STUDY OF VENTURE CAPITAL IN INDIA AND ITS ASPECT

STUDY OF VENTURE CAPITAL IN INDIA AND ITS ASPECT2015

A DISSERTATION REPORT ONSTUDY OF VENTURE CAPITAL IN INDIA AND ITS ASPECT

For the fulfillment of the requirement ofMASTER OF BUSINESS ADMINISTRATIONJAMIA HAMDARD, HAMDARD NAGAR, NEW DELHI(2013-2015)

Submitted to: Submitted by:Mr. Shanawaz Abdin Tanmay TondonAssistant professor [FMIT] MBA (Gen) 2013-2015

DECLARATION

I declare

(a)That the work presented for assessment in this dissertation Report is my own, that it has not previously been presented for another assessment and that my debts (for words, data, arguments and ideas) have been appropriately acknowledged

(b)That the work conforms to the guidelines for presentation and style set out in the relevant documentation.

Date:

TANMAY TANDON MBA (GEN) FINANCE

ACKNOWLEDGMENT

Dissertation report is a combined effort, so one should thank to all who have helped in making report purposeful. Hence, I take this opportunity to thank all those who have been instrumental in preparing this report. I am immensely grateful to Dr. Shibu John, Head of Department, Department of Management Studies, FMIT, Jamia Hamdard, for providing us every opportunity to bring up our talent.

I also want to thank Mr. SHANAWAZ abdin, who is my mentor and this report was not possible without her valuable efforts.

I also want to thank all my teachers, Staff members, library members and friends for their valuable advices and guidance which helped me to make this report purposeful. TANMAY TANDON MBA (GEN) FINANCE

Table of ContentPage no.1. Introduction.2. Objective of Study3. Literature Review4. Research Methodology.. 5. Data Analysis & Interpretation6. Findings.... 7. Conclusion 8. Limitation9. Suggestions Bibliographies.Annexure..ANNEXURE I NAME OF VENTURE CAPITAL FIRMS OUT SIDE OF INDIAANNEXURE II NAME OF VENTURE CAPITAL FIRMS IN INDIA.

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Chapter 1- IntroductionA number of technocrats are seeking to set up shop on their own and capitalize on opportunities. In the highly dynamic economic climate that surrounds us today, few traditional business models may survive. Countries across the globe are realizing that it is not the conglomerates and the gigantic corporations that fuel economic growth any more. The essence of any economy today is the small and medium enterprises. For example, in the US, 50% of the exports are created by companies with less than 20 employees and only 7% are created by companies with 500 or more employees. This growing trend can be attributed to rapid advances in technology in the last decade. Knowledge driven industries like InfoTech, health-care, entertainment and services have become the cynosure of bourses worldwide. In these sectors, it is innovation and technical capability that are big business-drivers. This is a paradigm shift from the earlier physical production and economies of scale model. However, starting an enterprise is never easy. There are a number of parameters that contribute to its success or downfall. Experience, integrity, prudence and a clear understanding of the market are among the sought after qualities of a promoter. However, there are other factors, which lie beyond the control of the entrepreneur. Prominent among these is the timely infusion of funds. This is where the venture capitalist comes in, with money, business sense and a lot more.

What Is Venture Capital ?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.Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.Venture capitalists generally: Finance new and rapidly growing companies Purchase equity securities Assist in the development of new products or services Add value to the company through active participation Take higher risks with the expectation of higher rewards Have a long-term orientationWhen considering an investment, venture capitalists carefully screen the technical and business merits of the proposed company. Venture capitalists only invest in a small percentage of the businesses they review and have a long-term perspective. They also actively work with the company's.

What is a Venture Capitalist?The typical person-on-the-street depiction of a venture capitalist is that of a wealthy financier who wants to fund start-up companies. The perception is that a person who develops a brand new change-the-world invention needs capital; thus, if they cant get capital from a bank or from their own pockets, they enlist the help of a venture capitalist.In truth, venture capital and private equity firms are pools of capital, typically organized as a limited partnership that invests in companies that represent the opportunity for a high rate of return within five to seven years. The venture capitalist may look at several hundred investment opportunities before investing in only a few selected companies with favorable investment opportunities. Far from being simply passive financiers, venture capitalists foster growth in companies through their involvement in the management, strategic marketing and planning of their investee companies. They are entrepreneurs first and financiers second.Even individuals may be venture capitalists. In the early days of venture capital investment, in the 1950s and 1960s, individual investors were the archetypal venture investor. While this type of individual investment did not totally disappear, the modern venture firm emerged as the dominant venture investment vehicle. However, in the last few years, individuals have again become a potent and increasingly larger part of the early stage start-up venture life cycle. These "angel investors" will mentor a company and provide needed capital and expertise to help develop companies. Angel investors may either be wealthy people with management expertise or retired business men and women who seek the opportunity for first-hand business development.

Factor to be considered by venture capitalist in selection of investment proposalThere are basically four key elements in financing of ventures which are studied in depth by the venture capitalists. These are:1. Management: The strength, expertise & unity of the key people on the board bring significant credibility to the company. The members are to be mature, experienced possessing working knowledge of business and capable of taking potentially high risks.2. Potential for Capital Gain: An above average rate of return of about 30 - 40% is required by venture capitalists. The rate of return also depends upon the stage of the business cycle where funds are being deployed. Earlier the stage, higher is the risk and hence the return. 3. Realistic Financial Requirement and Projections: The venture capitalist requires a realistic view about the present health of the organization as well as future projections regarding scope, nature and performance of the company in terms of scale of operations, operating profit and further costs related to product development through Research & Development. 4. Owner's Financial Stake: The financial resources owned & committed by the entrepreneur/ owner in the business including the funds invested by family, friends and relatives play a very important role in increasing the viability of the business. It is an important avenue where the venture capitalist keeps an open eye. A Brief HistoryThe concept of venture capital is not new. Venture capitalists often relate the story of Christopher Columbus. In the fifteenth century, he sought to travel westwards instead of eastwards from Europe and so planned to reach India. His far-fetched idea did not find favor 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.The modern venture capital industry began taking shape in the post World War II years. 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 thing 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, and in particular, L S Rockefeller, one of whose earliest investments was in Eastern Airlines, which is now defunct but was one of the earliest commercial airlines.The Second World War produced an abundance of technological innovation, primarily with military applications. They include, for example, some of the earliest work on micro circuitry. Indeed, J.H. Whitneys investment in Minute Maid was intended to commercialize an orange juice concentrate that had been developed to provide nourishment for troops in the field.In the mid-1950s, the U.S. federal government wanted to speed the development of advanced technologies. In 1957, the Federal Reserve System conducted a study that concluded that a shortage of entrepreneurial financing was a chief obstacle to the development of what it called "entrepreneurial businesses." As a response this a number of Small Business Investment Companies (SBIC) were established to "leverage" their private capital by borrowing from the federal government at below-market interest rates. Soon commercial banks were allowed to form SBICs and within four years, nearly 600 SBICs were in operation.At the same time a number of venture capital firms were forming private partnerships outside the SBIC format. These partnerships added to the venture capitalists toolkit, by offering a degree of flexibility that SBICs lack. Within a decade, private venture capital partnerships passed SBICs in total capital under management.The 1960s saw a tremendous bull IPO market that allowed venture capital firms to demonstrate their ability to create companies and produce huge investment returns. For example, when Digital Equipment went public in 1968 it provided ARD with 101% annualized Return on Investment (ROI). The US$70,000 Digital invested to start the company in 1959 had a market value of US$37mn. As a result, venture capital became a hot market, particularly for wealthy individuals and families. However, it was still considered too risky for institutional investors.In the 1970s, though, venture capital suffered a double-whammy. First, a red-hot IPO market brought over 1,000 venture-backed companies to market in 1968, the public markets went into a seven-year slump. There were a lot of disappointed stock market investors and a lot of disappointed venture capital investors too. Then in 1974, after Congress legislation against the abuse of pension fund money, all high-risk investment of these funds was halted. As a result of poor public market and the pension fund legislation, venture capital fund raising hit rock bottom in 1975.Well, things could only get better from there. Beginning in 1978, a series of legislative and regulatory changes gradually improved the climate for venture investing. First Congress slashed the capital gains tax rate to 28% from 49.5%. Then the Labor Department issued a clarification that eliminated the pension funds act as an obstacle to venture investing. At around the same time, there was a number of high-profile IPOs by venture-backed companies. These included Federal Express in 1978, and Apple Computer and Genetech Inc in 1981. This rekindled interest in venture capital on the part of wealthy families and institutional investors. Indeed, in the 1980s, the venture capital industry began its greatest period of growth. In 1980, venture firms raised and invested less than US$600 million. That number soared to nearly US$4bn by 1987. The decade also marked the explosion in the buy-out business.The late 1980s marked the transition of the primary source of venture capital funds from wealthy individuals and families to endowment, pension and other institutional funds. The surge in capital in the 1980s had predictable results. Returns on venture capital investments plunged. Many investors went into the funds anticipating returns of 30% or higher. That was probably an unrealistic expectation to begin with. The consensus today is that private equity investments generally should give the investor an internal rate of return something to the order of 15% to 25%, depending upon the degree of risk the firm is taking.However, by 1990, the average long-term return on venture capital funds fell below 8%, leading to yet another downturn in venture funding. Disappointed families and institutions withdrew from venture investing in droves in the 1989-91 periods. The economic recovery and the IPO boom of 1991-94 have gone a long way towards reversing the trend in both private equity investment performance and partnership commitments.In 1998, the venture capital industry in the United States continued its seventh straight year of growth. It raised US$25bn in committed capital for investments by venture firms, who invested over US$16bn into domestic growth companies US firms have traditionally been the biggest participants in venture deals, but non-US venture investment is growing. In India, venture funding more than doubled from $420 million in 2002 to almost $1 billion in 2003. For the first half of 2004, venture capital investment rose 32% from 2003.

Venture Capital In IndiaMost 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 (ad?)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 financial institutions, foreign institutional investors or pension funds and high net-worth individuals. Though an attempt was also made to raise funds from the public and fund new ventures, the venture capitalists had hardly any impact on the economic scenario for the next eight years.However, it was realized that the concept of venture capital funding needed to be institutionalized and regulated. This funding requires different skills in assessing the proposal and monitoring the progress of the fledging enterprise. In 1996, the Securities and Exchange Board of India (SEBI) came out with guidelines for venture capital funds has to adhere to, in order to carry out activities in India. This was the beginning of the second phase in the growth of venture capital in India. The move liberated the industry from a number of bureaucratic hassles and paved the path for the entry of a number offoreign funds into India. Increased competition brought with it greater access to capital and professional business practices from the most mature markets.There are a number of funds, which are currently operational in India and involved in funding start-up ventures. Most of them are not true venture funds, as they do not fund start-ups. However, there is a strong optimistic undertone in the air. With the Indian knowledge industry finally showing signs of readiness towards competing globally and awareness of venture capitalists among entrepreneurs higher than ever before, the stage seems all set for an overdrive.The Indian Venture Capital Association (IVCA), is the nodal center for all venture activity in the country. The association was set up in 1992 and over the last few years, has built up an impressive database. According to the IVCA, the pool of funds available for investment to its 20 members in 1997 was Rs25.6bn. Out of this, Rs10 bn had been invested in 691 projects.Certain venture capital funds are Industry specific(ie they fund enterprises only in certain industries such as pharmaceuticals, infotech or food processing) whereas others may have a much wider spectrum. Again, certain funds may have a geographic focus like Uttar Pradesh, Maharashtra, Kerala, etc whereas others may fund across different territories.

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Chapter 2- Objective of the StudyWhen we are going to study something there is specific purpose for our study. It may be for our course, as hobby, for passing our time, to find out genuine solution for any problem or to draw out certain inferences out of the available data. The objectives of my study are:

To find out the venture capital investment volume in India. To study the problem faced by venture capitalist in India. To study the future prospects of venture capital financing

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Chapter 3- Literature ReviewAccording to Subash and Nair, (May 2005)According to theses persons though the modern concept of venture capital stated during 1946 and now practiced by almost all economies around the world, there seems to be a slowdown of venture capital activities after 2000.There may be a long list of reasons for this situation, where people feel more risky to put their money in new and emerging ventures. Hardly 5% of the total venture capital investment globally is given to really stage ventures. In all the years people around the world has seen the potentiality of venture capital in promoting different economies of the world by improving the standard of living of the people by expanding business activities, increasing employment and also generating more revenue to the governmentAccording To Kumar, (June 2003)This study focus on the industry should concentrate more on early stage business opportunities instead of later stage. It is the experience world over and especially in the United States of America that the early stage opportunities have generated exceptional returns for the industry. He also suggests that individual capitalists should follow a focused investment strategy. The specialization should be in a board technology segment.According to Kumar and Kaura, (March 2006)The present study reports four factors which are used by the venture capitalist to screen new venture proposals. Using Kendalls tau-c analysis, the study brings out strong association between several variable pair. Broadly, the analysis finds that: Successful venture teams put in sustained efforts o identified target markets. They are highly meticulous while attending to the details. These teams are adept at dealing with risk because of their impeccable past experience. Indian venture capitalists do not seem to be much enamored of technology venturing; at least some of the successful funded by them do not seem to show signs of being hi- tech.The study brings out four important variables which are highly unique to successful venture in India. They are: Ability to evaluate and react to risk Attention to details Market share Profits.Evaluating risk seems to be an area where unsuccessful venture fail. Since successful teams focus on established markets and meticulously pursue these markets to gain market share, they achieve desired profits.According to Kumar, (May 2004)The Indian Venture Capital Industry has followed the classical model of venture capital finance. The early stage financing which includes seeds, startup & early stage investment was always the major part of the total investment. Whenever venture capitalists invest in venture certain basic preference play a crucial role in investment decision. Two such considerations are location preferences and ownership preferences. Seed stage finance is provided to new companies for the use in product development & initial marketing company may be in the process of setting up the business or may be in the business for short period but have not reach the stage of commercialization.According to Kumar, (March, 2004)The industry should concentrate more an early stage business opportunities instead of later stage. It is the experience world over and especially in the United states of America that the early stage opportunities have generated exceptional for the industry. It is recommended that the venture capitalists should retain their basic feature that taking retain their basic feature that is taking high risk. The present situation may compel venture capitalists to opt for less risky opportunities but it is against the sprit of venture capitalism. The established fact is big gains are possible in high risk projects.

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Chapter 4- Research MethodologyREDMEN & MORY defines, Research as a systematized effort to gain now knowledge.It is a careful investigation for search of new facts in any branch of knowledge. The purpose of research methodology section is to describe the procedure for conduction the study. It includes research design, sample size, data collection and procedure of analysis of research instrument.Research always starts with a question or a problem. Its purpose is to find answers to questions through the application of the scientific method. It is a systematic and intensive study directed towards a more complete knowledge of the subject studied.RESEARCH DESIGN:Acc. to Kerlinger, Research design is the plan structure & strategy of investigation conceived so as to obtain answers to research questions and to control variance. Acc. to Green and Tull, A research design is the specification of methods and procedures for acquiring the information needed. It is the overall operational pattern or framework of the project that stipulates what information is to be collected from which sources by what procedures. Its found that research design is purely and simply the framework for a study that guides the collection and analysis of required data.Research design is broadly classified into Exploratory research design Descriptive research design Casual research designThis research is a Exploratory research. The major purpose of this research is description of state of affairs as it exists at present.

DATA COLLECTIONSecondary dataSecondary data is the data which is already collected by someone and complied for different purposes which are used in research for this study. It includes:- Internet Magazine Journal Newspaper

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Chapter 5- DATA ANALYSISConceptual Frame Work The Venture Capital ProcessThe Venture Capital Investment Process: The venture capital activity is a sequential process involving the following six steps.

1. Deal origination2. Screening3. Due diligence Evaluation4. Deal structuring5. Post-investment activity6. Exit

Venture Capital Investment ProcessDeal origination: In generating a deal flow, the VC investor creates a pipeline of deals or investment opportunities that he would consider for investing in. Deal may originate in various ways. referral system, active search system, and intermediaries. Referral system is an important source of deals. Deals may be referred to VCFs by their parent organizations, trade partners, industry associations, friends etc. Another deal flow is active search through networks, trade fairs, conferences, seminars, foreign visits etc. Intermediaries is used by venture capitalists in developed countries like USA, is certain intermediaries who match VCFs and the potential entrepreneurs. Screening: VCFs, before going for an in-depth analysis, carry out initial screening of all projects on the basis of some broad criteria. For example, the screening process may limit projects to areas in which the venture capitalist is familiar in terms of technology, or product, or market scope. The size of investment, geographical location and stage of financing could also be used as the broad screening criteria. Due Diligence: Due diligence is the industry jargon for all the activities that are associated with evaluating an investment proposal. The venture capitalists evaluate the quality of entrepreneur before appraising the characteristics of the product, market or technology. Most venture capitalists ask for a business plan to make an assessment of the possible risk and return on the venture. Business plan contains detailed information about the proposed venture. The evaluation of ventures by VCFs in India includes; Preliminary evaluation: The applicant required to provide a brief profile of the proposed venture to establish prima facie eligibility. Detailed evaluation: Once the preliminary evaluation is over, the proposal is evaluated in greater detail. VCFs in India expect the entrepreneur to have:- Integrity, long-term vision, urge to grow, managerial skills, commercial orientation. VCFs in India also make the risk analysis of the proposed projects which includes: Product risk, Market risk, Technological risk and Entrepreneurial risk. The final decision is taken in terms of the expected risk-return trade-off as shown in Figure. Deal Structuring: Structuring refers to putting together the financial aspects of the deal and negotiating with the entrepreneurs to accept a venture capitals proposal and finally closing the deal. To do a good job in structuring, one needs to be knowledgeable in areas of accounting, cash flow, finance, legal and taxation. Also the structure should take into consideration the various commercial issues (ie what the entrepreneur wants and what the venture capital would require protecting the investment). Documentation refers to the legal aspects of the paperwork in putting the deal together. The instruments to be used in structuring deals are many and varied. The objective in selecting the instrument would be to maximize (or optimize) venture capitals returns/protection and yet satisfies the entrepreneurs requirements. The instruments could be as follows:InstrumentIssues

LoanClean vs secured

Interest bearing vs non interest bearing

convertible vs one with features (warrants)

1st Charge, 2nd Charge,

loan vs loan stock

Maturity

Preference sharesredeemable (conditions under Company Act)

Participating

par value

nominal shares

Warrantsexercise price, expiry period

Common sharesnew or vendor shares

par value

partially-paid shares

In India, straight equity and convertibles are popular and commonly used. Nowadays, warrants are issued as a tool to bring down pricing.A variation that was first used by PACT and TDICI was "royalty on sales". Under this, the company was given a conditional loan. If the project was successful, the company had to pay a % age of sales as royalty and if it failed then the amount was written off. In structuring a deal, it is important to listen to what the entrepreneur wants, but the venture capital comes up with his own solution. Even for the proposed investment amount, the venture capital decides whether or not the amount requested, is appropriate and consistent with the risk level of the investment. The risks should be analyzed, taking into consideration the stage at which the company is in and other factors relating to the project. (eg exit problems, etc).Post Investment Activities: Once the deal has been structured and agreement finalized, the venture capitalist generally assumes the role of a partner and collaborator. He also gets involved in shaping of the direction of the venture. The degree of the venture capitalist's involvement depends on his policy. It may not, however, be desirable for a venture capitalist to get involved in the day-to-day operation of the venture. If a financial or managerial crisis occurs, the venture capitalist may intervene, and even install a new management team. Exit: Venture capitalists generally want to cash-out their gains in five to ten years after the initial investment. They play a positive role in directing the company towards particular exit routes. A venture may exit in one of the following ways:1. Initial Public Offerings (IPOs)2. Acquisition by another company3. Purchase of the venture capitalist's shares by the promoter, 4. Purchase of the venture capitalist's share by an outsider Stages of Venture Capital FundingThe Venture Capital funding varies across the different stages of growth of a firm. The various stages are:

1. Pre seed Stage: Here, a relatively small amount of capital is provided to an entrepreneur to conceive and market a potential idea having good future prospects. The funded work also involves product development to some extent.

2. Seed Stage: Financing is provided to complete product development and commence initial marketing formalities.

3. Early Stage / First Stage: Finance is provided to companies to initiate commercial manufacturing and sales.

4. Second Stage: In the Second Stage of Financing working capital is provided for the expansion of the company in terms of growing accounts receivable and inventory.

5. Third Stage: Funds provided for major expansion of a company having increasing sales volume. This stage is met when the firm crosses the breakeven point.

6. Bridge / Mezzanine Financing or Later Stage Financing: Bridge / Mezzanine Financing or Later Stage Financing is financing a company just before its IPO (Initial Public Offer). Often, bridge finance is structured so that it can be repaid, from the proceeds of a public offering.Methods of Venture FinancingVenture capital is typically available in three forms in India, they are:

Equity: All VCFs in India provide equity but generally their contribution does not exceed 49 percent of the total equity capital. Thus, the effective control and majority ownership of the firm remains with the entrepreneur. They buy shares of an enterprise with an intention to ultimately sell them off to make capital gains. Conditional Loan: It is repayable in the form of a royalty after the venture is able to generate sales. No interest is paid on such loans. In India, VCFs charge royalty ranging between 2 to 15 percent; actual rate depends on other factors of the venture such as gestation period, cost-flow patterns, riskiness and other factors of the enterprise. Income Note: It is a hybrid security which combines the features of both conventional loan and conditional loan. The entrepreneur has to pay both interest and royalty on sales, but at substantially low rates. Other Financing Methods: A few venture capitalists, particularly in the private sector, have started introducing innovative financial securities like participating debentures, introduced by TCFC is an example.

Venture Capital Fund OperationVenture capitalists are very selective in deciding what to invest in. A common figure is that they invest only in about one in four hundred ventures presented to them.They are only interested in ventures with high growth potential. Only ventures with high growth potential are capable of providing the return that venture capitalists expect, and structure their businesses to expect. Because many businesses cannot create the growth required having an exit event within the required timeframe, venture capital is not suitable for everyone.Venture capitalists usually expect to be able to assign personnel to key management positions and also to obtain one or more seats on the company's board of directors. This is to put people in place, a phrase that has sometimes quite unfortunate implications as it was used in many accounting scandals to refer to a strategy of placing incompetent or easily bypassed individuals in positions of due diligence and formal legal responsibility, enabling others to rob stockholders blind. Only a tiny portion of venture capitalists, however, have been found liable in the large scale frauds that rocked American (mostly) finance in 2000 and 2001.Venture capitalists expect to be able to sell their stock, warrants, options, convertibles, or other forms of equity in three to ten years: this is referred to as harvesting. Venture capitalists know that not all their investments will pay-off. The failure rate of investments can be high; anywhere from 20% to 90% of the enterprises funded fail to return the invested capital.Many venture capitalists try to mitigate this problem through diversification. They invest in companies in different industries and different countries so that the systematic risk of their total portfolio is reduced. Others concentrate their investments in the industry that they are familiar with. In either case, they work on the assumption that for every ten investments they make, two will be failures, two will be successful, and six will be marginally successful. They expect that the two successes will pay for the time given to, and risk exposure of the other eight. In good times, the funds that do succeed may offer returns of 300 to 1000% to investors.Venture capital partners (also known as "venture capitalists" or "VCs") may be former chief executives at firms similar to those which the partnership funds. Investors in venture capital funds are typically large institutions with large amounts of available capital, such as state and private pension funds, university endowments, insurance companies and pooled investment vehicles.Most venture capital funds have a fixed life of ten yearsthis model was pioneered by some of the most successful funds in Silicon Valley through the 1980s to invest in technological trends broadly but only during their period of ascendance, to cut exposure to management and marketing risks of any individual firm or its product.In such a fund, the investors have a fixed commitment to the fund that is "called down" by the VCs over time as the fund makes its investments. In a typical venture capital fund, the VCs receive an annual "management fee" equal to 2% of the committed capital to the fund and 20% of the net profits of the fund. Because a fund may run out of capital prior to the end of its life, larger VCs 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 with their initial industry contactsby the time the fund cashes out, an entirely new generation of technologies and people is ascending, whom they do not know well, 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 knows

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Chapter 6- FindingsDuring the preparation of my report I have analyzed many things which are following:- A number of people in India feel that financial institution are not only conservatives but they also have a bias for foreign technology & they do not trust on the abilities of entrepreneurs. Some venture fails due to few exit options. Teams are ignorant of international standards. The team usually a two or three man team. It does not possess the required depth In top management. The team is often found to have technical skills but does not possess the overall organization building skills team is often short sited. Venture capitalists in India consider the entrepreneurs integrity &urge to grow as the most critical aspect or venture evaluation.

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Chapter 7- ConclusionVenture capital can play a more innovation and development role in a developing country like India. It could help the rehabilitation of sick unit through people with ideas and turnaround management skill. A large number of small enterprises in India because sick unit even before the commencement of production of production. Venture capitalist could also be in line with the developments taking place in their parent companies.Yet another area where can play a significant role in developing countries is the service sector including tourism, publishing, healthcare etc. they could also provide financial assistance to people coming out of the universities, technical institutes etc. who wish to start their own venture with or without high-tech content, but involving high risk. This would encourage the entrepreneurial spirit. It is not only initial funding which is need from the venture capitalists, but the should also simultaneously provide management and marketing expertise-a real critical aspect of venture capitalists, but they also simultaneously provide management and marketing expertise-a real critical aspect of venture capital in developing countries. Which can improve their effectiveness by setting up venture capital cell in R&D and other scientific generation, providing syndicated or consortium financing and acing as business incubators.

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Chapter 8- Limitations of Study1. The biggest limitation was time because the time was not sufficient as there was lot of information to be got & to have it interpretation2. The data required was secondary & that was not easily available.3. Study by its nature is suggestive & not conclusive4. Expenses were high in collecting & searching the data.5. It will be difficult to get relevant and up-to-date data for this project.6. The facts and figures from different sources might have some minor variations among themselves.7. Time is constraint in this project.

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Chapter 9- Suggestions The investment should be in turnaround stage. Since there are many sick industries in India and the number is growing each year, the venture capitalists that have specialized knowledge in management can help sick industries. It would also be highly profitable if the venture capitalist replace management either good ones in the sick industries. It is recommended that the venture capitalists should retain their basic feature that is tasking high risk. The present situation may compel venture capitalists to opt for less risky opportunities but is against the spirit of venture capitalism. The established fact is big gains are possible in high risk projects. There should be a greater role for the venture capitalists in the promotion of entrepreneurship. The Venture capitalists should promote entrepreneur forums, clubs and institutions of learning to enhance the quality of entrepreneurship.

References Coopers & Lybrand - Eighth Annual Economic Impact of Venture Capital StudySteven P. Galante, Editor and Publisher, The Private Equity Analyst newsletter - An Overview of the Venture Capital Industry and Emerging ChangesThe Securities and Exchange Board of India - SEBI (Venture Capital Funds) Regulations Various newspapers and magazines1. The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis2. Jump up^The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis3. Jump up^See Reference: Authors: Ruhnka, J.C., Young, J.E

BOOKS I.M. Panday- venture capital development process in India I. M. Panday- venture capital the Indian experience, WebsitesInfraline.comSebi.comIndiacore.com www.indiainfoline.comwww.vcapital.comwww.investopedia.comwww.vcinstitute.com Google.comIndiainfoline.com

ANNEXURE IVenture capital firmsExamples of venture capital firms include: Accede Partners Austin Ventures Atlas Venture Battery Ventures Benchmark Capital Charles River Ventures Doughty Hanson Technology Ventures Fidelity Ventures Health Cap Hummer Wimbled Insight Venture Partners Mobius Venture Capital Mohr Davidow Ventures Sevin Rosen Funds Sequoia Capital Trelys

ANNEXURE IISome important Venture Capital Funds in India1. APIDC Venture Capital Limited, , Babukhan Estate, Hyderabad 500 001 2. Canbank Venture Capital Fund Limited, IInd Floor, Kareem Towers, Bangalore. 3. Gujarat Venture Capital Fund 1997, Ashram Road, Ahmedabad 380 009 4. Industrial Venture Capital Limited, Thyagaraya Road, Chennai 600 017 5. Gujarat Venture Capital Fund 1995 Ashram Road Ahmedabad 380 0096. Karnataka Information Technology Venture Capital Fund Cunningham Rd Bangalore 7. India Auto Ancillary Fund Nariman Point, Mumbai 400 0218. Information Technology Fund, Nariman Point, Mumbai 4000219. Tamilnadu InfoTech Fund Nariman Point, Mumbai 400021 10. Orissa Venture Capital Fund Nariman Point Mumbai 400021 11. Uttar Pradesh Venture Capital Fund Nariman Point, Mumbai 40002112. SICOM Venture Capital Fund Nariman Point Mumbai 400 021

SUBMITTED BY: TANMAY TONDON, MBA (GENERAL) Page 42