Dissertation

on

Analysis of Venture Capitalists in India

By Siddhant Pahwa A0101911298

Introduction
The objectives of research are: To study the trends of Venture Capital in India and its implications. To explore the major hurdles to growth of Venture Capital. To identify key variables having an impact on the Venture Capital activity.

Conceptual Framework
Venture Capital
Venture Capital is the commitment of knowledge and capital for the formation and setting up of companies particularly those specializing in new ideas or new technologies. Thus it is not just an injection of funds but also a simultaneous input skills needed to set the firm up, design its marketing strategy, organize and manage it.

Maturity Stage

Exit Route, Merger & Acquisition and IPO

Growth Stage

Access to more capital, engage in R & D and capture market share

Initial Stage

Product development and Commercialization

Start-Up

Start-up capital, preparing business plan and conducting market research

Review of Literature
Chandra, Garima J. & Sarkar, Atul K. (2012) explained the Venture Capital scenario in India by conducting empirical study comprising responses form 30 investee firms spread across India.

Stimel, Derek (2012) seeks to examine the relationship between the steps taken by the federal reserve (tightening of monetary policy, Feds Rate) and other macro-economic factors (GDP, inflation rate) on the venture capital industry in the United States.

Panda, Swati (2012) draws out variables like tangible assets, profitability, size, volatility, growth opportunities, etc. The author describes the framework for growth firms seeking venture capital.

Kwaning, Stephen A. (2010) discussed the challenges both within the industry and the economic environment faced by venture capitalists in developing markets.

Geronikolaou, George & Papachristou, George (2012) study the impact of venture capital funding on innovative entrepreneurship and Technological Progress

Research Methodology
In order to achieve the objectives of this research, both exploratory as well as descriptive research is carried out. The descriptive part of the research is carried out when we observe the trends of venture capital activity in the country as well as in other countries, the exploratory part comes into existence as we try and explain the trends of venture capital, finding out and exploring the factors which cause certain patterns to emerge as a result of certain key variables. Research is based on secondary data collected from research papers, journals and online resources of recognized venture capital associations. Microsoft Excel has been extensively used to model the patterns of venture capital activity in India and the impact of key variables like GDP, Interest Rates, and Taxation on venture capital. Regression Analysis has been used to check significance of impact of these three variables

Hypothesis
H0= GDP does not have significant impact on Venture Capital H1= GDP has significant impact on Venture Capital H0= Interest Rates do not have significant impact on Venture Capital H1=Interest Rates have significant impact on Venture Capital H0= Taxes have significant impact on Venture Capital H1= Taxes do not have significant impact on Venture Capital

Purpose of Study
The future of every economy depends upon the success of new industries and services that are supporting these industries. In a capital scarce and nation like India, Venture Capital assumes greater significance. Venture Capital contributes towards employment generation, particularly for skilled and educated workforce. This report aims to study the trends in Venture Capital in India, while giving a brief overview of the same in the world. It is also aimed at finding out the reasons for growth of this sector in the Indian Economy. The report also explores the process of obtaining Venture Capital, how it is different from Private Equity. There is a detailed analysis on the various stages of Venture Capital with the associated developments in business.

Data Analysis
After achieving a peak in 2008, the amount of venture capital raised in India has still not been able to reach its peak of more than $1.7 billion. The graph only depicts the trend which is a mirror reflection of the investment scenario in the world which saw the biggest downturn in 2008. Although the lift off after 2009 is good but it has not been positive in 2012. We can attribute this largely to the policy paralysis which plagued the country and the current government is still struggling to get rid of this image by undertaking a slew of reform measures.
VC Amount Raised and No. of Rounds
1800 1600 1400 In million$ 1200 1000 800 600 400 50 0 150 100 250

200
No. of Deals

200
0 Amount Raised No. of Deals 2006 600 66 2007 900 97 2008 1700 106 2009 800 83 2010 1100 103 2011 1500 155 2012 762 206

 Interest Rates There is a direct relationship between the interest rates and the amount of venture capital raised. The correlation coefficient, (r), between the above variables comes out to be 0.43. This indicates a fair degree of linear relationship between interest rates and Amount of venture capital raised. Intuitively, other things remaining constant, as interest rates go up, the cost of capital goes up which forces promoters to go in for alternate sources of funding which includes venture capital.

VC Vs Interest Rates
1800 1600 1400 In million $ 1200 1000 800 600 400 200 0 Amount Raised Interest Rates 9 8 7 6 4 3 2 1 0 5

2006
600 6.7

2007
900 7

2008
1700 6.95

2009
800 4.45

2010
1100 5.2

2011
1500 7.6

2012
762 8.15

In %

 GDP The level of GDP in the economy has a positive response on the level of venture capital activity. The correlation coefficient (r) between the two variables is 0.32, which denotes a fair degree of linear relationship between GDP and Venture Capital. Intuitively, the level of GDP sets the investment climate in the country and these numbers also determine the expected return that the international investors can earn on investments in the country, thereby increasing their inflows of venture capital funding in times of economic prosperity.
Venture Capital Vs GDP
1800 2000 1800 1600 1400 1200 1000 800 600 400 200 0

1600
1400 In million $ 1200 1000 800

600
400 200 0 Amount Raised GDP

2006
600 810

2007
900 951

2008
1700 1242

2009
800 1214

2010
1100 1380

2011
1500 1729

2012
762 1847

In billion $

 Taxes There is a negative relationship between the amount of venture capital raised and the tax rates. The tax rates increase the cost to the venture capitalist and also hikes the expected rate of return. The correlation coefficient (r) between the two variables, is, -0.48, which shows the negative linear relationship between the two variables.

VC Activity Vs Tax Rate

1800 1600 1400 1200 In million $ 1000 800 600 400 74 72 70 68

64 62 60

200
0 Amount Raised Taxes (% of profits)

58 2006
600 72.8

2007
900 71.5

2008
1700 69

2009
800 64.7

2010
1100 63.3

2011
1500 61.8

56

In %

66

Regression Analysis
Regression Equation: Y = b0 + b1X1 + b2X2 + b3X3 +E Y= Venture Capital (Amount Raised) {Dependent Variable} b0 = Intercept b1 = Interest Rates b2 = GDP b3 = Taxes (as a percentage of profits) E = Error term ..\..\Documents\Book1.xlsx

Hurdles to growth of Venture Capital

Expectations mismatch over asset valuations. Macroeconomic uncertainties Competitive environment Unclear and complex regulations and tax laws Post-deal collaboration between PE investors and promoters

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