A Live Project Report

On
Venture Capital
(Problems and Challenges in India compared to global scenario)

Submitted to Indus Business Academy, Greater Noida.

In the fulfillment of the requirement for the PGDM course-Ist year.

Session 2010-11

Under Guidance of: Submitted by:

Prof. Samiran Jana Rahul Kumar Ravish
(Finance Faculty) FPG/10-12/015
IBA,Gn

INDUS
BUSINESS
ACADEMY

Greater Noida-201308

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 TABLE OF CONTENTS

• Acknowledgements
• Executive summary
• Introduction
• Investment philosophy
• History
• Venture Capital in India
• Stages of venture capital
• Methods of financing
• Types of venture capital
• Problems with venture capital
• Global scenario
• Corporate venturing
• Process of venture capital
• Assessing venture capital
• Current trends
• Research methodology
• Limitations
• Suggestions and recommendations
• Conclusion

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 ACKNOWLEDGEMENT

With profound sense of gratitude and regard, I express my sincere thanks to

Indus Business Academy, Greater Noida and my guide and mentor Prof.
Samiran Jana for his valuable guidance and the confidence he instilled in me,
that helped me in the successful completion of this project report. Without
his help, this project would have been a distant affair.

His thorough understanding of the subject and professional guidance was

indeed of immense help to me.

I am also greatly thankful to the faculty members of our institute who co-
operated with me and gave me their valuable time.

Rahul Kumar Ravish

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 Executive Summary

Through this project I have tried to bring to light, process of venture financing, in
theory and in practice. This is done by understanding the theoretical
aspects of venture financing at the later stage practical aspects of venture
financing are brought to light.
A venture capitalist harnesses the risk of the project first and through careful
nurturing of the project reaps reward at a later stage. While a conventional
financier leads against maximum security through collaterals and guarantees and
is interested in interest income.
Through conventional financing finds its way in to established big or medium
sized business, venture capital provides the impetus to high risk, high technology,
innovative projects often promoted by first generation entrepreneurs.

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 Introduction
A number of technocrats are seeking to set up shop on their own and capitalize on
opportunities. In this 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.

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. The venture
capitalist comes in, with money, business sense and a lot more.

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 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 orientation

When 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 management, especially with contacts
and strategy formulation. Venture capitalists mitigate the risk of investing by
developing a portfolio of young companies in a single venture fund. Many times
they co-invest with other professional venture capital firms. In addition, many
venture partnerships manage multiple funds simultaneously. For decades, venture
capitalists have nurtured the growth of America's high technology and
entrepreneurial communities resulting in significant job creation, economic
growth and international competitiveness. Companies such as Digital Equipment
Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel,
Microsoft and Genentech are famous examples of companies that received
venture capital early in their development.

(Source: National Venture Capital Association 1999 Yearbook).

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In India, these funds are governed by the Securities and Exchange Board of India
(SEBI) guidelines. According to this, venture capital fund means a fund
established in the form of a company or trust, which raises monies through loans,
donations, issue of securities or units as the case may be, and makes or proposes
to make investments in accordance with these regulations.

(Source: SEBI (Venture Capital Funds) Regulations, 1996)

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 Investment Philosophy
The basic principal underlying venture capital – invest in high-risk projects with
the anticipation of high returns. These funds are then invested in several fledging
enterprises, which require funding, but are unable to access it through the
conventional sources such as banks and financial institutions. Typically first
generation entrepreneurs start such enterprises. Such enterprises generally do not
have any major collateral to offer as security, hence banks and financial
institutions are averse to funding them. Venture capital funding may be by way of
investment in the equity of the new enterprise or a combination of debt and
equity, though equity is the most preferred route.

Since most of the ventures financed through this route are in new areas
(worldwide venture capital follows "hot industries" like InfoTech, electronics and
biotechnology), the probability of success is very low. All projects financed do
not give a high return. Some projects fail and some give moderate returns. The
investment, however, is a long-term risk capital as such projects normally take 3
to 7 years to generate substantial returns. Venture capitalists offer "more than
money" to the venture and seek to add value to the investee unit by active
participation in its management. They monitor and evaluate the project on a
continuous basis.

The venture capitalist is however not worried about failure of a company,

because the deal which succeeds, nets a very high return on his investments – high
enough to make up for the losses sustained in unsuccessful projects. The returns
generally come in the form of selling the stocks when they get listed on the stock
exchange or by a timely sale of his stake in the company to a strategic buyer. The
idea is to cash in on an increased appreciation of the share value of the company
at the time of disinvestment in the investee company. If the venture fails (more
often than not), the entire amount gets written off. Probably, that is one reason
why venture capitalists assess several projects and invest only in a handful after
careful scrutiny of the management and marketability of the project.

To conclude, a venture financier is one who funds a start up company, in most

cases promoted by a first generation technocrat promoter with equity. A venture
capitalist is not a lender, but an equity partner. He cannot survive on minimalism.
He is driven by maximization: wealth maximization. Venture capitalists are
sources of expertise for the companies they finance. Exit is preferably through
listing on stock exchanges. This method has been extremely successful in USA,

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and venture funds have been credited with the success of technology companies in
Silicon Valley. The entire technology industry thrives on it.

Early stage funding is avoided by most funds apart from ICICI ventures, Draper,
SIDBI and Angels. Funding growth or mezzanine funding till pre IPO is the
segment where most players operate. In this context, most funds in India are
private equity investors.

Size Of Investment

The size of investment is generally less than US$1mn, US$1-5mn, US$5-10mn,

and greater than US$10mn. As most funds are of a private equity kind, size of
investments has been increasing. IT companies generally require funds of about
Rs30-40mn in an early stage which fall outside funding limits of most funds and
that is why the government is promoting schemes to fund start ups in general, and
in IT in particular.

Value Addition

The venture funds can have a totally "hands on" approach towards their
investment like Draper or "hands off" like Chase. ICICI Ventures falls in the
limited exposure category. In general, venture funds who fund seed or start ups
have a closer interaction with the companies and advice on strategy, etc while the
private equity funds treat their xposure like any other listed investment. This is
partially justified, as they tend to invest in more mature stories.

A list of the members registered with the IVCA as of June 1999, has been
provided in the Annexure. However, in addition to the organized sector, there are
a number of players operating in India whose activity is not monitored by the
association. Add together the infusion of funds by overseas funds, private
individuals, ‘angel’ investors and a host of financial intermediaries and the total
pool of Indian Venture Capital today, stands at Rs50bn, according to industry
estimates!

The primary markets in the country have remained depressed for quite some time
now. In the last two years, there have been just 74 initial public offerings (IPOs)
at the stock exchanges, leading to an investment of just Rs14.24bn. That’s less
than 12% of the money raised in the previous two years. That makes the
conservative estimate of Rs36bn invested in companies through the Venture
Capital/Private Equity route all the more significant.

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Some of the companies that have received funding through this route include:

• Mastek, one of the oldest software houses in India

• Geometric Software, a producer of software solutions for the CAD/CAM
market
• Ruksun Software, Pune-based software consultancy
• SQL Star, Hyderabad based training and software development
• company
• Microland, networking hardware and services company based in
Bangalore
• Satyam Infoway, the first private ISP in India
• Hinditron, makers of embedded software
• PowerTel Boca, distributor of telecomputing products for the Indian
market
• Rediff on the Net, Indian website featuring electronic shopping, news,
chat, etc
• Entevo, security and enterprise resource management software products
• Planetasia.com, Microland’s subsidiary, one of India’s leading portals
• Torrent Networking, pioneer of Gigabit-scaled IP routers for inter/intra
nets
• Selectica, provider of interactive software selection
• Yantra, ITLInfosys’ US subsidiary, solutions for supply chain
management

Though the InfoTech companies are among the most favored by venture
capitalists, companies from other sectors also feature equally in their portfolios.
The healthcare sector with pharmaceutical, medical appliances and biotechnology
industries also get much attention in India.

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 A Brief History
The 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 industry’s 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. Whitney’s 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
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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 formingprivate

partnerships outside the SBIC format. These partnerships added to the venture
capitalist’s 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, aseries 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 were
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.
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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
period. 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 in
all sectors, but primarily focused on information technology.

How venture capital differ from banks

Conventional financing generally extends loans to companies, while VC financing
invests in equity of the company. Conventional financing looks to current income
i.e. dividend and interest, while in VC financing returns are by way of capital
appreciation. Assessment in conventional financing is conservative i.e. lower the
risk, higher the chances of getting loan. On the other hand VC financing is a risk
taking finance where potential returns outweigh risk factors.

Venture Capitalists also lend management support and provide entrepreneurs with
many other facilities. They even participate in the management process. VC
generally invest in unlisted companies and make profit only after the company
obtains listing. VC extend need based support in a number of stages of
investments unlike single round financing by conventional financiers.VC are in
for long run and rarely exit before 3 years. To sustain such commitment VC and
private equity groups seek extremely high returns.. a return of 30% in dollar
terms. A bank or an FI will fund a project as long as it assure that enough cash
flow will be generated to repay the loans.

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VC is not a lender but an equity partner. Venture capitalists take higher risks by
investing in an early-stage company with little or no history, and they expect a
higher return for their high-risk equity investment. Internationally, VCs look at an
internal rate of return (IRR) north of 40% plus. In India, the ideal benchmark is in
the region of an IRR of 25% for general funds and more than 30% for IT-specific
funds. With respect to investing in a business, institutional venture capitalists look
for average returns of at least 40 per cent to 50 per cent for start-up funding.
Second and later stage funding usually requires at least a 20 per cent to 40 per
cent return per annum.

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 \

Venture Capital In India

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

Traditionally, the role of venture capital was an extension of the developmental

financial institutions like IDBI, ICICI, SIDBI and State Finance Corporations
(SFCs). The first origins of modern Venture Capital in India can be traced to the
setting up of a Technology Development Fund (TDF) in the year 1987-88,
through the levy of a cess on all technology import payments. TDF was meant to
provide financial assistance– to innovative and high-risk technological programs
through the Industrial Development Bank of India. This measure was followed up
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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 industry’s 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.

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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.

Stages of Venture Capital Funding

The 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.
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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 break even
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.

Classification
Venture funds in India can be classified on the basis of

Genesis

Financial Institutions Led By ICICI Ventures, RCTC, ILFS, etc.

 Private venture funds like Indus, etc.

 Regional funds like Warburg Pincus, JF Electra (mostly operating out of
Hong Kong).
 Regional funds dedicated to India like Draper, Walden, etc.
 Offshore funds like Barings, TCW, HSBC, etc.
 Corporate ventures like Intel.

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To this list we can add Angels like Sivan Securities, Atul Choksey (ex Asian
Paints) and others. Merchant bankers and NBFCs who specialized in "bought out"
deals also fund companies. Most merchant bankers led by Enam Securities now
invest in IT companies.

Indian Scenario - A Statistical Snapshot

Financing By Investment Stage

Investment Stages Rs million Number

Start-up 3,813.00 297
Later stage 3,338.99 154
Other early stage 1,825.77 124
Seed stage 963.2 107
Turnaround financing 59.5 9
Total 10,000.46 691

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 Rs million

4,500.00
3,813.00
4,000.00 3,338.99
3,500.00
3,000.00
2,500.00
1,825.77
2,000.00
1,500.00 963.2
1,000.00
500.00 59.5
0.00
Start-up Later stage Other early Seed stage Turnaround
stage financing

Interpretation: This diagram shows the highest finance is received by the

venture in startup stage of any venture.

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Financing By Industry

Industry Rs million
Industrial products, machinery 2,599.32
Computer Software 1,832
Consumer Related 1,412.74
Medical 623.8
Food, food processing 500.06
Other electronics 436.54
Tel & Data Communications 385.09
Biotechnology 376.46
Energy related 249.56
Computer Hardware 203.36
Miscellaneous 1,380.85
Total 10,000.46

Interpretation: In this diagram highest finance received by industrial products

and machinery and secondly finance received by computer software.

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Financing By States

Investment Rs million
Maharashtra 2,566
Tamil Nadu 1531
Andhra Pradesh 1372
Gujarat 1102
Karnataka 1046
West Bengal 312
Haryana 300
Delhi 294
Uttar Pradesh 283
Madhya Pradesh 231
Kerala 135
Goa 105
Rajasthan 87
Punjab 84
Orissa 35
Dadra & Nagar Haveli 32
Himachal Pradesh 28
Pondicherry 22
Bihar 16
Overseas 413
Total 9994

Source IVCA (2005-06)

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 Rs million

3,000 2,566
2,500
2,000
1531
1372
1,500 1102 1046
1,000
500 312 300 294

0
h
u

at

i
al
tr a

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ak
ad

an
ng
ar

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de
sh

il N

at
uj

ry
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a
a

rn
G

Ha
Pr
m
ar

Ka

t
Ta

es
ah

a
hr

W
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nd
A

Interpretation: In this diagram highest finance given by the Maharashtra to

the ventures to promote the state economy growth.

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 Recent Investments in India

Number Of
Investments

Investor 200 200 2007 2008 2009 Total

5 6
Sequoia Capital India 7 12 13 18 3 53
Ventureast 5 11 4 9 3 32
Intel Capital 3 7 4 8 1 23
Helion Venture Partners 0 4 8 8 2 22
DFJ India 0 3 3 9 2 17
Nexus India Capital 0 1 4 9 2 16
NEA IndoUS Ventures 0 0 5 9 0 14
IDG India Ventures 0 0 6 5 0 11
Kleiner Perkins 1 3 0 6 0 10
Norwest Venture 1 3 1 2 3 10
Partners
Canaan Partners 0 1 4 4 1 10
Inventus Capital - - - - 3 3
Partners

Value Of
Investments
($ mn)

Investor 2005 2006 2007 2008 2009 Total

Sequoia Capital India 42 184 114 138 26 504
Intel Capital 19 37 15 53 7 131
Norwest Venture 13.9 8.1 24.1 17.7 92.8 156.6
Partners
Helion Venture - 30 30 30 10 100
Partners
Nexus India Capital - 7.5 16 45 7 75.5
DFJ India - 13.75 4 33 10 61
Ventureast 7 19 2 17 9 54
NEA IndoUS Ventures - - 24 26 - 50
Canaan Partners - 4 10 12 4 30
Kleiner Perkins 2 8 - 19 - 29

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IDG India Ventures - - 14 8 - 22
Inventus Capital - - - - - -
Partners

Total Funds
Raised
($ mn)
Investor 2005 2006 2007 2008 2009 Total
Sequoia Capital India 200 400 300 725 - 1,625
Helion Venture - 140 - 210 - 350
Partners
Nexus India Capital - - 100 220 - 320
Ventureast - - 136 86 - 222
NEA IndoUS Ventures - - 189 - - 189
IDG India Ventures - 150 - - - 150
Inventus Capital - - - 125 - 125
Partners
Norwest Venture - - - - - -
Partners
DFJ India - - - - - -
Kleiner Perkins - - - - - -
Intel Capital - - - - - -
Canaan Partners - - - - - -

Source : Outlook Business

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 List of registered Venture
Capital Funds
S.N Name of the Venture Capital Fund Registration Date of
o No. Registrati
on
1 Aavishkaar India Micro Venture Capital IN/VCF/02- 22.05.200
Fund 03/037 2
2 Aboyne India Trust IN/VCF/09- 10.11.200
10/161 9
3 ACA Private Equity Trust IN/VCF/08- 04.11.200
09/136 8
4 Adharshila Venture Capital Fund IN/VCF/06- 16.01.200
07/095 7
5 Aditya Birla Private Equity Trust IN/VCF/08- 24.12.200
09/138 8
6 Akruti City Venture Capital Fund IN/VCF/08- 10.07.200
09/125 8
7 Ambit Pragma Fund IN/VCF/08- 10.07.200
09/126 8
8 Anand Rathi Realty Fund IN/VCF/05- 23.06.200
06/064 5
9 APIDC IN/VC/98- 20.11.199
99/008 8
10 Aditya Birla Real Estate Fund IN/VCF/09- 26.02.201
10/169 0
11 Ariston IET Fund IN/VCF/10- 18.10.201
11/0192 0
12 ASK Real Estate Special Opportunities IN/VCF/10- 02.09.201
Fund 11/0185 0
13 Ativir Venture Capital Trust IN/VCF/07- 13.11.200
08/107 7
14 Aureos India Fund IN/VCF/05- 01.02.200
06/076 6
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 15 Avendus Ace Fund Trust IN/VCF/09- 26.10.200
10/154 9
16 Avigo India Private Equity Trust IN/VCF/05- 14.03.200
06/080 6
17 Axis Infrastructure Fund -1 IN/VCF/08- 28.04.200
09/116 8
18 Axis Venture Capital Trust IN/VCF/06- 03.10.200
07/090 6
19 Blume Ventures Fund 1 IN/VCF/10- 07.01.201
11/0201 1
20 BTS India Private Equity Fund IN/VCF/05- 31.03.200
06/085 6
21 Business Excellence Trust IN/VCF/08- 08.10.200
09/133 8
22 Business Excellence Trust II IN/VCF/10- 31.05.201
11/175 0
23 BYTS Growth Fund IN/VCF/08- 25.07.200
09/127 8
24 Canbank Venture Capital Fund IN/VC/97- 04.03.199
98/006 8
25 Cheeko Tel Pvt Ltd IN/VCF/09- 22.09.200
10/152 9
26 CIG Realty Fund IN/VCF/05- 02.12.200
06/075 5
27 Cinema Capital Venture Fund IN/VCF/08- 22.05.200
09/117 8
28 DHFL Venture Capital Fund IN/VCF/05- 01.10.200
06/069 5
29 Dhunn Carr Management and IN/VC/00- 11.01.200
Research India Private Limited 01/031 1
30 Edelweiss Investment Trust IN/VCF/05- 31.10.200
06/072 5
31 Emerging India Fund IN/VCF/10- 18.05.201
11/173 0
32 Enam India Infrastructure Fund IN/VCF/10- 06.09.201
11/0186 0
33 Eureka Venture Fund IN/VCF/04- 14.02.200
05/054 5
34 Faering Capital India Evolving Fund IN/VCF/10- 23.11.201
11/0195 0
35 Felicitas Venture Capital Trust IN/VCF/08- 17.10.200
09/135 8
36 FIRE Capital Fund IN/VCF/04- 19.07.200
05/049 4
37 Footprint Venture India Fund IN/VCF/07- 22.06.200
31 | P a g e
 08/100 7
38 Forum Synergies India Trust IN/VCF/08- 30.09.200
09/132 8
39 Gaja Capital India Fund- I IN/VCF/07- 30.10.200
08/105 7
40 Green India Venture Fund IN/VCF/08- 27.06.200
09/121 8
41 Growth Plus Real Estate Fund IN/VCF/07- 12.06.200
08/099 7
42 Gujarat Bio techology Fund IN/VCF/05- 08.04.200
06/056 5
43 Gujarat Information Tech Fund IN/VC/00- 26.06.200
01/023 0
44 Gujarat Infrastructure Development IN/VCF/05- 01.02.200
Fund 06/078 6
45 Gujarat VCF – 1990 IN/VC/99- 03.11.199
00/018 9
46 GVFL Venture Capital Fund IN/VCF/07- 07.06.200
08/098 7
47 Halcyon Opportunities Special IN/VCF/09- 07.01.201
Situations Rupee Fund 10/167 0
48 HDFC Property Fund IN/VCF/04- 21.12.200
05/053 4
49 High Street Venture Capital Trust IN/VCF/08- 24.11.200
09/137 8
50 Hive Fund IN/VC/00- 22.01.200
01/033 1
51 i3E Trust IN/VCF/09- 28.10.200
10/156 9
52 ICICI Econet Fund IN/VC/00- 04.12.200
01/028 0
53 ICICI Emerging Sector Trust IN/VCF/02- 29.08.200
03/040 2
54 IDFC - India Infrastructure Fund – 3 IN/VCF/08- 28.05.200
09/118 8
55 IDFC Infrastructure Fund IN/VCF/02- 10.12.200
03/042 2
56 IDFC Infrastructure Fund – 2 IN/VCF/05- 15.06.200
06/061 5
57 IL&FS ORIX Trust IN/VCF/09- 21.07.200
10/147 9
58 IL&FS Private Equity Trust IN/VCF/04- 27.07.200
05/050 4
59 IL&FS Special Opportunities Fund IN/VCF/09- 21.12.200
10/166 9
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 60 iLabs Venture Capital Fund IN/VC/00- 11.01.200
01/030 1
61 India Advantage Fund 1 IN/VCF/02- 20.01.200
03/043 2
62 India Advantage Fund –III IN/VCF/05- 06.06.200
06/060 5
63 India Advantage Fund IV IN/VCF/05- 11.08.200
06/067 5
64 India Advantage Fund RE S2 IN/VCF/10- 06.09.201
11/0187 0
65 India Advantage Fund S3 I (earlier IN/VCF/07- 19.03.200
known as India Advantage Fund VIII) 08/113 8
67 India Alternatives Pvt Equity Fund IN/VCF/10- 19.04.201
11/172 0
Till Zephyr Peacock India II Trust IN/VCF/09- 04.12.200
18 10/165 9
0

Types of venture capital

Generally there are three types of organised or institutional venture capital funds:-

 venture capital funds set up by angel investors, that is, high net worth
individual investors;
 venture capital subsidiaries of corporations and private venture capital
firms/ funds.
 Venture capital subsidiaries are established by major corporations,
commercial bank holding companies and other financial institutions.

Venture funds in India can be classified on the basis of the type of promoters

 Financial institutions led by ICICI ventures, RCTC, ILFS, etc.

 Private venture funds like Indus, etc.
 Regional funds : Warburg Pincus, JF Electra (mostly operating out
of Hong Kong).
 Regional funds dedicated to India: Draper, Walden, etc.
 Offshore funds :Barings, TCW, HSBC, etc.
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34 | P a g e
 Problems With VCs In The Indian Context
One can ask why venture funding is so successful in USA and faced a number of
problems in India. The biggest problem was a mindset change from "collateral
funding" to high risk high return funding. Most of the pioneers in the industry
were people with credit background and exposure to manufacturing industries.
Exposure to fast growing intellectual property business and services sector was
almost zero. All these combined to a slow start to the industry. The other issues
that led to such a situation include:

License Raj And The IPO Boom

Till early 90s, under the license raj regime, only commodity centric businesses
thrived in a deficit situation. To fund a cement plant, venture capital is not needed.
What was needed was ability to get a license and then get the project funded by
the banks and DFIs. In most cases, the promoters were well-established industrial
houses, with no apparent need for funds. Most of these entities were capable of
raising funds from conventional sources, including term loans from institutions
and equity markets.

Scalability

The Indian software segment has recorded an impressive growth over the last few
years and earns large revenues from its export earnings, yet our share in the global
market is less than 1 per cent. Within the software industry, the value chain ranges
from body shopping at the bottom to strategic consulting at the top. Higher value
addition and profitability as well as significant market presence take place at the
higher end of the value chain. If the industry has to grow further and survive the
flux it would only be through innovation.

For any venture idea to succeed there should be a product that has a growing
market with a scalable business model. The IT industry (which is most suited for
venture funding because of its "ideas" nature) in India till recently had a service
centric business model. Products developed for Indian markets lack scale.

Mindsets

Venture capital as an activity was virtually non-existent in India. Most venture

capital companies want to provide capital on a secured debt basis, to established
businesses with profitable operating histories. Most of the venture capital units

35 | P a g e
were offshoots of financial institutions and banks and the lending mindset
continued.

True venture capital is capital that is used to help launch products and ideas of
tomorrow. Abroad, this problem is solved by the presence of`angel investors’.
They are typically wealthy individuals who not only provide venture finance but
also help entrepreneurs to shape their business and make their venture successful.

Returns, Taxes and Regulations

There is a multiplicity of regulators like SEBI and RBI. Domestic venture funds
are set up under the Indian Trusts Act of 1882 as per SEBI guidelines, while
offshore funds routed through Mauritius follow RBI guidelines. Abroad, such
funds are made under the Limited Partnership Act, which brings advantages in
terms of taxation. The government must allow pension funds and insurance
companies to invest in venture capitals as in USA where corporate contributions
to venture funds are large.

Exit

The exit routes available to the venture capitalists were restricted to the IPO route.
Before deregulation, pricing was dependent on the erstwhile CCI regulations. In
general, all issues were under priced. Even now SEBI guidelines make it difficult
for pricing issues for an easy exit. Given the failure of the OTCEI and the revised
guidelines, small companies could not hope for a BSE/ NSE listing. Given the
dull market for mergers and acquisitions, strategic sale was also not available.

Valuation

The recent phenomenon is valuation mismatches. Thanks to the software boom,

most promoters have sky high valuation expectations. Given this, it is difficult for
deals to reach financial closure as promoters do not agree to a valuation. This
coupled with the fancy for software stocks in the bourses means that most
companies are preponing their IPOs. Consequently, the number and quality of
deals available to the venture funds gets reduced.

36 | P a g e
Major Problems of Venture Capital Financing :

VCF is in its nascent stages in India. The emerging scenario of global

competitiveness has put an immense pressure on the industrial sector to improve
the quality level with minimisation of cost of products by making use of latest
technological skills. The implication is to obtain adequate financing along with
the necessary hi-tech equipments to produce an innovative product which can
succeed and grow in the present market condition. Unfortunately, our country
lacks on both fronts. The necessary capital can be obtained from the venture
capital firms who expect an above average rate of return on the investment. The
financing firms expect a sound, experienced, mature and capable management
team of the company being financed. Since the innovative project involves a
higher risk, there is an expectation of higher returns from the project. The payback
period is also generally high (5 - 7 years).

The various problems/ queries can be outlined as follows :

 Requirement of an experienced management team and an above average

rate of ROI.

 Longer payback period.

 Uncertainty regarding the success of the product in the market.

 Questions regarding the infrastructure details of production like plant

location, accessibility, relationship with the suppliers and creditors,
transportation facilities, labour availability etc.

 The category of potential customers and hence the packaging and pricing
details of the product.

 The size of the market .

 Major competitors and their market share.

 Skills and Training required and the cost of training.

 Financial considerations like return on capital employed (ROCE), cost of

the project, the Internal Rate of Return (IRR) of the project, total amount
of funds required, ratio of owners investment (personnel funds of the
entrepreneur), borrowed capital, mortgage loans etc. in the capital

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 employed.

Regulatory Issues
This aims to give a bird's eye’s view of the various guidelines a venture fund has
to adhere to in India. There are a number of rules and regulation for venture
capital and these would broadly come under either of the following heads:

 The Indian Trust Act, 1882 or the Company Act, 1956 depending on
whether the fund is set up as a trust or a company. (In the US, a venture
capital firm is normally set up as a limited liability partnership)
 The Foreign Investment Promotion Board (FIPB) and the Reserve Bank of
India (RBI) in case of an offshore fund. These funds have to secure the
permission of the FIPB while setting up in India and need a clearance from
the RBI for any repatriation of income.
 The Central Board of Direct Taxation (CBDT) governs the issues
pertaining to income tax on the proceeds from venture capital funding
activity. The long term capital gains tax is at around 10% in India and the
relevant clauses to venture capital may be found in Section 10 (subsection
23).
 The Securities and Exchange Board of India has come out with a set of
guidelines attached in the annexure.

In addition to the above there are a number of arms of the

Government of India – Ministry of Finance that may have to be approached in

certain situations. Also intervention allied agencies like the Department of
Electronics, the National Association of Software and Computers (NASSCOM)
and various taskforces and standing committees is not uncommon.

Probably this explains why most of the funds prefer to take the easy way out by
listing as offshore funds operating out of tax havens like Mauritius (where the
Avoidance of Double Taxation Treaty, incomes may be freely repatriated).

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39 | P a g e
 Global Scenario In Brief
In the UK, more than 16,500 companies have received venture capital backing
since 1983. In a survey carried out by the British Venture Capital Association and
Coopers & Lybrand (now Price Waterhouse Coopers, over a period of four years
from 1990-91 to 1994-95, on an average, venture-backed companies:

 Sales rose by 34 per cent per annum (Five times faster than that of the FT-
SE 100 companies)
 Exports grew by 29 per cent
 Investment increased by 28 per cent
 As much as 88 per cent said that they benefited from their venture capital
backers who provided "more than just money"
 Almost 90 per cent venture backed companies would have disappeared or
would have grown less rapidly without Venture Capital

In the US, in 1997 venture capitals invested a record, US$11.4bn in nascent

companies. According to VentureOne, San Francisco, CA,

 The surge in investments represented a 16 per cent increase over 1996

 Venture capitalists invested in 1,848 companies over the year, 162
more than in 1996

The Venture Capital pool in Hong Kong is 5.5 per cent of the country’s GDP,
with similar figures in Singapore and South Korea. India, Malaysia and Thailand
attract large-scale investible funds from abroad.

The prosperity of many rapidly growing Australian technology companies can be

directly attributed to venture capitalists, according to a research conducted on
behalf of Price Waterhouse Coopers. The findings of the survey, companies in the
development/ expansion stage, where the majority of the venture capital funding
is directed, exhibited increased:

 Employment at an average annual rate of 9.5 per cent between 1993 and
1997
 Sales at an average rate of 12.1 per cent
 Profits at 34.9 per cent
 Exports at 15.2 per cent
 52 per cent of the respondents viewed the importance of venture capital to
growth of business as crucial

40 | P a g e
  56 per cent considered venture capitalists as being a ‘real partner’

Corporate Venturing
Even though corporate venturing is an attractive alternative, most companies find
it difficult to establish systems, capabilities and cultures that make good venture
capital firms. Corporate managers seldom have the same freedom to fund
innovative projects or to cancel them midstream. Their skills are honed for
managing mature businesses and not nurturing start up companies. If a firm is to
apply the venture capital model, it must understand the characteristics of the
model and tailor its venture capital program to its own circumstances without
losing sight of these essentials.

Success of venture capital firms rest on the following characteristics:

 Focus on specific industry niches and look for business concepts.

 Although corporate managers have a clear focus in their business, they run
into ambiguity with venture programs.
 biggest challenge is to establish clear, prioritized objectives. Simply
making a good financial return is not sufficient.
 Manage portfolios ruthlessly, abandon losers, whereas abandoning
ventures has never been easy for large corporations, whose projects are
underpinned by personal relationships, political concerns.
 Venture capital firms share several attributes with start up they fund. They
tend to be small, flexible and quick to make decisions. They have flat
hierarchies and rely heavily on equity and incentive pay.

Apple Computers established a venture fund in 1986 with the dual objectives of
earning high financial return and supporting development of Macintosh software.
They structured compensation mechanisms, decision criteria and operating
procedures on those of top venture capital firms. While they considered
Macintosh as an initial screening factor, its funding decisions were aimed at
optimizing financial returns. The result was an IRR of 90 per cent but little
success in improving the position of Macintosh.

New ventures can be powerful source of revenues, diversification and flexibility

in rapidly changing environments. The company should create an environment
that encourages venturing. An innovative culture cannot be transplanted but must
evolve within the company. Venture investing requires different mindset from
typical corporate investors.

41 | P a g e
How relevant is corporate venturing in the Indian scenario? The firms, which
launched the successful corporate ventures had created new products in the
market operating at the higher end of the value chain and had attained a certain
size in the market. Most Indian companies are yet to move up the value chain and
consolidate their position as players in the global market.

Financing Options In General

The possibility of raising a substantial part of project finances in India through

both equity and debt instruments is among the key advantages of investing in
India.

The Indian banking system has shown remarkable growth over the last two
decades. The rapid growth and increasing complexity of the financial markets,
especially the capital market have brought about measures for further
development and improvement in the working of these markets. Banks and
development financial institutions led by ICICI, IDBI and IFCI were providers of
term loans for funding projects.

The options were limited to conventional businesses, ie manufacturing centric.

Services sector was ignored because of the "collateral" issue.

Equity was raised from the capital markets using the IPO route. The bull markets
of the 90s, fuelled by Harshad Mehta and the FIIs, ensured that (ad)venture capital
was easily available. Manufacturing companies exploited this to the full.

The services sector was ignored, like software, media, etc. Lack of understanding
of these sectors was also responsible for the same. If we look back to 1991 or
even 1992, the situation as regards financial outlay available to Indian software
companies was poor.

Most software companies found it extremely difficult to source seed capital,

working capital or even venture capital. Most software companies started off
undercapitalized, and had to rely on loans or overdraft facilities to provide
working capital. This approach forced them to generate revenue in the short term,
rather than investing in product development. The situation fortunately has
changed.

42 | P a g e
43 | P a g e
 The Venture Capital Process
Venture capitalists are a busy lot. This chapter aims to highlight the approach to
an investor and the entire process that goes into the wooing the venture capital
with your plan.

First, you need to work out a business plan. The business plan is a document that
outlines the management team, product, marketing plan, capital costs and means
of financing and profitability statements.

The venture capital investment process has variances/features that are context
specific and vary from industry, timing and region. However, activities in a
venture capital fund follow a typical sequence. The typical stages in an investment
cycle are as below:

 Generating a deal flow

 Due diligence
 Investment valuation
 Pricing and structuring the deal
 Value Addition and monitoring
 Exit

Generating A Deal Flow

In generating a deal flow, the venture capital investor creates a pipeline of ‘deals’
or investment opportunities that he would consider for investing in. This is
achieved primarily through plugging into an appropriate network. The most
popular network obviously is the network of venture capital funds/investors. It is
also common for venture capitals to develop working relationships with R&D
institutions, academia, etc, which could potentially lead to business opportunities.
Understandably the composition of the network would depend on the investment
focus of the venture capital funds/company. Thus venture capital funds focussing
on early stage technology based deals would develop a network of R&D centers
working in those areas. The network is crucial to the success of the venture capital
investor. It is almost imperative for the venture capital investor to receive a large
number of investment proposals from which he can select a few good investment
candidates finally. Successful venture capital investors in the USA examine
hundreds of business plans in order to make three or four investments in a year.

44 | P a g e
It is important to note the difference between the profile of the investment
opportunities that a venture capital would examine and those pursued by a
conventional credit oriented agency or an investment institution. By definition, the
venture capital investor focuses on opportunities with a high degree of innovation.

The deal flow composition and the technique of generating a deal flow can vary
from country to country. In India, different venture capital funds/companies have
their own methods varying from promotional seminars with R&D institutions and
industry associations to direct advertising campaigns targeted at various segments.
A clear pattern between the investment focus of a fund and the constitution of the
deal generation network is discernible even in the Indian context.

Due Diligence

Due diligence is the industry jargon for all the activities that are associated with
evaluating an investment proposal. It includes carrying out reference checks on
the proposal related aspects such as management team, products, technology and
market. The important feature to note is that venture capital due diligence focuses
on the qualitative aspects of an investment opportunity.

It is also not unusual for venture capital fund/companies to set up an ‘investment

screen’. The screen is a set of qualitative (sometimes quantitative criteria such as
revenue are also used) criteria that help venture capital funds/companies to
quickly decide on whether an investment opportunity warrants further diligence.
Screens can be sometimes elaborate and rigorous and sometimes specific and
brief. The nature of screen criteria is also a function of investment focus of the
firm at that point. Venture capital investors rely extensively on reference checks
with ‘leading lights’ in the specific areas of concern being addressed in the due
diligence.

New Financing

Sometimes, companies may have experienced operational problems during their

early stages of growth or due to bad management. These could result in losses or
cash flow drains on the company. Sometimes financing from venture capital may
end up being used to finance these losses. They avoid this through due diligence
and scrutiny of the business plan.

Inter-Company Transactions

When investments are made in a company that is part of a group, inter-company

transactions must be analyzed.
45 | P a g e
Investment Valuation

The investment valuation process is an exercise aimed at arriving at ‘an

acceptable price’ for the deal. Typically in countries where free pricing regimes
exist, the valuation process goes through the following steps:

 Evaluate future revenue and profitability

 Forecast likely future value of the firm based on experienced market
capitalization or expected acquisition proceeds depending upon the
anticipated exit from the investment.
 Target an ownership position in the investee firm so as to achieve desired
appreciation on the proposed investment. The appreciation desired should
yield a hurdle rate of return on a Discounted Cash Flow basis.

Structuring A Deal

Structuring refers to putting together the financial aspects of the deal and
negotiating with the entrepreneurs to accept a venture capital’s 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 to protect 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 capital’s
returns/protection and yet satisfy the entrepreneur’s requirements.

46 | P a g e
The instruments could be as follows:

Instrument Issues
Loan clean vs secured
Interest bearing vs non interest bearing
convertible vs one with features (warrants)
1st Charge, 2nd Charge,
loan vs loan stock
Maturity
Preference shares redeemable (conditions under Company Act)
Participating
par value
nominal shares
Warrants exercise price, expiry period
Common shares new or vendor shares
par value
partially-paid shares
Options exercise price, expiry period, call, put

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).

47 | P a g e
Promoter Shares

As venture capital is to finance growth, venture capital investment should ideally

be used for financing expansion projects (eg new plant, capital equipment,
additional working capital). On the other hand, entrepreneurs may want to sell
away part of their interests in order to lock-in a profit for their work in building up
the company. In such a case, the structuring may include some vendor shares,
with the bulk of financing going into buying new shares to finance growth.

Exit

One of the most crucial issues is the exit from the investment. After all, the return
to the venture capitalist can be realized only at the time of exit. Exit from the
investment varies from the investment to investment and from venture capital to
venture capital. There are several exit routes, buy-buck by the promoters, sale to
another venture capitalist or sale at the time of Initial Public Offering, to name a
few. In all cases specialists will work out the method of exit and decide on what is
most profitable and suitable to both the venture capitalist and the investee unit and
the promoters of the project.

At present many investments of venture capitalists in India remain on paper as

they do not have any means of exit. Appropriate changes have to be made to the
existing systems in order that venture capitalists find it easier to realize their
investments after holding on to them for a certain period of time. This factor is
even more critical to smaller and mid sized companies, which are unable to get
listed on any stock exchange, as they do not meet the minimum requirements for
such listings.

Accessing Venture Capital

Venture funds, both domestic and offshore, have been around in India for some
years now. However it is only in the past 12 to 18 months, they have come into
the limelight. The rejection ratio is very high, about 10 in 100 get beyond pre
evaluation stage, and 1 gets funded.

Venture capital funds are broadly of two kinds - generalists or specialists. It is

critical for the company to access the right type of fund, ie who can add value.
This backing is invaluable as focused/specialized funds open doors, assist in
future rounds and help in strategy. Hence, it is important to choose the right
venture capitalist.
48 | P a g e
The standard parameters used by venture capitalists are very similar to any
investment decision. The only difference being exit. If one buys a listed security,
one can exit at a price but with an unlisted security, exit becomes difficult. The
key factors which they look for in

The Management

Most businesses are people driven, with success or failure depending on the
performance of the team. It is important to distinguish the entrepreneur from the
professional management team. The value of the idea, the vision, putting the team
together, getting the funding in place are amongst others, some key aspects of the
role of the entrepreneur. Venture capitalists will insist on a professional team
coming in, including a CEO to execute the idea. One-man armies are passe.
Integrity and commitment are attributes sought for. The venture capitalist can
provide the strategic vision, but the team executes it. As a famous Silicon Valley
saying goes "Success is execution, strategy is a dream".

The Idea

The idea and its potential for commercialization are critical. Venture funds look
for a scalable model, at a country or a regional level. Otherwise the entire game
would be reduced to a manpower or machine multiplication exercise. For
example, it is very easy for Hindustan Lever to double sales of Liril - a soap
without incremental capex, while Gujarat Ambuja needs to spend at least Rs4bn
before it can increase sales by 1mn ton. Distinctive competitive advantages must
exist in the form of scale, technology, brands, distribution, etc which will make it
difficult for competition to enter.

Valuation

All investment decisions are sensitive to this. An old stock market saying "Every
stock is a buy at a price and vice versa". Most deals fail because of valuation
expectation mismatch. In India, while calculating returns, venture capital funds
will take into account issues like rupee depreciation, political instability, which
adds to the risk premia, thus suppressing valuations. Linked to valuation is the
stake, which the fund takes. In India, entrepreneurs are still uncomfortable with
the venture capital "taking control" in a seed stage project.

49 | P a g e
Exit

Without exit, gains cannot be booked. Exit may be in the form of a strategic sale
or and IPO. Taxation issues come up at the time. Any fund would discuss all exit
options before closing a deal. Sometimes, the fund insists on a buy back clause to
ensure an exit.

Portfolio Balancing

Most venture funds try and achieve portfolio balancing as they invest in different
stages of the company life cycle. For example, a venture capital has invested in a
portfolio of companies predominantly at seed stage, they will focus on expansion
stage projects for future investments to balance the investment portfolio. This
would enable them to have a phased exit.

50 | P a g e
51 | P a g e
 Current Trends
Capital Is Pouring Into Private Equity Funds

The IPO boom and its exceptional returns to venture and other kinds of private
equity investments have led institutional investors, pension funds and
endowments to park their money in these investments.

Bigger Is Better

The most established venture funds now have more partners and therefore are able
to put more money to work effectively. Also, venture firms are doing less deal
syndication, which enables them to put more money to work in a single deal.
Thirdly, many traditional early-stage venture firms have shifted to a multi-stage
investment approach. They will back companies in technologies and industries
they know intimately, almost regardless of the stage.

First-time Firms Never Had It So Good

During the 1989-91 downturn, new venture capital firms faced a problem in
raising partnership capital, as there was a ‘flight to quality’ among investors who
backed established funds in the private equity market. However, developments
over the past few years have demonstrated that investing with an established firm
is no more asure-bet than an investment in a ‘first-time fund’.

The State Wants Its Share Of The Pie Too

The Department of Electronics of the Government of India announced the

creation of a Rs1bn IT fund. Many state governments are sponsoring the
formation of new venture capital firms to spur the creation and growth of new
business quickly followed this move. Andhra Pradesh, Karnataka, Kerala, Gujarat
and West Bengal are among the states creating such programs. They are fairly
controversial efforts, because they run the risk of sacrificing return for economic
stimulus. Many would believe that they are not a good idea. However, some of
them are better designed than others and few might actually work.

Venture Firms Are Being Run More Like Businesses

One of the healthiest consequences of the growth in institutional funding has been
increased scrutiny that venture firms have come under. Feedback from previous

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investments and suggestions from the investors in these funds are helping to
increase the sense of professionalism in the industry.

No More Men In Gray Suits

Another trend that is emerging slowly is the change in the profile of a fund
manager. The venture capitalist is no longer a hybrid investment banker trying to
cash in on another market boom while still keeping his cards close to his chest.
The new-age venture capitalist is industry-bred and highly regarded in the
business and is fairly at ease with the technologies and processes in the market.

Tomorrow Is Coming Faster

Rapid changes in technology have accelerated the pace and raised the efficiencies
for getting from idea to market. Investors are specializing. Financing sources are
becoming much more focused on their way to investment in today's competitive
environment. Today, from venture capital firms to leveraged buyout (LBO)
houses and corporations, investors are devising specific plans for industries and
technologies they want to be in.

More Venture Funds Are Seeking Traditional Businesses

More venture capital funds are going after low-tech or no-tech companies. For
example, Draper International has picked up a stake in Shoppers Stop and Indus
League Clothing.

Financing Sources Are More Flexible

More companies are acquiring new ideas, products and complementary operations
to capture growth and gain market share. This means financing must allow for
covenants that permit mergers, acquisitions and continued investments.

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 Research methodology

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Problem Identification
In this project the main emphasis is given on the present scenario in venture
capital in the country and other developed countries and giving suggestions for the
further improvement of the venture capital.

Data collection method

The project primarily based on secondary data. Extensive desk- research will be
carried out.
Various libraries like the
 Chamber of commerce, etc. will be consulting for the purpose of this
project.
 Data is will be collected from various publications of
 Investment papers
 Business magazine
 Official websites
 Newspapers

Research design
Research design is the framework for a study that guides the collection and the
analysis of the data required. it is a blueprint that followed in completing the
study.

Descriptive collection
Descriptive collections are those researches, which are concerned with describing
the characteristics of a particular study.
Descriptive research is used to find out the various alternatives which is cause of
high rate of rise and return while selecting the venture capital and measuring their
performance

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 Prospects of Venture Capital Financing :

With the advent of liberalisation, India has been showing remarkable growth in
the economy in the past 10 - 12 years.
The government is promoting growth in capacity utilisation of available and
acquired resources and hence entrepreneurship development, by liberalising
norms regarding venture capital.
While only eight domestic venture capital funds were registered with SEBI during
1996-1998, 14 funds have already been registered in 1999-2000. Institutional
interest is growing and foreign venture investments are also on the rise.
Many state governments have also set up venture capital funds for the IT sector in
partnership with the local state financial institutions and SIDBI. These
include Andhra Paradesh, Karnataka, Delhi, Kerala and Tamil Nadu. The
other states are to follow soon.

In the year 2000, the finance ministry announced the liberalisation of tax
treatment for venture capital funds to promote them & to increase job
creation.
This is expected to give a strong boost to the non resident Indians located in the
Silicon valley and elsewhere to invest some of their capital, knowledge and
enterprise in these ventures.
The company would be creating and marketing branded web based consumer
products in the near future.

The following points can be considered as the harbingers of VC financing in

India :-

(1) Existence of a globally competitive high technology.

(2) Globally competitive human resource capital.
(3) Vast pool of existing and ongoing scientific and technical research carried
by large number of research laboratories.
(4) Initiatives taken by the Government in formulating policies to encourage
investors and entrepreneurs.
(5) Initiatives of the SEBI to develop a strong and vibrant capital market
giving the adequate liquidity and flexibility for investors for entry & exit.

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 Limitations of study

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 1) It will be difficult to get relevant and up-to-date data for this project.

2) The facts and figures from different sources might have some minor
variations among themselves.

3) Time is constraint in this project.

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 Suggestions and Recommendations

 Awareness should be increase in venture capital.

 Market stability.

 More liberalization fuction.

 Investment area should be increase.

 More steps on the part of government should be taken.

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Conclusion:
The world is becoming increasingly competitive. Companies are required to be
super efficient with respect to cost, productivity, labour efficiency, technical back
up, flexibility to consumer demand, adaptability and foresightedness.

There is an impending demand for highly cost effective, quality products and
hence the need for right access to valuable human expertise to guide and monitor
along with the necessary funds for financing new projects.

The Government of India in an attempt to bring the nation at par and above the
developed nations has been promoting venture capital financing to new,
innovative concepts & ideas, liberalising taxation norms providing tax incentives
to venture firms, giving a philip to the creation of local pools of capital and
holding training sessions for the emerging VC investors.

There are large sectors of the economy that are ripe for VC investors,like,. I.T.,
Pharma, Manufacturing. Telecom, Retail franchises, food processing and many
more. The nation awaits for the burgeoning VC business in India inspite of the
existing shortcomings in the Indian infrastructure. Looking ahead for a bright
future for India Inc.

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