Meaning of Venture Capital

„ Venture capital means funds made available for startup firms and small
businesses with exceptional growth potential.

„ It is a investment of long term equity finance where the equity

shareholders earns has return primarily in the form of capital gains.

„ Venture capital is money provided by professionals who alongside

management invest in young, rapidly growing companies that have the
potential to develop into significant economic contributors.
Venture Capitalists generally:

‡ Finance new and rapidly growing companies

‡ Purchase equity securities

‡ Assist in the development of new products or services

‡ Add value to the company through active participation.

 Features of venture capital

‡ ˜
 
 Venture financing is through direct purchase of
shares, options and convertible securities. objective is to make capital gain
by selling off the investment once the fir become profitable.
‡
 venture financing is not repayable on demand. The
venture capital firm have to wait for long period, say 5-10 years to make
large profits.
‡  
 venture financing ensure continuing
participation of venture capitalist in the management of entrepreneur's
business. It helps to protect and enhance his investment by actively
participating and supporting the management. Venture capitalist gives his
marketing, technology, planning and management skills to the new firm.
 ¢tages in venture capital financing

ï ˜ 
a. seed financing for supporting the concept idea.
b. R & D development for product development.
c. start up capital for initial production and marketing.
d. first stage financing for initial production and marketing.

 ˜
 
a. second stage financing for working capital and initial
expansion.
b. develpoment financing for facilitating public issue.
c. bridge financing for facilitating public issue.
 Cont«

_





 

a. Acquiring another firm for public issue.
b. management buyout financing for enabling operating group to
acquire firm or part of its business.
c. turnaround financing for turning around a sick business.
 Process of venture capital financing

ï 

 a continuous flow of deal is essential for venture
capital business. Deal originates in following ways:
a.  deals may be referred by VCFs by their parent
organizations, trade partners, industry association, friends etc.
b.    through networks, trade fairs, conferences, seminars,
foreign visits etc.
c. - who matches VCFs and potential entrepreneurs.

2.  - before going for some in-depth analysis, VCFs carry out
initial screening of all projects on some on the basis of some broad
criteria. ¢creening process limit projects to areas in which the VC are
familiar in terms of technology, product or market scope, size of
investment, geographic location as well as stage of financing.
 Cont«

_ 
  once the proposal is passed through initial

screening the idea is subject to detail evaluation or due
diligence. They ask for business plan for the evaluation of risk
& return. The venture capitalist rely on subjective but
comprehensive evaluation. The evaluation process includes:
 

applicants are required to provide the
brief profile of proposed venture to establish prime facie
eligibility. Promoters are encouraged to have face to face
discussion.
 

: a lot of stressed is put on techno economic
evaluation. Most of the VCFs involve technical experts for
technical evaluation.
 Cont«

( 

: once the venture has been evaluated as viable

the venture capitalist and venture company negotiate the terms of
the deal- amount, form and price of investment. Both the parties
protect their interest.
a. 
 : they like a deal to provide for return
commensurate with the risk, influence over the firm through board
membership, minimum taxes, investment liquidity, right to place
management I case of consistent poor managerial performance,
etc.
b. 

: they would like to earn reasonable return,
minimize taxes, have enough liquidity to operate their business
and remain in commanding position.
c. common interest: flexible, have the structure to protect their
interests and provide enough incentives to both to co-operate with
each other.
 Cont«

5. 
 : once the deal has been structured and
agreement finalized the venture capitalist assume the role of partner
or the collaborator. VC involve in shaping the direction of the
management by formal representation. If financial or maangerial
crisis occurs, the VC use to interfere.
 ˜: A venture capital may exit in one of the following ways:
a. IPO
b. Acquisition by another company.
c. Purchase of venture capital¶s share by the promoter.
d. Purchase of venture capital¶s share by an outsider.
 Methods of venture Financing

The financing pattern of the deal is the most important element.

Following are the various methods of venture financing:
‡ Equity- the contribution of VC should not exceed 49% of total equity
capital.

‡ p


 it is repayable in the form of royalty after the
venture is able to generate the sales. No interest is paid. VC charge
royalty ranging between 2 to 15 percent.

‡ 

 it is a hybrid security which combines the features of
both conventional and commercial loan. The enterprise has to pay
both interest and royalty on sales.
 Cont«

‡  
: this security charges interest in three

phases.
a. start-up phase- no interest is charged.
b. to a particular level of operation- low interest is charged.
c. Full commercial basis- high interest is charged.
‡ !


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‡ The concept of venture capital was formally introduced in India in
1987 by IDBI.

‡ The government levied a 5 per cent cess on all know-how import

payments to create the venture fund.

‡ ICICI started VC activity in the same year

‡ Later on ICICI floated a separate VC company - TDICI

 "
 


VCFs in India can be categorized into following five
groups:

1)Those promoted by the Central Government controlled

development finance institutions. For example:
- ICICI Venture Funds Ltd.
- IFCI Venture Capital Funds Ltd (IVCF)
- ¢IDBI Venture Capital Ltd (¢VCL)
2) Those promoted by ¢tate Government controlled development finance
institutions.
For example:
- Punjab Infotech Venture Fund
- Gujarat Venture Finance Ltd (GVFL)
- Kerala Venture Capital Fund Pvt Ltd.

3) Those promoted by public banks.

For example:
- Canbank Venture Capital Fund
- ¢BI Capital Market Ltd
4)Those promoted by private sector
companies.
For example:
- IL&F¢ Trust Company Ltd
- Infinity Venture India Fund

5)Those established as an overseas venture capital fund.

For example:
- Walden International Investment Group
- H¢BC Private Equity
management Mauritius Ltd
)
*


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„A¢ PER ¢EBI

„A¢ PER INCOME TAX ACT,1961
 )
˜+ 
A VCF are regulated by the ¢EBI (Venture Capital Fund)
Regulations, 1996.
A The following are the various provisions:

„ A venture capital fund may be set up by a company or a trust,

after a certificate of registration is granted by ¢EBI on an
application made to it. On receipt of the certificate of
registration, it shall be binding on the venture capital fund to
abide by the provisions of the ¢EBI Act, 1992.
 p
,
„ A VCF may raise money from any investor, Indian, Non-
resident Indian or foreign, provided the money accepted
from any investor is not less than Rs 5 lakhs. The VCF
shall not issue any document or advertisement inviting
offers from the public for subscription of its security or
units.
‡ ¢EBI regulations permit investment by venture capital
funds in equity or equity related instruments of unlisted
companies and also in financially weak and sick
industries whose shares are listed or unlisted
 p
,
„ At least 80% of the funds should be invested in venture capital
companies and no other limits are prescribed.

„ ¢EBI Regulations do not provide for any sectoral restrictions for

investment except investment in companies engaged in financial
services.
„ A VCF is not permitted to invest in the equity shares of any
company or institutions providing financial services.

„ The securities or units issued by a venture capital fund shall not be

listed on any recognized stock exchange till the expiry of 4 years
from the date of issuance .
 p
,
„ A ¢cheme of VCF set up as a trust shall be wound up
(a) when the period of the scheme if any, is over
(b) If the trustee are of the opinion that the winding up shall be in the
interest of the investors
(c) 75% of the investors in the scheme pass a resolution for winding up
or,
(d) If ¢EBI so directs in the interest of the investors.








„ The Income Tax Act provides tax exemptions to the
VCFs under ¢ection 10(23FA) subject to compliance
with Income Tax Rules.

„ Restrict the investment by VCFs only in the equity of

unlisted companies.

„ VCFs are required to hold investment for a minimum

period of 3 years.
 p
,
„ The Income Tax Rule until now provided that VCF shall
invest only upto 40% of the paid-up capital of VCU and
also not beyond 20% of the corpus of the VCF.

„ After amendment VCF shall invest only upto 25% of the

corpus of the venture capital fund in a single company.

„ There are sectoral restrictions under the Income Tax

Guidelines which provide that a VCF can make
investment only in specified companies.
 "
p
˜




- "p

A It was established in 1993 and is based in Delhi, the capital of
India
A It is a member based national organization that
- represents venture capital and private equity firms
- promotes the industry within India and throughout the world
- encourages investment in high growth companies &
supports entrepreneurial activity and innovation.
‡ IVCA members comprise venture capital firms,
institutional investors, banks, incubators, angel groups,
corporate advisors, accountants, lawyers, government
bodies, academic institutions and other service providers
to the venture capital and private equity industry.

‡ Members represent most of the active venture capital

and private equity firms in India. These firms provide
capital for seed ventures, early stage companies and
later stage expansion.
m

"
p

./
A Venture capital firms typically source the majority of their funding
from large investment institutions.

A Investment institutions expect very high ROI

A VC¶s invest in companies with high potential where they are able to
exit through either an IPO or a merger/acquisition.

A Their primary ROI comes from capital gains although they also
receive some return through dividend.
 "
 



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Percentage calculated on the total VC investment- 14,234 U¢B (fig. of 2007)

 &
  


p & ˜ ˜p&#)

MUMBAI ¢oftware services, BPO, Media,

Computer graphics, Animations,
Finance & Banking
BANGALORE All IP led companies, IT & ITE¢,
Bio-technology

DELHI ¢oftware services, ITE¢ , Telecom

CHENNAI IT , Telecom

HYDERABAD IT & ITE¢, Pharmaceuticals

PUNE Bio-technology, IT , BPO

 

"p˜ 
16000 450

14234
14000 400
387

350
12000

299 300
10000 280

250
8000 7500

6390 200

6000 170
146 150

4000 110
100
78 71
2200
56 1650
2000 50
1160 937
591 470
0 0
2000 2001 2002 2003 2004 2005 2006 2007 1st half of
2008
Value of deals No of deals