support and also

Financial and strategic planning

Recruitment of key personnel

Obtain bank and other debt financing

Access to international markets and technology

Introduction to strategic partners and acquisition targets in the region

Regional expansion of manufacturing and marketing operations

Obtain a public listing

Difference between Venture Finance & Debt Finance

Venture FinanceDebt Finance

ObjectiveMaximize ReturnInterest payment

Holding Period2-5 yearsShort/Long term

InstrumentsCommon shares, Convertible bonds, Options, WarrantsLoan, Factoring,leasing

PricingPrice earnings ratio, net tangible assets Interest spread

CollateralVery RareYes

OwnershipYes No

ControlMinority shareholders, rights protection, board membersCovenants

Impact on B/S Reduced LeverageIncreased Leverage

Exit MechanismPublic offering, Sale to third party, Sale to entrepreneurLoan repayment

VENTURE CAPITAL IN INDIA

Most of the success stories of the popular Indian entrepreneurs like the Ambanis and Tatas had little to do with a professionally backed up investment at an early stage. In fact, till very recently, for an entrepreneur starting off on his own personal savings or loans raised through personal contacts/financial institutions.

Traditionally, the role of venture capital was an extension of the developmental financial institutions like IDBI, ICICI, SIDBI and State Finance Corporations (SFCs). The first origins of modern Venture Capital in India can be traced to the setting up of a Technology Development Fund (TDF) in the year 1987-88, through the levy of a cess on all technology import payments. TDF was meant to provide financial assistance to innovative and high-risk technological programs through the Industrial Development Bank of India. This measure was followed up in November 1988, by the issue of guidelines by the (then) Controller of Capital Issues (CCI). These stipulated the framework for the establishment and operation of funds/companies that could avail of the fiscal benefits extended to them.

However, another form of venture capital which was unique to Indian conditions also existed. That was funding of green-field projects by the small investor by subscribing to the Initial Public Offering (IPO) of the companies. Companies like Jindal Vijaynagar Steel, which raised money even before they started constructing their plants, were established through this route.

The industrys growth in India can be considered in two phases. The first phase was spurred on soon after the liberalization process began in 1991. According to former finance minister and harbinger of economic reform in the country, Manmohan Singh, the government had recognized the need for venture capital as early as 1988. That was the year in which the Technical Development and Information Corporation of India (TDICI, now ICICI ventures) was set up, soon followed by Gujarat Venture Finance Limited (GVFL). Both these organizations were

promoted by financial institutions. Sources of these funds were the fina

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