RESEARCH PROJECT REPORT

ON
A STUDY ON VENTURE CAPITAL AND HOW IT IS
HELPFUL FOR THE GROWTH OF INDIAN
ECONOMY

Submitted in partial fulfilment of the requirement for the award of the degree of

Masters of Business Administration

SUBMITTED TO: SUBMITTED BY:

MR. PRAKASH KUNDNANI PRADYUMN SHUKLA
Department of Business Administration MBA 2 nd YEAR
2000110700091

UNITED INSTITUTE OF MANAGEMENT (PRAYAGRAJ)

Affiliated To
Dr. A.P.J Abdul Kalam Technical University (AKTU)

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CERTIFICATE

2
 ACKNOWLEDGEMENT
Hard work, concentration, motivation are important but they are not only the tool which help the
student to achieve their goal. Each hard work should be rewarded with the efficient guidance,
kind cooperation, consultancy and right direction with help the individual into achieve in his
desire goal.

A profound knowledge can be achieved through any optimal combination of concentration and
inspiration. No work can be achieved by taking guidance from the people.

I would like to convey thanks to the Principal Prof. K.K. Malviya, Head of Department
Dr.Vishnu Prakash Mishra and Mentor Mr.Prakash Kundani(Assistance Professor)

The internship was a great way of learning and I learned a lot from this project from my project
Mentor Mr.Prakash Kundani.

I would like to convey my sincere thanks to my Mentor M. Prakash kundnani for rendering their
valuable time providing me full support and effective knowledge which is required in order to
success completion of this report.

NAME – PRADYUMN SHUKLA ROLL NO. 2000110700091

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 PREFACE

In today; trend of cut throat competition master of business administration (MBA) in sure to
have an edge over their counter parts.

MBA education brings its student in direct contracts with real corporate world through
company analysis .The MBA program provide its student with an in depth study of various
managerial activities conducted in various department like production ,marketing credit depth
etc. Gives the student a conceptual idea of what they are expected to manage .how to manage
and how obtain the maximum output through minimize the wastage of resources.

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 DECLARATION

I, PRADYUMN SHUKLA, hereby declare that this project report title - "A Study of Venture
Capital and how it is helpful for the growth of Indian Economy." Under the guidance of Mr.
Prakash Kundani Sir (Assistant Professor) submitted in partial fulfilment of the requirement
of the award of the degree of a M.B.A. to Dr. A.P.J. Abdul Kalam Technical University,
Lucknow is an original work done under the mentorship of Prakash Kundani Sir. To the best of
my knowledge the result embodies in this have not been submitted to any other University of
Institute for the award of any degree of diploma.

Place - Prayagraj

Pradyumn Shukla

M.B.A. 4 Sem.

2000110700091

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 INDEX

Sr. No. Content Page No.

1 Objective of report 7-8

2 Scope of study 9-10

3 Description of study 11-62

4 Research methodology 63-66

5 Importance of study 67-68

6 Data analysis and interpretation 69-79

7 Conclusion 80-81

8 Recommendation 82-83

9 Bibliography 84-85

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 CHAPTER -1

OBJECTIVE OF

REPORT

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 OBJECTIVE

1. To study about the venture capital and its importance in Indian Economy and the way
it effects the growth of Indian Economy.
2. To analyze contribution of venture capital institutions in different sectors of
our Economy.

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 CHAPTER-2
SCOPE OF STUDY

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 SCOPE OF STUDY

The study is about the venture capital finance in India. So any kind of financing other

than venture capital is out of scope. Also data of any country other than India Is about of
the scope of the study.

Due to the limitation of time the study has been performed for the limited sectors of the

venture capital investments.

This study provides a guide to the current structure of Venture Capital, its importance

andit’s financing in various sectors of the Indian Economy.The aim of the study was to
gather as detailed and comprehensive a set of data as possible.

The concept of venture capital is fairly new in India; therefore the historical data

available was limited.

This research is also helpful to know about the Venture capital and its growth in Indian

Economy.
Finally we can conclude these venture capital companies are creating good atmosphere. They are
not only financing their ventures but they are giving active supports in technological
management, human resources and other field also.

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 CHAPTER -3
DESCRIPTION OF STUDY

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 DESCRIPTION OF STUDY

INTRODUCTION

Venture Capital refers to the finance provided by Venture Capitalists, who invest in relatively
new, high growth companies or startups that have a potential to grow and develop into highly
profitable ventures. It has high-risk and high-return characteristics. Therefore, it acts as an
important source of finance for entrepreneurs with new ideas.

Venture Capital is the most suitable form of funding for companies and for businesses having
large up-front capital requirements which have no other cheap alternatives.

What is Venture Capital?

It is a private or institutional investment made to early start-up companies. Venture Capital is

money invested in businesses that are small; or exist only as an initial stage but have huge
potential to grow. The people who invest this money are known as venture capitalists.

It is an investment made when a venture capitalist buys shares of a startup company and become
a financial partner in the business.

Venture Capital is also stated as a huge capital risk or patient risk capital investment, as it
involves the risk of losing the money if the venture doesn’t succeed.

It is the basically the money invested by an outside investor to finance a new, growing or
troubled business. The money invested, by capitalists, is in exchange for an equity stake in the
business rather than given as a loan.

Venture capital investment is one of the most flexible form of financing technology based or
innovative business firms. It is a more wide way of getting finances for investment in business
enterprises which hold a bright future in terms of profit and as well as growth.

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Venture capital is invested as equity shares and not as any type of a loan. Because of investment
in shares, venture capital is also known as risk capital. The investment is majorly in risky
projects.

Broadly speaking, venture capital is a source of necessary risk capital like financing for shares. It
has now emerged as the best financing alternative in developing as well as developed countries.
Approximately 70 countries provide the facility of venture capital investment to the business
enterprises.

Importance of Venture Capital

Venture Capital institutions lets entrepreneurs convert their knowledge into viable projects with
the assistance of such Venture Capital institutions.

It helps new products with modern technology become commercially feasible.

It promotes export oriented units to earn more foreign exchange.

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 It not only provide the financial institution but also assist in management, technical and

others.

It strengthens the capital market which not only improves the borrowing concern but also

creates a situation whereby they can raise their own capital through capital market.

It promotes modern technology through the process where financial institutions

encourage business ventures with new technology.

Many sick companies get a turn around after getting proper nursing from such Venture

Capital institutions.

Features of Venture Capital

High-risk investment: It is highly risky and the chances of failure are much higher as it
provides long-term startup capital to high risk-high reward ventures.

High Tech projects: Generally, venture capital investments are made in high tech projects or
areas using new technologies as they have higher returns.

Participation in Management: Venture Capitalists act complementary to the entrepreneurs, for

better or worse, in making decisions for the direction of the company.

Length of Investment: The investors eventually seek to exit in three to seven years. The process
takes several years for having significant returns and also need the talent of venture capitalist and
entrepreneurs to reach completion.

Illiquid Investment: It is an investment that is not subject to repayment on demand or a

repayment schedule.

Venture Capital in India

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Evolution of Venture Capital

In 1983, the first analysis was reported on risk capital in India. It indicated that new companies
often face barriers while entering into the capital market and also for raising equity finance
which weakens their future expansion and growth. It also indicated that on the whole, there is a
need to assess the equity cult by ensuring competitive return on equity investment. This all came
out as institutional inadequacies and resulted in the evolution of Venture Capital.

In India, IFCO was the first institution to initiate the idea of Venture Capital when it established
the Risk Capital Foundation in 1975. It provided the seed capital to all small and risky projects.
However, the concept of Venture Capital got its recognition for the first time in the budget for
the year 1986-87.

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Objectives of Venture Capital in India

It allows for the working together of capitalists and startups/businesses closely and for the
promoting of entrepreneurs to focus on making more and more ideas.

It creates an environment suitable for knowledge and technology-based enterprises.

It helps to boost scientific, technology and knowledge-based ideas into a powerful engine

of economic growth and wealth creation in a suitable manner.

It aims to play a catalytic role to India on the world map as a success story.

Process Of Venture Capital Financing

The Venture Capital Funding process gets completed in six different stages:

Seed Stage

In this stage, a small amount of capital is provided to an entrepreneur to market a better idea
having future prospects. The investor investigates into the business plan before making any
investment and, if he is not satisfied with the idea or he does not see any potential in the
idea/product, then the investor may not consider financing the idea. But in case if the part of the
idea is worth, then the investor may spend some time and money further on the idea. At this
stage, the risk factor is very high because there are many uncertain factors.

Startup Stage

If the idea/product is fit for further investigation, then the process moves on to the second stage,
also known as the Start-up stage. At this stage Venture Capital has to submit a business plan
which must include the following:-

Executive summary of the business plan,

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 Review of current competitive scenario,

In-detailed financial projections,

Details of the management of the company,

Description of the size and potential of the market.

All the above analysis needs to be submitted, in order to decide, whether or not, Venture Capital
to take the project or not. This type of financing is provided to complete product development
and commence initial market strategies.

Second Stage

At this stage, the idea transforms into a product and is being sold. The main goal at this stage is
that Ventures tries squeezing between the rests and getting some market shares from the
competitors. The management is being monitored by the Venture Capital firms in order to know
the capability of the team just to ensure the development process of the product and how they
respond to the competitors. If the firms find out that the capabilities are against the competition.
Then the Venture Capital might not go to the next stage.

At this stage of financing, working capital is provided for the expansion of the business in terms
of growing accounts and inventory.

Third Stage

This stage is also called as later stage finance. Capital is provided to an enterprise that has basic
marketing set-up, typically for market expansion, acquisition product development etc. At a later
stage, ventures try to multiply market shares by increasing the sales of the product and having
better marketing promotion.

Venture Capital monitors objectives of earlier stages i.e. second stage and also of the current
stage to evaluate whether the team has made the expected cost reduction or not.

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Venture Capitalists prefer this stage than any other stages as the rate of failure in the later stage is
low. It is also because firms at this stage have a track record of the management, past
performance data and established the procedure for financial data.

Risk at this stage is still decreasing because venture relies on the income from the sales of the
current product.

IPO Stage

This stage is also known as a bridge finance stage. It is the last round of financing before exit.
The Ventures at this stage gain a certain amount of shares which gives them opportunities, such
as merger and acquisition, eliminating the competitors, keeping away new companies from the
market. At this stage, Venture has to determine the product position, and if possible, reposition it
attract the new market.

Advantages of Venture Capital

Expansion of Company: Venture capital provides large funding that a company needs to
expand its business. It has the ability for company expansion that would not be possible through
bank loans or other methods.

Expertise joining the company: Venture capitalists provide valuable expertise, advice and
industry connections. These experts have deep knowledge of specific market standards and they
can help you avoid your business from many downsides that are usually associated with startups.

Better Management: It’s not always that being an entrepreneur one is also a good business
manager. However, since Venture Capitalists hold a percentage of equity in the business. They
will have the power to say in the management of the business. So if one is not good at managing
the business, this is a significant benefit.

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No Obligation to repay: In addition, there is an obligation to repay to investors as it would be in
case of banks loans. Rather, investors take the investment risk on their own shoulders because
they believe in the company’s future success.

Value Added Services: Venture Capitalists provide HR Consultants, who are specialist in hiring
the best staff for your business. This helps in avoiding to hire the wrong person. It also offers a
number of other such services such as mentoring, alliances and also facilitates the exit.

Disadvantages of Venture Capital

Complex Process: It is a lengthy and complex process which needs a detailed business plan and
financial projections. Until and unless the Venture Capitalists are properly satisfied with the
business plan, whether or not it will succeed in the future, they won’t invest. So securing a deal
with a Venture Capitalist can be a long and complex process.

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Loss of control: Venture Capital firms add one of their team members to your management team,
while this is usually done for ensuring the success of the business, it can also create internal
problems.

Loss over decisions: Another big problem faced in Venture Capital funding is that you will have
to give up many key decisions on how the company will process or operate. This is because
Venture Capitalist are required to be informed about all the key decision relating to business
plans, and they usually can override such decision if they are unsatisfied with the decision.

No Confidentiality: Generally Venture Capitalist treat information confidentially. But they refuse
to sign non- disclosure agreement due to the legal ramification of doing so. This puts the ideas at
risk, especially when they are new. Further, your investor will expect regular information and
consultation to check how things are progressing. For example, accounts and minutes of board
meetings.Quick Liquidity: Most Venture Capitalists seek to realize their investment in the
company in three to five years. If your business plan expects a longer timetable before providing
liquidity, then Venture Capital funding may not be a suitable option for you.

For a virtual capital investment, you need to have the following traits:

A business firm which has the potential to grow in near future

The investment should be for a long time like from two to ten years.

The business should have had invested in shares of established business enterprises which

hold a strong history of profits.

The risk level should be high of the ongoing projects in the firm that also ensure high

amount of profits.

Once the funding is done, the investor must remain active.

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 Some of the examples of venture capital investment that were made in the past are as

follows:

A software development based company steps into telecommunication switch in Israel.

A hand tool manufacturer in china with low cost products and high operational efficiency

but the best quality.

An exporter of horticultural products in Africa

A national store chain in and around India

These examples show how investments are made in venture capital. They show growth in
business firms and a high level of sales and profitability which is best for an investors.

The venture capital investment assist in fostering innovative entrepreneurship in India. It has
developed as an outcome of the requirement to provide non-conventional, risky finance to new
ventures based on innovative entrepreneurship. An investment in the shape of equity, quasiequity
and at times debt- straight or conditional, Venture capital is made in new ventures, promoted by
a technically or professionally qualified entrepreneur. Venture capital implies risk capital. It
comprises of capital investment, both equity and debt, which carries enormous risk and
uncertainties.

Venture capital has different meanings for different people. It is in fact almost next to
impossible to define it with the help of a single definition.

Jane Koloski Morris, editor of the well-known industry publication, Venture Economics, defines
venture capital as 'providing seed, start-up and first stage financing' and also 'funding the
expansion of companies that have already demonstrated their business potential but do not yet
have access to the public securities market or to credit oriented institutional funding sources.

The European Venture Capital Association describes it as risk finance for entrepreneurial growth
oriented companies. It is investment for the medium or long term return seeking to maximize

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medium or long term for both parties. It is a partnership with the entrepreneur in which the
investor can add value to the company because of his knowledge, experience and contact base.

According to SEBI Venture Capital Funds (VCFs) Regulations, 1996, A Venture Capital Fund
means a fund established in the form of a trust/company; including a body corporate, and
registered with SEBI which (i) has a dedicated pool of capital raised in a manner specified in the
regulations and (ii) invests in venture capital undertakings (VCUs) in accordance with these
regulations.

A Venture Capital Undertaking means a domestic company (i) whose shares are not listed on a
recognized stock exchange in India and (ii) which is engaged in the business of providing
services/production/manufacture of articles/things but does not include such activities/sectors as
are specified in the negative list by SEBI with government approval-namely, real estate,
nonbanking financial companies (NBFCs), gold financing, activities not permitted under the
industrial policy of the Government and any other activity which may be specified by SEBI in
consultation with the Government from time to time.

Before the onset of venture capital, Development Finance Institutions (DFIs) had been partially
playing the role of venture capitalists by offering assistance for direct equity participation. The
requirement for venture capital was felt in the mid-eighties when a substantial chunk of investors
burnt their fingers by investing in such endeavors. The venture capital industry in India evolved
in the late 1980s with Government of India according a legal status to venture capital operations
in 1988 and has been beguiling attention ever since. Technology Development and Information
Company of India Ltd. (TDICI), an equal joint venture of ICICI and UTI, was the first
organization to commence its venture capital operations in India. TDICI was the investment
manager and the funds were registered as UTI’s Venture Capital Unit Scheme (VECAUS).
Thereafter in 1996 the regulatory framework of the industry was defined by SEBI (Venture
Capital Fund) Regulations, 1996, followed by the SEBI (Foreign Venture Capital Investor)
Regulations, 2000 on the recommendation of Chandrasekhar committee stimulating growth in
the industry.

With the passage of time venture capital have scaled astral heights. During January- September
2015, 323 deals were inked, enticing an investment of $1.4 billion.

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According to data from Venture Intelligence, a research company, investments made in first nine
months of 2015 have surpassed the previous historical high of $1.2 billion (304 deals) recorded
in whole of 2014. The Indian government budget for 2014-15 was a presage of creating an
investor friendly environment with a slew of provisions and funds earmarked for start-ups in
India. At the same time, a start-up fund worth INR 10000 crore was going to be earmarked. Thus
everything sounded positive and all these developments were harbinger of halcyon days for
angel investors and venture capitalists (VCs).

Entrepreneurs need investments for their start-up companies. The investments or the capital that
these entrepreneurs receive from wealthy investors is called Venture Capital and the investors
are called Venture Capitalists.

VC firms reduce the risk of investments by co-investing with other VC firms. Usually, there will
be the main investor called the ‘lead investor’ and other investors will be called ‘followers’.

How does Venture Capital Fund work?

1. Venture Capital Fund is made up of investments from wealthy individuals or companies

who give their money to a VC firm to manage their investment portfolios for them and to
invest in high-risk start-ups in exchange for equity.
2. The basic idea is to invest in a company’s balance sheet and infrastructure.
3. Venture Capitalist nurtures the idea of an entrepreneur for a short period of time and exits
with the help of an investment banker.
4. In a start-up company, VC will receive an equity partnership in exchange for investments
in the start-up company.
5. VC’s receive liquidation preference, it means in the worst-case scenario where the
company fails, VCs are given the first claim to all the company’s assets and technology.
It also offers voting rights over key decisions like Initial Public Offer (IPO) or even sale
of the company.

What are the types of Venture Capital funding?

As per the ideation stage, age of start-up company and its performance over the years, venture
capital funding can be categorized into different types.
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Below table gives a list of the types of venture capital funding and their features

Type of Objective & Amount of Funding

Funding

Pre-seed 1. Pre-seed funding is in the range of $100,000 – $200,000

funding 2. Funding provided when a startup is less than a year old.
3. Supports R&D, Market Research.
4. Recruit new members.

Seed Capital 1. Funding will be in the range of $ 1million – $ 2 million

2. Start-up company will need a product that will be viable in the market

Series A 1. Funding will range in between $ 2 million – $ 15 million

funding 2. The start-up company needs to have a market-proven product that will help in
scaling up fast.

Series B 1. Funding can range between $ 7 million – $ 20 million.

funding 2. This round is considered to be less risky.
3. Funding is used for Business Development, advertising.

Series C 1. Funds for developing more products and services, acquiring another company
funding 2. Funding received is usually in the range of $ 25 million.

Series D 1. Few start-ups reach this stage.

funding 2. Positive reasons could be the company wants to stay private for some more time
or they need to go for more expansion before going for IPO.
3. The negative reason could be the company did not hit the expected growth plans.
4. This is down round funding as trust in the companies abilities has been eroded.

Each letter corresponds to the development stage of the start-up that has received funding.

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What are the advantages of Venture Capital?

1. Banks usually prefer to finance a new business which has hard assets. In the current
information-based economy, new start-ups hardly have any hard asset. Venture
Capitalists step in under these circumstances.
2. They can provide more insights into the market.
3. Can help in strategy formulation.
4. Can help in developing strategic networks

How is a Venture Capital (VC) Fund Structured?

Currently, the fund structure is similar to what it was 40 to 50 years back.

1. The partnership is a combination of limited and general partners.

2. The life of the fund ranges from 7 years to 10 years.
3. The VC fund investments take place over the course of the first two to three years and the
returns are usually obtained over the last 2 or 3 years.
4. In today’s scenario, the average fund managed and the number of investments managed is
much more than what it used to be in the past.

Explain the importance of Venture Capital?

Venture Capital industry in the USA is considered as an engine of economic growth. The
modern-day computer industry in the USA was created partly due to the capital made available
by early venture capitalists like Tom Perkins, Tommy Davis, Eugene Kleiner, Arthur Rock.

Innovation and entrepreneurship are the kernels of a capitalist economy. New businesses,
however, are often highly-risky and cost-intensive ventures. As a result, external capital is often
sought to spread the risk of failure. In return for taking on this risk through investment, investors
in new companies are able to obtain equity and voting rights for cents on the potential dollar.
Venture capital, therefore, allows startups to get off the ground and founders to fulfill their
vision.

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Working of Venture Capital firms:

1. Venture capital funds usually go into a particular industry in a particular time period. For
example, in the 1980s in the US, Venture Capital (VC) funds majorly went into the
energy industry, later on, it shifted into genetic engineering, telecom industry and
software companies. In the next stage, VC funds concentrated more on the Internet-based
industry.
2. One can safely conclude that VC funding is guided more by the growth potential in a
particular industry rather than the potential and skills of individual entrepreneurs.

Venture Capital different from an angel investor

While both provide money to startup companies, venture capitalists are typically professional
investors who invest in a broad portfolio of new companies and provide hands-on guidance and
leverage their professional networks to help the new firm. Angel investors, on the other hand,
tend to be wealthy individuals who like to invest in new companies more as a hobby or
side-project and may not provide the same expert guidance. Angel investors also tend to invest
first and are later followed by VCs.

The growth of venture capital in India has followed a gradual sequence of events. The idea of

venture capital financing was adopted at the instance of the central government and government

– sponsored institutions. The need for venture capital financing was first highlighted in 1972 by

the Committee on Development of small and medium entrepreneurs under the chairmanship of

R.S. Bhatt (popularly known as the Bhatt Committee) which drew attention to the problems of

new entrepreneurs and technologists in setting up industries.

Venture capital is long-term stable capital provided to early-stage, high-potential, and growth

start-up companies. Venture capital funds generally invest in novel and scalable technology or

business models in technology industries, such as software engineering, consumer internet,

biotechnology and other industries. Venture capital funds usually require proof of concept

prior
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to their investment. Venture capital funds bring domain knowledge and expertise.

Wright and Robbie (1998) defined venture capital as, “this is the investment for long term by a

number of investors in risky equity where their prime aim is eventual going and they are not

interested in any periodical income or dividends.”

Cumming and Macintosh (2003) defined venture capital as, “financial intermediaries who get

capital investment from various institutional investors, high net worth people from the various

economic sectors and make investment of these pooled deposits in small and private business

which have high technology and have a lot of potential for high growth.”

In general term we can say that venture capital means capital which is planned to invest into a

highly risky firm with good growth potential. Venture capitalist is a person who works as an

intermediary between investors who give their fund to invest and new companies which gets risk

capital on another hand.

According to above definitions venture capital organization can be kept into following three

categories:

 Independents

 Captives

 Semi-captives

Independent venture capital organizations are those organizations which have many investors. It

dilutes its ownership into many investors. These investors are the main source of funding the

capital. In captives‟ venture capital organizations, these companies are setup by the parent

companies and resources are supplied by the main companies.

In semi captive organizations, these organizations are set up by one company but a large amount

of fund is invested by third party investors.

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Private equity can be categorized into three sub groups: Informal Venture Capital,

Formal Venture Capital and Other Private equity. When wealthy individuals invest their fund

into venture firm this is called informal venture Capital and these investors are termed as

business angels. In formal venture capital a company pools funds from the various people and

invest into the venture firms. This company manages the vast pool of business angels. Generally

when business angels invest their money into venture firms at their own, they invest into the

early stage away. These business angels are very profitable for the business economy.

Classification of Sources of Financing New Venture Firms

All the available sources for financing a new venture firm have been shown.

These sources are introduced as below:

1) Equity: Equity means exchanging a portion of the ownership of the business for a financial
investment in the business. The ownership stake resulting from an equity investment allows the
investor to share in the company’s profits. Equity involves permanent investment in a company
and is not repaid by the company at a later date.

Equity capital is divided into two parts:

a. Risk Capital (Public Equity and Private Equity): Private venture capital partnerships are
perhaps the largest source of risk capital as compared to public equity. They generally look for
businesses that have the capability to generate a 30-percent return on investment each year. They
like to actively participate in the planning and management of the businesses they finance and
have very large capital bases--up to $500 million--to invest at all stages.

b. Semi-equity:

2) Debt: Debt financing involves borrowing funds from creditors with the stipulation of repaying
the borrowed funds plus interest at a specified future time. For the creditors (those lending the
funds to the business), the reward for providing the debt financing is the interest on the amount
lent to the borrower. Debt financing may be of two types:

a. Soft Loan:

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b. Traditional Loan

Characteristics of venture capital concept

A venture capitalist always invests into a high growth and highly risky firm and helps the

management with guidance and expertise. There are following characteristics of the venture

capital concepts:

Financing of risky ventures and high investment returns

Generally venture capital investment is done into highly risky ventures because they have small

cap and there can be hundred per cent investment loss. These companies are not having any good

operation history.

According to the various reports published by National Venture Capital Association from time
to time, usually a venture capital firm can make a return between twentyfive per cent and thirty
five per cent of total revenue generated.

Provisions of equity capital and minority interest

Venture capital is generally invested in the form of equity capital. This investment is made in

ordinary shares and preference shares. In this way venture capital organizations are always

minority stockholders in the investee companies.

Management support and monitoring

Venture capital concept and its nature are just like operations of any financial institutions. But it

has one more uniqueness that it always supports the investee company in terms of guidance,

management support etc. So the entire venture capital concept revolves around the helping of

investee companies which received help in modern business practices. So the venture capital

firms always watch that investee companies work according to the decided plans and terms and

conditions.

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Limited time horizon and longer investment process

Venture capital is invested usually for five to ten years after they exit from the investment. This

process restricts venture capital to be invested for a limited time period rather than into unlimited

equities.

2. Venture capital investment process

This is the process by which a venture capital company invests into a venture. The initial point is

how it raises the fund from the different sources. There is a five step approach developed by

Tybee, Bruno and Isakson (2000). Starting at the very beginning, there are six early stages in the

investment financing of a firm: seed, startup, expansion, mezzanine, buyout, and (if needed)

turnaround. Most venture outlays focus on the seed, startup, and expansion stages.

A tiny fraction of venture capital money, about two per cent, goes in earliest-stage financing,

called seed money, which constitutes funds for initial research to prove a concept. A

significant proportion of venture capital is invested to support product development and initial

marketing (often referred to as startup funds).

Venture capital investment in startup/seed activities.

It is very clear form the above figure that from 1980-02, startup/seed activities had constituted

$21.4 billion out of the total US$ 339.9 billion invested in all the business stages, accounting for

approximately 6.3 per cent of all US venture capital disbursements. Startup/seed activities rose

from $157.5 million in 1980 to a first peak of $1.5 billion in 1986, a nearly ten fold increase.

They then had fallen to $241 million in 1991, for an 83.9 per cent decline. Seed/early money,

then, ramped up to a peak of $3.3 billion in 1999, leading the high-tech (and medical) boom and

other sectors as well. The latest reduction was also vivid: a 90 per cent decline from 1999 to a

30
low of $352 million in 2002. It had remained approximately the same last year, at $354 million.

This early set might be driven by funds availability and optimism or pessimism. However, it also

might reflect how many promising ideas had been generated at that point by ongoing innovation

and the advance of knowledge. The early seed cycle would also partly drive the later cycles.

The set for overall venture placements was also highly volatile, as shown in the table below. The

following figure shows the percentage change in the value of venture capital and venture capital
backed IPOs, compared with the previous year, in 1983–2003.

The five steps of venture capital investment process has been shown i.e.

Planning for objectives of investments,

Search for the better options available,

Identifying different opportunities for investment purposes,

Selecting the best deal after proper screening of the proposals,

Monitoring and evaluation of the fund.

In the first stage of establishing fund, a venture capital process starts when the venture capital
firm is established. It depends on the structure of the firm that

1. Establish fund

 Planning for Investment objectives

 Search options to get capital for investment

2. Deal flow

31
 Do the activities for creating opportunity

 Identifying opportunities

3. Decisions for investment

 Screening and evaluating the deal

 Selecting and deselecting deal

 Negotiating the structure deal

4. Monitoring and value addition

 Developing the strategies

 Search options to get capital for investment

5. Exit from the venture

 Planning for sale of investment
 Search options for exit from venture how they will go ahead.
 Initial Public Offering (IPO): The venture‟s shares are offered in a public sale on an
established share market.
 Acquisition (or trade sale): The whole venture is sold to another company.
 Secondary sale: The venture capital firm‟s sell their part of the venture‟s shares only.
 Buyback or management Buy-out: Either the entrepreneur or the management of the firm
buys back the venture capital company's shares of the firm.
 Reconstruction, liquidation or bankruptcy: If the project fails the venture capital firm‟s
last resort is to restructure or close down the venture
.
The venture capital process is complete when the company is sold through either a listing on the
stock market or the acquisition of the firm by another firm, or when the company fails.
The firm is a product to be sold, not to be retained (Kenney and von Burg 1999). The venture
capital process requires that investments should be liquidated, so there must be the possibility of
exiting the firm.

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Venture capital investment is one of the most flexible form of financing technology based or
innovative business firms. It is a more wide way of getting finances for investment in business
enterprises which hold a bright future in terms of profit and as well as growth.

venture-capital
Venture capital is invested as equity shares and not as any type of a loan. Because of investment
in shares, venture capital is also known as risk capital. The investment is majorly in risky
projects.

Broadly speaking, venture capital is a source of necessary risk capital like financing for shares. It
has now emerged as the best financing alternative in developing as well as developed countries.
Approximately 70 countries provide the facility of venture capital investment to the business
enterprises.

For a virtual capital investment, you need to have the following traits:

A business firm which has the potential to grow in near future

The investment should be for a long time like from two to ten years.

The business should have had invested in shares of established business enterprises which hold a
strong history of profits.

The risk level should be high of the ongoing projects in the firm that also ensure high amount of
profits.

Once the funding is done, the investor must remain active.

Some of the examples of venture capital investment that were made in the past are as follows:

Now let us see the scenario of venture capital investment in India.

Growth of Venture Capital in India

Venture Capital in India was known since nineties era. It is now that it has successfully emerged
for all the business firms that take up risky projects and have high growth prospects as well.

33
Venture Capital in India is provided as risk capital in the forms of shares, seed capital and other
similar means.

In 1988, ICICI emerge as a venture capital provider with unit trust of India. And now, there are a
number of venture capital institutes in India. Financial banks like ICICI have stepped into this
and have their own venture capital subsidiaries. Apart from Indian investors, international
companies too have settled in India as a financial institute providing investments to large
business firms. It is because of foreign investors that financial markets have developed in India
on a large scale. Introduction of western financial philosophies, tight contracts, focus on
profitable projects and active involvement in finance was contributed by foreign investors only.

The financial investment process has evolved a lot with time in India. Earlier there were only
commercial banks and some financial institutes but now with venture capital investment
institutes, India has grown a lot. Business forms now focus on expansion because they can get
financial support with venture capital. The scale and quality of the business enterprises have
increased in India now. With international competition, there have been a number of growth
oriented business firms that have invested in venture capital. All the business firms that deal in

34
information technology, manufacturing products as well as providing contemporary services can
opt for venture capital investment in India.

Work of Venture Capitalist

When an entrepreneur has an idea for a new product or service, they need financial resources to
create a business. Moving from innovation to production often requires large amounts of money
and business expertise. Certain investors specialize in analyzing the risks of a startup company
and providing capital or funds in exchange for ownership in the business. In this article, we look
at the role of venture capitalists in funding new businesses and explore how they contribute to
the global marketplace.

Venture capitalist (VC)

35
A venture capitalist is an investor who provides funds to a startup business in exchange for a
share in the company's profits. VCs also act as fund managers and analysts whose job is to invest
money into other businesses.

They work with partners to fund large-scale growth and are typically willing to take more
investment risks than traditional banks. Venture capitalists see the risks of a startup company as
an opportunity and will provide the large amounts of money needed to fund a new business
through various stages of development if they can arrange a deal with the entrepreneur.

A venture capitalist specializes in funding certain industries. Traditionally, a large share of

venture capital goes to fund startups in the tech sector. Some VCs also focus their investments on
pioneering markets like genetics and energy. If a business offers fast growth and new ideas, a
venture capitalist is the one to take notice and make a calculated investment.

Entrepreneurs look to a venture capitalist to provide more than funds. A VC will also mentor a
company through daily operations, financial decisions and long-term growth strategy.

Venture capitalist Work

A venture capitalist makes financial choices that impact years of business growth. Their daily
work involves investment decisions, business analysis and mentorship for new companies. The
main duties a venture capitalist performs are:

Investing in new companies

A venture capitalist helps drive innovation by funding the needs of a startup. VCs invest funds
into a company in exchange for a share in the profits and decision-making power within the
business.

Venture capitalists usually work within a firm to seek out investment opportunities for their own
clients. It's the job of a VC to analyze the risks and growth potential of an emerging business and
make a deal with companies they feel can succeed. Once a venture capital firm decides to fund a
startup company, the VC will negotiate the investment. They will decide the valuation or

36
estimated amount of money a new business is worth and determine how the investors will share
in the company's profits.

Providing business expertise

A venture capitalist will contribute to the business operations of the new company. They may
work to hire management as the company grows, serve on the board that makes decisions for the
business and grow relationships between the startup and other investors. They provide proven
expertise in guiding a company from an idea to a profitable business.

Managing funds for partners

Since venture capital is funded privately, the venture capitalist is accountable to a group of
partners who provide the cash for investment. VCs invest their funds into a new company to
generate a profit. Investment partners look to the venture capitalist to make smart decisions with
their funds.

Closing an investment

Venture capitalists will negotiate an exit strategy that will allow the firm to end their investment
after a period that generally lasts three to seven years. They will help the company's leaders sell
their business or open their stock to the public so venture capital is no longer needed to grow the
company.

After closing an account, the VC will hopefully give partners a return on their investment that
made the deal worthwhile. They will continue to manage other investments while looking for the
next opportunity, gaining commissions and profits from each venture.

37
Importance of venture capitalists in business:
Venture capitalists are the bridge between entrepreneurs and the global business market. They
invest money in an idea that they hope will change an industry. Venture capital fills the gap
when research funding provided by governments, universities and corporations end. When an
innovator is ready to move to the next stage of development, VCs help evolve that idea into a
business.

A venture capitalist will help startup companies in middle development stages when an influx of
cash is needed to manufacture and market a product. They also offer financial assistance at later
stages so a company can begin to publicly trade its stock.

Venture capitalists assume risks that traditional funding structures will not. To do this, they find
private investors to back companies for millions of dollars when the business may not have made
any profit or product. VCs allow entrepreneurs to quickly grow a business's infrastructure from
an innovative idea to a working company.

Different types of venture capital:

When a venture capital investor chooses to give money to a startup company, they provide the
needed funds for the following stages of growth:

Early-stage capital

Some venture capitalists provide funds before a startup begins operating as a business. This type
of venture capital assumes the most risk but allows for the greatest profit and growth potential by
earning a share in the eventual revenue of the startup. VCs who invest at this stage will give
funds to help replace money spent in research and development to increase daily operations and
production on a larger scale.

Expansion capital

When a company is ready for next-level growth, VCs invest the capital to expand a proven
business model. Risk is now greatly reduced and venture capitalists will provide money to help
the business market their brand further and emerge into new markets.
38
Late-stage capital

When a company has gained momentum and is producing revenue, risk is at its lowest. At this
stage, venture capitalists will provide funds as a short-term investment. Companies continue to
mature during this phase but may need help to increase their available cash flow for business
operations.

Acquisition/buyout capital

When a company is ready to go public, some VCs specialize in providing the funds that will help
set up the initial public offering. They may also assist in finding a buyer for the company in a
merger or acquisition. Venture capitalists involved in these stages of the company can earn
money by selling off their stock.

How to become a venture capitalist

To have a career as a venture capitalist, consider these steps:

Earn a degree. A Bachelor's Degree in Business with a specialization in finance will help you
build the basic skills needed for a career in investing.

Consider an MBA. An advanced degree may give you an advantage in training and expertise as
you pursue working in venture capital investment.

Work at a bank. Gain experience in your field working at a bank that invests in businesses.
Funding small business ventures will help you gain knowledge of the startup process.

Become an entrepreneur. Venture capitalists who have started and grown their own business
are considered valuable in their field. Investors with experience in startup companies can often
work in venture capital without prior financial education or training.

Work with a firm. Begin as an associate and move up to a position as a partner, making
decisions for new investments.

Start your own firm. Use your knowledge and expertise to control your own investment
opportunities and bring in strategic partners to fund new venture.

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CONTRIBUTION TO ECONOMIC GROWTH
Venture capital firms play an inevitable role in the development of the economy through
capitalizing on:

Promoting innovation; financing the development of new products, new technologies,

and processes of the companies that are meant to directly and positively influence the
economy.

Improving the absorptive capacity; raising the level of knowledge, skills, and business

acumen acquired from the process of inventing various solutions and startups.

Creating jobs through the various employment opportunities the empowered startups get

to offer.

Creating wealth that is measured by market performance and growth of sales,

profitability, survival, and return on investment.

REGIONAL DEVELOPMENT
Most of the world’s biggest companies, and the ones considered to be “game changers”, are
VC-backed. Put them on the map; a quick look can reveal the regional cluster of these companies
and suggest the general economic level and GDP of those regions.
However, in a research paper that was published in 2012, it was found that venture capital firms
are usually regional-focused for many reasons including capital capacity and legislations. It’s
why the economic impact can be largely seen concentrated in certain industries and regions.
Looking at the world now, that is changing. Since then, many venture capitalists have expanded
and also emerged during the past 8 years especially in the MENA region following the global
movement of digital transformation and 2030 Vision.

REGIONAL CONNECTIVITY AND SYNERGIES FORMATION

One of the distinguishing features of venture capitalists, besides the investment capability, is
creating networks and trusted relations across regions on an economical level. Without synergies

40
formation, venture capital firms would be a lot more like other investors. Those synergies
strengthen the positioning of the venture capital and facilitate regional growth.

The Venture capital sector is the most vibrant industry in the financial market today. Venture
capitalists are professional investors who specialize in funding and building young, innovative
enterprises. Venture capitalists are long-term investors who take a hands-on approach with all of
their investments and actively work with entrepreneurial management teams in order to build
great companies which will have the potential to develop into significant economic contributors.
Venture capital is an important source of equity for start-up companies. Venture capital can be
visualized as ―your ideas and our moneyǁ concept of developing business. Venture capitalists
are people who pool financial resources from high net worth individuals, corporate, pension
funds, insurance companies, etc. to invest in high risk - high return ventures that are unable to
source funds from regular channels like banks and capital markets. The venture capital industry
in India has really taken off in. Venture capitalists not only provide monetary resources but also
help the entrepreneur with guidance in formalizing his ideas into a viable business venture.

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

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

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

Resource raising, investment, management and exit should be as simple and flexible as

needed and driven by global trends.

Venture capital should become an institutionalized industry that protects investors and

invitee firms, operating in an environment suitable for raising the large amounts of risk
capital needed and for spurring innovation through start-up firms in a wide range of high
growth areas.

41
 Venture capital should become an institutionalized industry that protects investors and

invitee firms, operating in an environment suitable for raising the large amounts of risk
capital needed and for spurring innovation through start-up firms in a wide range of high
growth areas.

In view of increasing global integration and mobility of capital it is important that Indian

venture capital funds as well as venture finance enterprises are able to have global
exposure and investment opportunities.

Infrastructure in the form of incubators and R&D need to be promoted using government

support and private management as has successfully been done by countries such as the
US, Israel and Taiwan. This is necessary for faster conversion of R&D and technological
innovation into commercial products.

Critical factors for success of venture capital industry:

While making the recommendations the Committee felt that the following factors are critical for
the success of the VC industry in India:
(A) The regulatory, tax and legal environment should play an enabling role. Internationally,
venture funds have evolved in an atmosphere of structural flexibility, fiscal neutrality and
operational adaptability.
(B) Resource raising, investment, management and exit should be as simple and flexible as
needed and driven by global trends
(C) Venture capital should become an institutionalized industry that protects investors and
investee firms, operating in an environment suitable for raising the large amounts of risk capital
needed and for spurring innovation through startup firms in a wide range of high growth areas.
(D) In view of increasing global integration and mobility of capital it is important that Indian
venture capital funds as well as venture finance enterprises are able to have global exposure and
investment opportunities
(E) Infrastructure in the form of incubators and R&D need to be promoted using Government
support and private management as has successfully been done by countries such as the US,

42
Israel and Taiwan. This is necessary for faster conversion of R & D and technological innovation
into commercial products.
The hassle free entry of such Foreign Venture Capitalists in the pattern of FIIs is even more
necessary because of the following factors:
(i) Venture capital is a high risk area. In out of 10 projects, 8 either fails or yield negligible
returns. It is therefore in the interest of the country that FVCIs bear such a risk.
(ii) (ii) For venture capital activity, high capitalization of venture capital companies is
essential to withstand the losses in 80% of the projects. In India, we do not have such
strong companies.
(iii) (iii) The FVCIs are also more experienced in providing the needed managerial expertise
and other supports.

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 REVIEW OF LITERATURE
The theoretical research on venture finance has only been recently emerged. Venture capital is a
type of private equity finance involving investments in unquoted companies with growth
potential. It is generally medium to long term in nature and made in exchange for a stake in a
company. The term venture capital is likely to be accepted as the generic term for business
angels, mezzanine equity, institutional or any other similar investments in early stages of
business. In summary, it is “a professionally managed pool of equity capital” (Hisrich and Peters,
1998).
According to Berlin (1998), venture capitalists take an active role in the management of the
firm. They fund the new company and work in close collaboration with the stock market to take
the firm public. Therefore they place emphasis on the support to the company. They offer
start-ups the controls, they might be granted as well as the exit strategy available. In all, they
foster growth in companies through hands-on involvement in financing, management, and
technical support.In most of the venture capitalists firm, the ventures take a very active role in
the working of the firm.

Burgyl (2000) described venture capital as the intermediary between institutional investor (such
as pension funds, banks, insurance companies) and portfolio companies.
Investment screenings, negotiation, making agreements, controlling investments and assisting to
management team are the most common functions of venture capital.

Mason and Harrison (2000) stated that after bubble of internet hype got busted, most of the
venture capital companies had started funding only at maturity level because they did not want to
take any risk while funding the ventures. Because these companies had invested heavily into
venture so they had wanted only safer option while investing.

Smith (2001) has explained about the venture capital firm that these companies had given
valuable support in terms of product development, production, marketing and other areas of
business function. A venture capital firm had searched and had invested into those companies
which were already research oriented and had shown a growth curve.

44
Selection of venture by venture capital firm
1. Production capacity and past performance
2. Production planning of the venture
3. Results of the last few years
\
Lerner (2001) argued that venture capital had impacted on four factors: firms, economy,
innovation and geographical regions. Firms had benefited from additional capital that was
necessarily required for research and development, meanwhile economy was growing because of
more new jobs, and bigger value addition of new venture capital backed firms as well as
particular industry was flourishing because of bigger investment.

Amit, Glosten and Muller (1993) had suggested that venture capitalists should be regarded as
financial intermediaries. The basic aspect of financial intermediaries was to provide a link
between the entrepreneur and investor. This work had been done by venture capitalists in
particular as they had provided fund to the new ventures.

Lerner (2001) contended that venture capital backed companies were more innovative than their
counterparts. And the last, but not the least geographical regions had benefitted because of
growing investment in R&D due to closer relationship between science and business sectors.

F.C.C. &Koh W.T.H. (2002) argued that thoughtful policies and support of the venture capital
industry could create the right climate for innovation and entrepreneurship, which in turn would
pay dividends in terms of job and wealth creation.

Ueda (2004) had offered an explanation for why venture capitalists and banks had coexisted in
an economy. The key trade-off between the two choices was that while venture capitals‟
evaluations of the project quality were more accurate, they had also used the threat of
expropriation to extract rent from the entrepreneurs. The model had explained why projects
financed by venture capitals been less collateral, high growth, high risk, and high profitability,
and why venture capital markets were more active in markets where intellectual property was
better protected.

45
Wonglimpiyarat (2007) argued that venture capital had improved the nation's innovative
capacity by making investments in early stage businesses that had offered both high potential
and high risk.

Engel and Keilbach (2007) have used firm data to examine the influence of venture capital
financing on innovation behaviour, specifically on the number of patent registrations at the
German patent office.

According to Dapkus and Kriaucioniene (2008) “Research and developments in business were
seen as a key tool for economy upgrade and national competitiveness achieved through the
development of high value added”. Meanwhile venture capital; with the financing such ventures
had triggered the development of particular industry and at the same time of the overall
economy.

Florida and Kenney (1988) contended that venture capital in each region had boosted
economicaldevelopment by attracting entrepreneurs and technical personnel. Venture capitalists
had notonly helped to organize the process of innovation but also functioned to a large extent as
technological „gatekeepers‟ for the United States‟ economy and its fastest growing regions
In the study conducted by Hart and Moore (1994) had been explained that the option of the
entrepreneur to repudiate her financial obligations had limited the feasible amount of outsider
claims. Neher (1994) had extended their approach to stage financing as an instrument to
implement the optimal investment path. Admati and Pfleiderer (1994) had shown that a fixed
fraction equity contract might give robust optimal incentives if it was efficient to allocate the
control rights to the venture capitalist. Bergdorf (1994) had considered convertible debt in a
framework of incomplete contracts to transfer control rights to the value-maximizing party.

Chan, Siegel and Thakor (1990) had explained the optimal transition of control between
entrepreneur and venture capitalist in a model with initial uncertainty about the skill of the
entrepreneur. Hellmann (1996) had explained the willingness of the entrepreneur to relinquish
control rights by a trade-off between equity and debt induced incentives.

46
 Trester (1997) hadargued that the problem of an entrepreneur dissipating the firm‟s assets
could be mitigated if the investor had no option to declare default and seize the assets.

Cornelli and Yosha (1997) had analysed the problem of an entrepreneur, manipulating
short-term results for purposes of “window-dressing”. Venture capital funds are not the only
financial intermediaries that bridge gap between the investors and small businesses; banks also
provide the intermediary function for small businesses.

Ueda (2004) had focused on the ex-ante screening ability differential between venture capitalists
and banks. Winton and Yerramilli (2008) model followed-on financing decisions, thus
incorporating ex-post (costly) monitoring into their analysis. In addition to the standard
continueor-liquidate decision, the model allowed for an aggressive or a conservative continuation
choice which made continuation strategy risky in the sense of cash flow volatility between the
two choices. Venture capitalists had better ability to monitor, but had demanded higher returns
because they had imposed illiquidity on their investors; In contrast, banks were less skilled at
monitoring, but had demanded lower returns from entrepreneurs because they themselves had
faced lower funding cost by exposing themselves to liquidity shocks. Venture capitalists were
optimal only if firms had faced highly risky and positively skewed project cash flows, with low
probability of success, low liquidation value, and high returns if successful, and if they had faced
highly volatile cash flows across two continuation strategies.

The number of companies which venture capitalists had monitored seems to have changed little
since 1984.

Metrick and Yasuda (2010) had reported that, for a sample of funds raised between
1993 and 2006, a mean (median) venture capital fund had invested in 24 (20) companies and
had 5 (4) partners, suggesting that a partner at a typical venture capital firm running two funds
on
average would monitor close to 10 firms at a given point in time.

Kaplan et al. (2009) had examined fifty venture capital backed companies that eventually went
public, and had found that business lines remained stable from early business plan to IPOs, while
47
management was frequently replaced. Therefore, the results had suggested that the business
(idea) rather than the management team should be the key screening criteria for investments in
start-ups. The evidence of frequent management turnover was in line with Hellmann (1998),
which had explained that in equilibrium, founders voluntarily had relinquished control of the
firm so that venture capitalists had incentives to search for a superior management team without
fear of holdup.
In an empirical study of a large, comprehensive small business dataset, Puri and Zarutskie (2010)
have found that venture capital backed companies had tended to be younger, faster-growing, and
larger compared to non-venture capital backed companies. Thus, scalability was an important
criterion that venture capitalists used to screen prospective investments‟ market potential, while
profitability was not. The tendency for faster growth of venture capital backed firms had also
contributed to the higher CEOs turnover rate: rare are individuals who had the talent and skill
sets of founder- CEOs of start-ups as well as those of professional managers running multibillion
dollar companies. First, venture capitalists had intervened very actively in the management of the
firms that they funded: they used their experience, contacts, and reputation in order to provide
advice to the entrepreneurs, especially with regard to issues such as the selection of qualified
personnel or the dealing with suppliers and customers. Second, the infusion of capital had
occurred in stages, matching investment decisions based on information that had arrived over
time. Third, it had relied on equity-like and convertible securities instead of the senior secured
debt that characterized most bank finance.

(Chan 1983) had done his research about venture capital investment and had found that
imperfect information about investment and ill-informed entrepreneur did not make wise
decision to make investment and in this way they had earned low return. While, if they had
proper information about investment into new ideas and new ventures, they could earn huge
amount.

(Campello and Da Matta 2010) had made an equilibrium analysis about limited partners‟
demand and services of the general partners, quality of general partners and their investment
patterns in venture capital fund. They had evolved that except venture capitalist, there were large
number of financial intermediaries who had worked as an active agent such as bank and these

48
intermediaries had bridged the gap between investors and small businesses. These banks had
worked for both venture capital and small businesses as well.

Veda (2004) has explained why venture capitalist and banks had equal importance in an
economy. This model has explained that venture capital financing has been less collateral, given
higher growth, higher risk and higher profitability and why venture capitalist market was more
active and provided better protection for intellectual property.

Winton and Yerramilli (2008) have presented a paper and in this paper, they had compared
venture capital financing and bank financing. While Veda (2004) mainly focused on screening
abilities of bank and venture capital funding, Winton and Yeramilli (2008) have mainly
focused on financing decision so they could analyzed about post financing scenario as well.
When they had seen notability into these two choices, venture capital companies were having
better techniques and mechanism to monitor financing but they had wanted better returns
because they had been pressured from their investors. But on the other hand, bank had lower
monitoring rate because they had wanted lower returns from entrepreneurs. Bank had low cost of
funding or fund raising activities. Venture capital firm might opt for high risk but they had
needed high margin because their main objective was to earn better returns on their investments.

The Economic Rational for Professional Buyout Investors

Professional buyout investors‟ literature had always focused on public to private deals. But
before public listed companies were purchased and delisted by buyout investors. In the literature
review below, there are two aspects. In first aspect conflict between shareholders and managers
are discussed and leveraged buyouts are proposed as a solution and in another solution liquidity
is emphasized as main point for the firm going to privates.

Jensen and Meckling (1976) and Jensen (1986, 1989, 2007) had developed a hypothesis and
implied about free cash flow. They had shown that free cash flow public firm always had created
an agency problem and leveraged buyout had solved these problems between shareholders and
managers. A public firm manager could misuse the firm‟s free cash flow for their own
selfinterest and shareholders were not satisfied because of these strategies. Leveraged buyouts

49
were the good tools because of high debt agency. Managers had the responsibility to spare the
debt as early as possible. These types of firms did better and had shown better financial results
without any problem.

Lehn and Poulsen (1983) have studied the sample of 263 private transactions between 1980 and
1987 and have got empirical results for Jansen‟s free-cash-flow hypothesis. Cash flows which
were not distributed were the main factors for the firm to go private and stake holders to get their
due premium out of this undistributed cash flow.

Mehran and Peristians (2010) conducted a study about the companies which had become
private between 1990 and 2007 and had argued that main reason of the companies to go private
was their failure to attract investor‟s interest. Firms which were having low stock turnover, they
would prefer to go public as early as possible.

Bharath and Ditmar (2010) had also got the similar results; they had studied a sample of the
firms which went private from 1980 to 2004. Both studies compared the firms, taken over by BO
fund and acquired by other investors. They found that they had become private for the same
reason. If firm had higher free cash flow it was likely that firm would be non-LBO going.

Economic Rational of Private to Private buyouts

All the largest buyout which was taking place in the entire business world, they were private to
private buyouts.
Stomberg (2007) had conducted a study and he had taken sample of 21,397 buyouts transactions
between 1970 and 2007. In these buyouts 97 per cent were private to private buyouts.

Ching (2009) had studied and had told that these buyouts had always been worked for better and
had gone into fruitful and successful results. Unlike most other financial intermediaries, such as
pension funds and banks, venture capitalists were active investors. They had many mechanisms
to mitigate these principal-agent conflicts suggested by Jensen and Meckling (1976). First,
venture capitalists had engaged in a screening process (Chan 1983). They had carefully screened
projects and firms with great potential to succeed.

50
They had collected information before deciding whether to invest and had tried to identify
exante, unprofitable projects and bad entrepreneurs (Kaplan and Stromberg 2004). They had
carried out formal studies of the technology and market strategy, and informal assessments of the
management team. Second, venture capitalists could design financial contracts to reduce
investment risks, for example, convertible securities, allocation of control rights and cash flows

Sahlman (1990) had suggested that three control mechanisms were common to nearly all
venturecapital financing: the use of convertible securities (Trester 1998), syndication of
investment and the staging of capital infusions.

Kaplan and Stromberg (2003) had shown how venture capitalists had allocated various control
and ownership rights contingent on observable measures of financial and non-financial
performance. After studying 213 investments in 119 portfolio companies by 14 venture capital
firms, they found that if a portfolio company had performed poorly, venture capitalists would
obtain full control. As the performance would improve, the entrepreneurs again would obtain
more control rights over the company.

What Venture Capitalist and buyouts Investors do

Private equity investors are very active because they work on behalf of their limited partners.
These limited partners gives money to the venture capital firm and venture capital firm further
invest money into an idea or new venture with a view to get good returns. Now the literature is
focusing on three main activities of venture capital firm:
1. Pre-investment screening activities
2. Monitoring while holding period
3. Activities which are associated with the existing process.

Venture capitalist and their economical activities

Venture capitalist firm works as a general partner. These firms get fund only for a finite period
of time. Generally this time period is ten years. A firm generally raises fund after every three to
five years and invest into more than one venture, which it manages consecutively two funds at a
time.
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If fund is invested for five years or less than five years, general partner has to work very hard and
invest more time, energy and effort to manage the fund. General partners have to screen a
number of prospective start ups before investing its fund into it.
Funds which are invested for more than five years, they are called growth and harvesting stage
fund and for these fund venture capitalist has to just monitor the fund and in this stage venture
capital fund companies assist the portfolio companies.
And at last they help the companies for exiting. In this process, initial public offer and
acquisition techniques is sought. When venture capital firm sees that venture is not going to give
any profitable results, they shut down the business in that non-profitable business.

Gooman and Sahlman (1989) had conducted a study regarding the process of venture capital
companies. They had taken a sample of hundred venture capital firms in 1984. They had
concluded how a venture capital firm had invested its time into various operations.
They had got the following results:
a) Venture capital firms had spent their half time in monitoring their investment in the
nine portfolio companies.
b) They had sat on the board of the companies and its numbers were five.
c) As board member, they had spent so many hours with the companies and on
telephone; they had spent thirty hours, while they were having contact with companies.
d) They were engaged in fund raising analysis and recruitment of the management staff.

Metrick and yasunda (2010) had conducted a study and for this study, they had collected some
sample for fund raised between 1993 and 2006. This study had shown that each venture capital
firm was managing ten companies at a given period of time.

Kaplan (2009) had examined fifty venture capital backed companies and had found that their
business had started quietly from early stages to initial public offer, while management had seen
a lot of changes. This result had depicted that business idea was more important rather than
management. While screening, the start up idea had shown to be the main criteria rather than
quality of management.

52
Hellmann (1998) had conducted a study and found that equal-partners had left the companies
andventure capital firms were having fair chances to search for better management.

Puri and Zaratskie (2010) had done an empirical study and found that venture capital backed
companies were fast growing and larger as compared to non-venture capital backed companies.
So scalability was the main point while selecting a company for investment. Profitability was not
the main criteria. Faster growth of the companies had seen changes in the number of CEOs.
There are few chances that CEOs continue for a long time.

Do venture capital companies make funding in high-growth

companies or thosecompanies which are funded by venture capital
companies grow fast?
Sahlman (1990) had suggested that the coping mechanismwas to either design investment
contracts which materially would skew the distribution of thepayoffs from the project to the
venture capital investors or would involve the active participationof the venture capital investors
to assure that the project had the professional managerialexpertise to succeed.

Sahlman (1990) had identified the three key factors of the investment contract that skewed
payoffs in favour of the venture capital investor: (1) the staging of the commitment of capital, (2)
the use of convertible securities instead of straight common shares and the associated senior
claims on the assets of the firm in case of failure and (3) anti-dilution provisions to secure the
venture capital investors equity position in the new firm. Of these mechanisms, he had concluded
that staged capital infusions were the most important control mechanism that a venture capitalist
could employ.

Cossin, Leleux&Saliasi (2002) had examined the economic value of these legal features in a
real option context.

Inderst and Muller (2009) had conducted a study which had concluded that both the conditions

53
might be applicable. Their paper had shown if a Venture was financed by a venture capital firm,
this venture would take the advantage of this funding. The products of this venture might take
lead on its rivals because over-investing had always supported these types of products. Their
paper had shown that venture capital firm was very useful for emerging market because it would
encourage higher growth and large scale. Venture capital firm had made target of this type of
ideas and would put its hard effort to make these ideas successful and that was in a very short
period of time. They had found that how venture capital fund monitored and made investment.
This monitoring was stage wise. Funding was also conditional. Some payment was made in
advance and rest of the payment was made phase wise and according to the performance of the
venture. If venture capital firm had seen that venture was not going according to the terms and
conditions specified in the agreement, they had abandoned the project in the mid way.

Gompers (1995)analysed venture capital funded companies. He had taken a sample of seven
hundred and thirty four companies. He found that a firm which had higher cost in performing the
various task, was being monitored frequently. Venture capital companies had given active advice
to run the company and had told them how to manage the staff.

Hellmann and Puri (2002) conducted a research and found that venture capital backed
companieshad more professionalism. They had good human resource policies and had better
marketing strategies. They had used a sample of European venture capital deals.

Bottazzi (2008) found that those venture capital companies which had more experience had
helped their portfolio companies for better management and fund raising activities. They had
helped the portfolio companies for recruiting the staff for running the entire show.
Both Baker and Gompers (2003) and Hochberg (2003) conducted a research and found that
venture capital companies made a change in the board of directors. Boards of directors of these
companies were more independent.

Lerner (1995) found that venture capital backed companies had witnessed more turnover rate in
CEOs of the companies and those companies which were not backed by venture capital, they had
stake CEOs.

54
Cornell (2010) had made a survey for European venture capital investment data and found that
after IPO, those companies which were backed by venture capital companies, showed low
earning rate and those companies which were not supported by venture capital firm showed
better results.

Kortum and Lerner (2000) had made a research about the venture capital companies and their
patenting strategies. They found that venture capital companies‟ patents were more valuable.

Hellman and puri (2000) found that venture capital companies had taken less time to bring
product into the market and especially those products which were innovative and new to the
market. This had shown that a venture capital firm invested into innovative ideas and even when
a venture capital firm exiting from the venture, this innovative process continuous. Sometimes a
venture capital firm and its portfolio companies compete with each other.

Lindsey (2008) had made a research and found that those companies which were having the
same venture capital company as their financing partner, were having better strategic alliance.

Economic activities of buyout investors

Both venture capital and buyout fund which were making investments in ventures, these
investments were illiquid. The final returns for venture capital companies were reported as
internal rate of return.

Deal-level performance: venture capital

Brave and Gompers (1997) had conducted a study about venture capital backed companies and
non-venture capital backed companies. They had studied the data between 1972 and 1992 and
found the venture capital backed companies‟ initial public offers were better than non venture
capital backed companies. They found that the venture capital backed companies were never
formed under pressure. They found that the reason of better performance was that ventures
always had a pressure from the venture capital companies to perform.

55
Cochrane (2005) had used mean, standard deviation and beta of venture companies to measures
the risk and return with the help of vitality. He found these measures with respect to NASDAQ
and calculated volatility and concluded how a venture capital firm might invest into a venture
where investment was not risky and return was also higher.

Sorensen (2010) had developed a model which studied that beta value should be between two to
three. This had clearly shown that individual security of the company was highly volatile as
compared to stock exchange where this security was listed.

Performance Persistence and Sources of Performance

Kaplan and schoar (2005) had conducted a study and found that venture capital was more
persistence than BO. BO fund managers increased the size of fund, when they increased in
numbers. But a venture capital fund manager did not increase the size of fund.

When talking about making investment by venture capital, following points were reviewed:

Industry
This was the main point when venture capital firm had invested into a company.
Generally venture capital companies had wanted those companies which could provide
better results.
A venture capital, as name suggests try to invest where more risk is involved with innovative
ideas and more return as compare to investment into other types of companies

Amit, James and Zott (1998) had conducted a study and they found that a venture capital firm
should be vigilant and should make a place into a segment so that people could know more about
the performance of the company. In their study, they had found the securities/companies in
which venture capital firm had invested the money. They had to spend less money on the
monitoring point. So they had preferred companies like biotechnology, computer, and software
etc. They had not preferred the companies like retail sector or fast food or food chains because
these companies had required more monitoring and more cost was involved in these types of
businesses.

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Syndication

57
Bygrane, (1987); Brander et al (1999), had conducted a study about syndication. They had
collected total sample of five hundred companies and had found that syndication add value to the
portfolio companies because companies had required large fund to connect the innovative ideas
into reality. Only one venture capital firm was not sufficient to finance the project alone, there
was the need of other venture capital firms too with similar interest to come together and to
construct syndication, so that large funding could be done for the ongoing project and each stage
must have sufficient fund to invest. There should be smooth conduct of the activities.

Chemmanor and Tian (2009) had also conducted a study and had found that syndication was
always better than a single venture capital company because at the time of exit, syndication did
better than as individual firm. Those companies which were successful in syndication, they
had further made a prowl of companies and they had invested the money into the future
projects.
Wilson (1968) had conducted a study and had found that decision making process by a group of
companies (Syndication), had delayed a process rather than investing by the single venture
capital firm, even though decision making was done jointly to give better result as compared to
single company.

Investment Duration
Cunnin and Macintosh (2001) had conducted a study about venture capital companies to find
that investment into various stages was very important because it could give investors a very
clear picture about the duration of the investment and its success rate. They had also collected
data to find out the stage in which a project was funded by the venture capital and to know the
duration of the investment.

Cumming and Johan (2010) had developed a theory of venture capital investment duration and
had found that total duration of the investment was based on the marginal benefit which should
be less than the expected cost for managing the portfolio.

Staging
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Sahlman (1990) had conducted a research for staging decision. He had found that these
decisions had played an important role while making the investment decisions.
It matters a lot when a venture capital firm was going to invest into a portfolio company. If it had
invested at early stage it would have got benefits because it had engaged from the right of the
beginning. If it had invested into more advanced stages, it would have got fewer benefits because
portfolio firm was quite mature and it had taken most of the benefits from the market.

Li (2002) had also conducted a research for staging decision and had found that many options
could be used for this type of decision. He had augmented that if a person was taking the option
to invest into a venture capital firm, which was far better than investing immediately because in
due course of time, market conditions could be judged correctly.

Exits
Wang and Sim (2001) had conducted a research for the data between 1990 and 1998. They had
found that family owned and high technology industries would exit generally through initial
public offer. This initial public offer would be depended on total amount financed by the venture
capital firm and total sale of the company.

Giot and Schwiebacher (2007) had conducted a research around six thousand venture capital
backed firm, covering around twenty thousand rounds. They had found that with the passing of
great time, there were many changes in companies‟ existing policy via initial public offer.

Bienz and Leite (2008) had conducted a research and had found that those companies which had
made good profit, they would have opt for going public through initial public offer. On the other
hand, those companies which had earned less profit, they would have gone for trade sales. They
had also found that if product was more innovative, going public would be more profitable as
compared to trade sales.

Arif and Abdul khadir (2005) had conducted a research and had found that those firm which
had low investment, they would have exited through initial public offer. Initial public offer route

59
is also related to total amount which is financed by venture capital firm, total rounds done by
venture capital companies and total funds which have participated in the whole process.

Dot-Com effect
M.B. Green (2004) had conducted a research for pre-bubble, bubble and post-bubble period and
he had analyzed the investment patterns for stage financing of various industries. He had found
the bubble period industries. He had found that the bubble period had attracted larger fund and
more deals as compared to pre-bubble and post-bubble period.

Indian Venture Capital and Private Equity Industry

Prof. I.M. Pandey had conducted a research in the year 1998. This research was based on the
process of developing venture capital in India from the in-depth case study of the Technology
Development and Information Company of India (TDICI). Initially TDICI had focused on
hightech industries but after that they had shifted to more profitable industries.

A. ThillaiRajan (2010) had conducted a research on the efficiency of venture capital and its
portfolio companies. He had collected a sample between the year 2004 and 2008. He had
found that in round I, there were larger investment and later on, it had decreased dramatically.
Mostly
these investments were in later stage and with short duration. He had concluded that these factors
had not focused on good growth of venture capital industry in India.

Ljungquist and Richardson (2003) had conducted a research and had made an analysis of
venture capital returns based on the cash flows of the ventures and buyout capital funds. Their
study was mainly emphasized on timing and magnitude of decisions. They had calculated the
time period in which capital was returned to the investors and for the overall functions of the
venture capital.They had also found that most of the firms had taken three years to invest 56.9
per cent and six years to invest 90.5 per cent of the total capital agreed to invest. These
companies had taken eight years to convert internal rate of return into positive and ten years to
exceed public equity returns. Further, they had found that the private equity was much better
than public equity return. This return was five per cent to eight per cent higher in public equity.
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Under

61
syndication, internal rate of return was higher than return in single company. They had produced
good results when legal environment was in better situation.

Weidig and Mathoned (2004) had conducted a research on the risk and return pattern of the
various investment alternatives. They had calculated the risk-return of the various private equity
investment alternatives such as direct investment. They had studied that calculation of risk was
volatile in the market price as compared to various investment vehicles which had majorly
impacted adversely because of lack of efficient market for price and product.
Therefore risk was measured only in standard deviation with the help of average return. The
return was measured as internal rate of return. This research had clearly shown that
diversification had played an important role for direct investment and for various other funds.
They had also found that around thirty per cent of the diversification was complete failure and
investors had lost their capital.

Cumming and Walz (2007) also had done analysis of the venture capital firms and found that
there were number of drivers for institutional investment in private equity. They had found
that institutional investment had preferred to invest in those private equity firms, where there
was a lot of disclosure of the standards.
Venture capitalists are one important category of investors that specializes in financing
innovation (Amit, Brander, &Zott, 1998). The structure of venture capital arrangements had
allowed these organizations to overcome many of the information asymmetry problems that
plague external financing of the innovation.
Thus, it is to be proposed that access to venture capital, which varies across environments and
over time, makes new firms more innovative.
As far as India is concerned, Chokshi had conducted a research in 2007. He had analyzed the
various factors which were responsible for stopping the process of leveraged buyout in India.
From the above restriction, it is clear that there were a lot of difficulties in investing into Indian
corporate market.

BangaRashmi (2006) had done a research on the growth of service sector in an atmosphere
where this sector had helped in removing poverty and unemployment. Due to growth of service

62
sector, a huge opportunity in job marked was created. So a lot of unemployed person got the job
and this led to remove the poverty from India.
So we can say that growth in service sector had improved the overall economy of India. In this
paper author had described about innovative investment means searching new avenues for
investment.

Nirvikar Singh (2006) had also conducted a study about rapid growth of service sector. He had
emphasized that this sector had large potential for growth. If we had paid attention on this sector,
Indian economy would increase rapidly. He had also told that service sector should be
industrialized. Industrialized means government should bring clear cut policy for this sector and
make a conducive atmosphere for the development of this sector.

Mani Sunil (2006) had done a study about service sector and manufacturing sector. He had
explained the role of government of India and its policy for venture capital investment in India.
This study had shown that chemical and pharmaceutics industry had attracted venture capital and
capital was invested into research and development activities in this sector. This sector had
created a number of patents. This process was responsible for the growth of service sector based
on manufacturing sector.

D. Nagayya (2005) conducted a study about venture capital and found how the development of
this capital had impacted the growth of Indian economy. He had talked about pattern of venture
capital fund and how it had grown. He explained that venture capital had developed in phased
manner and after 1991, liberalization took place in India. Number of foreign companies came to
India and set up their business. It had spurred the growth of Indian economy. As these companies
came to India, they brought new ideas. When these new ideas were converted into reality, it
needed a large amount of fund and thus this process had created a large pot of venture capital
fund in Indian start-ups.

Dossani and Martin (2001) had conducted a research work for the development of venture
capital firm in India. They emphasized on various patterns which were responsible for the

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growth or failure of the venture capital investment in many countries. These patterns were taken
as a model in India. These models were implemented in India.

Summary
The literature review discussed above yields summarized findings as following:
1. Venture capitalists play an active role in corporate governance of their portfolio firms, by
designing contract to allocate control rights, influencing the board of directors, and monitoring
managers directly.
2. They emphasize various patterns which are responsible for the growth or failure of the venture
capital investment in many countries. These patterns are taken as a model in India. These models
were implemented in India.
3. Venture capitalists carefully structure exit strategies for their investments. They normally do
not sell any shares during the IPO, but they divest their interests in a portfolio firm within several
years following the IPO.
4. Independence of the board and/or audit committee is negatively associated with earnings
management and the likelihood of financial statement restatement.
5. Insider selling is positively associated with opportunistic behavior in financial disclosure such
as earnings management and accounting fraud. There is mixed evidence on whether earnings
management is used before insider trading or after insider trading. Share distribution can exempt
VCs from securities regulation on insider trading, which makes the exit of venture capital out of
the notice to other investors.
6. There are positive discretionary accruals (a proxy for earnings management) in the IPO
year. Venture capital backing is significantly associated with lower discretionary accruals in
the IPO year.
7. There are a lot of restrictions of the foreign investment in India, limited availability of
professional management, under development of debt market, lot of restrictions of the bank
lending. From the above restriction, it is clear that there are a lot of difficulties in investing
into Indian corporate market.

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 CHAPTER -3

RESEARCH METHODOLOGY

65
 RESEARCH METHODOLOGY
Research methodology simply refers to the practical “how” of any given piece of research. More
specifically, it’s about how a researcher systematically designs a study to ensure valid and
reliable results that address the research aims and objectives.

For example, how did the researcher go about deciding:

What data to collect (and what data to ignore)

Who to collect it from (in research, this is called “sampling design”)

How to collect it (this is called “data collection methods”)

How to analyze it (this is called “data analysis methods”)

In a dissertation, thesis, academic journal article (or pretty much any formal piece of research),
you’ll find a research methodology chapter (or section) which covers the aspects mentioned
above. Importantly, a good methodology chapter in a dissertation or thesis explains not just what
methodological choices were made, but also explains why they were made.

In other words, the methodology chapter should justify the design choices, by showing that the
chosen methods and techniques are the best fit for the research aims and objectives, and will
provide valid and reliable results. A good research methodology provides scientifically sound
findings, whereas a poor methodology doesn’t. We’ll look at the main design choices below.

Objectives of Research:
The purpose of research is to discover answers to questions through the application of scientific
procedures. The main aim of research is to find out the truth which is hidden and which has not
been discovered as yet. Though each research study has its own specific purpose, we may think
of research objectives as falling into a number of following broad groupings:

66
1. To gain familiarity with a phenomenon or to achieve new insights into it (studies with this
object in view are termed as exploratory or formulative research studies);

2. To portray accurately the characteristics of a particular individual, situation or a group(studies

with this object in view are known as descriptive research studies);

3. To determine the frequency with which something occurs or with which it is associated with
something else (studies with this object in view are known as diagnostic research studies);

4. To test a hypothesis of a causal relationship between variables (such studies are known as
hypothesis-testing research studies).

TYPES OF RESEARCH DESIGN USED

Exploratory:

As the name suggests, researchers conduct exploratory studies to explore a group of questions.
The answers and analytics may not offer a conclusion to the perceived problem. It is undertaken
to handle new problem areas that haven’t been explored before. This exploratory process lays the
foundation for more conclusive data collection and analysis.

Descriptive:

It focuses on expanding knowledge on current issues through a process of data collection.

Descriptive research describe the behavior of a sample population. Only one variable is
required to conduct the study. The three primary purposes of descriptive studies are
describing, explaining, and validating the findings. For example, a study conducted to know
if top-level management leaders in the 21st century possess the moral right to receive a
considerable sum of money from the company profit.

RESEARCH METHODOLOGY
67
RESEARCH DESIGN – Descriptive Research
DATA COLLECTION

Secondary Data Collection

Secondary Data are those data which are primarily collected by other person for his own
Purpose. Data was collected from books, magazines, web sites, going through the records
of the organization, etc. It is the data which has been collected by individual or someone
else for the purpose of other than those of our particular research study. Or in other words
we can say that secondary data is the data used previously for the analysis and the results
are undertaken for the next process.

This study is based on secondary data. To fulfill the first objective of the report is to study about
the venture capital and its importance in Indian Economy is Analyzed by revieving various
literatures and Venture Capital Act 2002(Austrailia) (2018 Edition) and Financial Markets and
Services written by E.Gordon and N.Natarajan.To analyze contribution of Venture Capital
institutions in different sections of Indian Economy.

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 CHAPTER-5

IMPORTANCE OF STUDY

69
 IMPORTANCE OF STUDY
The venture capital industry in India has really taken off in and it unbelievable role in Indian
Economy. Venture capitalists not only provide monetary resources but also help the entrepreneur
with guidance in formalizing his ideas into a viable business venture with existing resources or
import new technology

Venture capital firms play an inevitable role in the development of the economy through
capitalizing on: Promoting innovation; financing the development of new products, new
technologies, and processes of the companies that are meant to directly and positively influence
the economy.

Importance of Venture Capital

Venture Capital institutions lets entrepreneurs convert their knowledge into viable projects with
the assistance of such Venture Capital institutions.

It helps new products with modern technology become commercially feasible.

It promotes export oriented units to earn more foreign exchange.

It not only provides the financial institution but also assist in management, technical and

others.

It strengthens the capital market which not only improves the borrowing concern but also

creates a situation whereby they can raise their own capital through capital market.

It promotes modern technology through the process where financial institutions

encourage business ventures with new technology.

Many sick companies get a turn around after getting proper nursing from such Venture

Capital institutions.

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 CHAPTER-6

DATA ANALYSIS

AND

INTERPRETATION

71
DATA ANALYSIS AND INTERPRETATION

INTERPRETATION: Financial and political setbacks were the main reason for the decline
of venture capital in India. Government could not bring the good capital expansion plan for the

development of this sector. Many big sectors like telecommunication and infrastructure could

not be developed by the government of India. So it could not attract good venture capital and
private equity. Regulatory system had also worsened this issue. Venture capital and private
equity deal value had come down by thirty per cent from $20.11 billion to $10.2 billion in 2012.
Now deal volume was good enough. Fund raising activities had seen a slow growth rate. Limited
partners were doing hard work before counting their fund into a venture. In 2012 the total fund
invested in deals was $3.5 billion. In year 2011, it was $6.9 billion. Venture capital was playing
a main role in deal making. There were around 125 deals in 011 and 2012 it became 244.
Investment had been rising in consumer sector.

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VC Investment in India During 2021

VC Investment in India During 2021

INTERPRETATION: The year 2021 has witnessed a record-breaking venture capital (VC)
investment in India. Venture capital is a type of private equity and Seed to Series D round
financing that startups or small businesses less than ten years old with long-term growth potential
get from investors. Such investments usually come from well-off financial institutions, angel
investors, and increment of 64.9% in these investments compared to 2020 bagged a total of $1.9
billion investments from 615 deals.

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VC Investment in India During 2021

VC Investment in India During 2021

INTERPRETATION: India is a huge market not only for domestic investors but also for
global players as well. In 2021, 825 domestic funds were invested in India-based startups, 442 investors
have roots in North America, and 163 investors were from different Asian countries.

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INTERPRETATION: Table shows the Total fund Raised by the Venture Capitals for
Investments in India from the Year 2014 to 2020.In the year 2014 it was 1.5 Billion $ and in
2015 it was increased up to 2.1 Billion $ and in the year 2016 the fund investment is increase and
it was 2.8 Billion $.And in year 2017 the venture capital funds was decreased and it was only 1
Billion $. And in 2020 it was 3 Billion $.

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Investment by Region

INTERPRETATION: In 2021, Bangalore retained the top and most preferred region for
VC investments with an overall 282 deals with a valuation of $1.3 billion. The key startups that
sealed the highest investment deal from Bangalore were Velocity, Klub, and Teachmint. The
second spot was taken by Delhi NCR with 202 VC deals worth $0.8 billion and Mumbai
grabbed the third position with 108 investments and total funding of $0.6 billion.

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Investments by Stage

VC Investment by Stage in 2021

Stage-Wise Investments in 2021

77
INTERPRETATION: There are mainly five stages of venture capital investments, namely
the Seed stage, Start-up stage, Early-stage, Expansion (growth) stage, and Bridge stage. The first
stage is about approaching the angel investors to fund the idea or prototype. In the Startup stage,
the idea is converted into a sample and a business plan is formulated based on testing results,
market research, and forecast. The Early stage is where the product is available in the market,
and the business is competing against competitors. The funding required in this stage goes for
manufacturing, marketing, and sales. In the Expansion or Growth stage, the motive is to seek
funds to expand and scale up the business or its production. The last stage is called Bridge or
Pre-IPO stage, and here, the company’s goal is to go public so that investors can exit and earn
profit. The aim is to arrange funds for transaction activities.

The startups and businesses in their early stage were also focused on by VC firms as they made
637 investments worth $2.3 billion in 2021, which is nearly 27% more than the deal volume of
2020.

However, a dip of 7% was noticed compared to 2021 in the investments done in Growth Stage
companies. The overall share of Early-Stage deals stood at 86% in 2021.

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Investments by Sector

Tech and tech-enabled companies were favourites for investors during 2021 as a total of
644 investments were recorded with a cumulative worth of $2.8 billion. On the other hand,
the non-tech investments accounted for only 97 deals worth $383 million.

VC Investment in India During 2021

Consumer vs B2B Investments

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INTERPRETATION: The most significant non-tech VC investments were in skincare
startup Minimalist and FMCG company Walgreens Farms. In addition to this, among B2B and
B2C companies, the latter raised $1.7 billion from 414 deals while B2B firms got 327
investments worth $1.5 billion. Enterprise software was the preferred sector for VC funding in
2021 as the deal volume was 168, with a net worth of $696 million. The highest investment
deals were closed by the B2B buyer intelligence startup Slintel, B2B marketplace startup Fash
inza, and B2B logistics startup GoBolt.

80
India’s GDP is estimated to reach US$4.7 trillion (INR 330 trillion) by 2024 (US$4.17
trillion adjusting for COVID crisis), with a nominal GDP CAGR of 8.2% over 2019-24. This
growth rate is estimated to be ahead of other emerging markets like Brazil (4.7%), China
(8%),
Indonesia (7.8%) and South Korea (4.8%).

A key driver of strong growth forecasts for India is its diverse economy. Unlike other leading
Asian economies, which are export-oriented and heavily focused on manufacturing, India’s
growth is propelled by various sectors and an economic base supported by domestic
consumption (exports only make up 10% of (GDP). The service sector contributes 59% to the
total GDP but employs only one third of the population, while the industrial sector contributes
24.9% and agriculture and allied sectors 16%. Agriculture employs 42% of India’s working
population. The low exports share is also an upside opportunity for India to further boost its
growth.

Moreover, nearly 60% of India’s GDP is driven by domestic private consumption, as

compared to 40% in China. Hence, the economy is protected to a great extentagainst external

81
shocks and cycles of low or high public investment.

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CHAPTER – 7

CONCLUSION

83
 CONCLUSION

The findings in this study revealed that venture capital has an impact on growth of ventures, they

finance. The study has demonstrated that use of venture capital can be profitable in India even in

an inauspicious political and economic climate. The study concluded that newly set-up

Companies that use venture capital experience improved growth and thus more new enterprises

should be encouraged to use this form of finance if the country has to achieve its vision 2030.

The findings in this study revealed that venture capital has an impact on growth of

ventures, they finance.

The study has demonstrated that use of venture capital can be profitable in India even in

an inauspicious political and economic climate.

From this Research I got to aware that IT Sector and E-commerce sector accounted for

42% of all the investments in 2021.

The study concluded that newly set-up Companies that use venture capital experience

improved growth and thus more new enterprises should be encouraged to use this form of
finance.

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 CHAPTER -8

RECOMMENDATION

85
 RECOMMENDATION
From the above Research it should be recommended that:

The Venture Capital creates the good impact in the growth of the economy.

The use of Venture capital is very profitable in India so increase the use of Venture

capital for the Growth of Economy.

As the IT sector and E-Commerce sector are the current trends of the market so

Government should mainly focus on these sectors.

The venture capital experience improved growth and thus more new enterprises should be

encouraged to use this form of finance.

Venture capital firms’ investment gives definite growth to Indian economy so

government of India must further relax rules and regulation for venture capital firms so
that they could come and invest in India with ease and comfort. There should be low tax
and more investment friendly environment for these firms and must face low red tape
while being into process for investment.

Economic institutions plays an vital part for the development of any economy and they

support a number of start ups and venture capital firms so this sector needs more attention
of government .Government should further formulate liberal policies for the development
of this sector.

Capital account convertibility should be eased and more visible so that there should be

more investment.

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CHAPTER -9

BIBLIOGRAPHY

87
 BIBLIOGRAPHY
Admati, A. R. and Pfleiderer, P. (Jun, 1994). Robust financial contracting and the role of

venture capitalists. Journal of finance.

Aggarwal, Alok. (August 21, 2006). Is the venture capital market in India getting

overheated? Evalueserve, IVCA and Venture Intelligence India,

Cumming, D. (2008). Contracts and exits in venture capital finance. Review of Financial Studies.

Cumming, D., 2006. Adverse Selection and Capital Structure: Evidence from Venture Capital.

Entrepreneurship: Theory & Practice.

Websources

Www.indiavca.org (accessed September 15, 2011)

Www.sebi.gov.in (accessed September 18, 2011)

Www.moneycontrol.com (accessed September 20, 2011)

Http://business.gov.in/business_financing/venture_capital.php (accessed January 10, 2012)

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