venture capital project report

8/13/2019 Venture Capital Project Report

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FINAL REPORT

ON

Study of Venture Capital

in India and its AspectsSubmitted in partial fulfilment of the requirement of MBADegree of

Maharshi Dayanand University, Rohtak

Under the supervision o!

Mr Vivek Bhatia

Faculty International Business, IM !urgaon

"u#$itted #y!

sandeep arora

"#$MB%$&'#

Session '""#$'""(

Institute o Te%hno&o'y and Mana'e$ent

(ur'aon

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon


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Acknowledgement

+No Learnin' is proper and ee%tive ithoutProper (uidan%e-

)very study is incomplete *ithout having a *ell plan and concrete e+posure to the

student Management studies are not e+ception Scope of the pro-ect at this level is

very *ide ranging .n the other hand it provide sound basis to adopt the theoretical

kno*ledge and on the other hand it gives an opportunities for e+posure to real time

situation

his study is an internal part of our MB% program and to do this pro-ect in a short

period *as a heavy task

Intention, dedication, concentration and hard *ork are very much essential to

complete any task But still it needs a lot of support, guidance, assistance, co$

operation of people to make it successful

I bear to imprint of my people *ho have given me, their precious ideas and times to

enable me to complete the research and the pro-ect report I *ant to thanks them for

their continuous support in my research and *riting efforts

I *ish to record my thanks and indebtedness to Mr .ivek Bhatia / Fa%u&ty

Internationa& Business, ITM (ur'aon,*hose inspiration, dedication and helping

nature provided me the kind of guidance necessary to complete this pro-ect

I am e+tremely grateful to $ana'e$ent of Institute o Te%hno&o'y 0

Mana'e$ent, (ur'aon for granting me permission to be part of this college

I *ould also like to ackno*ledge $y parentsand $y #at%h $atesfor their guidance

and blessings



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Table of Content

1. Introduction

2. SignificanceofStudy

3. .b-ective of Study

4. /esearchMethodology

0iterature /evie*

1onceptualFrame*ork

.perational Definition

5.

%nalysis 2 Interpretation6. Findings

7. Suggestions

8. 1onclusion

9. 0imitation

10. Bibliographies

11. %nne+ure

ANNEXUEI3 4%M).FV)45/)1%6I%0FI/MS.5

SID).FI4DI%

ANNEXUEII34%M).FV)45/)1%6I%0FI/MSI4

I4DI%



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Introduction

%numberof technocratsare seeking to setup shopon theiro*nandcapitali7eon

opportunitiesIn thehighlydynamiceconomicclimatethatsurroundsus today, fe*

8traditional9business models may survive 1ountries across the globe are reali7ing

that it is not the conglomerates and the gigantic corporations that fuel economic

gro*th any more he essence of any economy today is the small and medium

enterprises For e+ample, in the 5S, :"; of the e+ports are createdby companies

*ithlessthan'"employeesandonly#;arecreatedbycompanies*ith:""ormoreemployeeshisgro*ing trendcanbeattributedtorapidadvancesin technology in

the last decade


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Venturecapital is an investment in the formof equity, quasi$equityand sometimes

debt $ straight or conditional, made in ne* or untried concepts,promotedby a

technically or professionally qualified entrepreneur Venture capital means risk

capitalItreferstocapitalinvestment,bothequityanddebt,*hichcarriessubstantial

risk and uncertainties he risk envisaged maybe very high maybe so high as to

resultintotallossorverylesssoastoresultinhighgains

The%on%epto.enture1apita&

VenturecapitalmeansmanythingstomanypeopleItisinfactnearlyimpossibleto

comeacrossonesingledefinitionoftheconcept

2ane 3o&oski Morris, editor of the *ell kno*n industry publication, Venture

)conomics, deines venture capital as 4providin' seed, start/up and irst sta'e

inan%in'4 and also 4undin' the e5pansion o %o$panies that have a&ready

de$onstrated their #usiness potentia& #ut do not yet have a%%ess to the pu#&i%

se%urities$arketorto%reditorientedinstitutiona&undin'sour%es

he European .enture 1apita& Asso%iation describes it as risk finance for

entrepreneurialgro*thorientedcompanies It is investment for themediumor long

term return seeking to ma+imi7e medium or long term forbothparties It is a

partnership*iththeentrepreneurin*hichtheinvestorcanaddvaluetothecompany

becauseofhiskno*ledge,e+perienceandcontactbase

Meanin'oventure%apita&!

Venture capital is money provided by professionals *ho invest alongside

managementinyoung,rapidlygro*ingcompaniesthathavethepotentialtodevelop

into significant economic contributors Venture capital is an important source of

equityforstart$upcompanies

6rofessionally managed venture capital firms generally areprivatepartnerships or

closely$held corporations fundedbyprivate andpublicpension funds, endo*ment

funds, foundations, corporations, *ealthy individuals, foreign investors, and the

venturecapitaliststhemselves

Venturecapitalistsgenerally>

Financene*andrapidlygro*ingcompanies



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6urchaseequitysecurities

%ssistinthedevelopmentofne*productsorservices

%ddvaluetothecompanythroughactiveparticipation

akehigherrisks*iththee+pectationofhigherre*ards

=avealong$termorientation

?hen considering an investment, venture capitalists carefully screen the technical

andbusiness merits of theproposed company Venture capitalists only invest in a

smallpercentage of thebusinesses they revie* and have a long$termperspective

hey also actively *ork *ith the company@s management, especially *ith contacts

andstrategyformulation

Venturecapitalistsmitigate the riskof investingbydevelopingaportfolioofyoung

companies in a single venture fund Many times they co$invest *ith other

professional venture capital firms In addition, many venturepartnerships manage

multiple funds simultaneously For decades, venture capitalists have nurtured the

gro*th of %merica@s high technology and entrepreneurial communities resulting in

significant -ob creation, economic gro*th and international competitiveness

1ompaniessuchasDigital)quipment1orporation,%pple,Federal)+press,1ompaq,

SunMicrosystems,Intel,Microsoftand!enetecharefamouse+amplesofcompanies

thatreceivedventurecapitalearlyintheirdevelopment

6"our%e!NationalVentureCapitalAssociation$%%%&ear'ook(



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PrivateE7uityInvestin'

Venturecapital investinghasgro*nfromasmall investmentpool in the&(A"sand

early &(#"s to a mainstream asset class that is a viable and significantpart of the

institutionalandcorporate investmentportfolio/ecently,someinvestorshavebeen

referringtoventureinvestingandbuyoutinvestingasprivateequityinvestinghis

termcanbeconfusingbecausesomeintheinvestmentindustryusethetermprivate

equity to referonly tobuyout fund investing Inanycase,an institutional investor

*ill allocate '; to C; of their institutionalportfolio for investment in alternative

assetssuchasprivateequityorventurecapitalaspartoftheiroverallassetallocation

1urrently, over :"; of investments in venture capitalprivate equity comes from

institutional public and private pension funds, *ith the balance coming from

endo*ments,foundations,insurancecompanies,banks,individualsandotherentities

*hoseektodiversifytheirportfolio*iththisinvestmentclass

8hatisa.enture1apita&ist9

hetypicalperson$on$the$streetdepictionofaventurecapitalististhatofa*ealthyfinancier*ho*antstofundstart$upcompaniesheperceptionisthataperson*ho

developsabrandne*change$the$*orldinventionneedscapitalEthus,iftheycan9tget

capital from abank or from their o*npockets, they enlist the help of a venture

capitalist

In truth, venture capital andprivate equity firms arepools of capital, typically

organi7ed as a limitedpartnership that invests in companies that represent the

opportunityforahighrateofreturn*ithinfivetosevenyearsheventurecapitalist

maylookatseveralhundredinvestmentopportunitiesbeforeinvestinginonlyafe*

selectedcompanies*ith favorable investmentopportunitiesFar frombeing simply

passive financiers, venture capitalists foster gro*th in companies through their

involvement in themanagement, strategic marketing andplanningof their investee

companiesheyareentrepreneursfirstandfinancierssecond

)ven individuals maybe venture capitalists In the early days of venture capitalinvestment,inthe&(:"sand&(A"s,individualinvestors*erethearchetypalventure



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investor ?hile this type of individual investment did not totally disappear, the

modernventurefirmemergedasthedominantventureinvestmentvehicle=o*ever,

inthelastfe*years,individualshaveagainbecomeapotentandincreasinglylarger

partoftheearlystagestart$upventurelifecycleheseangelinvestors*illmentor

a company andprovide needed capital and e+pertise to help develop companies

%ngel investorsmayeitherbe*ealthypeople*ithmanagemente+pertiseorretired

business men and *omen *ho seek the opportunity for first$hand business

development

)actor to 'e considered 'y *enture capitalist in

selection of in*estmentproposalherearebasically fourkeyelements in financingofventures*hicharestudied in

depth by the venture capitalists hese are>

:;Mana'e$ent> hestrength,e+pertise2unityofthekeypeopleontheboardbring

significant credibility to the company he members are tobe mature, e+perienced

possessing *orking kno*ledge ofbusiness and capable of takingpotentially high

risks

; Oner4s Finan%ia& "take! he financial resources o*ned 2 committedby the

entrepreneur o*ner in thebusiness including the funds investedby family, friends

andrelativesplayaveryimportantroleinincreasingtheviabilityofthebusinessItis

animportantavenue*heretheventurecapitalistkeepsanopeneye



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A +rief ,istory

heconceptofventurecapitalisnotne*Venturecapitalistsoftenrelatethestoryof

1hristopher1olumbusInthefifteenthcentury,hesoughttotravel*est*ardsinstead

ofeast*ardsfrom)uropeandsoplannedtoreachIndia=isfar$fetchedideadidnot

find favor *ith the

A$eri%an Resear%h and Deve&op$ent 1orporation, formed in &(A, *hose

biggest success*asDigital)quipmenthefounderof%/D*as!eneral!eorges

Doroit, a French$born military man *ho is considered ?the ather o venture

%apita&;?Inthe&(:"s,hetaughtatthe=arvardBusinessSchool=islecturesonthe

importance of risk capital *ere considered quirkyby the rest of the faculty, *ho

concentratedonconventionalcorporatemanagement

2;@;8hitney01oalsoformedin&(A,oneof*hoseearlyhits*asMinuteMaid

-uiceHock?hitneyisconsideredoneoftheindustry9sfounders

TheRo%kee&&erFa$i&y, and inparticular,0 S /ockefeller, one of *hose earliest

investments*asin)astern%irlines,*hichisno*defunctbut*asoneoftheearliest

commercialairlines

he Second ?orld ?ar produced an abundance of technological innovation,

primarily*ithmilitaryapplicationsheyinclude,fore+ample,someoftheearliest

*ork on micro circuitry Indeed, H= ?hitney9s investment in Minute Maid *as



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intended to commerciali7e an orange-uice concentrate that hadbeen developed to

providenourishmentfortroopsinthefield

In themid$&(:"s, the5S federalgovernment*antedtospeed thedevelopmentof

advancedtechnologiesIn&(:#, theFederal/eserveSystemconductedastudythat

concluded that a shortage of entrepreneurial financing *as a chief obstacle to the

development of *hat it called ?entrepreneuria& #usinesses;?%s a response this a

number of Small Business Investment 1ompanies SBI1J *ere established to

leveragetheirprivatecapitalbyborro*ingfromthefederalgovernmentatbelo*$

marketinterestratesSooncommercialbanks*ereallo*edtoformSBI1sand*ithin

fouryears,nearlyA""SBI1s*ereinoperation

%tthesametimeanumberofventurecapitalfirms*ereformingprivatepartnerships

outsidetheSBI1formathesepartnershipsaddedtotheventurecapitalist9stoolkit,

byofferingadegreeoffle+ibilitythatSBI1slack?ithinadecade,privateventure

capitalpartnershipspassedSBI1sintotalcapitalundermanagement

he&(A"s sa*a tremendousbull I6.market thatallo*edventurecapital firms to

demonstrate their ability to create companies andproducehuge investment returns

For e+ample, *hen Digital )quipment *entpublic in &(AK itprovided %/D *ith

&"&; annuali7ed /eturn on Investment /.IJ he 5SL#",""" Digital invested to

start the company in &(:( had a market value of 5SLC#mn %s a result, venture

capitalbecame a hot market,particularly for *ealthy individuals and families

=o*ever,it*asstillconsideredtooriskyforinstitutionalinvestors

Inthe&(#"s,though,venturecapitalsufferedadouble$*hammyFirst,ared$hotI6.

marketbroughtover&,"""venture$backedcompanies tomarket in&(AK, thepublicmarkets*entintoaseven$yearslumphere*erealotofdisappointedstockmarket

investorsandalotofdisappointedventurecapitalinvestorstoohenin&(#,after

1ongress legislation against the abuse of pension fund money, all high$risk

investment of these funds *as halted %s a result ofpoorpublic market and the

pensionfundlegislation,venturecapitalfundraisinghitrockbottomin&(#:

?ell, things could only getbetter from there Beginning in &(#K, a series of

legislative and regulatory changes gradually improved the climate for venture



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investingFirst1ongressslashedthecapitalgainsta+rateto'K;from(:;hen

the0aborDepartment issuedaclarificationthateliminatedthepensionfundsactas

an obstacle to venture investing %t around the same time, there *as a number of

high$profile I6.sbyventure$backedcompanieshese includedFederal)+press in

&(#K, and %pple 1omputer and !enetech Inc in &(K& his rekindled interest in

venturecapitalonthepartof*ealthyfamiliesandinstitutional investorsIndeed, in

the&(K"s, theventurecapital industrybegan itsgreatestperiodofgro*thIn&(K",

venture firms raisedand invested less than5SLA""millionhatnumbersoared to

nearly 5SLbnby &(K# he decade also marked the e+plosion in thebuy$out

business

he late&(K"smarked thetransitionof theprimarysourceofventurecapital funds

from*ealthyindividualsandfamiliestoendo*ment,pensionandotherinstitutional

fundshe surgeincapital in the&(K"shadpredictable results/eturnsonventure

capitalinvestmentsplungedManyinvestors*entintothefundsanticipatingreturns

of C"; or higherhat *asprobably an unrealistic e+pectation tobegin *ith he

consensustodayisthatprivateequityinvestmentsgenerallyshouldgivetheinvestor

aninternalrateofreturnsomethingtotheorderof&:;to':;,dependinguponthe

degreeofriskthefirmistaking

=o*ever,by&((", theaveragelong$termreturnonventurecapitalfundsfellbelo*

K;, leading toyet anotherdo*nturn inventure fundingDisappointed familiesand

institutions*ithdre* fromventure investing indroves in the&(K($(&periods he

economic recovery and the I6.boom of &((&$( have gone a long *ay to*ards

reversing the trend inbothprivate equity investmentperformance andpartnership

commitments

In &((K, the venture capital industry in the 5nited States continued its seventh

straightyear ofgro*th It raised5SL':bn in committed capital for investmentsby

venturefirms,*hoinvestedover5SL&Abnintodomesticgro*thcompanies5Sfirms

havetraditionallybeenthebiggestparticipantsinventuredeals,butnon$5Sventure

investment is gro*ing In India, venture funding more than doubled from L'"

millionin'""'toalmostL&billionin'""CForthefirsthalfof'"",venturecapital

investmentroseC';from'""C



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Venture Capital in IN-IA

Venture capital *as introduced in India in mid eightiesby %ll India Financial

Institutions *ith the inauguration of /isk 1apital Foundation /1FJ sponsoredby

IF1I*ithavie*toencouragethetechnologistsandtheprofessionaltopromotene*

industries1onsequentlythegovernmentofIndiapromotedtheventurecapitalduring

&(KA$K#bycreatingaventurecapital fund in theconte+tof structuraldevelopment

and gro*th of small$scalebusiness enterprises Since then several venture capital

firmsfunds V1FsJ are incorporatedby Financial Institutions FIsJ, 6ublic Sector

Banks6SBsJ,and 6rivateBanksand6rivateFinancialcompanies

heIndianVenture1apitalIndustryIV1IJis-ustaboutadecadeoldindustry

ascomparedtothatin)uropeand5SInthisshortspanithasnurturedclosetoone

thousand ventures, mostly in SM) segment and has supported building

technocratprofessionals allthroughheV1industry,throughitsinvestmentinhigh

gro*thcompaniesas*ellascompaniesadoptingne*ertechnologiesbackedbyfirstgenerationentrepreneurs,hasmadea substantial contribution to economy In India,

ho*ever,thepotentialofventurecapitalinvestmentsisyettobefullyreali7edhere

arearound thirtyventure capital funds,*hichhavegarneredover/s :"""1rores

heventurecapitalinvestmentsinIndiaat/s&"""":croreasin&((#,representing

"&percentof!D6,ascomparedto::percentincountriessuchas=ong


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Venturecapitalistscanbegeneralists,investinginvariousindustrysectors,orvarious

geographiclocations,orvariousstagesofacompany9s life%lternatively, theymay

bespecialistsinoneort*oindustrysectors,ormayseektoinvestinonlyalocali7ed

geographicarea

4ot all venture capitalists invest in start$ups ?hile venture firms *ill invest in

companiesthatareintheirinitialstart$upmodes,venturecapitalists*illalsoinvestin

companiesatvariousstagesofthebusinesslifecycle%venturecapitalistmayinvest

before there isa realproductorcompanyorgani7edsocalledseed investingJ,or

mayprovidecapitaltostartupacompanyinitsfirstorsecondstagesofdevelopment

kno*n as early stage investing %lso, the venture capitalist mayprovide needed

financingtohelpacompanygro*beyondacriticalmasstobecomemoresuccessful

e+pansionstagefinancingJ

heventurecapitalistmayinvestinacompanythroughoutthecompany9slifecycle

andthereforesomefundsfocusonlaterstageinvestingbyprovidingfinancingtohelp

the company gro* to a critical mass to attractpublic financing through a stock

offering%lternatively,theventurecapitalistmayhelpthecompanyattractamerger

or acquisition *ith another company by providing liquidity and e+it for the

company9sfounders

%t theother endof the spectrum, someventure funds speciali7e in the acquisition,

turnaround or recapitali7ation of public and private companies that represent

favorableinvestmentopportunities

hereareventurefundsthat*illbebroadlydiversifiedand*illinvestincompanies

in various industry sectors as diverse as semiconductors, soft*are, retailing andrestaurantsandothersthatmaybespecialistsinonlyonetechnology

?hile high technology investment makes up most of the venture investing in the

5S, and the venture industry gets a lot of attention for its high technology

investments, venture capitalists also invest in companies such as construction,

industrial products, business services, etc here are several firms that have

speciali7ed in retail company investment and others that have a focus in investing

onlyinsociallyresponsiblestart$upendeavors



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hebasicprincipalunderlyingventurecapital3investinhigh$riskpro-ects*iththe

anticipation of high returns hese funds are then invested in several fledging

enterprises, *hich require funding, but are unable to access it through the

conventional sources such as banks and financial institutions ypically first

generation entrepreneurs start such enterprises Such enterprises generally do not

haveanyma-orcollateraltoofferassecurity,hencebanksandfinancial institutions

areaversetofundingthemVenturecapitalfundingmaybeby*ayofinvestmentin

theequityofthene*enterpriseoracombinationofdebtandequity,thoughequityis

themostpreferredroute

Sincemostof theventuresfinanced through this routeare inne*areas*orld*ide

venturecapitalfollo*shotindustrieslikeInfoech,electronicsandbiotechnologyJ,

theprobabilityofsuccessisverylo*%llpro-ectsfinanceddonotgiveahighreturn

Somepro-ects fail and some give moderate returns he investment, ho*ever, is a

long$term risk capital as suchpro-ects normally take C to # years to generate

substantial returnsVenture capitalists offer more than money to the venture and

seektoaddvaluetotheinvesteeunitbyactiveparticipationinitsmanagementhey

monitorandevaluatethepro-ectonacontinuousbasis

heventurecapitalist isho*evernot*orriedaboutfailureofaninvesteecompany,

because thedeal*hichsucceeds,netsaveryhighreturnonhis investments3high

enough to make up for the losses sustained in unsuccessfulpro-ects he returns

generally come in the form of selling the stocks *hen they get listed on the stock

e+changeorbyatimelysaleofhisstakeinthecompanytoastrategicbuyerheidea

is tocash inonan increasedappreciationof the sharevalueof thecompanyat the

timeofdisinvestment intheinvesteecompanyIf theventurefailsmoreoftenthan

notJ, the entire amount gets *ritten off 6robably, that is one reason *hy venture

capitalistsassessseveralpro-ectsandinvestonlyinahandfulaftercarefulscrutinyof

themanagementandmarketabilityofthepro-ect

oconclude,aventurefinancierisone*hofundsastartupcompany,inmostcases

promotedbyafirstgenerationtechnocratpromoter*ithequity%venturecapitalistis

notalender,butanequitypartner=ecannotsurviveonminimalism=eisdrivenby

ma+imi7ation>*ealthma+imi7ationVenturecapitalists are sourcesof e+pertise for



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the companies they finance )+it ispreferably through listing on stock e+changes

his method hasbeen e+tremely successful in 5S%, and venture funds havebeen

credited *ith the success of technology companies in Silicon Valley he entire

technologyindustrythrivesonit

Len'th o invest$ent>

Venture capitalists *ill help companies gro*,but they eventually seek to e+it the

investmentinthreetosevenyears%nearlystageinvestmentmaketakeseventoten

years tomature,*hile a later stage investmentmanyonly take a fe* years, so the

appetitefortheinvestmentlifecyclemustbecongruent*iththelimitedpartnerships9

appetite for liquidity he venture investment is neither a short term nor a liquidinvestment,butaninvestmentthatmustbemade*ithcarefuldiligenceande+pertise



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Stages of Venture Capital )unding

heVenture1apital fundingvaries across thedifferent stagesof gro*thof a firm

hevariousstagesare>

>

&; Pre seed "ta'e> =ere, a relatively small amount of capital isprovided to an

entrepreneur to conceive andmarket apotential ideahavinggood futureprospects

hefunded*orkalsoinvolvesproductdevelopmenttosomee+tent

'; "eed "ta'e> Financing is provided to complete product development and

commenceinitialmarketingformalities

C Ear&y "ta'e First "ta'e> Finance isprovided to companies to initiate

commercialmanufacturingandsales

"e%ond "ta'e!IntheSecondStageofFinancing*orkingcapitalisprovidedfor

thee+pansionofthecompanyintermsofgro*ingaccountsreceivableandinventory

:; Third "ta'e> Fundsprovided for ma-or e+pansion of a company having

increasingsalesvolumehisstageismet*henthefirmcrossesthebreakevenpoint

A; Brid'e Meanine Finan%in' or Later "ta'e Finan%in'> Bridge

Me77anineFinancingor0aterStageFinancingisfinancingacompany-ustbeforeits

I6.Initial6ublic.fferJ.ften,bridgefinanceisstructuredsothatitcanberepaid,

fromtheproceedsofapublicoffering



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/ et"ods of Venture )inancing

VenturecapitalistypicallyavailableinthreeformsinIndia,theyare>

E7uity> %llV1FsinIndiaprovideequitybutgenerallytheircontributiondoesnot

e+ceed(percentofthetotalequitycapital hus,theeffectivecontrolandma-ority

o*nershipofthefirmremains*iththeentrepreneur heybuysharesofanenterprise

*ithanintentiontoultimatelysellthemofftomakecapitalgains

1onditiona& Loan>Itisrepayableintheformofaroyaltyaftertheventureisable

to generate sales4o interest ispaidon such loans In India, V1Fs charge royalty

rangingbet*een'to&:percentEactualratedependsonotherfactorsoftheventure

such as gestationperiod, cost$flo*patterns, riskiness and other factors of the

enterprise

In%o$e Note! It is a hybrid security *hich combines the features of both

conventionalloanandconditionalloanheentrepreneurhastopaybothinterestand

royaltyonsales,butatsubstantiallylo*rates

Other Finan%in' Methods> % fe* venture capitalists,particularly in the

private sector, have started introducing innovative financial securities like

participatingdebentures,introducedby1F1isane+ample



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Venture Capital )und 0peration

Venturecapitalistsareveryselectiveindeciding*hattoinvestin%commonfigure

isthattheyinvestonlyinaboutoneinfourhundredventurespresentedtothem

heyareonly interestedinventures*ithhighgro*thpotential.nlyventures*ith

high gro*thpotential are capable ofproviding the return that venture capitalists

e+pect, and structure theirbusinesses to e+pect Because manybusinesses cannot

create the gro*th required having an e+it event *ithin the required timeframe,

venturecapitalisnotsuitableforeveryone

Venturecapitalistsusuallye+pecttobeabletoassignpersonneltokeymanagement

positionsandalso toobtainoneormore seatson the company@s board of directors

his is to put peop&e in p&a%e, a phrase that has sometimes quite unfortunate

implications as it *as used in many accounting scandals to refer to a strategy of

placing incompetent or easily bypassed individuals in positions of due diligenceand

formal legal responsibility, enabling others to rob stockholders blind .nly a tiny

portion of venture capitalists, ho*ever, have been found liable in the large scale

frauds that rocked %merican mostlyJ finance in '"""and '""&

Venture capitalists e+pect to be able to sell their stock, *arrants, options,

convertibles, or other forms of equity in three to ten years> this is referred to as

harvestin' Venture capitalists kno* that not all their investments *ill pay$off he

failure rate of investments can be highE any*here from '"; to ("; of the enterprises

funded fail to return the invested capital

Many venture capitalists try to mitigate this problem through diversification hey

invest in companies in different industries and different countries so that the

systematic risk of their total portfolio is reduced .thers concentrate their investments

in the industry that they are familiar *ith In either case, they *ork on the assumption

that for every ten investments they make, t*o *ill be failures, t*o *ill be successful,

and si+ *ill be marginally successful hey e+pect that the t*o successes *ill pay for

the time given to, and risk e+posure of the other eight In good times, the funds that

do succeed may offer returns of C"" to &"""; to investors

http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Accounting+scandals&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Due+diligence&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=2000&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=2001&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Accounting+scandals&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Due+diligence&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=2000&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=2001&gwp=8&curtab=2222_1


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Venture capital partners also kno*n as venture capitalists or V1sJ may be

former chief e+ecutives at firms similar to those *hich the partnership funds

Investors in venture capital funds are typically large institutions *ith large amounts of

available capital, such as state and private pension funds, university endo*ments,

insurancecompanies andpooled investmentvehicles

Most venture capital funds have a fi+ed life of ten yearsthis model *as pioneered

by some of the most successful funds inSilicon Valleythrough the &(K"sto invest in

technological trends broadly but only during their period of ascendance, to cut

e+posure to management and marketing risks of any individual firm or its product

In such a fund, the investors have a fi+ed commitment to the fund that is calleddo*n by the V1s over time as the fund makes its investments In a typical venture

capital fund, the V1s receive an annual management fee equal to '; of the

committed capital to the fund and '"; of the net profits of the fund Because a fund

may run out of capital prior to the end of its life, larger V1s usually have several

overlapping funds at the same timethis lets the larger firm keep specialists in all

stage of the development of firms almost constantly engaged Smaller firms tend to

thrive or fail *ith their initial industry contactsby the time the fund cashes out, an

entirely ne* generation of technologies and people is ascending, *hom they do not

kno* *ell, and so it is prudent to re$assess and shift industries or personnel rather

than attempt to simply invest more in the industry or people it already kno*s

http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Chief+executive+officer&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Pension&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Endowment&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insurance&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Pooling&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Silicon+Valley&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=1980s&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Chief+executive+officer&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Pension&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Endowment&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insurance&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Pooling&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Silicon+Valley&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=1980s&gwp=8&curtab=2222_1


20/59

Significance of Study

Venture capitalists not only support high technologypro-ects they also fiancN any

risky idea, theyprovide funds aJ if one needs additional capital to e+pand his

e+istingbusinessoronehasane*2promisingpro-ect toe+ploitbJ ifonecannot

obtain aconventional loan the requirement terms*ould create aburdenduring the

periodthefirmisstrugglingtogro*n

ItistheambitionofmanytalentedpeopleinIndiatosetuptheiro*nventureifthey

couldgetadequate2reliablesupportFinancialinvestmentprovidesloans2equity

Buttheydonotprovidemanagementsupport,*hichisoftenneededby

entrepreneursButtheventurecapitalindustriesprovidesuchsupportalong*ith

capitalalsoVenturecapitalist actsapartnernotafinancier



21/59

O#)e%tive o the "tudy

?hen*earegoingtostudysomethingthereisspecificpurposeforourstudyItmay

beforourcourse,ashobby,forpassingourtime,tofindoutgenuinesolutionforany

problemortodra*outcertaininferencesoutoftheavailabledataheob-ectivesof

mystudyare>

ofindouttheventurecapitalinvestmentvolumeinIndia

ostudytheproblemfacedbyventurecapitalistinIndia

ostudythefutureprospectsofventurecapitalfinancing

0'1ecti*e No2 $

3o )ind out t"e *enture capital in*estment

*olume in India

MethodsoFinan%in'

Instru$ents Rs$i&&ion Per%ent



22/59

)quityShares A,C&K&' AC&K

/edeemable6referenceShares ',&:A '&:

4on1onvertibleDebt K#C"& K#C

1onvertibleInstruments :K""' :K

.therInstruments #:K: "#:

otal &","""A &""

Rs million

6,318.12

2,154.46

873.01 580.0275.85

0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

7,000.00

Equity

Shares

Redeemable

re!eren"e

Shares

#on

$on%ertible

&ebt

$on%ertible

'nstruments

(ther

'nstruments

Interpretation!hisdiagramsho*stheventurecapitalfinancinginequityshareandsecondlytheyinvestinredeemablepreferencesharestogethigherreturns

1ontri#utorsoFunds

1ontri#utors Rs;$n Per%ent

ForeignInstitutionalInvestors &C,'A# :'A;

%llIndiaFinancialInstitutions A,':'(" 'C;

MultilateralDevelopment%gencies ',&CCA KC;

.therBanks &,:&"" A"';

ForeignInvestors :#" ''C;

6rivateSector &':C &A&;



23/59


24/59


25/59

Finan%in'ByIndustry

Industry Rs$i&&ionIndustrialproducts,machinery ',:((C'

1omputerSoft*are &,KC'

1onsumer/elated &,&'#

Medical A'CK

Food,foodprocessing :"""A

.therelectronics CA:

el2Data1ommunications CK:"(

Biotechnology C#AA)nergyrelated '(:A

1omputer=ard*are '"CCA

Miscellaneous &,CK"K:

otal &","""A

Rs million

2,5)).32

1,832

1,412.74

623.8500.06 436.54385.0) 376.46

24).56203.36

1,380.85

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

'ndustrial

+rodu"ts,

$om+uter

So!t/are

$onsumer

Related

0edi"al

1ood,!ood

+ro"essin-

(ther

ele"troni"s

.el2&ata

$ommuni"ations

3iote"hnolo-y

Ener-yrelated

$om+uter

4ard/are

0is"ellaneous



26/59

Interpretation!Inthisdiagramhighestfinancereceivedbyindustrialproductsand

machineryandsecondlyfinancereceivedbycomputersoft*are



27/59

Finan%in'By"tates

Invest$ent Rs$i&&ion

Maharashtra ',:AAamil4adu &:C&

%ndhra6radesh &C#'

!u-arat &&"'


28/59

Rs million

2,566

15311372

1102 1046

312 300 2)4

0

500

1,000

1,500

2,000

2,500

3,000

0aharas

htra

.am

il#adu

5ndhra

radesh

6u7ar

at

8arna

ta9a

:est3en-al

4ary

ana

&elhi

Interpretation! In this diagramhighest finance givenby theMaharashtra to the

venturestopromotethestateeconomygro*th



29/59

A ssessing Venture Capital

Venturefunds,bothdomesticandoffshore,havebeenaroundinIndiaforsomeyears

no* =o*ever it is only in thepast &' to &K months, they have come into the

limelighthere-ectionratioisveryhigh,about&"in&""getbeyondpreevaluation

stage,and&getsfunded

Venturecapitalfundsarebroadlyoft*okinds$generalistsorspecialistsItiscritical

forthecompanytoaccesstherighttypeoffund,ie*hocanaddvaluehisbacking

isinvaluableasfocusedspeciali7edfundsopendoors,assistinfutureroundsandhelp

instrategy=ence,itisimportanttochoosetherightventurecapitalist

he standard parameters used by venture capitalists are very similar to any

investmentdecisionheonlydifferencebeinge+itIfonebuysalistedsecurity,one

can e+it at apricebut *ith an unlisted security, e+itbecomes difficult he key

factors*hichtheylookforin

TheMana'e$ent

Most businesses are people driven, *ith success or failure depending on the

performance of the team It is important to distinguish the entrepreneur from the

professional management team he value of the idea, the vision,putting the team

together,gettingthefundinginplaceisamongstothers,somekeyaspectsoftherole

oftheentrepreneurVenturecapitalists*illinsistonaprofessionalteamcomingin,

including a 1). to e+ecute the idea .ne$man armies arepasse Integrity and

commitmentareattributessoughtforheventurecapitalistcanprovidethestrategic

vision,buttheteame+ecutesit%safamousSiliconValleysayinggoesSuccessis

e+ecution,strategyisadream

TheIdea

heideaanditspotentialforcommerciali7ationarecriticalVenturefundslookfora

scalablemodel,atacountryoraregionallevel.ther*isetheentiregame*ouldbe

reduced to amanpo*er ormachinemultiplication e+erciseFor e+ample, it is very

easyfor=industan0evertodoublesalesof0iril$asoap*ithoutincrementalcape+,



30/59

*hile!u-arat%mbu-aneeds tospendat least/sbnbeforeitcan increasesalesby

&mn ton Distinctive competitive advantages must e+ist in the form of scale,

technology,brands, distribution, etc *hich *ill make it difficult for competition to

enter

.a&uation

%ll investment decisions are sensitive to this %n old stock market saying )very

stock is abuy at aprice and vice versa Most deals failbecause of valuation

e+pectationmismatch In India,*hilecalculatingreturns,venturecapital funds*ill

takeintoaccountissueslikerupeedepreciation,politicalinstability,*hichaddstothe

riskpremia, thussuppressingvaluations0inkedtovaluationis thestake,*hichthefund takes In India, entrepreneurs are still uncomfortable *ith the venture capital

takingcontrolinaseedstagepro-ect

E5it

?ithout e+it, gains cannotbebooked )+it maybe in the form of a strategic sale

orand I6. a+ation issues come up at the time %ny fund *ould discuss all e+it

optionsbefore closing a deal Sometimes, the fund insists on abuyback clause toensureane+it

Porto&ioBa&an%in'

Most venture funds try and achieveportfoliobalancing as they invest in different

stages of the company life cycle For e+ample, a venture capital has invested in a

portfolio of companiespredominantly at seed stageE they *ill focus on e+pansion

stagepro-ectsforfutureinvestmentstobalancetheinvestmentportfoliohis*ouldenable themtohaveaphasede+it In summary,venturecapital fundsgo througha

certainduediligencetofinali7ethedealhisincludesevaluationofthemanagement

team,strategy,e+ecutionandcommerciali7ationplanshisissupplementedbylegal

andaccountingduediligence, typically carriedoutbyane+ternal agency In India,

the entireprocess takes about A months )ntrepreneurs are advised to keep that in

mindbeforelookingtoraisefundsheactualcashinflo*mightgetdelayedbecause

ofregulatoryissuesItisinterestingtonotethatin5S%,attimesangels*ritechecksacrossthetable



31/59

)inancing 0ptions in :eneral

hepossibilityofraisingasubstantialpartofpro-ectfinancesinIndiathroughboth

equityanddebtinstrumentsareamongthekeyadvantagesofinvestinginIndia

heIndianbankingsystemhassho*nremarkablegro*thoverthelastt*odecades

herapidgro*thandincreasingcomple+ityof the financialmarkets,especially the

capital market have brought about measures for further development and

improvement in the *orking of these markets Banks and development financialinstitutions ledby I1I1I, IDBI and IF1I *ereproviders of term loans for funding

pro-ects he options *ere limited to conventionalbusinesses, ie manufacturing

centricServicessector*asignoredbecauseofthecollateralissue

)quity*asraisedfromthecapitalmarketsusingtheI6.routehebullmarketsof

the("s,fuelledby=arshadMehtaandtheFIIs,ensuredthatadJ venturecapital*aseasilyavailableManufacturingcompaniese+ploitedthistothefull

heservicessector*asignored,likesoft*are,media,etc0ackofunderstandingof

thesesectors*asalsoresponsibleforthesameIf*elookbackto&((&oreven&((',

thesituationas regards financialoutlayavailable to Indiansoft*arecompanies*as

poor Most soft*are companies found it e+tremely difficult to source seed capital,

*orkingcapitalorevenventurecapital

Most soft*are companies started off undercapitali7ed, and had to rely on

loansoroverdraftfacilitiestoprovide*orkingcapitalhisapproachforcedthemto

generaterevenueintheshortterm,ratherthaninvestinginproductdevelopmenthe

situationfortunatelyhaschanged



32/59

esearc" /et"odology

REDMEN 0 MORC defines,O/esearch as a systemati7ed effort to gain no*

kno*ledgeOItisacarefulinvestigationforsearchofne*factsinanybranchofkno*ledgehe

purposeofresearchmethodologysectionistodescribetheprocedureforconduction

the study It includes researchdesign, sample si7e,datacollectionandprocedureof

analysisofresearchinstrument

/esearch al*ays starts *ith a question or a problem Its purpose is to find ans*ers to

questions through the application of the scientific method It is a systematic and

intensive study directed to*ards a more complete kno*ledge of the sub-ect studied

RE"EAR1@ DE"I(N>

Acc2 to ;erlinger


33/59

DATA 1OLLE1TION

"e%ondarydata

Secondarydata is thedata*hich is alreadycollectedbysomeoneandcomplied for

differentpurposes*hichareusedinresearchforthisstudyItincludes>$

Internet

Maga7ine

Hournal

4e*spaper



34/59

=iterature e*iew

A%%ordin'to"u#ashandNair,6May


35/59

he studybrings out four important variables *hich are highly unique to

successfulventureinIndiaheyare>

%bilityto evaluateandreacttorisk

%ttentiontodetails

Marketshare

6rofits

)valuating risk seems tobe an area *here unsuccessful venture fail Since

successfulteamsfocusonestablishedmarketsandmeticulouslypursuethese

marketstogainmarketshare,theyachievedesiredprofits

A%%ordin'to3u$ar,6May

he Indian Venture 1apital Industry has follo*ed the classical model of venture

capitalfinanceheearlystagefinancing*hichincludesseeds,startup2earlystage

investment *as al*ays the ma-orpart of the total investment ?henever venture

capitalistsinvestinventurecertainbasicpreferenceplayacrucialroleininvestment

decision *o such considerations are location preferences and o*nership

preferencesSeedstagefinanceisprovidedtone*companiesfortheuseinproduct

development 2 initial marketing company maybe in theprocess of setting up the

businessormaybe in thebusiness for shortperiodbuthavenot reach the stageof

commerciali7ation

A%%ordin'to3u$ar,6Mar%h,

heindustryshouldconcentratemoreanearlystagebusinessopportunitiesinsteadof

later stage It is the e+perience *orld over and especially in the 5nited states of

%merica that the early stage opportunities have generated e+ceptional for the

industry It is recommended that the venture capitalists should retain theirbasic

feature that taking retain theirbasic feature that is taking high risk hepresent

situationmay compel venture capitalists to opt for less riskyopportunitiesbut it is

againstthespritofventurecapitalismheestablishedfactisbiggainsarepossiblein

highriskpro-ects



36/59

A%%ordin'to1hary,6"epte$#er


37/59

capitalists@co$investingstrategyhestudyfindsthateventhroughventurecapitalists

fi+tightmilestonesandtimelinestheythemselvescontributetomanyof thedelays

thataree+periencedbyatypicalstartupfirmhisisbecauseofthehierarchicalco$

investingpartners and the lack of understanding *ithin the venture capitalist co$

investorsasto*hatroletheyindividuallyplayinthedevelopmentoftheirportfolio

company

A%%ordin'toRo##ie,6:HH

/obbies,etal&((#Jhighlightsthemonitoringpoliciesoffundedunitsbyventure

capitalists and studies the performance targets, monitoring information, and

monitoring actions through a questionnaire$based survey he survey *as

administered to &"K British Venture 1apital %ssociation members and total of ##

responses*eregatheredinthestudyhefindingsrelatedtoperformancetargetsand

othermonitoringissues*ereconsiderableadditiontotheliteratureinthesub-ect

he issues concerningboard of directors@ role in venturebacked companies

are*idelydebatedtopicsinacademicresearchhefindingsofthestudybyFriedet

al &((KJemphasi7ethat theboardofdirectorsareamoreinvolvedintheventure$

backedfirmsthanboards*heremembersdonothavelargeo*nershipatstakehe

studyprovides an empirical evidence of variation in theboards@ involvement and

sho*sitsrelevanceinperformancemanagementoffundedunits

A%%ordin'toMishra,62u&y

hereisabundantempiricalresearchconductedindevelopedcountries*hichaddress

therelativeinvestmentevaluationcriteriatakenintoaccountinthescreeningprocessforne*ventureinvestmentproposalsQopunidis&((Jprovidesausefulsummary

ofthepreviousresearchinthisfieldheidentificationofselectioncriteriahasbeen

researchedusingdifferentmethodologiessuchassimpleratingofcriteriaperpetual

anddealspecificresponsesJ


38/59

approach has also been used /iquelme, &((J to enhance understanding of

investmentcriteriaandalsoe+tendittootheraspectsofinvestmentprocesslikedeal

structuringanddivestment



39/59

Conceptual )rame !ork >

3"e Venture Capital .rocessheVenture1apitalInvestment6rocess>

heventurecapitalactivityisasequentialprocessinvolvingthefollo*ingsi+steps

&Dealorigination'ScreeningCDuediligence)valuationDealstructuring:6ost$investmentactivityA)+it



40/59

.enture1apita&Invest$entPro%ess



41/59

Dea& ori'ination!

Ingeneratingadeal flo*,theV1investorcreatesapipelineofdealsor investment

opportunities thathe*ouldconsiderfor investing inDealmayoriginate invarious

*aysreferralsystem,activesearchsystem,andintermediaries/eferralsystemisanimportant source of deals Deals may be referred to V1Fs by their parent

organi7ations, tradepartners,industryassociations, friendsetc%notherdealflo*is

activesearchthroughnet*orks,tradefairs,conferences,seminars,foreignvisitsetc

Intermediaries is usedby venture capitalists in developed countries like 5S%, is

certainintermediaries*homatchV1Fsandthepotentialentrepreneurs

"%reenin'!

V1Fs,beforegoingforanin$depthanalysis,carryoutinitialscreeningofallpro-ectson thebasis of somebroad criteria For e+ample, the screeningprocess may limit

pro-ectstoareasin*hichtheventurecapitalistisfamiliarintermsoftechnology,or

product,ormarketscopehesi7eofinvestment,geographicallocationandstageof

financingcouldalsobeusedasthebroadscreeningcriteria

Due Di&i'en%e!

Due diligence is the industry-argon for all the activities that are associated *ith

evaluating an investmentproposal he venture capitalists evaluate the quality ofentrepreneur before appraising the characteristics of the product, market or

technologyMostventurecapitalistsaskforabusinessplantomakeanassessmentof

the possible risk and return on the venture Business plan contains detailed

informationabouttheproposedventureheevaluationofventuresbyV1FsinIndia

includesE

6reliminary evaluation> he applicant required toprovide abriefprofile of the

proposedventuretoestablishprimafacieeligibility

Detailed evaluation> .nce the preliminary evaluation is over, the proposal is

evaluatedingreaterdetailV1FsinIndiae+pecttheentrepreneurtohave>$ Integrity,

long$termvision,urgetogro*,managerialskills,commercialorientation

V1Fs in Indiaalsomake the riskanalysisof theproposedpro-ects*hich includes>

6roduct risk, Market risk, echnological risk and )ntrepreneurial risk he final

decisionistakenintermsofthee+pectedrisk$returntrade$offassho*ninFigure



42/59

DealStructuring> Structuring refers toputting together the financial aspects of the

dealandnegotiating*iththeentrepreneurstoacceptaventurecapital9sproposaland

finally closing the deal o do a good -ob in structuring, one needs to be

kno*ledgeableinareasofaccounting,cashflo*,finance,legalandta+ation%lsothe

structure should take into consideration the various commercial issues ie *hat the

entrepreneur *ants and *hat the venture capital *ould require protecting the

investmentJDocumentationreferstothelegalaspectsofthepaper*orkinputtingthe

deal togetherhe instruments tobeused in structuringdealsaremanyandvaried

heob-ectiveinselectingtheinstrument*ouldbetoma+imi7eoroptimi7eJventure

capital9s returnsprotection and yet satisfies the entrepreneur9s requirements he

instrumentscouldbeasfollo*s>

Instru$ent Issues

0oan 1leanvssecured

Interestbearingvsnoninterestbearing

convertiblevsone*ithfeatures*arrantsJ

&st1harge,'nd1harge,

loanvsloanstock

Maturity

6referenceshares redeemableconditionsunder1ompany%ctJ

participatingparvalue

nominalshares

?arrants e+erciseprice,e+piryperiod

1ommonshares ne*orvendorshares

parvalue

partially$paidshares

InIndia,straightequityandconvertiblesarepopularandcommonlyused4o*adays,

*arrantsareissuedasatooltobringdo*npricing

%variation that*as firstusedby6%1andDI1I*asroyaltyon sales5nder

this, the company *as given a conditional loan If thepro-ect *as successful, the

companyhadtopaya;ageofsalesasroyaltyandifitfailedthentheamount*as

*ritten off In structuring a deal, it is important to listen to *hat the entrepreneur

*ants,buttheventurecapitalcomesup*ithhiso*nsolution)venfortheproposed

investmentamount,theventurecapitaldecides*hetherornottheamountrequested,

isappropriateandconsistent*iththeriskleveloftheinvestmentherisksshouldbe



43/59

analy7ed, taking into consideration the stage at *hich the company is in and other

factorsrelatingtothepro-ectege+itproblems,etcJ

Post Invest$ent A%tivities>

.nce the deal hasbeen structured and agreement finali7ed, the venture capitalist

generally assumes the role of apartner and collaborator =e also gets involved in

shaping of the direction of the venture he degree of the venture capitalist@s

involvementdependsonhispolicy Itmaynot,ho*ever,bedesirable for aventure

capitalisttogetinvolvedintheday$to$dayoperationoftheventureIfafinancialor

managerialcrisisoccurs,theventurecapitalistmayintervene,andeveninstallane*

managementteam

E5it!

Venturecapitalistsgenerally*anttocash$outtheirgainsinfivetotenyearsafterthe

initialinvestmentheyplayapositiveroleindirectingthecompanyto*ards

particulare+itroutes%venturemaye+itinoneofthefollo*ing*ays>

&Initial6ublic.fferingsI6.9sJ

'%cquisitionbyanothercompany

C6urchaseoftheventurecapitalist@ssharesbythepromoter,

6urchaseoftheventurecapitalist@ssharebyanoutsider



44/59

0'1ecti*e No25

3o study t"e pro'lemsfaced 'y *enture

capitalist in India2

Pro#&e$so.enture 1apita& in Indian 1onte5t

.ne can ask *hy venture funding is so successful in 5S% and faced a number of

problems in India hebiggestproblem *as a mindset change from collateral

fundingtohighriskhighreturnfundingMostofthepioneersin theindustry*ere

people*ithcreditbackgroundande+posuretomanufacturingindustries)+posureto



45/59

fast gro*ing intellectualpropertybusiness and services sector *as almost 7ero

Moreover V1F is in its nascent stages in India he emerging scenario of global

competitivenesshasputanimmensepressureontheindustrialsectortoimprovethe

quality level *ith minimi7ation of cost of products by making use of latest

technological skillshe implication is to obtain adequate financing along*ith the

necessary hi$tech equipments toproduce an innovativeproduct *hich can succeed

andgro*inthepresentmarketcondition5nfortunately,ourcountry lacksonboth

fronts he necessary capital canbe obtained from the venture capital firms *ho

e+pectanaboveaveragerateofreturnontheinvestmenthefinancingfirmse+pect

a sound, e+perienced,matureand capablemanagement teamof the companybeing

financedSincetheinnovativepro-ectinvolvesahigherrisk,thereisane+pectation

ofhigherreturnsfromthepro-ecthepaybackperiodisalsogenerallyhigh: $#

yearsJheotherissuesthatledtosuchasituationinclude>

Li%enseRa)andTheIPOBoo$

ill early ("s, under the license ra- regime, only commodity centricbusinesses

thrived inadeficit situationofundacementplant,venturecapital isnotneeded

?hat*asneeded*asabilitytogetalicenseandthengetthepro-ectfundedbythe

banksandDFIsInmostcases,thepromoters*ere*ell$establishedindustrialhouses,

*ithnoapparentneedforfundsMostoftheseentities*erecapableofraisingfunds

fromconventionalsources,includingtermloansfrominstitutionsandequitymarkets

"%a&a#i&ity

he Indian soft*are segment has recorded an impressive gro*th over the last fe*yearsandearns large revenues fromitse+port earnings,yetour share in theglobal

market is less than&percent?ithin thesoft*are industry, thevaluechain ranges

frombody shopping at thebottom to strategic consulting at the top =igher value

addition andprofitability as *ell as significant marketpresence takeplace at the

higherendofthevaluechainIftheindustryhastogro*furtherandsurvivetheflu+

it*ouldonlybethroughinnovationForanyventureideatosucceedthereshouldbe

aproductthathasagro*ingmarket*ithascalablebusinessmodelheIindustry

*hich ismostsuitedforventurefundingbecauseof itsideasnatureJ inIndiatill



46/59

recentlyhadaservicecentricbusinessmodel6roductsdevelopedforIndianmarkets

lackscale

Mindsets

Venturecapitalasanactivity*asvirtuallynon$e+istentinIndiaMostventurecapital

companies*anttoprovidecapitalonasecureddebtbasis,toestablishedbusinesses

*ithprofitableoperatinghistoriesMostoftheventurecapitalunits*ereoffshootsof

financial institutions andbanks and the lending mindset continued rue venture

capitaliscapitalthatisusedtohelplaunchproductsandideasoftomorro*%broad,

thisproblemissolvedbythepresenceofRangelinvestors9heyaretypically*ealthy

individuals*honotonlyprovideventurefinancebutalsohelpentrepreneurstoshape

theirbusinessandmaketheirventuresuccessful

Returns,Ta5esandRe'u&ations

hereisamultiplicityofregulatorslikeS)BIand/BIDomesticventurefundsare

set upunder the Indian rusts%ct of &KK' asper S)BI guidelines, *hile offshore

fundsroutedthroughMauritiusfollo*/BIguidelines%broad,suchfundsaremade

underthe0imited6artnership%ct,*hichbringsadvantagesintermsofta+ationhe

governmentmustallo*pensionfundsandinsurancecompanies toinvestinventure

capitalsasin5S%*herecorporatecontributionstoventurefundsarelarge



47/59

E5it

he e+it routesavailable to theventurecapitalists*ere restricted to the I6. route

Before deregulation,pricing *as dependent on the erst*hile 11I regulations In

general,allissues*ereunderpriced)venno*S)BIguidelinesmakeitdifficultfor

pricing issues for an easy e+it !iven the failure of the .1)I and the revised

guidelines, small companiescouldnothope for aBS)4S)listing!iven thedull

marketformergersandacquisitions,strategicsale*asalsonotavailable

.a&uation

herecentphenomenonisvaluationmismatcheshankstothesoft*areboom,most

promotershaveskyhighvaluatione+pectations!iventhis,itisdifficultfordealsto

reachfinancialclosureaspromotersdonotagreetoavaluationhiscoupled*ith

thefancyforsoft*arestocksintheboursesmeansthatmostcompaniesarepreponing

theirI6.9s1onsequently,thenumberandqualityofdealsavailabletotheventure

fundsgetsreduced

Someotherma-orproblemsfacingbyventurecapitalistinIndiaare>

a. /equirementofane+periencedmanagementteam

b. /equirement of an above average rate of return on investment

0ongerpaybackperiod

". 5ncertaintyregardingthesuccessoftheproductinthemarket

d. Guestionsregardingtheinfrastructuredetailsofproductionlikeplantlocation,

accessibility, relationship *ith the suppliers and creditors, transportation

facilities,labouravailabilityetc

e. he category ofpotential customers and hence thepackaging andpricing

detailsoftheproduct

!. hesi7eofthemarket

-. Ma-orcompetitorsandtheirmarketshare

h. Skillsandrainingrequiredandthecostoftraining

i. Financialconsiderationslikereturnoncapitalemployed/.1)J,costofthe

pro-ect,theInternal/ateof/eturnI//Jofthepro-ect,totalamountoffunds



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required, ratio of o*ners investment personnel funds of the entrepreneurJ,

borro*edcapital,mortgageloansetcinthecapitalemployed

?Source.andey


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O#)e%tiveNo; =

3o study t"e futureprospect of Venture

Capital )inancing;

Prospe%tso.enture 1apita& Finan%in'

?ith theadventof liberali7ation, Indiahasbeensho*ingremarkablegro*th in the

economyinthepast&"$&'yearshegovernmentispromotinggro*thincapacity

utili7ation of available and acquired resources and hence entrepreneurship

development,by liberali7ing norms regarding venture capital ?hile only eight

domesticventurecapitalfunds*ereregistered*ithS)BIduring&((A$&((K,&funds

have alreadybeen registered in &((($'""" Institutional interest is gro*ing and

foreignventure investmentsarealsoonthe riseManystategovernmentshavealso

set up venture capital funds for the I sector inpartnership *ith the local state

financial institutionsandSIDBIhese include%ndhra6aradesh,


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!. Initiativesof theS)BI todevelopastrongandvibrantcapitalmarketgiving

theadequateliquidityandfle+ibilityforinvestorsforentryande+it

Inarecentsurveyithasbeensho*nthattheV1investmentsinIndia@sI$Soft*are

andservicessectorincludingdotcomcompaniesJ$havegro*nfrom5SL&:"million

in&((K toover5SL&'""million in'""Khecredit canbegiven to settingupof a

4ationalVenture1apitalFundfortheSoft*areandIIndustry4FSIJinassociation

*ithvarious financial institutionsofSmall IndustriesandDevelopmentBankof India

SIDBIJ he facts reveal that V1 disbursements as on September C", '""' madeby

4FSItotaled/s':CAmn

Sourcewww.evaluesevrve.com

http://www.evaluesevrve.com/http://www.evaluesevrve.com/http://www.evaluesevrve.com/


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)indings

During the preparation of my report I have analy7ed many things *hich are

follo*ing>$

% number of people in India feel that financial institution are not only

conservativesbuttheyalsohaveabiasforforeigntechnology2theydonottrust

ontheabilitiesofentrepreneurs



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Someventure failsdue to fe*e+itoptionseams are ignorant of international

standards he team usually a t*o or three man team It does notpossess the

required depth In top management he team is often found to have technical

skillsbut doesnotpossess theoverall organi7ationbuilding skills team is often

shortsited

VenturecapitalistsinIndiaconsidertheentrepreneur9sintegrity2urgetogro*as

themostcriticalaspectorventureevaluation



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=imitations of Study1. hebiggestlimitation*astimebecausethetime*asnotsufficientasthere

*aslotofinformationtobegot2tohaveitinterpretation

2. hedatarequired*assecondary2that*asnoteasilyavailable

3. Studybyitsnatureissuggestive2notconclusive

4. )+penses*erehighincollecting2searchingthedata



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Suggestions

1. he investment shouldbe in turnaround stageSince there are many

sick industries in India and the number is gro*ing each year, the

venturecapitaliststhathavespeciali7edkno*ledgeinmanagementcan

help sick industries It*ould alsobehighlyprofitable if theventure

capitalistreplacemanagementeithergoodonesinthesickindustries

2. Itisrecommendedthattheventurecapitalistsshouldretaintheirbasic

feature that is tasking high risk hepresent situation may compel

venturecapitaliststooptforlessriskyopportunitiesbutisagainstthe

spirit of venture capitalism he established fact isbig gains are

possibleinhighriskpro-ects

3. here shouldbe a greater role for the venture capitalists in the

promotionofentrepreneurshipheVenturecapitalistsshouldpromote

entrepreneurforums,clubsandinstitutionsoflearningtoenhancethe

qualityofentrepreneurship



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+i'liograp"y

1. 2OURNAL"

%660I)D FI4%41) V)45/) S%!) I4V)SM)4

6/)F)/)41)I4I4DI%,VI4%


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ANNEXUE I

.enture%apita&ir$s)+amplesofventurecapitalfirmsinclude>

%ccede6artners

%ustinVentures

%tlasVenture

BatteryVentures

Benchmark1apital

1harles/iverVentures

Doughty=ansonechnologyVentures

FidelityVentures

=ealth 1ap

=ummer?imbled

InsightVenture6artners

MobiusVenture1apital

MohrDavido*Ventures

Sevin/osenFunds

Sequoia1apital

relys

http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Atlas+Venture&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Atlas+Venture&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Atlas+Venture&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Benchmark+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Benchmark+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Benchmark+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Fidelity+Ventures&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Fidelity+Ventures&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Fidelity+Ventures&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Fidelity+Ventures&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insight+Venture+Partners&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insight+Venture+Partners&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insight+Venture+Partners&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insight+Venture+Partners&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insight+Venture+Partners&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Sequoia+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Sequoia+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Sequoia+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Trelys&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Trelys&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Atlas+Venture&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Benchmark+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Fidelity+Ventures&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Insight+Venture+Partners&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Sequoia+Capital&gwp=8&curtab=2222_1http://www.answers.com/main/ntquery?method=4&dsid=2222&dekey=Trelys&gwp=8&curtab=2222_1


57/59

ANNEJUREII

SomeimportantVenture1apitalFundsinIndia

&%6ID1Venture1apital0imited, ,Babukhan)state,=yderabad:""""&

'1anbankVenture1apitalFund0imited,IIndFloor,


58/59



59/59

Conclusion

Venture capital canplay a more innovation and development role in a developing

country like India It could help the rehabilitation of sick unit throughpeople *ith

ideasandturnaroundmanagementskill%largenumberofsmallenterprisesinIndia

because sick unit evenbefore the commencement ofproduction ofproduction

Venture capitalist couldalsobe in line*ith thedevelopments takingplace in their

parentcompanies

et another area *here canplay a significant role in developing countries is the

servicesector including tourism,publishing,healthcareetc theycouldalsoprovide

financialassistancetopeoplecomingoutof theuniversities,technical institutesetc

*ho*ishtostarttheiro*nventure*ithor*ithouthigh$techcontent, butinvolving

high risk his *ould encourage the entrepreneurial spirit It is not only initial

funding*hichisneedfromtheventurecapitalists,buttheshouldalsosimultaneously

provide management and marketing e+pertise$a real critical aspect of venture

capitalists, but they also simultaneously provide management and marketing

e+pertise$arealcriticalaspectofventurecapitalindevelopingcountries ?hichcan

improve their effectivenessby setting up venture capital cell in /2D and other

scientific generation,providing syndicated or consortium financing and acing as

businessincubators

venture capital project report

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