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The Venture capital sector is the most vibrant industry in the financial
Venture capital can be visualized as “your ideas and our money” concept of
The venture capital industry in India has really taken off in. Venture
Five critical success factors have been identified for the growth of VC in
With technology and knowledge based ideas set to drive the global economy
The IPOs achieved by software companies in India in 1999 have attracted
Technologies and Satyam Infoway. Investors have lapped up the offerings of
Silicon Valley entrepreneurs. Others believe that Indian entrepreneurs are
India do not typically attract the right managerial talent to enable rapid
The venture capital phenomenon has now reached a take-off stage in India
Risk capital in all forms is becoming available more freely. As against the
IPOs of entrepreneur-driven Indian IT companies have had a very positive
India certainly needs a large pool of risk capital both from home and abroad
Steps are being taken at governmental level to improve infrastructure and
R&D. Certain NRI organizations are taking initiatives to create a corpus of
US$150m to strengthen the infrastructure of IITs. More focused attempts
Indian companies to start new ventures. The quality of enterprise in human
The environment is ripe for creating the right regulatory and policy
India is rightly poised for a big leap. What is needed is a vibrant venture
Economic and Scientific Research Foundation of India (Chitale 1983). It
"risk capital" for new ventures and proposed various measures to liberalize
India had in encouraging entrepreneurship and the general malfunctioning of
Indian policy toward venture capital has to be seen in the larger picture of
Venture capital was part of this larger movement
Finance 1988). These regulations really were aimed at allowing state
The government's awakening to the potential of venture capital occurred in
World Bank study quoted above. Noting that the government’s focus until
The 1989 World Bank (1989: 2) report noted that “Bank involvement … has
Making the case for supporting the new venture capital guidelines with
Ministry of Finance’s Controller of Capital Issues (which otherwise did not
The funds were restricted to investing in small amounts per firm (less than
100 million rupees); the recipient firms had to be involved in technology that
There were also other bureaucratic fetters including a list of approved
Finance had to approve every line of business in which a venture capital firm
The World Bank sought to ensure a level of professionalism in the four new
This was an innovative project for the World Bank. The report noted (1989:
42) that “this is the first experience of this kind in India or in the Bank.” To
World Bank would (1989: 31) “Review and approve initially nearly 30
USAID project meant to fund cooperative research between U.S. and Indian
ICICI and UTI, and the funds were registered as UTI’s Venture Capital Unit
Another reason for forming TDICI was that venture capital investments
The ICICI investment committee was not equipped to deal with such delays
TDICI managers wanted to escape from ICICI’s large-firm culture. TDICI
Indian government to establish it as the national center for high technology
The research activities of state-owned firms such as Indian Telephone
(prior to the compensation of the venture capitalists). This was despite
Finance Limited (GVFL) began operations with a 240 million rupee fund
GVFL estimated that ultimately he would be able to achieve a 15-percent
The other two venture funds had only modest success. The Andhra Pradesh
Development Corporation (APDIC). Though located in a relatively strong
This first stage of the venture capital industry in India had difficulties as
International Finance Corporation-sponsored venture capital funds failed
Venture capital is very different from traditional sources of financing
India's recent success story in software and IT is almost a fairy tale when
It also indicates the potential India has in terms of knowledge and
India has the second largest English speaking scientific and technical
It is also important to recognize that while India is doing very well in IT and
Many experts believe that just as the US did in the semiconductor industry in
This is not expected to happen automatically. The sequence of steps in the
India also has a vast pool of existing and on-going scientific and technical
The potential of venture capital is tremendous when looking at the
1992 showed that venture-backed IPOs earned 44.6 per cent over a typical
This potential can also be seen in the growth of sales figures for the US
The institution of venture capitalism is a difficult one to initiate through
Slow growth of venture capitalists in India is due to the short supply of good
The funds available for investment are less than 50 per cent of the
1999-2000. Institutional interest is growing and foreign venture investments
Indian market
The sample for this research project is a combination of venture capital
The number of people in the sample are limited to less that 30
(i.e. n< 30)
The sample is divided as follows
Venture capital firms = 5
Angel investors = 3
Professors = 10
Entrepreneurs = 12
The sample size was limited to 30 and was segregated strictly as
Primary data :
Through questionnaires and personal one on one interviews
( considering the small sample size and the topic of research)
Secondary data :
Historical data : Pre and post liberalization of Indian economy
Books on entrepreneurs and venture capital growth in India by popular
A viable venture capital industry depends upon a continuing flow of
The protectionist policy had benefits and costs. The benefit was that it
Q2) Are there enough tax rebates for venture capital funding?
It points out that this goes back to India’s traditional role as the world’s
In the absence of an organized venture capital industry until almost 1998 in
1988. However, these guidelines restricted the setting up of VCFs to the
In September 1995 the Indian government issued guidelines for overseas
Central Board of Direct Taxes (CBDT)issued guidelines. The flow of
Pursuant to this regulatory framework some domestic VCFs were registered
The typical venture capitalists ‘venturing’ into India today consist of
2005 witnessed over 68 investments in India with a total funding of US$ 1.8
With such admiration and encouragement from prestigious international
There are four possible interactions: A) The institution can be successfully
The establishment of any institution in another environment can be a
Such an environment would be considered hostile to the
India did have a number of strengths. It had an enormous number of small
Indian engineers who had emigrated to the U.S. became entrepreneurs and
India was very unlikely
The growth of Indian venture capital must be examined within the context of
A system of entrepreneurship has evolved in the U. S. that has been quite
(including wealthy family groups) have natural advantages in mobilizing the
Bombay 4 3 2 4 5 6 31
New Delhi 3 3 3 2 3 4 10
Hyderabad 1 1 1 1 1 1 1
Bangalore 2 2 2 5 5 5 8
Calcutta 1 1 1 1 1 1 2
Chennai 0 0 0 1 1 1 1
Lucknow 0 0 0 1 1 1 0
Nikko closed its Bombay offices in 2000 to consolidate in Bangalore. The
"salvage-type" deals and some Internet startups. Many of the other Bombay
The involvement of the overseas private sector in the Indian venture capital
Khosla (2000) spent three years commuting between India and Silicon
Draper decided to begin venture investing in a developing country. After
Draper International and recruited investments from a number of successful
Silicon Valley entrepreneurs and investors of Indian descent (Draper 2000)
This would the first major overseas firm to begin investing in India. To head
Only in 1996 did overseas and truly private domestic venture capitalists
Group (WIIG) initiated its India-focused venture capital operation. The first
(wiig.com 2000). This increase in investment was accelerated by SEBI's
The formalization of the Indian venture capital community began in 1993
Nadkarni who became its first chairman and GVFL's Vishnu Varshney who
The IVCA had a large agenda and a large task in its efforts to improve the
(1998) presented the industry’s suggestions on several issues including: (1)
Indian information technology industry association NASSCOM
There were internal divisions within the Indian venture capital industry
1999). These foreign firms registered in Mauritius as a strategy to avoid the
Indian firms were able to list on the NASDAQ and on the Indian stock
The success of Indian entrepreneurs in Silicon Valley that began in the
1980s became far more visible in the 1990s. This attracted attention and
(in order of descending importance): Silicon Valley (San Francisco Bay
Silicon Valley asserted its dominance as a technology center at the end of
The bureaucratic obstacles to the free operation of venture capital remained
Investments issued by the Department of Economic Affairs in the Ministry
The stated aim of the Indian regulatory regime is to be neutral with regard to
Regulations regarding venture capital continued to be cumbersome and
Impediments to the development of venture capital also exist in India’s
The general regulatory environment continues to hinder investment. For
India’s regulatory framework inhibits practices used in the U.S. to reward
India’s corporate law does not provide flexibility in using equity to reward
The restrictions on venture capital extend beyond the framework of
Another significant impediment to developing a vibrant venture capital
Indian rupee was non-convertible. The lack of convertibility hampered
Just as the currency regime inhibited international venture capital firms from
Broadcom would have had to be changed from a “pooling-of-interests”
(Dave 1999). The Indian legal and regulatory environment continued to
An important policy has been a willingness to invest heavily in university-
The most important direct U.S. government involvement in encouraging the
Act of 1958 authorizing the formation of small business investment
SBIC program also provided a vehicle for banks to circumvent the
Depression-era laws prohibiting commercial banks from owning more than 5
1970s. The final investment format permitted SBICs to raise money in the
The SBIC program experienced serious problems almost immediately
Starting in 1965 Federal criminal prosecution was necessary to rectify SBIC
The historical record also indicates that government action can harm venture
Employment Retirement Income Security Act (ERISA) making pension
This was interpreted to include venture capital funds. The result was that
National Venture Capital Association (NVCA) in 1973
Only in 1977 did they succeed in starting a process of a gradual
(a) Successful creation of venture capital industries -- Israel and Taiwan
The two most successful adopters of U.S.-style venture capital practice are
The Israeli venture capital industry is closely related to the U.S. The first
U.S. connection was built upon Israelis and Jewish networks that were able
It invested $8 million in ten funds that were required to raise another $12
The creation of the Taiwanese industry differs significantly from the Israeli
Taiwanese and other Chinese scientists and engineers in the U.S. that it
The venture capitalist invests in recently established firms believed to have
The venture capital process is complete when the company is sold through
There has been much debate about the preconditions for venture capital. One
In the U.S. the government played a role in the development of venture
U.S. universities and remained to work in high-technology firms. In the
Exchange Board of India (SEBI) was created to regulate the stock market
India (RBI 1999). The reforms and loosening of regulations resulted in an
India has a strong mutual fund sector that began in 1964 with the formation
The largest single source of funds for U.S. venture capital funds since the
An Indian venture capital industry is struggling to emerge and given the
Capital. SEBI then recommended that the Ministry of Finance adopt many
A number of suggestions were not accepted even though they would assist in
Government
Life insurance funds 156.36 12.3 None
Pension funds 262.48 20.7 None
(a) The banking system
Bank of India continuing to play the role of banker to government agencies
(b) Equity markets
The first Indian stock markets were established during the British Raj in the
There were several reasons for the growth of the Indian stock market
The distortion these policies created by encouraging concentration were
The 40-percent regulation did not liberalize the markets as much as one
The creation of a venture capital industry in India through transplantation
Small and medium-sized enterprises have a long history and great
Indian educational institutions very quickly became the elite Indian
Although published data on venture capital investment after the moderate
Unofficial figures gathered by SEBI and IVCAxix showed that over $1
In the introduction we argued that the transplantation of an institution could
Earlier patterns of growth or failure in venture capital industries in other
Minnesota in the 1980s or Germany until recently
The venture capital industry is emerging in India as a result of internal and
These funds were the beginnings of a process of legitimatizing venture
It is unlikely that the venture capital industry could have been successful
Even in 2001 the Indian government remains bureaucratic and highly
India is an example of how purposive action in an environment replete with
If the earlier period has provided the resources for constituting a venture
Bubble in April 2000 will be a stringent filter that will remove less viable
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Ashwini M

Ashwini M

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Published by Tejashree Krishna

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Published by: Tejashree Krishna on Jun 23, 2011
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