venture capital project report
TRANSCRIPT
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FINAL REPORT
ON
Study of Venture Capital
in India and its AspectsSubmitted in partial fulfilment of the requirement of MBADegree of
Maharshi Dayanand University, Rohtak
Under the supervision o!
Mr Vivek Bhatia
Faculty International Business, IM !urgaon
"u#$itted #y!
sandeep arora
"#$MB%$&'#
Session '""#$'""(
Institute o Te%hno&o'y and Mana'e$ent
(ur'aon
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Acknowledgement
+No Learnin' is proper and ee%tive ithoutProper (uidan%e-
)very study is incomplete *ithout having a *ell plan and concrete e+posure to the
student Management studies are not e+ception Scope of the pro-ect at this level is
very *ide ranging .n the other hand it provide sound basis to adopt the theoretical
kno*ledge and on the other hand it gives an opportunities for e+posure to real time
situation
his study is an internal part of our MB% program and to do this pro-ect in a short
period *as a heavy task
Intention, dedication, concentration and hard *ork are very much essential to
complete any task But still it needs a lot of support, guidance, assistance, co$
operation of people to make it successful
I bear to imprint of my people *ho have given me, their precious ideas and times to
enable me to complete the research and the pro-ect report I *ant to thanks them for
their continuous support in my research and *riting efforts
I *ish to record my thanks and indebtedness to Mr .ivek Bhatia / Fa%u&ty
Internationa& Business, ITM (ur'aon,*hose inspiration, dedication and helping
nature provided me the kind of guidance necessary to complete this pro-ect
I am e+tremely grateful to $ana'e$ent of Institute o Te%hno&o'y 0
Mana'e$ent, (ur'aon for granting me permission to be part of this college
I *ould also like to ackno*ledge $y parentsand $y #at%h $atesfor their guidance
and blessings
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Table of Content
1. Introduction
2. SignificanceofStudy
3. .b-ective of Study
4. /esearchMethodology
0iterature /evie*
1onceptualFrame*ork
.perational Definition
5.
%nalysis 2 Interpretation6. Findings
7. Suggestions
8. 1onclusion
9. 0imitation
10. Bibliographies
11. %nne+ure
ANNEXUEI3 4%M).FV)45/)1%6I%0FI/MS.5
SID).FI4DI%
ANNEXUEII34%M).FV)45/)1%6I%0FI/MSI4
I4DI%
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Introduction
%numberof technocratsare seeking to setup shopon theiro*nandcapitali7eon
opportunitiesIn thehighlydynamiceconomicclimatethatsurroundsus today, fe*
8traditional9business models may survive 1ountries across the globe are reali7ing
that it is not the conglomerates and the gigantic corporations that fuel economic
gro*th any more he essence of any economy today is the small and medium
enterprises For e+ample, in the 5S, :"; of the e+ports are createdby companies
*ithlessthan'"employeesandonly#;arecreatedbycompanies*ith:""ormoreemployeeshisgro*ing trendcanbeattributedtorapidadvancesin technology in
the last decade
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Venturecapital is an investment in the formof equity, quasi$equityand sometimes
debt $ straight or conditional, made in ne* or untried concepts,promotedby a
technically or professionally qualified entrepreneur Venture capital means risk
capitalItreferstocapitalinvestment,bothequityanddebt,*hichcarriessubstantial
risk and uncertainties he risk envisaged maybe very high maybe so high as to
resultintotallossorverylesssoastoresultinhighgains
The%on%epto.enture1apita&
VenturecapitalmeansmanythingstomanypeopleItisinfactnearlyimpossibleto
comeacrossonesingledefinitionoftheconcept
2ane 3o&oski Morris, editor of the *ell kno*n industry publication, Venture
)conomics, deines venture capital as 4providin' seed, start/up and irst sta'e
inan%in'4 and also 4undin' the e5pansion o %o$panies that have a&ready
de$onstrated their #usiness potentia& #ut do not yet have a%%ess to the pu#&i%
se%urities$arketorto%reditorientedinstitutiona&undin'sour%es
he European .enture 1apita& Asso%iation describes it as risk finance for
entrepreneurialgro*thorientedcompanies It is investment for themediumor long
term return seeking to ma+imi7e medium or long term forbothparties It is a
partnership*iththeentrepreneurin*hichtheinvestorcanaddvaluetothecompany
becauseofhiskno*ledge,e+perienceandcontactbase
Meanin'oventure%apita&!
Venture capital is money provided by professionals *ho invest alongside
managementinyoung,rapidlygro*ingcompaniesthathavethepotentialtodevelop
into significant economic contributors Venture capital is an important source of
equityforstart$upcompanies
6rofessionally managed venture capital firms generally areprivatepartnerships or
closely$held corporations fundedbyprivate andpublicpension funds, endo*ment
funds, foundations, corporations, *ealthy individuals, foreign investors, and the
venturecapitaliststhemselves
Venturecapitalistsgenerally>
Financene*andrapidlygro*ingcompanies
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6urchaseequitysecurities
%ssistinthedevelopmentofne*productsorservices
%ddvaluetothecompanythroughactiveparticipation
akehigherrisks*iththee+pectationofhigherre*ards
=avealong$termorientation
?hen considering an investment, venture capitalists carefully screen the technical
andbusiness merits of theproposed company Venture capitalists only invest in a
smallpercentage of thebusinesses they revie* and have a long$termperspective
hey also actively *ork *ith the company@s management, especially *ith contacts
andstrategyformulation
Venturecapitalistsmitigate the riskof investingbydevelopingaportfolioofyoung
companies in a single venture fund Many times they co$invest *ith other
professional venture capital firms In addition, many venturepartnerships manage
multiple funds simultaneously For decades, venture capitalists have nurtured the
gro*th of %merica@s high technology and entrepreneurial communities resulting in
significant -ob creation, economic gro*th and international competitiveness
1ompaniessuchasDigital)quipment1orporation,%pple,Federal)+press,1ompaq,
SunMicrosystems,Intel,Microsoftand!enetecharefamouse+amplesofcompanies
thatreceivedventurecapitalearlyintheirdevelopment
6"our%e!NationalVentureCapitalAssociation$%%%&ear'ook(
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PrivateE7uityInvestin'
Venturecapital investinghasgro*nfromasmall investmentpool in the&(A"sand
early &(#"s to a mainstream asset class that is a viable and significantpart of the
institutionalandcorporate investmentportfolio/ecently,someinvestorshavebeen
referringtoventureinvestingandbuyoutinvestingasprivateequityinvestinghis
termcanbeconfusingbecausesomeintheinvestmentindustryusethetermprivate
equity to referonly tobuyout fund investing Inanycase,an institutional investor
*ill allocate '; to C; of their institutionalportfolio for investment in alternative
assetssuchasprivateequityorventurecapitalaspartoftheiroverallassetallocation
1urrently, over :"; of investments in venture capitalprivate equity comes from
institutional public and private pension funds, *ith the balance coming from
endo*ments,foundations,insurancecompanies,banks,individualsandotherentities
*hoseektodiversifytheirportfolio*iththisinvestmentclass
8hatisa.enture1apita&ist9
hetypicalperson$on$the$streetdepictionofaventurecapitalististhatofa*ealthyfinancier*ho*antstofundstart$upcompaniesheperceptionisthataperson*ho
developsabrandne*change$the$*orldinventionneedscapitalEthus,iftheycan9tget
capital from abank or from their o*npockets, they enlist the help of a venture
capitalist
In truth, venture capital andprivate equity firms arepools of capital, typically
organi7ed as a limitedpartnership that invests in companies that represent the
opportunityforahighrateofreturn*ithinfivetosevenyearsheventurecapitalist
maylookatseveralhundredinvestmentopportunitiesbeforeinvestinginonlyafe*
selectedcompanies*ith favorable investmentopportunitiesFar frombeing simply
passive financiers, venture capitalists foster gro*th in companies through their
involvement in themanagement, strategic marketing andplanningof their investee
companiesheyareentrepreneursfirstandfinancierssecond
)ven individuals maybe venture capitalists In the early days of venture capitalinvestment,inthe&(:"sand&(A"s,individualinvestors*erethearchetypalventure
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investor ?hile this type of individual investment did not totally disappear, the
modernventurefirmemergedasthedominantventureinvestmentvehicle=o*ever,
inthelastfe*years,individualshaveagainbecomeapotentandincreasinglylarger
partoftheearlystagestart$upventurelifecycleheseangelinvestors*illmentor
a company andprovide needed capital and e+pertise to help develop companies
%ngel investorsmayeitherbe*ealthypeople*ithmanagemente+pertiseorretired
business men and *omen *ho seek the opportunity for first$hand business
development
)actor to 'e considered 'y *enture capitalist in
selection of in*estmentproposalherearebasically fourkeyelements in financingofventures*hicharestudied in
depth by the venture capitalists hese are>
:;Mana'e$ent> hestrength,e+pertise2unityofthekeypeopleontheboardbring
significant credibility to the company he members are tobe mature, e+perienced
possessing *orking kno*ledge ofbusiness and capable of takingpotentially high
risks
; Oner4s Finan%ia& "take! he financial resources o*ned 2 committedby the
entrepreneur o*ner in thebusiness including the funds investedby family, friends
andrelativesplayaveryimportantroleinincreasingtheviabilityofthebusinessItis
animportantavenue*heretheventurecapitalistkeepsanopeneye
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A +rief ,istory
heconceptofventurecapitalisnotne*Venturecapitalistsoftenrelatethestoryof
1hristopher1olumbusInthefifteenthcentury,hesoughttotravel*est*ardsinstead
ofeast*ardsfrom)uropeandsoplannedtoreachIndia=isfar$fetchedideadidnot
find favor *ith the
A$eri%an Resear%h and Deve&op$ent 1orporation, formed in &(A, *hose
biggest success*asDigital)quipmenthefounderof%/D*as!eneral!eorges
Doroit, a French$born military man *ho is considered ?the ather o venture
%apita&;?Inthe&(:"s,hetaughtatthe=arvardBusinessSchool=islecturesonthe
importance of risk capital *ere considered quirkyby the rest of the faculty, *ho
concentratedonconventionalcorporatemanagement
2;@;8hitney01oalsoformedin&(A,oneof*hoseearlyhits*asMinuteMaid
-uiceHock?hitneyisconsideredoneoftheindustry9sfounders
TheRo%kee&&erFa$i&y, and inparticular,0 S /ockefeller, one of *hose earliest
investments*asin)astern%irlines,*hichisno*defunctbut*asoneoftheearliest
commercialairlines
he Second ?orld ?ar produced an abundance of technological innovation,
primarily*ithmilitaryapplicationsheyinclude,fore+ample,someoftheearliest
*ork on micro circuitry Indeed, H= ?hitney9s investment in Minute Maid *as
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intended to commerciali7e an orange-uice concentrate that hadbeen developed to
providenourishmentfortroopsinthefield
In themid$&(:"s, the5S federalgovernment*antedtospeed thedevelopmentof
advancedtechnologiesIn&(:#, theFederal/eserveSystemconductedastudythat
concluded that a shortage of entrepreneurial financing *as a chief obstacle to the
development of *hat it called ?entrepreneuria& #usinesses;?%s a response this a
number of Small Business Investment 1ompanies SBI1J *ere established to
leveragetheirprivatecapitalbyborro*ingfromthefederalgovernmentatbelo*$
marketinterestratesSooncommercialbanks*ereallo*edtoformSBI1sand*ithin
fouryears,nearlyA""SBI1s*ereinoperation
%tthesametimeanumberofventurecapitalfirms*ereformingprivatepartnerships
outsidetheSBI1formathesepartnershipsaddedtotheventurecapitalist9stoolkit,
byofferingadegreeoffle+ibilitythatSBI1slack?ithinadecade,privateventure
capitalpartnershipspassedSBI1sintotalcapitalundermanagement
he&(A"s sa*a tremendousbull I6.market thatallo*edventurecapital firms to
demonstrate their ability to create companies andproducehuge investment returns
For e+ample, *hen Digital )quipment *entpublic in &(AK itprovided %/D *ith
&"&; annuali7ed /eturn on Investment /.IJ he 5SL#",""" Digital invested to
start the company in &(:( had a market value of 5SLC#mn %s a result, venture
capitalbecame a hot market,particularly for *ealthy individuals and families
=o*ever,it*asstillconsideredtooriskyforinstitutionalinvestors
Inthe&(#"s,though,venturecapitalsufferedadouble$*hammyFirst,ared$hotI6.
marketbroughtover&,"""venture$backedcompanies tomarket in&(AK, thepublicmarkets*entintoaseven$yearslumphere*erealotofdisappointedstockmarket
investorsandalotofdisappointedventurecapitalinvestorstoohenin&(#,after
1ongress legislation against the abuse of pension fund money, all high$risk
investment of these funds *as halted %s a result ofpoorpublic market and the
pensionfundlegislation,venturecapitalfundraisinghitrockbottomin&(#:
?ell, things could only getbetter from there Beginning in &(#K, a series of
legislative and regulatory changes gradually improved the climate for venture
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investingFirst1ongressslashedthecapitalgainsta+rateto'K;from(:;hen
the0aborDepartment issuedaclarificationthateliminatedthepensionfundsactas
an obstacle to venture investing %t around the same time, there *as a number of
high$profile I6.sbyventure$backedcompanieshese includedFederal)+press in
&(#K, and %pple 1omputer and !enetech Inc in &(K& his rekindled interest in
venturecapitalonthepartof*ealthyfamiliesandinstitutional investorsIndeed, in
the&(K"s, theventurecapital industrybegan itsgreatestperiodofgro*thIn&(K",
venture firms raisedand invested less than5SLA""millionhatnumbersoared to
nearly 5SLbnby &(K# he decade also marked the e+plosion in thebuy$out
business
he late&(K"smarked thetransitionof theprimarysourceofventurecapital funds
from*ealthyindividualsandfamiliestoendo*ment,pensionandotherinstitutional
fundshe surgeincapital in the&(K"shadpredictable results/eturnsonventure
capitalinvestmentsplungedManyinvestors*entintothefundsanticipatingreturns
of C"; or higherhat *asprobably an unrealistic e+pectation tobegin *ith he
consensustodayisthatprivateequityinvestmentsgenerallyshouldgivetheinvestor
aninternalrateofreturnsomethingtotheorderof&:;to':;,dependinguponthe
degreeofriskthefirmistaking
=o*ever,by&((", theaveragelong$termreturnonventurecapitalfundsfellbelo*
K;, leading toyet anotherdo*nturn inventure fundingDisappointed familiesand
institutions*ithdre* fromventure investing indroves in the&(K($(&periods he
economic recovery and the I6.boom of &((&$( have gone a long *ay to*ards
reversing the trend inbothprivate equity investmentperformance andpartnership
commitments
In &((K, the venture capital industry in the 5nited States continued its seventh
straightyear ofgro*th It raised5SL':bn in committed capital for investmentsby
venturefirms,*hoinvestedover5SL&Abnintodomesticgro*thcompanies5Sfirms
havetraditionallybeenthebiggestparticipantsinventuredeals,butnon$5Sventure
investment is gro*ing In India, venture funding more than doubled from L'"
millionin'""'toalmostL&billionin'""CForthefirsthalfof'"",venturecapital
investmentroseC';from'""C
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Venture Capital in IN-IA
Venture capital *as introduced in India in mid eightiesby %ll India Financial
Institutions *ith the inauguration of /isk 1apital Foundation /1FJ sponsoredby
IF1I*ithavie*toencouragethetechnologistsandtheprofessionaltopromotene*
industries1onsequentlythegovernmentofIndiapromotedtheventurecapitalduring
&(KA$K#bycreatingaventurecapital fund in theconte+tof structuraldevelopment
and gro*th of small$scalebusiness enterprises Since then several venture capital
firmsfunds V1FsJ are incorporatedby Financial Institutions FIsJ, 6ublic Sector
Banks6SBsJ,and 6rivateBanksand6rivateFinancialcompanies
heIndianVenture1apitalIndustryIV1IJis-ustaboutadecadeoldindustry
ascomparedtothatin)uropeand5SInthisshortspanithasnurturedclosetoone
thousand ventures, mostly in SM) segment and has supported building
technocratprofessionals allthroughheV1industry,throughitsinvestmentinhigh
gro*thcompaniesas*ellascompaniesadoptingne*ertechnologiesbackedbyfirstgenerationentrepreneurs,hasmadea substantial contribution to economy In India,
ho*ever,thepotentialofventurecapitalinvestmentsisyettobefullyreali7edhere
arearound thirtyventure capital funds,*hichhavegarneredover/s :"""1rores
heventurecapitalinvestmentsinIndiaat/s&"""":croreasin&((#,representing
"&percentof!D6,ascomparedto::percentincountriessuchas=ong
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Venturecapitalistscanbegeneralists,investinginvariousindustrysectors,orvarious
geographiclocations,orvariousstagesofacompany9s life%lternatively, theymay
bespecialistsinoneort*oindustrysectors,ormayseektoinvestinonlyalocali7ed
geographicarea
4ot all venture capitalists invest in start$ups ?hile venture firms *ill invest in
companiesthatareintheirinitialstart$upmodes,venturecapitalists*illalsoinvestin
companiesatvariousstagesofthebusinesslifecycle%venturecapitalistmayinvest
before there isa realproductorcompanyorgani7edsocalledseed investingJ,or
mayprovidecapitaltostartupacompanyinitsfirstorsecondstagesofdevelopment
kno*n as early stage investing %lso, the venture capitalist mayprovide needed
financingtohelpacompanygro*beyondacriticalmasstobecomemoresuccessful
e+pansionstagefinancingJ
heventurecapitalistmayinvestinacompanythroughoutthecompany9slifecycle
andthereforesomefundsfocusonlaterstageinvestingbyprovidingfinancingtohelp
the company gro* to a critical mass to attractpublic financing through a stock
offering%lternatively,theventurecapitalistmayhelpthecompanyattractamerger
or acquisition *ith another company by providing liquidity and e+it for the
company9sfounders
%t theother endof the spectrum, someventure funds speciali7e in the acquisition,
turnaround or recapitali7ation of public and private companies that represent
favorableinvestmentopportunities
hereareventurefundsthat*illbebroadlydiversifiedand*illinvestincompanies
in various industry sectors as diverse as semiconductors, soft*are, retailing andrestaurantsandothersthatmaybespecialistsinonlyonetechnology
?hile high technology investment makes up most of the venture investing in the
5S, and the venture industry gets a lot of attention for its high technology
investments, venture capitalists also invest in companies such as construction,
industrial products, business services, etc here are several firms that have
speciali7ed in retail company investment and others that have a focus in investing
onlyinsociallyresponsiblestart$upendeavors
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hebasicprincipalunderlyingventurecapital3investinhigh$riskpro-ects*iththe
anticipation of high returns hese funds are then invested in several fledging
enterprises, *hich require funding, but are unable to access it through the
conventional sources such as banks and financial institutions ypically first
generation entrepreneurs start such enterprises Such enterprises generally do not
haveanyma-orcollateraltoofferassecurity,hencebanksandfinancial institutions
areaversetofundingthemVenturecapitalfundingmaybeby*ayofinvestmentin
theequityofthene*enterpriseoracombinationofdebtandequity,thoughequityis
themostpreferredroute
Sincemostof theventuresfinanced through this routeare inne*areas*orld*ide
venturecapitalfollo*shotindustrieslikeInfoech,electronicsandbiotechnologyJ,
theprobabilityofsuccessisverylo*%llpro-ectsfinanceddonotgiveahighreturn
Somepro-ects fail and some give moderate returns he investment, ho*ever, is a
long$term risk capital as suchpro-ects normally take C to # years to generate
substantial returnsVenture capitalists offer more than money to the venture and
seektoaddvaluetotheinvesteeunitbyactiveparticipationinitsmanagementhey
monitorandevaluatethepro-ectonacontinuousbasis
heventurecapitalist isho*evernot*orriedaboutfailureofaninvesteecompany,
because thedeal*hichsucceeds,netsaveryhighreturnonhis investments3high
enough to make up for the losses sustained in unsuccessfulpro-ects he returns
generally come in the form of selling the stocks *hen they get listed on the stock
e+changeorbyatimelysaleofhisstakeinthecompanytoastrategicbuyerheidea
is tocash inonan increasedappreciationof the sharevalueof thecompanyat the
timeofdisinvestment intheinvesteecompanyIf theventurefailsmoreoftenthan
notJ, the entire amount gets *ritten off 6robably, that is one reason *hy venture
capitalistsassessseveralpro-ectsandinvestonlyinahandfulaftercarefulscrutinyof
themanagementandmarketabilityofthepro-ect
oconclude,aventurefinancierisone*hofundsastartupcompany,inmostcases
promotedbyafirstgenerationtechnocratpromoter*ithequity%venturecapitalistis
notalender,butanequitypartner=ecannotsurviveonminimalism=eisdrivenby
ma+imi7ation>*ealthma+imi7ationVenturecapitalists are sourcesof e+pertise for
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the companies they finance )+it ispreferably through listing on stock e+changes
his method hasbeen e+tremely successful in 5S%, and venture funds havebeen
credited *ith the success of technology companies in Silicon Valley he entire
technologyindustrythrivesonit
Len'th o invest$ent>
Venture capitalists *ill help companies gro*,but they eventually seek to e+it the
investmentinthreetosevenyears%nearlystageinvestmentmaketakeseventoten
years tomature,*hile a later stage investmentmanyonly take a fe* years, so the
appetitefortheinvestmentlifecyclemustbecongruent*iththelimitedpartnerships9
appetite for liquidity he venture investment is neither a short term nor a liquidinvestment,butaninvestmentthatmustbemade*ithcarefuldiligenceande+pertise
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Stages of Venture Capital )unding
heVenture1apital fundingvaries across thedifferent stagesof gro*thof a firm
hevariousstagesare>
>
&; Pre seed "ta'e> =ere, a relatively small amount of capital isprovided to an
entrepreneur to conceive andmarket apotential ideahavinggood futureprospects
hefunded*orkalsoinvolvesproductdevelopmenttosomee+tent
'; "eed "ta'e> Financing is provided to complete product development and
commenceinitialmarketingformalities
C Ear&y "ta'e First "ta'e> Finance isprovided to companies to initiate
commercialmanufacturingandsales
"e%ond "ta'e!IntheSecondStageofFinancing*orkingcapitalisprovidedfor
thee+pansionofthecompanyintermsofgro*ingaccountsreceivableandinventory
:; Third "ta'e> Fundsprovided for ma-or e+pansion of a company having
increasingsalesvolumehisstageismet*henthefirmcrossesthebreakevenpoint
A; Brid'e Meanine Finan%in' or Later "ta'e Finan%in'> Bridge
Me77anineFinancingor0aterStageFinancingisfinancingacompany-ustbeforeits
I6.Initial6ublic.fferJ.ften,bridgefinanceisstructuredsothatitcanberepaid,
fromtheproceedsofapublicoffering
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/ et"ods of Venture )inancing
VenturecapitalistypicallyavailableinthreeformsinIndia,theyare>
E7uity> %llV1FsinIndiaprovideequitybutgenerallytheircontributiondoesnot
e+ceed(percentofthetotalequitycapital hus,theeffectivecontrolandma-ority
o*nershipofthefirmremains*iththeentrepreneur heybuysharesofanenterprise
*ithanintentiontoultimatelysellthemofftomakecapitalgains
1onditiona& Loan>Itisrepayableintheformofaroyaltyaftertheventureisable
to generate sales4o interest ispaidon such loans In India, V1Fs charge royalty
rangingbet*een'to&:percentEactualratedependsonotherfactorsoftheventure
such as gestationperiod, cost$flo*patterns, riskiness and other factors of the
enterprise
In%o$e Note! It is a hybrid security *hich combines the features of both
conventionalloanandconditionalloanheentrepreneurhastopaybothinterestand
royaltyonsales,butatsubstantiallylo*rates
Other Finan%in' Methods> % fe* venture capitalists,particularly in the
private sector, have started introducing innovative financial securities like
participatingdebentures,introducedby1F1isane+ample
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Venture Capital )und 0peration
Venturecapitalistsareveryselectiveindeciding*hattoinvestin%commonfigure
isthattheyinvestonlyinaboutoneinfourhundredventurespresentedtothem
heyareonly interestedinventures*ithhighgro*thpotential.nlyventures*ith
high gro*thpotential are capable ofproviding the return that venture capitalists
e+pect, and structure theirbusinesses to e+pect Because manybusinesses cannot
create the gro*th required having an e+it event *ithin the required timeframe,
venturecapitalisnotsuitableforeveryone
Venturecapitalistsusuallye+pecttobeabletoassignpersonneltokeymanagement
positionsandalso toobtainoneormore seatson the company@s board of directors
his is to put peop&e in p&a%e, a phrase that has sometimes quite unfortunate
implications as it *as used in many accounting scandals to refer to a strategy of
placing incompetent or easily bypassed individuals in positions of due diligenceand
formal legal responsibility, enabling others to rob stockholders blind .nly a tiny
portion of venture capitalists, ho*ever, have been found liable in the large scale
frauds that rocked %merican mostlyJ finance in '"""and '""&
Venture capitalists e+pect to be able to sell their stock, *arrants, options,
convertibles, or other forms of equity in three to ten years> this is referred to as
harvestin' Venture capitalists kno* that not all their investments *ill pay$off he
failure rate of investments can be highE any*here from '"; to ("; of the enterprises
funded fail to return the invested capital
Many venture capitalists try to mitigate this problem through diversification hey
invest in companies in different industries and different countries so that the
systematic risk of their total portfolio is reduced .thers concentrate their investments
in the industry that they are familiar *ith In either case, they *ork on the assumption
that for every ten investments they make, t*o *ill be failures, t*o *ill be successful,
and si+ *ill be marginally successful hey e+pect that the t*o successes *ill pay for
the time given to, and risk e+posure of the other eight In good times, the funds that
do succeed may offer returns of C"" to &"""; to investors
Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon
http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Accounting+scandals&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Due+diligence&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=2000&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=2001&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Accounting+scandals&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Due+diligence&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=2000&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=2001&gwp=8&curtab=2222_1 -
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Venture capital partners also kno*n as venture capitalists or V1sJ may be
former chief e+ecutives at firms similar to those *hich the partnership funds
Investors in venture capital funds are typically large institutions *ith large amounts of
available capital, such as state and private pension funds, university endo*ments,
insurancecompanies andpooled investmentvehicles
Most venture capital funds have a fi+ed life of ten yearsthis model *as pioneered
by some of the most successful funds inSilicon Valleythrough the &(K"sto invest in
technological trends broadly but only during their period of ascendance, to cut
e+posure to management and marketing risks of any individual firm or its product
In such a fund, the investors have a fi+ed commitment to the fund that is calleddo*n by the V1s over time as the fund makes its investments In a typical venture
capital fund, the V1s receive an annual management fee equal to '; of the
committed capital to the fund and '"; of the net profits of the fund Because a fund
may run out of capital prior to the end of its life, larger V1s usually have several
overlapping funds at the same timethis lets the larger firm keep specialists in all
stage of the development of firms almost constantly engaged Smaller firms tend to
thrive or fail *ith their initial industry contactsby the time the fund cashes out, an
entirely ne* generation of technologies and people is ascending, *hom they do not
kno* *ell, and so it is prudent to re$assess and shift industries or personnel rather
than attempt to simply invest more in the industry or people it already kno*s
Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon
http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Chief+executive+officer&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Pension&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Endowment&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insurance&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Pooling&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Silicon+Valley&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=1980s&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Chief+executive+officer&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Pension&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Endowment&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insurance&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Pooling&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Silicon+Valley&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=1980s&gwp=8&curtab=2222_1 -
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Significance of Study
Venture capitalists not only support high technologypro-ects they also fiancN any
risky idea, theyprovide funds aJ if one needs additional capital to e+pand his
e+istingbusinessoronehasane*2promisingpro-ect toe+ploitbJ ifonecannot
obtain aconventional loan the requirement terms*ould create aburdenduring the
periodthefirmisstrugglingtogro*n
ItistheambitionofmanytalentedpeopleinIndiatosetuptheiro*nventureifthey
couldgetadequate2reliablesupportFinancialinvestmentprovidesloans2equity
Buttheydonotprovidemanagementsupport,*hichisoftenneededby
entrepreneursButtheventurecapitalindustriesprovidesuchsupportalong*ith
capitalalsoVenturecapitalist actsapartnernotafinancier
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O#)e%tive o the "tudy
?hen*earegoingtostudysomethingthereisspecificpurposeforourstudyItmay
beforourcourse,ashobby,forpassingourtime,tofindoutgenuinesolutionforany
problemortodra*outcertaininferencesoutoftheavailabledataheob-ectivesof
mystudyare>
ofindouttheventurecapitalinvestmentvolumeinIndia
ostudytheproblemfacedbyventurecapitalistinIndia
ostudythefutureprospectsofventurecapitalfinancing
0'1ecti*e No2 $
3o )ind out t"e *enture capital in*estment
*olume in India
MethodsoFinan%in'
Instru$ents Rs$i&&ion Per%ent
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)quityShares A,C&K&' AC&K
/edeemable6referenceShares ',&:A '&:
4on1onvertibleDebt K#C"& K#C
1onvertibleInstruments :K""' :K
.therInstruments #:K: "#:
otal &","""A &""
Rs million
6,318.12
2,154.46
873.01 580.0275.85
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00
7,000.00
Equity
Shares
Redeemable
re!eren"e
Shares
#on
$on%ertible
&ebt
$on%ertible
'nstruments
(ther
'nstruments
Interpretation!hisdiagramsho*stheventurecapitalfinancinginequityshareandsecondlytheyinvestinredeemablepreferencesharestogethigherreturns
1ontri#utorsoFunds
1ontri#utors Rs;$n Per%ent
ForeignInstitutionalInvestors &C,'A# :'A;
%llIndiaFinancialInstitutions A,':'(" 'C;
MultilateralDevelopment%gencies ',&CCA KC;
.therBanks &,:&"" A"';
ForeignInvestors :#" ''C;
6rivateSector &':C &A&;
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Finan%in'ByIndustry
Industry Rs$i&&ionIndustrialproducts,machinery ',:((C'
1omputerSoft*are &,KC'
1onsumer/elated &,&'#
Medical A'CK
Food,foodprocessing :"""A
.therelectronics CA:
el2Data1ommunications CK:"(
Biotechnology C#AA)nergyrelated '(:A
1omputer=ard*are '"CCA
Miscellaneous &,CK"K:
otal &","""A
Rs million
2,5)).32
1,832
1,412.74
623.8500.06 436.54385.0) 376.46
24).56203.36
1,380.85
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
'ndustrial
+rodu"ts,
$om+uter
So!t/are
$onsumer
Related
0edi"al
1ood,!ood
+ro"essin-
(ther
ele"troni"s
.el2&ata
$ommuni"ations
3iote"hnolo-y
Ener-yrelated
$om+uter
4ard/are
0is"ellaneous
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Interpretation!Inthisdiagramhighestfinancereceivedbyindustrialproductsand
machineryandsecondlyfinancereceivedbycomputersoft*are
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Finan%in'By"tates
Invest$ent Rs$i&&ion
Maharashtra ',:AAamil4adu &:C&
%ndhra6radesh &C#'
!u-arat &&"'
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Rs million
2,566
15311372
1102 1046
312 300 2)4
0
500
1,000
1,500
2,000
2,500
3,000
0aharas
htra
.am
il#adu
5ndhra
radesh
6u7ar
at
8arna
ta9a
:est3en-al
4ary
ana
&elhi
Interpretation! In this diagramhighest finance givenby theMaharashtra to the
venturestopromotethestateeconomygro*th
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A ssessing Venture Capital
Venturefunds,bothdomesticandoffshore,havebeenaroundinIndiaforsomeyears
no* =o*ever it is only in thepast &' to &K months, they have come into the
limelighthere-ectionratioisveryhigh,about&"in&""getbeyondpreevaluation
stage,and&getsfunded
Venturecapitalfundsarebroadlyoft*okinds$generalistsorspecialistsItiscritical
forthecompanytoaccesstherighttypeoffund,ie*hocanaddvaluehisbacking
isinvaluableasfocusedspeciali7edfundsopendoors,assistinfutureroundsandhelp
instrategy=ence,itisimportanttochoosetherightventurecapitalist
he standard parameters used by venture capitalists are very similar to any
investmentdecisionheonlydifferencebeinge+itIfonebuysalistedsecurity,one
can e+it at apricebut *ith an unlisted security, e+itbecomes difficult he key
factors*hichtheylookforin
TheMana'e$ent
Most businesses are people driven, *ith success or failure depending on the
performance of the team It is important to distinguish the entrepreneur from the
professional management team he value of the idea, the vision,putting the team
together,gettingthefundinginplaceisamongstothers,somekeyaspectsoftherole
oftheentrepreneurVenturecapitalists*illinsistonaprofessionalteamcomingin,
including a 1). to e+ecute the idea .ne$man armies arepasse Integrity and
commitmentareattributessoughtforheventurecapitalistcanprovidethestrategic
vision,buttheteame+ecutesit%safamousSiliconValleysayinggoesSuccessis
e+ecution,strategyisadream
TheIdea
heideaanditspotentialforcommerciali7ationarecriticalVenturefundslookfora
scalablemodel,atacountryoraregionallevel.ther*isetheentiregame*ouldbe
reduced to amanpo*er ormachinemultiplication e+erciseFor e+ample, it is very
easyfor=industan0evertodoublesalesof0iril$asoap*ithoutincrementalcape+,
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*hile!u-arat%mbu-aneeds tospendat least/sbnbeforeitcan increasesalesby
&mn ton Distinctive competitive advantages must e+ist in the form of scale,
technology,brands, distribution, etc *hich *ill make it difficult for competition to
enter
.a&uation
%ll investment decisions are sensitive to this %n old stock market saying )very
stock is abuy at aprice and vice versa Most deals failbecause of valuation
e+pectationmismatch In India,*hilecalculatingreturns,venturecapital funds*ill
takeintoaccountissueslikerupeedepreciation,politicalinstability,*hichaddstothe
riskpremia, thussuppressingvaluations0inkedtovaluationis thestake,*hichthefund takes In India, entrepreneurs are still uncomfortable *ith the venture capital
takingcontrolinaseedstagepro-ect
E5it
?ithout e+it, gains cannotbebooked )+it maybe in the form of a strategic sale
orand I6. a+ation issues come up at the time %ny fund *ould discuss all e+it
optionsbefore closing a deal Sometimes, the fund insists on abuyback clause toensureane+it
Porto&ioBa&an%in'
Most venture funds try and achieveportfoliobalancing as they invest in different
stages of the company life cycle For e+ample, a venture capital has invested in a
portfolio of companiespredominantly at seed stageE they *ill focus on e+pansion
stagepro-ectsforfutureinvestmentstobalancetheinvestmentportfoliohis*ouldenable themtohaveaphasede+it In summary,venturecapital fundsgo througha
certainduediligencetofinali7ethedealhisincludesevaluationofthemanagement
team,strategy,e+ecutionandcommerciali7ationplanshisissupplementedbylegal
andaccountingduediligence, typically carriedoutbyane+ternal agency In India,
the entireprocess takes about A months )ntrepreneurs are advised to keep that in
mindbeforelookingtoraisefundsheactualcashinflo*mightgetdelayedbecause
ofregulatoryissuesItisinterestingtonotethatin5S%,attimesangels*ritechecksacrossthetable
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)inancing 0ptions in :eneral
hepossibilityofraisingasubstantialpartofpro-ectfinancesinIndiathroughboth
equityanddebtinstrumentsareamongthekeyadvantagesofinvestinginIndia
heIndianbankingsystemhassho*nremarkablegro*thoverthelastt*odecades
herapidgro*thandincreasingcomple+ityof the financialmarkets,especially the
capital market have brought about measures for further development and
improvement in the *orking of these markets Banks and development financialinstitutions ledby I1I1I, IDBI and IF1I *ereproviders of term loans for funding
pro-ects he options *ere limited to conventionalbusinesses, ie manufacturing
centricServicessector*asignoredbecauseofthecollateralissue
)quity*asraisedfromthecapitalmarketsusingtheI6.routehebullmarketsof
the("s,fuelledby=arshadMehtaandtheFIIs,ensuredthatadJ venturecapital*aseasilyavailableManufacturingcompaniese+ploitedthistothefull
heservicessector*asignored,likesoft*are,media,etc0ackofunderstandingof
thesesectors*asalsoresponsibleforthesameIf*elookbackto&((&oreven&((',
thesituationas regards financialoutlayavailable to Indiansoft*arecompanies*as
poor Most soft*are companies found it e+tremely difficult to source seed capital,
*orkingcapitalorevenventurecapital
Most soft*are companies started off undercapitali7ed, and had to rely on
loansoroverdraftfacilitiestoprovide*orkingcapitalhisapproachforcedthemto
generaterevenueintheshortterm,ratherthaninvestinginproductdevelopmenthe
situationfortunatelyhaschanged
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esearc" /et"odology
REDMEN 0 MORC defines,O/esearch as a systemati7ed effort to gain no*
kno*ledgeOItisacarefulinvestigationforsearchofne*factsinanybranchofkno*ledgehe
purposeofresearchmethodologysectionistodescribetheprocedureforconduction
the study It includes researchdesign, sample si7e,datacollectionandprocedureof
analysisofresearchinstrument
/esearch al*ays starts *ith a question or a problem Its purpose is to find ans*ers to
questions through the application of the scientific method It is a systematic and
intensive study directed to*ards a more complete kno*ledge of the sub-ect studied
RE"EAR1@ DE"I(N>
Acc2 to ;erlinger
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DATA 1OLLE1TION
"e%ondarydata
Secondarydata is thedata*hich is alreadycollectedbysomeoneandcomplied for
differentpurposes*hichareusedinresearchforthisstudyItincludes>$
Internet
Maga7ine
Hournal
4e*spaper
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=iterature e*iew
A%%ordin'to"u#ashandNair,6May
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he studybrings out four important variables *hich are highly unique to
successfulventureinIndiaheyare>
%bilityto evaluateandreacttorisk
%ttentiontodetails
Marketshare
6rofits
)valuating risk seems tobe an area *here unsuccessful venture fail Since
successfulteamsfocusonestablishedmarketsandmeticulouslypursuethese
marketstogainmarketshare,theyachievedesiredprofits
A%%ordin'to3u$ar,6May
he Indian Venture 1apital Industry has follo*ed the classical model of venture
capitalfinanceheearlystagefinancing*hichincludesseeds,startup2earlystage
investment *as al*ays the ma-orpart of the total investment ?henever venture
capitalistsinvestinventurecertainbasicpreferenceplayacrucialroleininvestment
decision *o such considerations are location preferences and o*nership
preferencesSeedstagefinanceisprovidedtone*companiesfortheuseinproduct
development 2 initial marketing company maybe in theprocess of setting up the
businessormaybe in thebusiness for shortperiodbuthavenot reach the stageof
commerciali7ation
A%%ordin'to3u$ar,6Mar%h,
heindustryshouldconcentratemoreanearlystagebusinessopportunitiesinsteadof
later stage It is the e+perience *orld over and especially in the 5nited states of
%merica that the early stage opportunities have generated e+ceptional for the
industry It is recommended that the venture capitalists should retain theirbasic
feature that taking retain theirbasic feature that is taking high risk hepresent
situationmay compel venture capitalists to opt for less riskyopportunitiesbut it is
againstthespritofventurecapitalismheestablishedfactisbiggainsarepossiblein
highriskpro-ects
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A%%ordin'to1hary,6"epte$#er
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capitalists@co$investingstrategyhestudyfindsthateventhroughventurecapitalists
fi+tightmilestonesandtimelinestheythemselvescontributetomanyof thedelays
thataree+periencedbyatypicalstartupfirmhisisbecauseofthehierarchicalco$
investingpartners and the lack of understanding *ithin the venture capitalist co$
investorsasto*hatroletheyindividuallyplayinthedevelopmentoftheirportfolio
company
A%%ordin'toRo##ie,6:HH
/obbies,etal&((#Jhighlightsthemonitoringpoliciesoffundedunitsbyventure
capitalists and studies the performance targets, monitoring information, and
monitoring actions through a questionnaire$based survey he survey *as
administered to &"K British Venture 1apital %ssociation members and total of ##
responses*eregatheredinthestudyhefindingsrelatedtoperformancetargetsand
othermonitoringissues*ereconsiderableadditiontotheliteratureinthesub-ect
he issues concerningboard of directors@ role in venturebacked companies
are*idelydebatedtopicsinacademicresearchhefindingsofthestudybyFriedet
al &((KJemphasi7ethat theboardofdirectorsareamoreinvolvedintheventure$
backedfirmsthanboards*heremembersdonothavelargeo*nershipatstakehe
studyprovides an empirical evidence of variation in theboards@ involvement and
sho*sitsrelevanceinperformancemanagementoffundedunits
A%%ordin'toMishra,62u&y
hereisabundantempiricalresearchconductedindevelopedcountries*hichaddress
therelativeinvestmentevaluationcriteriatakenintoaccountinthescreeningprocessforne*ventureinvestmentproposalsQopunidis&((Jprovidesausefulsummary
ofthepreviousresearchinthisfieldheidentificationofselectioncriteriahasbeen
researchedusingdifferentmethodologiessuchassimpleratingofcriteriaperpetual
anddealspecificresponsesJ
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approach has also been used /iquelme, &((J to enhance understanding of
investmentcriteriaandalsoe+tendittootheraspectsofinvestmentprocesslikedeal
structuringanddivestment
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Conceptual )rame !ork >
3"e Venture Capital .rocessheVenture1apitalInvestment6rocess>
heventurecapitalactivityisasequentialprocessinvolvingthefollo*ingsi+steps
&Dealorigination'ScreeningCDuediligence)valuationDealstructuring:6ost$investmentactivityA)+it
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.enture1apita&Invest$entPro%ess
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Dea& ori'ination!
Ingeneratingadeal flo*,theV1investorcreatesapipelineofdealsor investment
opportunities thathe*ouldconsiderfor investing inDealmayoriginate invarious
*aysreferralsystem,activesearchsystem,andintermediaries/eferralsystemisanimportant source of deals Deals may be referred to V1Fs by their parent
organi7ations, tradepartners,industryassociations, friendsetc%notherdealflo*is
activesearchthroughnet*orks,tradefairs,conferences,seminars,foreignvisitsetc
Intermediaries is usedby venture capitalists in developed countries like 5S%, is
certainintermediaries*homatchV1Fsandthepotentialentrepreneurs
"%reenin'!
V1Fs,beforegoingforanin$depthanalysis,carryoutinitialscreeningofallpro-ectson thebasis of somebroad criteria For e+ample, the screeningprocess may limit
pro-ectstoareasin*hichtheventurecapitalistisfamiliarintermsoftechnology,or
product,ormarketscopehesi7eofinvestment,geographicallocationandstageof
financingcouldalsobeusedasthebroadscreeningcriteria
Due Di&i'en%e!
Due diligence is the industry-argon for all the activities that are associated *ith
evaluating an investmentproposal he venture capitalists evaluate the quality ofentrepreneur before appraising the characteristics of the product, market or
technologyMostventurecapitalistsaskforabusinessplantomakeanassessmentof
the possible risk and return on the venture Business plan contains detailed
informationabouttheproposedventureheevaluationofventuresbyV1FsinIndia
includesE
6reliminary evaluation> he applicant required toprovide abriefprofile of the
proposedventuretoestablishprimafacieeligibility
Detailed evaluation> .nce the preliminary evaluation is over, the proposal is
evaluatedingreaterdetailV1FsinIndiae+pecttheentrepreneurtohave>$ Integrity,
long$termvision,urgetogro*,managerialskills,commercialorientation
V1Fs in Indiaalsomake the riskanalysisof theproposedpro-ects*hich includes>
6roduct risk, Market risk, echnological risk and )ntrepreneurial risk he final
decisionistakenintermsofthee+pectedrisk$returntrade$offassho*ninFigure
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DealStructuring> Structuring refers toputting together the financial aspects of the
dealandnegotiating*iththeentrepreneurstoacceptaventurecapital9sproposaland
finally closing the deal o do a good -ob in structuring, one needs to be
kno*ledgeableinareasofaccounting,cashflo*,finance,legalandta+ation%lsothe
structure should take into consideration the various commercial issues ie *hat the
entrepreneur *ants and *hat the venture capital *ould require protecting the
investmentJDocumentationreferstothelegalaspectsofthepaper*orkinputtingthe
deal togetherhe instruments tobeused in structuringdealsaremanyandvaried
heob-ectiveinselectingtheinstrument*ouldbetoma+imi7eoroptimi7eJventure
capital9s returnsprotection and yet satisfies the entrepreneur9s requirements he
instrumentscouldbeasfollo*s>
Instru$ent Issues
0oan 1leanvssecured
Interestbearingvsnoninterestbearing
convertiblevsone*ithfeatures*arrantsJ
&st1harge,'nd1harge,
loanvsloanstock
Maturity
6referenceshares redeemableconditionsunder1ompany%ctJ
participatingparvalue
nominalshares
?arrants e+erciseprice,e+piryperiod
1ommonshares ne*orvendorshares
parvalue
partially$paidshares
InIndia,straightequityandconvertiblesarepopularandcommonlyused4o*adays,
*arrantsareissuedasatooltobringdo*npricing
%variation that*as firstusedby6%1andDI1I*asroyaltyon sales5nder
this, the company *as given a conditional loan If thepro-ect *as successful, the
companyhadtopaya;ageofsalesasroyaltyandifitfailedthentheamount*as
*ritten off In structuring a deal, it is important to listen to *hat the entrepreneur
*ants,buttheventurecapitalcomesup*ithhiso*nsolution)venfortheproposed
investmentamount,theventurecapitaldecides*hetherornottheamountrequested,
isappropriateandconsistent*iththeriskleveloftheinvestmentherisksshouldbe
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analy7ed, taking into consideration the stage at *hich the company is in and other
factorsrelatingtothepro-ectege+itproblems,etcJ
Post Invest$ent A%tivities>
.nce the deal hasbeen structured and agreement finali7ed, the venture capitalist
generally assumes the role of apartner and collaborator =e also gets involved in
shaping of the direction of the venture he degree of the venture capitalist@s
involvementdependsonhispolicy Itmaynot,ho*ever,bedesirable for aventure
capitalisttogetinvolvedintheday$to$dayoperationoftheventureIfafinancialor
managerialcrisisoccurs,theventurecapitalistmayintervene,andeveninstallane*
managementteam
E5it!
Venturecapitalistsgenerally*anttocash$outtheirgainsinfivetotenyearsafterthe
initialinvestmentheyplayapositiveroleindirectingthecompanyto*ards
particulare+itroutes%venturemaye+itinoneofthefollo*ing*ays>
&Initial6ublic.fferingsI6.9sJ
'%cquisitionbyanothercompany
C6urchaseoftheventurecapitalist@ssharesbythepromoter,
6urchaseoftheventurecapitalist@ssharebyanoutsider
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0'1ecti*e No25
3o study t"e pro'lemsfaced 'y *enture
capitalist in India2
Pro#&e$so.enture 1apita& in Indian 1onte5t
.ne can ask *hy venture funding is so successful in 5S% and faced a number of
problems in India hebiggestproblem *as a mindset change from collateral
fundingtohighriskhighreturnfundingMostofthepioneersin theindustry*ere
people*ithcreditbackgroundande+posuretomanufacturingindustries)+posureto
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fast gro*ing intellectualpropertybusiness and services sector *as almost 7ero
Moreover V1F is in its nascent stages in India he emerging scenario of global
competitivenesshasputanimmensepressureontheindustrialsectortoimprovethe
quality level *ith minimi7ation of cost of products by making use of latest
technological skillshe implication is to obtain adequate financing along*ith the
necessary hi$tech equipments toproduce an innovativeproduct *hich can succeed
andgro*inthepresentmarketcondition5nfortunately,ourcountry lacksonboth
fronts he necessary capital canbe obtained from the venture capital firms *ho
e+pectanaboveaveragerateofreturnontheinvestmenthefinancingfirmse+pect
a sound, e+perienced,matureand capablemanagement teamof the companybeing
financedSincetheinnovativepro-ectinvolvesahigherrisk,thereisane+pectation
ofhigherreturnsfromthepro-ecthepaybackperiodisalsogenerallyhigh: $#
yearsJheotherissuesthatledtosuchasituationinclude>
Li%enseRa)andTheIPOBoo$
ill early ("s, under the license ra- regime, only commodity centricbusinesses
thrived inadeficit situationofundacementplant,venturecapital isnotneeded
?hat*asneeded*asabilitytogetalicenseandthengetthepro-ectfundedbythe
banksandDFIsInmostcases,thepromoters*ere*ell$establishedindustrialhouses,
*ithnoapparentneedforfundsMostoftheseentities*erecapableofraisingfunds
fromconventionalsources,includingtermloansfrominstitutionsandequitymarkets
"%a&a#i&ity
he Indian soft*are segment has recorded an impressive gro*th over the last fe*yearsandearns large revenues fromitse+port earnings,yetour share in theglobal
market is less than&percent?ithin thesoft*are industry, thevaluechain ranges
frombody shopping at thebottom to strategic consulting at the top =igher value
addition andprofitability as *ell as significant marketpresence takeplace at the
higherendofthevaluechainIftheindustryhastogro*furtherandsurvivetheflu+
it*ouldonlybethroughinnovationForanyventureideatosucceedthereshouldbe
aproductthathasagro*ingmarket*ithascalablebusinessmodelheIindustry
*hich ismostsuitedforventurefundingbecauseof itsideasnatureJ inIndiatill
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recentlyhadaservicecentricbusinessmodel6roductsdevelopedforIndianmarkets
lackscale
Mindsets
Venturecapitalasanactivity*asvirtuallynon$e+istentinIndiaMostventurecapital
companies*anttoprovidecapitalonasecureddebtbasis,toestablishedbusinesses
*ithprofitableoperatinghistoriesMostoftheventurecapitalunits*ereoffshootsof
financial institutions andbanks and the lending mindset continued rue venture
capitaliscapitalthatisusedtohelplaunchproductsandideasoftomorro*%broad,
thisproblemissolvedbythepresenceofRangelinvestors9heyaretypically*ealthy
individuals*honotonlyprovideventurefinancebutalsohelpentrepreneurstoshape
theirbusinessandmaketheirventuresuccessful
Returns,Ta5esandRe'u&ations
hereisamultiplicityofregulatorslikeS)BIand/BIDomesticventurefundsare
set upunder the Indian rusts%ct of &KK' asper S)BI guidelines, *hile offshore
fundsroutedthroughMauritiusfollo*/BIguidelines%broad,suchfundsaremade
underthe0imited6artnership%ct,*hichbringsadvantagesintermsofta+ationhe
governmentmustallo*pensionfundsandinsurancecompanies toinvestinventure
capitalsasin5S%*herecorporatecontributionstoventurefundsarelarge
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E5it
he e+it routesavailable to theventurecapitalists*ere restricted to the I6. route
Before deregulation,pricing *as dependent on the erst*hile 11I regulations In
general,allissues*ereunderpriced)venno*S)BIguidelinesmakeitdifficultfor
pricing issues for an easy e+it !iven the failure of the .1)I and the revised
guidelines, small companiescouldnothope for aBS)4S)listing!iven thedull
marketformergersandacquisitions,strategicsale*asalsonotavailable
.a&uation
herecentphenomenonisvaluationmismatcheshankstothesoft*areboom,most
promotershaveskyhighvaluatione+pectations!iventhis,itisdifficultfordealsto
reachfinancialclosureaspromotersdonotagreetoavaluationhiscoupled*ith
thefancyforsoft*arestocksintheboursesmeansthatmostcompaniesarepreponing
theirI6.9s1onsequently,thenumberandqualityofdealsavailabletotheventure
fundsgetsreduced
Someotherma-orproblemsfacingbyventurecapitalistinIndiaare>
a. /equirementofane+periencedmanagementteam
b. /equirement of an above average rate of return on investment
0ongerpaybackperiod
". 5ncertaintyregardingthesuccessoftheproductinthemarket
d. Guestionsregardingtheinfrastructuredetailsofproductionlikeplantlocation,
accessibility, relationship *ith the suppliers and creditors, transportation
facilities,labouravailabilityetc
e. he category ofpotential customers and hence thepackaging andpricing
detailsoftheproduct
!. hesi7eofthemarket
-. Ma-orcompetitorsandtheirmarketshare
h. Skillsandrainingrequiredandthecostoftraining
i. Financialconsiderationslikereturnoncapitalemployed/.1)J,costofthe
pro-ect,theInternal/ateof/eturnI//Jofthepro-ect,totalamountoffunds
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required, ratio of o*ners investment personnel funds of the entrepreneurJ,
borro*edcapital,mortgageloansetcinthecapitalemployed
?Source.andey
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O#)e%tiveNo; =
3o study t"e futureprospect of Venture
Capital )inancing;
Prospe%tso.enture 1apita& Finan%in'
?ith theadventof liberali7ation, Indiahasbeensho*ingremarkablegro*th in the
economyinthepast&"$&'yearshegovernmentispromotinggro*thincapacity
utili7ation of available and acquired resources and hence entrepreneurship
development,by liberali7ing norms regarding venture capital ?hile only eight
domesticventurecapitalfunds*ereregistered*ithS)BIduring&((A$&((K,&funds
have alreadybeen registered in &((($'""" Institutional interest is gro*ing and
foreignventure investmentsarealsoonthe riseManystategovernmentshavealso
set up venture capital funds for the I sector inpartnership *ith the local state
financial institutionsandSIDBIhese include%ndhra6aradesh,
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!. Initiativesof theS)BI todevelopastrongandvibrantcapitalmarketgiving
theadequateliquidityandfle+ibilityforinvestorsforentryande+it
Inarecentsurveyithasbeensho*nthattheV1investmentsinIndia@sI$Soft*are
andservicessectorincludingdotcomcompaniesJ$havegro*nfrom5SL&:"million
in&((K toover5SL&'""million in'""Khecredit canbegiven to settingupof a
4ationalVenture1apitalFundfortheSoft*areandIIndustry4FSIJinassociation
*ithvarious financial institutionsofSmall IndustriesandDevelopmentBankof India
SIDBIJ he facts reveal that V1 disbursements as on September C", '""' madeby
4FSItotaled/s':CAmn
Sourcewww.evaluesevrve.com
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)indings
During the preparation of my report I have analy7ed many things *hich are
follo*ing>$
% number of people in India feel that financial institution are not only
conservativesbuttheyalsohaveabiasforforeigntechnology2theydonottrust
ontheabilitiesofentrepreneurs
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Someventure failsdue to fe*e+itoptionseams are ignorant of international
standards he team usually a t*o or three man team It does notpossess the
required depth In top management he team is often found to have technical
skillsbut doesnotpossess theoverall organi7ationbuilding skills team is often
shortsited
VenturecapitalistsinIndiaconsidertheentrepreneur9sintegrity2urgetogro*as
themostcriticalaspectorventureevaluation
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=imitations of Study1. hebiggestlimitation*astimebecausethetime*asnotsufficientasthere
*aslotofinformationtobegot2tohaveitinterpretation
2. hedatarequired*assecondary2that*asnoteasilyavailable
3. Studybyitsnatureissuggestive2notconclusive
4. )+penses*erehighincollecting2searchingthedata
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Suggestions
1. he investment shouldbe in turnaround stageSince there are many
sick industries in India and the number is gro*ing each year, the
venturecapitaliststhathavespeciali7edkno*ledgeinmanagementcan
help sick industries It*ould alsobehighlyprofitable if theventure
capitalistreplacemanagementeithergoodonesinthesickindustries
2. Itisrecommendedthattheventurecapitalistsshouldretaintheirbasic
feature that is tasking high risk hepresent situation may compel
venturecapitaliststooptforlessriskyopportunitiesbutisagainstthe
spirit of venture capitalism he established fact isbig gains are
possibleinhighriskpro-ects
3. here shouldbe a greater role for the venture capitalists in the
promotionofentrepreneurshipheVenturecapitalistsshouldpromote
entrepreneurforums,clubsandinstitutionsoflearningtoenhancethe
qualityofentrepreneurship
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+i'liograp"y
1. 2OURNAL"
%660I)D FI4%41) V)45/) S%!) I4V)SM)4
6/)F)/)41)I4I4DI%,VI4%
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ANNEXUE I
.enture%apita&ir$s)+amplesofventurecapitalfirmsinclude>
%ccede6artners
%ustinVentures
%tlasVenture
BatteryVentures
Benchmark1apital
1harles/iverVentures
Doughty=ansonechnologyVentures
FidelityVentures
=ealth 1ap
=ummer?imbled
InsightVenture6artners
MobiusVenture1apital
MohrDavido*Ventures
Sevin/osenFunds
Sequoia1apital
relys
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http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Atlas+Venture&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Atlas+Venture&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Atlas+Venture&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Benchmark+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Benchmark+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Benchmark+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Fidelity+Ventures&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Fidelity+Ventures&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Fidelity+Ventures&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Fidelity+Ventures&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insight+Venture+Partners&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insight+Venture+Partners&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insight+Venture+Partners&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insight+Venture+Partners&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insight+Venture+Partners&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Sequoia+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Sequoia+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Sequoia+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Trelys&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Trelys&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Atlas+Venture&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Benchmark+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Fidelity+Ventures&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insight+Venture+Partners&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Sequoia+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Trelys&gwp=8&curtab=2222_1 -
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ANNEJUREII
SomeimportantVenture1apitalFundsinIndia
&%6ID1Venture1apital0imited, ,Babukhan)state,=yderabad:""""&
'1anbankVenture1apitalFund0imited,IIndFloor,
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Conclusion
Venture capital canplay a more innovation and development role in a developing
country like India It could help the rehabilitation of sick unit throughpeople *ith
ideasandturnaroundmanagementskill%largenumberofsmallenterprisesinIndia
because sick unit evenbefore the commencement ofproduction ofproduction
Venture capitalist couldalsobe in line*ith thedevelopments takingplace in their
parentcompanies
et another area *here canplay a significant role in developing countries is the
servicesector including tourism,publishing,healthcareetc theycouldalsoprovide
financialassistancetopeoplecomingoutof theuniversities,technical institutesetc
*ho*ishtostarttheiro*nventure*ithor*ithouthigh$techcontent, butinvolving
high risk his *ould encourage the entrepreneurial spirit It is not only initial
funding*hichisneedfromtheventurecapitalists,buttheshouldalsosimultaneously
provide management and marketing e+pertise$a real critical aspect of venture
capitalists, but they also simultaneously provide management and marketing
e+pertise$arealcriticalaspectofventurecapitalindevelopingcountries ?hichcan
improve their effectivenessby setting up venture capital cell in /2D and other
scientific generation,providing syndicated or consortium financing and acing as
businessincubators