Chapter 1 INTRODUCTION TO VENTURE CAPITAL FUNDS 1.1 1.2 1.3 1.4 1.5 1.

.6 Introduction The Origin Background Meaning and Definition Characteristics Ty es of !C"

INTRODUCTION to Venture Capital

1.1 VENTURE CAPITAL
#$a%% &usinesses ne'er see$ to ha'e enough $oney. Bankers and #u %iers(

natura%%y( are i$ ortant in financing s$a%% &usiness gro)th through %oans and credit( &ut an e*ua%%y i$ ortant source of %ong ter$. Gro th Capital is the 'enture ca ita% fir$. !enture Ca ita% financing $ay ha'e an e+tra &onus( for if a s$a%% fir$ has an ade*uate e*uity &ase, &anks are $ore )i%%ing to e+tend credit. Venture !apital is $oney ro'ided &y rofessiona%s )ho in'est a%ongside

$anage$ent in young( ra id%y gro)ing co$ anies that ha'e the otentia% to de'e%o into significant econo$ic contri&utors. !enture ca ita% is an i$ ortant source of e*uity for start-u co$ anies. !enture ca ita% is ca ita% ty ica%%y ro'ided &y outside in'estors for financing of ne)( gro)ing or strugg%ing &usinesses. !enture ca ita% in'est$ents genera%%y are high risk in'est$ents &ut offer the otentia% for a&o'e a'erage returns and.or a ercentage of o)nershi of the co$ any. / 'enture ca ita%ist 0!C1 is a erson )ho $akes such in'est$ents. / 'enture ca ita% fund is a oo%ed in'est$ent 'ehic%e 0often a artnershi 1 that ri$ari%y in'ests the financia% ca ita% of third- arty in'estors in enter rises that are too risky for the standard ca ita% $arkets or &ank %oans. The ter$ 2!enture Ca ita%3 is understood in $any )ays. In a narro) sense( it refers to( in'est$ent in ne) and tried enter rises that are %acking a sta&%e record of gro)th. In a &roader sense( "enture !apital refers to the co$$it$ent of !apital as shareho%ding( for the for$u%ation and setting u of s$a%% fir$s s ecia%i4ing in ne) ideas or ne) techno%ogies. It is not $ere%y an in5ection of #un$% into a ne) fir$( it is a si$u%taneous in ut of ski%% needed to set u the fir$( design its $arketing strategy and organi4e and $anage it. It is an association )ith successi'e stages of fir$3s de'e%o $ent )ith distincti'e ty es of financing a ro riate to each stage of de'e%o $ent.

/ccording to Internationa% "inance Cor oration 0I"C1( 'enture ca ita% is e*uity or e*uity featured ca ita% seeking in'est$ent in ne) ideas( ne) co$ anies( ne) roduction( ne) rocess or ne) ser'ices that offer the otentia% of high returns on in'est$ents. /s defined in 6egu%ation 20$1of #7BI 0!enture Ca ita% "unds1 6egu%ation ( 1886 9'enture ca ita% fund $eans a fund esta&%ished in the for$ of a co$ any or trust )hich raises $onies through %oans( donations issue of securities or units as the case $ay &e( and $akes or regu%ations. Thus 'enture ca ita% is the ca ita% in'ested in young( ra id%y gro)ing or changing co$ anies that ha'e the otentia% for high gro)th. The !C $ay a%so in'est in a fir$ that is una&%e to raise finance through the con'entiona% $eans. :rofessiona%%y $anaged 'enture ca ita% fir$s genera%%y are ri'ate artnershi s or c%ose%y-he%d cor orations funded &y ri'ate and u&%ic ension funds( endo)$ent funds( foundations( cor orations( )ea%thy indi'idua%s( foreign in'estors( and the 'enture ca ita%ists the$se%'es. !enture ca ita%ists genera%%y;

ro oses to $ake in'est$ents in accordance )ith these

"inance ne) and ra id%y gro)ing co$ anies, :urchase e*uity securities, /ssist in the de'e%o $ent of ne) roducts or ser'ices, /dd 'a%ue to the co$ any through acti'e artici ation, Take higher risks )ith the e+ ectation of higher re)ards, <a'e a %ong-ter$ orientation

=hen considering an in'est$ent( 'enture ca ita%ists carefu%%y screen the technica% and &usiness $erits of the ro osed co$ any. !enture ca ita%ists on%y in'est in a s$a%% ercentage of the &usinesses they re'ie) and ha'e a %ong-ter$ ers ecti'e. >oing for)ard( they acti'e%y )ork )ith the co$ any?s $anage$ent &y contri&uting their e+ erience and &usiness sa''y gained fro$ he% ing other co$ anies )ith si$i%ar gro)th cha%%enges.

!enture ca ita%ists $itigate the risk of 'enture in'esting &y de'e%o ing a ortfo%io of young co$ anies in a sing%e 'enture fund. Many ti$es they )i%% co-in'est )ith other rofessiona% 'enture ca ita% fir$s. In addition( $any 'enture artnershi )i%% $anage $u%ti %e funds si$u%taneous%y. "or decades( 'enture ca ita%ists ha'e nurtured the gro)th of /$erica?s high techno%ogy and entre reneuria% co$$unities resu%ting in significant 5o& creation( econo$ic gro)th and internationa% co$ etiti'eness. Co$ anies such as Digita% 7*ui $ent Cor oration( / %e( "edera% 7+ ress( Co$ a*( #un Microsyste$s( Inte%( Microsoft( @ahoo( /irte% and >enentech are fa$ous e+a$ %es of co$ anies that recei'ed 'enture ca ita% ear%y in their de'e%o $ent. !enture Ca ita% is the &usiness of esta&%ishing an in'est$ent fund in the for$ of e*uity financing 'ia in'est$ents in the co$$on stocks( referred stocks and con'erti&%e de&entures of 'arious co$ anies. These co$ anies are seen to ha'e a high gro)th otentia% and are a&%e to &e %isted on the stock e+change in order to gain the highest returns in di'idends and ca ita% gain.

1.& The Ori'in o# Venture Capital

In the 182A?s B 3A?s( the )ea%thy fa$i%ies of and indi'idua%s in'estors ro'ided the start u $oney for co$ anies that )ou%d %ater &eco$e fa$ous. 7astern /ir%ines and Cero+ are the $ore fa$ous 'entures they financed. /$ong the ear%y !C funds set u )as the one &y the 6ockfe%%er "a$i%y )hich started a s ecia% fund ca%%ed !7D6OCE in 185A( to finance ne) techno%ogy co$ anies. F#/ is the &irth %ace of !enture Ca ita% Industry as )e kno) it today. During $ost its historica% e'o%ution( the $arket for arranging such financing )as fair%y infor$a%( re%ying ri$ari%y on the resources of )ea%thy fa$i%ies. In 1846( /$erican 6esearch and De'e%o $ent Cor oration 0/6D1( a u&%ic%y traded( c%osed-end in'est$ent co$ any )as for$ed. /6D?s &est kno)n in'est$ent )as the start-u financing it ro'ided in 185G for co$ uter $aker Digita% 7*ui $ent Cor . /6D )as e'entua%%y rofita&%e( ro'iding its origina% in'estors )ith a 15.G ercent annua% rate of return o'er its t)enty-fi'e years as an inde endent fir$. >enera% Doriot( a rofessor at <ar'ard Business #choo%( set u the /6D( the first fir$( as o osed to ri'ate indi'idua%s( at MIT to finance the co$$ercia% ro$otion of

ad'anced techno%ogy de'e%o ed in the F# Fni'ersities. /6D?s a roach )as a c%assic !C in the sense that it used on%y e*uity( in'ested for %ong ter$( and )as re ared to %i'e )ith %osers. /6D?s in'est$ent in Digita% 7*ui $ent Cor oration 0D7C1 in 185H )as a )atershed in the history of !C financing. The nu$&er of such s ecia%i4ed in'est$ent fir$s( e'entua%%y to &e ca%%ed 'enture ca ita% fir$s( &egan to &oo$ in the %ate 185As.The gro)th )as aided in %arge art &y the creation in 185G of the federa% #$a%% Business In'est$ent Co$ any rogra$. <undreds of #BICs )ere for$ed in the 186As( and $any re$ain in o eration today. Slo Gro th in 1()*% + earl, 1(-*%. an$ the Fir%t /oo0 1ear in 1(-2 During the 186As and 18HAs( 'enture ca ita% fir$s focused their in'est$ent acti'ity ri$ari%y on starting and e+ anding co$ anies. More often than not( these co$ anies )ere e+ %oiting &reakthroughs in e%ectronic( $edica% or data- rocessing techno%ogy. /s a resu%t( 'enture ca ita% ca$e to &e a%$ost synony$ous )ith techno%ogy finance. !enture ca ita% fir$s suffered a te$ orary do)nturn in 18H4( )hen the stock $arket crashed and in'estors )ere natura%%y )ary of this ne) kind of in'est$ent fund. 18HG )as the first &ig year for 'enture ca ita%. The industry raised a ro+i$ate%y IH5A $i%%ion in 18HG. 3i'h% + Lo % o# the 1(2*% In 18GA( %egis%ation $ade it ossi&%e for ension funds to in'est in a%ternati'e assets c%asses such as 'enture ca ita% fir$s. 18G3 )as the &oo$ year - the stock $arket )ent through the roof and there )ere o'er 1AA initia% u&%ic offerings for the first ti$e in F.#. history. That year )as a%so the year that $any of today?s %argest and $ost ro$inent fir$s )ere founded. Due to the e+cess of I:Os and the ine+ erience of $any 'enture ca ita% fund $anagers( !C returns )ere 'ery %o) through the 18GAs. !C fir$s retrenched( )orking hard to $ake their ortfo%io co$ anies successfu%. The )ork aid off and returns &egan c%i$&ing &ack u .

/oo0 Ti0e% in the 1((*% The 188As ha'e &een( &y far the &est years for the !enture Ca ita% Industry. The engine for gro)th has &een the fa'oura&%e econo$ic c%i$ate in the F# cou %ed )ith the ad'ent of the Internet &oo$. During this decade( the interest rates )ere %o) and the :.7s )ere 'ery high co$ ared to historica% a'erages. "ina%%y( the rate of MB/ acti'ity has increased dra$atica%%y in the 188As( creating $ore o s$a%%( 'enture-&acked co$ anies to e+it 0cash out1 at high rices. The ad'ent of the Internet as a ne) $ediu$ for &oth co$$unications and co$$erce created an a'a%anche of o ersona% and &usiness ortunities for 'enture ortunities for

ca ita%ists in the $id and %ate 188As. /s a resu%t( the industry has e+ erienced e+traordinary gro)th in the ast fe) years( &oth in the nu$&er of fir$s( and in the a$ount of ca ita% they ha'e raised.

1.3 The /a!4'roun$ In #e te$&er 1885( >o'ern$ent of India issued guide%ines for o'erseas 'enture ca ita% in'est$ent in India )hereas the Centra% Board of Direct Ta+es 0CBDT1 issued guide%ines for ta+ e+e$ tion ur oses. 0The 6eser'e Bank of India go'erns the in'est$ent and f%o) of foreign currency in and out of India.1 /s a art of its $andate to regu%ate and to de'e%o the Indian ca ita% $arkets( #ecurities and 7+change Board of India 0#7BI1 fra$ed the #7BI 0!enture Ca ita% "unds1 6egu%ations( 1886. :ursuant to the regu%atory fra$e)ork( so$e do$estic !C"s )ere registered )ith #7BI. #o$e o'erseas in'est$ents a%so ca$e through the Mauritius route. <o)e'er( the 'enture ca ita% industry( understood g%o&a%%y as ?inde endent%y $anaged( dedicated oo%s of ca ita% that focus on e*uity or e*uity %inked in'est$ents in ri'ate%y he%d( high gro)th co$ anies? 0The !enture Ca ita% Cyc%e( >o$ ers and Jerner( 18881 is sti%% re%ati'e%y in a nascent stage in India. "igures fro$ the Indian !enture Ca ita% /ssociation 0I!C/1 re'ea% that( ti%% 2AAA( around 6s. 2(2AA crore 0F#I 5AA $i%%ion1 had &een co$$itted &y the do$estic !C"s and offshore funds

)hich are $e$&ers of I!C/. "igures a'ai%a&%e fro$ ri'ate sources indicate that o'era%% funds co$$itted are around F#I 1.3 &i%%ion. "unds that can &e in'ested )ere %ess than 5A ercent of the co$$itted funds and actua% in'est$ents )ere %o)er sti%%. /t the sa$e ti$e( due to econo$ic %i&era%isation and increasing g%o&a% out%ook in India( an increased a)areness and interest of do$estic as )e%% as foreign in'estors in 'enture ca ita% )as o&ser'ed. =hi%e on%y G do$estic !C"s )ere registered )ith #7BI during 1886-8G( $ore than 3A additiona% funds ha'e a%ready &een registered in 2AAA-A1. Institutiona% interest is gro)ing and foreign 'enture in'est$ents are a%so on the increase. >i'en the ro er en'iron$ent and o%icy su otentia% for 'enture ca ita% acti'ity in India. ort( there is a tre$endous

The "inance Minister( in the Budget 2AAA s eech announced( 9"or &oosting high tech sectors and su orting first generation entre reneurs( there is an acute need for higher in'est$ents in 'enture ca ita% acti'ities.9 <e a%so said that the guide%ines for the registration of 'enture ca ita% acti'ity )ith the Centra% Board of Direct Ta+es )ou%d &e har$oni4ed )ith those for registration )ith the #ecurities and 7+change Board of India. #7BI decided to set u a co$$ittee on 'enture ca ita% to identify the i$ edi$ents and suggest suita&%e $easures to faci%itate the gro)th of 'enture ca ita% acti'ity in India. Eee ing in 'ie) the need for g%o&a% ers ecti'e( it )as decided to associate Indian entre reneur fro$ #i%icon !a%%ey in the co$$ittee. The setting u of this co$$ittee )as ri$ari%y $oti'ated &y the need to %ay a faci%itating ro%e in tune )ith the $andate of #7BI( to regu%ate as )e%% as de'e%o the $arket. The co$$ittee headed &y E. B. Chandrasekhar( Chair$an( 7+odus Co$$unications Inc.( su&$itted its re ort on G Kanuary 2AAA.

1.4 5a67eanin' o# Venture Capital Venture !apital is %ong-ter$ risk !apital to finance high techno%ogy ro5ects )hich in'o%'e risk &ut at the sa$e ti$e has strong otentia% for gro)th. Venture ca ita%ist oo%s their resources inc%uding $anageria% a&i%ities to assist ne) entre reneur in the ear%y years of the pro8e!t. Once the pro8e!t reaches the stage of rofita&i%ity( they se%% their e*uity ho%dings at high re$iu$.

596 De#inition o# the Venture Capital Co0pan,

/ "enture !apital co$ any is defined as La financing institutions )hich 5oints an entre reneur as a co- ro$oter in a pro8e!t and shares the risks and re)ards of the enter rise.M

1.: Chara!teri%ti!% o# Venture Capital

The three ri$ary characteristics of "enture !apital #un$% )hich $ay the$

e$inent%y suita&%e as a source of risk finance are; 011 that it is e*uity or *uasi e*uity in'est$ents, 021 it is %ong-ter$ in'est$ent, and 031 it is an acti'e fro$ of in'est$ent. "irst( "enture !apital is e*uity or *uasi e*uity &ecause the in'estor assu$es risk. There is no security for his in'est$ent. Venture !apital #un$% &y artici ating in the e*uity !apital institutiona%i4e the rocess of risk taking )hich ro$otes successfu% do$estic techno%ogy de'e%o $ent. In'estors of "enture !apital ha'e no %i*uidity for a eriod of ti$e. Venture ca ita%ist or #un$% ho e that the co$ any they are &acking )i%% thri'e and after fi'e to se'en years fro$ $aking the in'est$ent it )i%% &e %arge and rofita&%e enough to se%% its shares in the stock $arket. But a re)ard is thee for %i*uidity and )aiting. The "enture

ca ita%ists ho e to se%% their share for $any ti$es )hat they aid for. If the unit fai%s the "enture ca ita%ists %osses e'erything. The ro&a&i%ity distri&ution of e+ ected returns for $ost "enture !apital in'est$ent is high%y ske)ed to the right. The success rate is 1A-2A ercent. #econd%y( "enture !apital is %ong-ter$ in'est$ent in'o%'ing &oth $oney and ti$e. "ina%%y( "enture !apital in'est$ent in'o%'es artici ation in the $anage$ent of the co$ any. Venture ca ita%ist artici ates in the Board and guides the fir$ on strategic and o%icy $atters. The features of "enture !apital genera%%y are( financing ne) and ra id%y gro)ing co$ anies, urchase of e*uity shares, assist in transfor$ation of inno'ati'e techno%ogy &ased ideas into roducts and ser'ices, and 'a%ue to co$ any &y acti'e artici ation, assu$e risks in the e+ ectation of %arge re)ards, and ossess a %ong-ter$ ers ecti'e. These features of "enture !apital render it e$inent%y suita&%e as a source of risk !apital for do$estica%%y de'e%o ed techno%ogies. De) "enture ercei'ed ro osa%s in high techno%ogy area are attracti'e &ecause of the

ossi&i%ity of su&stantia% gro)th and !apital gains. /%though "enture

!apital e'o%'ed as a $ethod of ear%y sage financing it inc%udes de'e%o $ent( e+ ansion and &uyout financing for units )hich are una&%e to raise #un$% through nor$a% financing channe%s. Fnits in de'e%o ing countries need #un$% for financing 'arious stages of de'e%o $ent. #uch a &road a roach )ou%d he% "enture #un$% to di'ersify their in'est$ent and s read risks.

1.) T,pe% o# Venture Capital Fir0%

!enture Ca ita% can &e di'ided into $any different ty es according to the characteristics of the shareho%ders and sources of in'est$ent -- such as ri'ate e*uity fir$s( &anks( financia% institutions( ri'ate cor orations( the go'ern$ent or insurance co$ anies. >enera%%y there are three ty es of organi4ed or institutiona% 'enture ca ita% funds; 'enture ca ita% funds set u &y ange% in'estors( that is( high net )orth indi'idua% in'estors, 'enture ca ita% su&sidiaries of cor orations and ri'ate 'enture ca ita% fir$s. funds. !enture ca ita% su&sidiaries are esta&%ished &y $a5or cor orations( co$$ercia% &ank ho%ding co$ anies and other financia% institutions. !enture funds in India can &e c%assified on the &asis of the ty e of ro$oters.

"inancia% institutions %ed &y ICICI 'entures( IJ"#( etc. :ri'ate 'enture funds %ike Indus( etc. 6egiona% funds; =ar&urg :incus( K" 7%ectra 0$ost%y o erating out of <ong Eong1. 6egiona% funds dedicated to India; Dra er( =a%den( etc. Offshore funds; Barings( TC=( <#BC( etc. Cor orate 'entures; 'enture ca ita% su&sidiaries of cor orations. /nge%s; high net )orth indi'idua% in'estors. Merchant &ankers and DB"Cs )ho s ecia%i4e in 9&ought out9 dea%s a%so fund co$ anies.

On the &asis of geogra hica% focus

6egiona% >%o&a% IT and IT-ena&%ed ser'ices #oft)are :roducts 0Main%y 7nter rise-focused1 =ire%ess.Te%eco$.#e$iconductor Banking

On the &asis of industry s ecia%ty

Media.7ntertain$ent Bio Techno%ogy.Bio Infor$atics :har$aceutica%s Contract Manufacturing 6etai%

On the &asis of funding stage;

#eed.ear%y Jate.$&o :i e

The !enture Ca ita% fir$s in India can &e categori4ed into the fo%%o)ing four grou s; 1. /%%-India D"I-s onsored !C"s such as Techno%ogy De'e%o $ent and Infor$ation Co$ any of India Jtd. 0TDICI1 &y ICICI( 6isk Ca ita% and Techno%ogy "inance Cor oration Jtd. 06CT"C1 &y I"CI and 6isk Ca ita% "und &y IDBI 2. #"C-s onsored !C"s such as >u5arat !enture Ca ita% Jtd. 0>!CJ1 &y >IIC and /ndhra :radesh !enture Ca ita% Jtd. 0/:!CJ1 &y /:#"C 3. Bank-s onsored !C"s such as Canfina and #BI Ca s 4. :ri'ate !C"s su orted &y ri'ate sector co$ anies such as Indus !enture

Ca ita% "und( Credit Ca ita% !enture "und.

Chapter & De"elop0ent o# VCF in International Arena an$ INDIA 2.1 !C" in Internationa% /rena 2.2 !enture Ca ita% in India 2.3 "uture of !enture Ca ita% in India

De"elop0ent o# Venture Capital &.1 The International arena

The $odern 'enture ca ita% industry &egan taking sha e in the ost N =or%d =ar II years. It is often said that eo %e decide to &eco$e entre reneurs &ecause they see ro%e $ode%s in other eo %e )ho ha'e &eco$e successfu% entre reneurs. Much the sa$e thing can &e said a&out 'enture ca ita%ists.

USA
The history of the 'enture ca ita% in F# traces &ack to the eriod after =or%d =ar II )hen a fe) )ea%thy fa$i%y grou s %ike 6ockefe%%er( /ndre) Carnegie and others took the initiati'e. The 'enture ca ita% industry )as started &y >eorge Detroit )ho co%%a&orated in esta&%ishing Cor oration at Boston. "ro$ 1865 to 18H2 near%y 4A 'enture ca ita% co$ anies )ere for$ed )ith co$$itted assets of I5AA $i%%ion. It is noted that in the F#( the 'enture ca ita% industry has &een associated )ith techno%ogy de'e%o $ent. In the 18GAs( the F# 'enture industry &egan to esta&%ish its &usiness o'erseas at %arge.

U;
In the FE( the de'e%o $ent of 'enture ca ita% o)es to the rofessiona%%y $anaged s ecia%ist fund N Charter <ouse N set u in 18GA for ro'iding risk e*uity finance for young and gro)ing s$a%% &usiness. In 18G3( British !enture Ca ita% /ssociation )as esta&%ished )ith a $e$&ershi of 33 funds( )hich rose to 115 in 1882.

<APAN
In 1863( 3 >o'ern$ent assisted co$ anies )ere esta&%ished in Tokyo( Osaka and Dagoya( to ro'ide 'enture ca ita% t s$a%% and $ediu$ industries. Jeading financia% institutions in Ka an started 'enture ca ita% co$ anies for financing high techno%ogy industria% units. The ra id gro)th of industry in Ka an is credited to the easy a'ai%a&i%ity of 'enture ca ita%.

&.& VENTURE CAPITAL IN INDIA

This acti'ity in the ast )as ossi&%y done &y the de'e%o $enta% financia% institutions %ike IDBI( ICICI and #tate "inancia% Cor orations. These institutions entities in the ri'ate sector )ith de&t as an instru$ent of funding. "or a %ong ti$e funds raised fro$ u&%ic )ere used as a source of !C. This source ho)e'er de ended a %ot on the $arket 'agaries. /nd )ith the $ini$u$ aid u ca ita% re*uire$ents &eing raised for %isting at the stock e+changes( it &eca$e difficu%t for s$a%%er fir$s )ith 'ia&%e ro5ects to raise funds fro$ u&%ic. In India( the need for !C )as recognised in the Hth fi'e year %an and %ong ter$ fisca% o%icy of >OI. In 18H3 a co$$ittee on De'e%o $ent of s$a%% and $ediu$ enter rises high%ighted the need to faster !C as a source of funding ne) entre reneurs and techno%ogy. !C financing rea%%y started in India in 18GG )ith the for$ation of Techno%ogy De'e%o $ent and Infor$ation Co$ any of India Jtd. 0TDICI1 ro$oted &y ICICI and FTI. The first ri'ate !C fund )as s onsored &y Credit Ca ita% "inance Cor oration 0C"C1 and ro$oted &y Bank of India( /sian De'e%o $ent Bank and the Co$$on)ea%th De'e%o $ent Cor oration 'i4. Credit Ca ita% !enture "und. /t the sa$e ti$e >u5arat !enture "inance Jtd. and /:IDC !enture Ca ita% Jtd. )ere started &y state %e'e% financia% institutions. #ources of these funds )ere the financia% institutions( foreign institutiona% in'estors or ension funds and high net-)orth indi'idua%s. Though an atte$ t )as a%so $ade to raise funds fro$ the u&%ic and fund ne) 'entures( the 'enture ca ita%ists had hard%y any i$ act on the econo$ic scenario for the ne+t eight years ro$oted

GRO=T3 OF FIR7S IN INDIA 1ear 1885 1886 188H 188G 1888 2AAA No. o# Fun$% 4 H 1A 6 5 4H 1ear 2AA1 2AA2 2AA3 2AA4 2AA5 2AA6 No. o# Fun$% 12 6 2 3 1 2

Sour!e> AVC<?IVCA India is ri$e target for 'enture ca ita% and ri'ate e*uity today( o)ing to 'arious factors such as fast gro)ing kno)%edge &ased industries( fa'oura&%e in'est$ent o ortunities( cost co$ etiti'e )orkforce( &oo$ing stock $arkets and su orti'e regu%atory en'iron$ent a$ong others. The sectors )here the country attracts 'enture ca ita% are IT and IT7#( soft)are roducts( &anking( :#F disin'est$ents( entertain$ent and $edia( &iotechno%ogy( har$aceutica%s( contract $anufacturing and retai%. /n offshore 'enture ca ita% co$ any $ay contri&ute u to 1AA ercent of the ca ita% of a do$estic 'enture ca ita% fund and $ay a%so set u a do$estic asset $anage$ent co$ any to $anage the fund. !enture ca ita% funds 0!C"s1 and 'enture ca ita% co$ anies 0!CC1 are er$itted u to 4A ercent of the aid u cor us of the do$estic un%isted co$ anies. This cei%ing )ou%d &e su&5ect to re%e'ant e*uity in'est$ent %i$it in force in re%ation to areas reser'ed for ##I. In'est$ent in a sing%e co$ any &y a !C".!CC sha%% not e+ceed 5 ercent of the aid u cor us of a do$estic !C".!CC. The auto$atic route is not a'ai%a&%e.

&.@Future o# Venture Capital in In$ia

6a id%y changing econo$ic en'iron$ent acce%erated &y the high techno%ogy e+ %osion( e$erging needs of ne) generation of entre reneurs in the rocess and inade*uacy of the e+isting "enture !apital funds.sche$es are indicati'e of the tre$endous sco e for "enture !apital in India and ointers to the need for the creation of a sound and &road-&ased "enture !apital $o'e$ent India. There are $any entre reneurs in India )ith a good pro8e!t idea &ut no re'ious entre reneuria% track record to %e'erage their fir$s( hand%e custo$ers and &ankers. Venture !apital can o en a ne) )indo) for such entre reneurs and he% the$ to %aunch their ro5ects successfu%%y. =ith ra id internationa% $arch of techno%ogy( de$and for ne)er techno%ogy and roducts in India has gone u tre$endous%y. the ace of de'e%o $ent of ne) and indigenous techno%ogy in the country has &een s%ack in 'ie) of the fact that se'era% rocess de'e%o ed in %a&oratories are not co$$ercia%i4ed &ecause of un)i%%ingness of eo %e to take entre reneuria% risks( i.e. risk their #un$% as a%so undergo the ordea% of $arketing the roducts and rocess. In such a situation( "enture financing assu$es $ore significance. It can act not on%y act as a financia% cata%yst &ut a%so ro'ide strong i$ etus for entre reneurs to de'e%o roducts in'o%'ing ne)er techno%ogies and co$$ercia%i4e the$. This )i%% gi'e a &oost to the de'e%o $ent of ne) techno%ogy and )ou%d go a %ong )ay in &roadening the industria% &ase( creation of 5o&s( ro'ide a thrust to e+ orts and he% in the o'era%% enrich$ent of the econo$y. /nother ty e of situation co$$on%y found in our country is )here the %oca% grou and a $u%ti-nationa% co$ any $ay &e ready to enter into a 5oint "enture &ut the for$er does not ha'e sufficient #un$% to ut u its share of the e*uity and the %atter is restricted to a certain ercentage. "or the ersona% reasons or &ecause of co$ etition( the %oca% grou $ay not &e keen to in'ite any one in its industry or any $a5or ri'ate in'estor to contri&ute e*uity and $ay refer a "enture !apital co$ any( as a %ess inti$ate%y in'o%'ed and te$ orary shareho%der. Venture ca ita%ists can a%so %end their e+ ertise and standing to the entre reneurs.

In ser'ice sector( )hich has i$$ense gro)th ros ects in India( "enture ca ita%ists can %ay significant ro%e in ta ing its otentia%ity to the fu%%. "or instance( "enture ca ita%ists can ro'ide !apital and e+ ertise to organi4ations se%%ing anti*ue( re$ode%ed 5e)e%%ery( &ui%ders of resort hote%s( &a&y and hea%th care $arket( retire$ent ho$es and s$a%% houses. In 'ie) of the a&o'e( it )i%% &e desira&%e to esta&%ish a se arate nationa% "enture !apital fund to) )hich the financia% institutions and &anks can contri&ute. In sco e and content such a nationa% "enture !apital fund shou%d co'er; 0i1 a%% the as ects of "enture !apital financing in a%% the three stages of conce tua%( de'e%o $enta% an e+ %oitation techno%ogica% inno'ation and 0ii1 as $ay of the risk stages-de'e%o $ent( $anufacturing( $arketing( $anage$ent and gro)th as ossi&%e under Indian Conditions. The fund shou%d offer a co$ rehensi'e ackage of technica%( co$$ercia%( $anageria% and financia% assistance and ser'ices to &ui%ding entre reneurs and &e a osition to offer inno'ati'e so%utions to the 'aried ro&%e$s faced &y the$ in &usiness ro$otion( transfer and inno'ation. To this end( the ro osed nationa% "enture !apital fund shou%d ha'e at its co$$and $u%ti-disci %inary technica% e+ ertise. The $a5or thrust of this fund shou%d &e on the ro$otion of 'ia&%e ne) &usiness in India to take ad'antage of the on co$ing high techno%ogy re'o%ution and setting u of high gro)th industries so as to take the Indian econo$y to co$$anding heights. hases in the rocess of co$$ercia%i4ation of the

Chapter @ Venture Capital In"e%t0ent Pro!e%% 3.1 3.2 3.3 3.4 3.5 3.6 3.H 3.G 3.8 3.1A In'est$ent :rocedure In'est$ent in !C &y Banks /ng%e Cor orate !enturing Consortiu$ "inancing "a'ourites of the In'estors :ro$otion #trategies Incenti'es Initiati'es # ecia% :ur ose !ehic%e

Venture Capital In"e%t0ent Pro!e%%

3.1 In'est$ent :rocedure
In generating a dea% f%o)( the 'enture ca ita% in'estor creates a i e%ine of 2dea%s3 or in'est$ent o ortunities that he )ou%d consider in'esting in. This is achie'ed ri$ari%y through %ugging into an a ro riate net)ork. The $ost o u%ar net)ork o&'ious%y is the net)ork of 'enture ca ita% funds.in'estors. It is a%so co$$on for 'enture ca ita%s to de'e%o )orking re%ationshi s )ith 6BD institutions( acade$ia( etc( )hich cou%d otentia%%y %ead to &usiness o ortunities. Fnderstanda&%y the co$ osition of the net)ork )ou%d de end on the in'est$ent focus of the 'enture ca ita% funds.co$ any. Thus 'enture ca ita% funds focusing on ear%y stage techno%ogy &ased dea%s )ou%d de'e%o a net)ork of 6BD centers )orking in those areas. The net)ork is crucia% to the success of the 'enture ca ita% in'estor. It is a%$ost i$ erati'e for the 'enture ca ita% in'estor to recei'e a %arge nu$&er of in'est$ent ro osa%s fro$ )hich he can se%ect a fe) good in'est$ent candidates fina%%y. Before $aking any in'est$ent( the goa% as 'enture ca ita%ists is to understand 'irtua%%y e'ery as ect of the target co$ any; the e+ erience and ca a&i%ities of the $anage$ent tea$( the &usiness %an( the nature of its o erations( its roducts and.or ser'ices( the $ethods &y )hich sa%es are $ade( the $arket for the roducts and.or ser'ices( the co$ etiti'e %andsca e( and other factors that $ay affect the outco$e of the in'est$ent. =hi%e due di%igence in'estigations are 'ie)ed &y $any as $undane and irritating tasks( the rocess ena&%es 'enture ca ita%ists to address areas of concern( is an i$ ortant too% in deter$ining a fair re-in'est$ent 'a%uation( and $ay he% to a'oid significant and other)ise une+ ected %ia&i%ity fo%%o)ing the in'est$ent. The 'enture ca ita%ists 'ie) the due di%igence rocess as a $eans of identifying and &eco$ing co$forta&%e )ith the risks to )hich their ca ita% )i%% &e e+ osed. The due di%igence rocess in'o%'es an assess$ent of &oth the $icroecono$ic and rocess a%so inc%udes a re'ie) of the cor orate and %ega% records( orting any re'ious issuances of the co$ any?s $acroecono$ic factors that can affect the earnings gro)th of the target co$ any. The due di%igence securities. inc%uding the docu$entation su

On%y one or t o 9u%ine%% plan% in 1** re%ult in %u!!e%%#ul #inan!in'. /nd of e'ery 1A in'est$ents $ade( on%y one or t)o are successfu%. But this is enough to reco'er in'est$ents $ade &y the 'enture ca ita% 0!C1 in a%% 1A start-u s in addition to an a'erage 4A-5AO returnP #ecuring an in'est$ent fro$ an institutiona% 'enture ca ita% fund is e+tre$e%y difficu%t. It is esti$ated that on%y fi'e &usiness %ans in 1AA are 'ia&%e in'est$ent o ortunities and on%y three in 1AA resu%ts in successfu% financing. In fact( the odds cou%d &e as %o) as one in 1AA. More than ha%f of the ro osa%s to 'enture ca ita%ists are usua%%y re5ected after a 2A-3A $inute scanning( and 25 er cent are discarded after a %engthier re'ie). The re$aining 15 er cent are %ooked at in $ore detai%( &ut at %east 1A er cent of these are dis$issed due to irreconci%a&%e f%a)s in the $anage$ent tea$ or the &usiness %an. / !enture Ca ita%ist %ooks at 'arious as ects &efore in'esting in any 'enture. "irst( you need to )ork out a &usiness %an. The &usiness %an is a docu$ent that out%ines the $anage$ent tea$( roduct( $arketing %an( ca ita% costs and $eans of financing and rofita&i%ity state$ents. 1. Initia% 7'a%uation; This in'o%'es the initia% rocess of assessing the feasi&i%ity of the ro5ect. 2. Due di%igence; In this stage an in-de th study is conducted to ana%yse the

feasi&i%ity of the ro5ect. 3. Dea% structuring and negotiation; <a'ing esta&%ished the feasi&i%ity( the instru$ents that gi'e the re*uired return are structured. 4. 5. In'est$ent 'a%uation; In this stage( fina% a$ount for dea% is decided. Docu$entation; This is the rocess of creating and e+ecuting %ega% docu$ents to

rotect the interest of the 'enture. 6. Monitoring and !a%ue addition; In this stage( the ro5ect is $onitored &y

e+ecuti'es fro$ the 'enture fund and undesira&%e 'ariations fro$ the &usiness %an are dea%t )ith. H. 7+it :o%icies; There are $ain%y 3 e+it o%icies fo%%o)ed &y !C"3s in genera%.

1.

Initial E"aluation>

Before any in de th ana%ysis is done on a ro5ect( an initia% screening is carried out to satisfy the 'enture ca ita%ist of certain as ects of the ro5ect. These inc%ude Co$ etiti'e as ects of the roduct or ser'ice Out%ook of the target $arket and their erce tion of the ne) roduct /&i%ities of the $anage$ent tea$ /'ai%a&i%ity of other sources of funding 7+ ected returns Ti$e and resources re*uired fro$ the 'enture ca ita% fir$

Through this screening the 'enture fir$ &ui%ds an initia% o'er'ie) a&out the Technica% ski%%s( e+ erience( &usiness sense( te$ era$ent and ethics of the ro$oters The stage of the techno%ogy &eing used( the dri'ers of the techno%ogy and the direction in )hich it is $o'ing Jocation and si4e of $arket and $arket de'e%o $ent costs( dri'ing forces of the $arket( co$ etitors and share( distri&ution channe%s and other $arket re%ated issues "inancia% facts of the dea% Co$ etiti'e edge a'ai%a&%e to the the co$ any and factors affecting it significant%y /d'antages fro$ the dea% for the 'enture ca ita%ist 7+it o tions a'ai%a&%e

&. Due $ili'en!e

Due di%igence is ter$ used that inc%udes a%% the acti'ities that are associated )ith in'estigating an in'est$ent ro osa% to assess feasi&i%ity. It inc%udes carrying out inde th reference checks on the ro osa% re%ated as ects such as $anage$ent tea$( roducts( techno%ogy and $arket. /dditiona% studies and co%%ection of ro5ect-&ased

data are done during this stage. The i$ ortant feature to note is that 'enture ca ita% due di%igence focuses on the *ua%itati'e as ects of an in'est$ent o /reas of due di%igence )ou%d inc%ude

ortunity.

>enera% assess$ent &usiness %an ana%ysis contract detai%s co%%a&orators cor orate o&5ecti'es #=OT ana%ysis Ti$e sca%e of i$ %e$entation

:eo %e Manageria% a&i%ities( ast erfor$ance and credi&i%ity of ro$oters "inancia% &ackground and feed&ack a&out ro$oters fro$ &ankers and re'ious

%enders

Detai%s of Board of Directors and their ro%e in the acti'ities /'ai%a&i%ity of ski%%ed %a&our 6ecruit$ent rocess :roducts.ser'ices( techno%ogy and rocess

In this category the ty e of *uestions asked )i%% de end on the nature of the industry into )hich the co$ any is %anning to enter. #o$e of the areas genera%%y considered are Technica% detai%s( $anufacturing rocess and atent rights

Co$ eting techno%ogies and co$ arisons 6a) $ateria%s to &e used( their a'ai%a&i%ity and $a5or su %iers %iers( re%ia&i%ity of

these su

Machinery to &e used and its a'ai%a&i%ity Detai%s of 'arious tests conducted regarding the ne) roduct :roduct %ife-cyc%e 7n'iron$ent and o%%ution re%ated issues #econdary data co%%ection on the roduct and techno%ogy( if so a'ai%a&%e Market

The *uestions asked under this head a%so 'ary de ending on the ty e of roduct. #o$e of the $ain *uestions asked are $ain custo$ers future de$and for the roduct co$ etitors in the $arket for the sa$e roduct category and their strategy ricing strategy su %ier and &uyer &argaining o)er

channe%s of distri&ution $arketing %an to &e fo%%o)ed future sa%es forecast.

Market sur'ey cou%d &e conducted to gather further $ore accurate and re%e'ant data.

"inance "inancia% forecasts for the ne+t 3-5 years /na%ysis of financia% re orts and &a%ance sheets of fir$s a%ready ro$oted or run

&y the ro$oters of the ne) 'enture Cost of roduction =age structure detai%s /ccounting rocess to &e used "inancia% re ort of critica% su %iers

6eturns for the ne+t 3-5 years and there&y the returns to the 'enture fund Budgeting $ethods to &e ado ted and &udgetary contro% syste$s 7+terna% financia% audit if re*uired

#o$eti$es( co$ anies $ay ha'e e+ erienced o erationa% ro&%e$s during their ear%y stages of gro)th or due to &ad $anage$ent. These cou%d resu%t in %osses or cash f%o) drains on the co$ any. #o$eti$es financing fro$ 'enture ca ita% $ay end u &eing used to finance these %osses. They a'oid this through due di%igence and scrutiny of the &usiness %an.

@. Stru!turin' a $eal
#tructuring refers to utting together the financia% as ects of the dea% and negotiating )ith the entre reneurs to acce t a 'enture ca ita%3s ro osa% and fina%%y c%osing the dea%. /%so the structure shou%d take into consideration the 'arious co$$ercia% issues 0ie )hat the entre reneur )ants and )hat the 'enture ca ita% )ou%d re*uire to rotect the in'est$ent1.

The instru$ents to &e used in structuring dea%s are $any and 'aried. The o&5ecti'e in se%ecting the instru$ent )ou%d &e to $a+i$i4e 0or o ti$i4e1 'enture ca ita%3s returns. rotection and yet satisfy the entre reneur3s re*uire$ents. The instru$ents cou%d &e as fo%%o)s; In%tru0ent 7*uity shares I%%ue% ne) or 'endor shares ar 'a%ue artia%%y- aid shares redee$a&%e 0conditions under Co$ any /ct1 artici ating ar 'a%ue no$ina% shares c%ean 's secured Interest &earing 's non interest &earing con'erti&%e 's one )ith features 0)arrants1 1st Charge( 2nd Charge( %oan 's %oan stock $aturity e+ercise rice( e+ iry eriod e+ercise rice( e+ iry eriod( ca%%( ut

:reference shares

Joan

=arrants O tions

In India( straight e*uity and con'erti&%es are o u%ar and co$$on%y used. Do)adays( )arrants are issued as a too% to &ring do)n ricing.

/ 'ariation that )as first used &y :/CT and TDICI )as 9roya%ty on sa%es9. Fnder this( the co$ any )as gi'en a conditiona% %oan. If the ro5ect )as successfu%( the co$ any had to ay a ercentage of sa%es as roya%ty and if it fai%ed then the a$ount )as )ritten off. In structuring a dea%( it is i$ ortant to %isten to )hat the entre reneur )ants( &ut the 'enture ca ita% co$es u )ith his o)n so%ution. 7'en for the ro osed in'est$ent a$ount( the 'enture ca ita% decides )hether or not the a$ount re*uested( is a ro riate and consistent )ith the risk %e'e% of the in'est$ent. The risks shou%d &e ana%y4ed( taking into consideration the stage at )hich the co$ any is in and other factors re%ating to the ro5ect. 0eg e+it ro&%e$s( etc1. / ty ica% ro osa% $ay inc%ude a co$&ination of se'era% different instru$ents %isted a&o'e. Fnder nor$a% circu$stances( entre reneurs )ou%d refer 'enture ca ita%s to in'est in e*uity as this )ou%d &e the %o)est risk o tion for the co$ any. <o)e'er fro$ the 'enture ca ita%s oint of 'ie)( the safest instru$ent( &ut )ith the %east return( )ou%d &e a secured %oan. <ence( u%ti$ate%y( )hat you end u )ith )ou%d &e so$e instru$ents in &et)een )hich are so%d to the entre reneur. / nu$&er of factors affect the choice of instru$ents( such as Cate'orie% Co$ any s ecific :ro$oter s ecific Fa!tor% in#luen!in' the !hoi!e o# In%tru0ent 6isk( current stage of o eration( ( e+ ected rofita&i%ity( future cash f%o)s( in'est$ent %i*uidity o tions Current financia% osition of ro$oters( erfor$ance track-record(

)i%%ingness of ro$oters to di%ute stake :roduct.:ro5ect s ecific "uture $arket otentia%( roduct %ife-cyc%e( gestation eriod Macro en'iron$ent Ta+ o tions on different instru$ents( %ega% fra$e)ork( ado ted &y co$ etition

o%icies

A.

In"e%t0ent "aluation

The in'est$ent 'a%uation rocess is an e+ercise ai$ed at arri'ing at 2an acce ta&%e rice3 for the dea%. Ty ica%%y in countries )here free 'a%uation rocess goes through the fo%%o)ing ste s; 1. 7'a%uate future re'enue and rofita&i%ity 2. "orecast %ike%y future 'a%ue of the fir$ &ased on e+ erienced $arket ca ita%i4ation or e+ ected ac*uisition in'est$ent. 3. Target o)nershi ositions in the in'estee fir$ so as to achie'e desired roceeds de ending u on the antici ated e+it fro$ the ricing regi$es e+ist( the

a reciation on the ro osed in'est$ent. The a reciation desired shou%d yie%d a hurd%e rate of return on a Discounted Cash "%o) &asis. In certainty the 'a%uation of the fir$ is dri'en &y a nu$&er of factors. The $ore significant a$ong these are; Q O'era%% econo$ic conditions; / &uoyant econo$y roduces an o ti$istic %ong- ter$ out%ook for ne) roducts.ser'ices and therefore resu%ts in $ore %i&era% re-$oney 'a%uations. Q De$and and su %y of ca ita%; )hen there is a sur %us of 'enture ca ita% of 'enture

ca ita% chasing a re%ati'e%y %i$ited nu$&er of 'enture ca ita% dea%s( 'a%uations go u . This can resu%t in unhea%thy %e'e%s of %o) returns for 'enture ca ita% in'estors. Q # ecific rates of dea%s; such as the founder3s.$anage$ent tea$3s track record( inno'ation. uni*ue se%%ing ro ositions 0F#:s1( the roduct.ser'ice si4e of the otentia% $arket( etc affects 'a%uations in an o&'ious $anner. Q The degree of o u%arity of the industry.techno%ogy in *uestion a%so inf%uences the re-$oney. Co$ uter /ided #ki%%s #oft)are 7ngineering 0C/#71 too%s and /rtificia% Inte%%igence )ere one ti$e dar%ings of the 'enture ca ita% co$$unity that ha'e no) gi'en %ace to &iotech and retai%ing.

Q The standing of the indi'idua% 'enture ca ita% =e%% esta&%ished 'enture ca ita%s )ho are sought after &y entre reneurs for a nu$&er of reasons cou%d get a)ay )ith tighter 'a%uations than their %ess kno)n counter arts. Q In'estor3s considerations cou%d 'ary significant%y. / study &y an /$erican 'enture ca ita%( !enture One( re'ea%ed the fo%%o)ing trend. Jarge cor orations )ho in'est for strategic ad'antages such as access to techno%ogies( roducts or $arkets ay t)ice as $uch as a rofessiona% 'enture ca ita% in'estor( for a gi'en o)nershi co$ any &ut on%y ha%f as $uch as in'estors in a u&%ic offering. Q !a%uation offered on co$ ara&%e dea%s around the ti$e of in'esting in the dea%. :. osition in a

Do!u0entation

It is the rocess of creating and e+ecuting %ega% agree$ents that are needed &y the 'enture fund for guarding of in'est$ent. Based on the ty e of instru$ent used the different ty es of agree$ents are 7*uity /gree$ent Inco$e Dote /gree$ent Conditiona% Joan /gree$ent O tiona%%y Con'erti&%e De&enture /gree$ent etc.

There are a%so different agree$ents &ased on )hether the agree$ent is )ith the ro$oters or the co$ any. The different %ega% docu$ents that are to &e created and e+ecuted &y the 'enture fir$ are #hareho%ders agree$ent - This agree$ent is $ade &et)een the 'enture

ca ita%ist( the co$ any and the ro$oters. The agree$ent takes into account Ca ita% structure.

Transfer of shares; This %ays the condition for transfer of e*uity &et)een the

e*uity ho%ders. The ro$oters cannot se%% their shares )ithout the rior er$ission of the 'enture ca ita%ist. / oint$ent of Board of Directors

:ro'isions regarding sus ension.cance%%ation of the in'est$ent. The issues under %ace are defau%t of co'enants and %y of $is%eading infor$ation( ina&i%ity to ay de&ts( dis osa% and

)hich such cance%%ation or sus ension takes conditions( su

re$o'a% of assets( refusa% of dis&ursa% &y other financia% institutions( roceedings against the co$ any( and %i*uidation or disso%ution of the co$ any. 7*uity su&scri tion agree$ent - This is the agree$ent &et)een the 'enture

ca ita%ist and the co$ any on Du$&er of shares to &e su&scri&ed &y the 'enture ca ita%ist :ur ose of the su&scri tion :re-dis&urse$ent conditions that need to &e $et #u&$ission of re orts to the 'enture ca ita%ist Currency of the agree$ent Deed of Fndertaking - The agree$ent is signed &et)een the ro$oters and the rior er$ission of the 'enture

'enture ca ita%ist )herein the ro$oter agrees not to )ithdra)( transfer( assign( %edge( hy othecate etc their in'est$ent )ithout er$ission. Inco$e Dote /gree$ent - It contains detai%s of re ay$ent( interest( roya%ty( ca ita%ist. The ro$oters sha%% not di'ersify( e+ and or change roduct $i+ )ithout

con'ersion( di'idend etc. Conditiona% Joan /gree$ent - It contains detai%s on the ter$s and conditions

of the %oan( security of %oan( a oint$ent of no$inee directors etc.

Deed of <y othecation( #hortfa%% Fndertaking( Koint and #e'era% :ersona%

>uarantee :o)er of /ttorney etc. =hene'er there is a $odification in any of the agree$ents( then a #u /gree$ent is created for the sa$e. %e$entary

).

7onitorin' an$ #ollo up

The ro%e of the 'enture ca ita%ist does not sto after the in'est$ent is $ade in the ro5ect. The ski%%s of the 'enture ca ita%ist are $ost re*uired once the in'est$ent is $ade. The 'enture ca ita%ist gi'es ongoing ad'ice to the ro$oters and $onitors the ro5ect continuous%y. It is to &e understood that the ro'iders of 'enture ca ita% are not 5ust financiers or su&scri&ers to the e*uity of the ro5ect they fund. They function as a dua% ca acity( as a financia% artner and strategic ad'isor. !enture ca ita%ists $onitor and e'a%uate ro5ects regu%ar%y. They are acti'e%y

in'o%'ed in the $anage$ent of the of the in'estor unit and ro'ide e+ ert &usiness counse%( to ensure its sur'i'a% and gro)th. De'iations or causes of )orry $ay a%ert the$ to otentia% ro&%e$s and they can suggest re$edia% actions or $easures to a'oid these ro&%e$s. /s rofessiona% in this uni*ue $ethod of financing( they $ay ha'e inno'ati'e so%utions to $a+i$i4e the chances of success of the ro5ect. /fter a%%( the u%ti$ate ai$ of the 'enture ca ita%ist is the sa$e as that of the ro$oters N the %ong ter$ rofita&i%ity and 'ia&i%ity of the in'estor co$ any. The "ariou% %t,le% are> <ands-on #ty%e suggests su orti'e and direct in'o%'e$ent of the 'enture ca ita%ist in

the assisted fir$ through Board re resentation and regu%ar%y ad'ising the entre reneur on $atters of techno%ogy( $arketing and genera% $anage$ent. Indian 'enture ca ita%ists do not genera%%y in'o%'e the$se%'es on a hands-on &asis &it they do ha'e &oard re resentations.

<ands-off #ty%e in'o%'es occasiona% assess$ent of the assisted fir$s $anage$ent and its erfor$ance )ith no direct $anage$ent assistance &eing ro'ided. Indian 'enture funds genera%%y fo%%o) this a roach. Inter$ediate #ty%e 'enture ca ita% funds a)e entit%ed to o&tain on a regu%ar &asis infor$ation a&out the assisted ro5ects. !enture ca ita% target co$ anies )ith su erior roducts or ser'ices focussed at fast-gro)ing or unta ed $arkets. !enture ca ita%ists $ust &e confident that the fir$ has the *ua%ity and de th in the $anage$ent tea$ to achie'e its as irations. They )i%% )ant to ensure that the in'estee co$ any has the )i%%ingness to ado t $odern cor orate go'ernance standards. "ir$s strong in factors re%ating to atents( $anage$ent( idea( and otentia% are $ore %ike%y to o&tain !C financing and )i%%ing acti'ities. artners to su ort co$$ercia%isation

-. EBIT %trate'ie% a$opte$ 9, VCFC%>

/ 'enture ca ita% fir$ enters a re%ationshi )ith a co$ any )ith the e+ ectation that a significant return of in'est$ent )i%% resu%t )hen the fir$ e+its the in'est$ent. The fir$ %ans for that e+it to take %ace )ithin a certain a$ount of ti$e( usua%%y fro$ three to si+ years( de ending on the de'e%o $ent stage of the co$ any in )hich it is in'esting. De ending on the in'est$ent focus and strategy of the 'enture fir$( it )i%% seek to e+it the in'est$ent in the ortfo%io co$ any. =hi%e the initia% u&%ic offering $ay &e the $ost g%a$orous and hera%ded ty e of e+it for the 'enture ca ita%ist and o)ners of the co$ any( $ost successfu% e+its of 'enture in'est$ents occur through a $erger or ac*uisition of the co$ any &y either the origina% founders or another co$ any. /gain( the e+ ertise of the 'enture fir$ in successfu%%y e+iting its in'est$ent )i%% dictate the success of the e+it for the$se%'es and the o)ner of the co$ any.

There are se'era% co$$on e+it strategies; IPO The initia% u&%ic offering is the $ost g%a$orous and 'isi&%e ty e of e+it for a 'enture in'est$ent. In recent years techno%ogy I:Os ha'e &een in the %i$e%ight during the I:O &oo$ of the %ast si+ years. /t u&%ic offering( the 'enture fir$ is considered an insider and )i%% recei'e stock in the co$ any( &ut the fir$ is regu%ated and restricted in ho) that stock can &e so%d or %i*uidated for se'era% years. Once this stock is free%y trada&%e( usua%%y after a&out t)o years( the 'enture fund )i%% distri&ute this stock or cash to its %i$ited artner in'estor )ho $ay then $anage the u&%ic stock as a regu%ar stock ho%ding or $ay %i*uidate it u on recei t. O'er the %ast t)enty-fi'e years( a%$ost 3AAA co$ anies financed &y 'enture funds ha'e gone u&%ic. 7er'er% an$ A!Dui%ition% Mergers and ac*uisitions re resent the $ost co$$on ty e of successfu% e+it for 'enture in'est$ents. In an era of %arge co$ anies do$inating industry %andsca es( ac*uisition is often the targeted and $ost co$$on e+it strategy. #$a%%er co$ anies ha'e( in essence( &eco$e the research and de'e%o $ent ar$ of %arger co$ anies )ho often %ook to &uy the$ once their inno'ations can contri&ute to their o)n rofita&i%ity. In the case of a $erger or ac*uisition( the 'enture fir$ )i%% recei'e stock or cash fro$ the ac*uiring co$ any and the 'enture in'estor )i%% distri&ute the roceeds fro$ the sa%e to its %i$ited artners. IPO 7er'er% an$ A!Dui%ition% Re$e0ption

Re$e0ption /nother a%ternati'e is that the co$ any $ay &e re*uired to &uy &ack a 'enture ca ita% fir$?s stock at cost %us a certain re$iu$. Often a 'enture ca ita% fir$ )i%% ut a rede$ tion c%ause 0so$eti$es referred to as a 9&uy-&ack c%ause91 in the in'est$ent ter$s )hich a%%o)s the$ to e+it their in'est$ent in your co$ any in the e'ent that an I:O or ac*uisition does not ha en )ithin a designated ti$e eriod.

&.& In"e%t0ent in Venture Capital 9, /an4%

To encourage the f%o) of finance for "enture !apital co$$ercia% &anks are a%%o)ed to in'est in "enture !apital )ithout any %i$it since / ri% 1888. The $onetary and credit o%icy for the year 1888-2AAA ro'ides that the o'era%% cei%ing of in'est$ent &y &anks in ordinary shares( con'erti&%e de&entures of cor orate and units of $utua% #un$% )hich is current%y at 5 er cent of their incre$enta% de osits )i%% stand auto$atica%%y enhanced to the e+tent of &anks3 in'est$ents in "enture !apital. "urther( the Monetary and Credit :o%icy 01888-2AAA1 ro'ides for the inc%usion of in'est$ent in "enture !apital under riority sector %ending.

&.@ An'el%
/nge%s are eo %e )ith %ess $oney orientation( &ut )ho %ay an acti'e ro%e in $aking an ear%y-stage co$ any )ork. They are eo %e )ith enough hands-on e+ erience and are e+ erts in their fie%ds. They understand the fie%d fro$ an o erationa% ers ecti'e. /n entre reneur needs this kind of e+ ertise. <e a%so needs $oney to $ake things ha en. /nge%s &ring &oth to the ta&%e of an entre reneur. /nge%s are i$ ortant %inks in the entire rocess of 'enture ca ita% funding. This is &ecause they su ort a f%edging enter rise at a 'ery ear%y stage N so$eti$e e'en &efore co$$ercia%i4ation of the roduct or ser'ice offering. Ty ica%%y( an ange% is an e+ erienced industry-&red indi'idua% )ith high net )orth. /nge%s unsta&%e. ro'ide funding &y 9first round9 financing for risky in'est$ents N risky

&ecause they are a young .start-u co$ any or &ecause their financia% track record is

This 'enture ca ita% financing is ty ica%%y used to re are the co$ any for 9second round9 financing in the for$ of an initia% u&%ic offering 0I:O1. 7+a$ %e N / co$ any $ay need 9first round9 financing to de'e%o a ne) roduct %ine( 0'i4 a ne) drug )hich )ou%d re*uire significant research B de'e%o $ent funding1 or $ake a strategic ac*uisition to achie'e certain %e'e%s of gro)th B sta&i%ity. It is i$ ortant to choose the right /nge% &ecause they )i%% sit on your Board of Directors( often for the duration of their in'est$ent and )i%% assist in getting 9second round9 financing. =hen choosing an ?/nge%?( it is i$ erati'e to consider their e+ erience in a re%e'ant industry( re utation( *ua%ifications and track record.

Corporate Venturin'
7'en though cor orate 'enturing is an attracti'e a%ternati'e( $ost co$ anies find it difficu%t to esta&%ish syste$s( ca a&i%ities and cu%tures that $ake good 'enture ca ita% fir$s. Cor orate $anagers se%do$ ha'e the sa$e freedo$ to fund inno'ati'e ro5ects or to cance% the$ $idstrea$. Their ski%%s are honed for $anaging $ature &usinesses and not nurturing start u co$ anies. If a fir$ is to a %y the 'enture ca ita% $ode%( it $ust understand the characteristics of the $ode% and tai%or its 'enture ca ita% rogra$ to its o)n circu$stances )ithout %osing sight of these essentia%s. #uccess of 'enture ca ita% fir$s rest on the fo%%o)ing characteristics; "ocus on s ecific industry niches Q /%though cor orate $anagers ha'e a c%ear focus in their &usiness( they run into a$&iguity )ith 'enture rogra$s. Their &iggest cha%%enge is to esta&%ish c%ear( rioriti4ed o&5ecti'es. #i$ %y $aking a good financia% return is not sufficient. Q Manage ortfo%ios ruth%ess%y, a&andon %osers( )hereas a&andoning 'entures has ne'er &een easy for %arge cor orations( )hose ro5ects are under inned &y ersona% re%ationshi s( o%itica% concerns.

Q !enture ca ita% fir$s share se'era% attri&utes )ith start u they fund. They tend to &e s$a%%( f%e+i&%e and *uick to $ake decisions. They ha'e f%at hierarchies and re%y hea'i%y on e*uity and incenti'e ay. / %e Co$ uters esta&%ished a 'enture fund in 18G6 )ith the dua% o&5ecti'es of orting de'e%o $ent of Macintosh soft)are.

earning high financia% return and su

They structured co$ ensation $echanis$s( decision criteria and o erating rocedures on those of to 'enture ca ita% fir$s. =hi%e they considered Macintosh as an initia% screening factor( its funding decisions )ere ai$ed at o ti$i4ing financia% returns. The resu%t )as an I66 of 8A er cent &ut %itt%e success in i$ ro'ing the osition of Macintosh. De) 'entures can &e o)erfu% source of re'enues( di'ersification and f%e+i&i%ity in ra id%y changing en'iron$ents. The co$ any shou%d create an en'iron$ent that encourages 'enturing. /n inno'ati'e cu%ture cannot &e trans %anted &ut $ust e'o%'e )ithin the co$ any. !enture in'esting re*uires different $indset fro$ ty ica% cor orate in'estors.

3o rele"ant i% !orporate "enturin' in the In$ian %!enarioE

The fir$s( )hich %aunched the successfu% cor orate 'entures had created ne) roducts in the $arket o erating at the higher end of the 'a%ue chain and had attained a certain si4e in the $arket. Most Indian co$ anies are yet to $o'e u the 'a%ue chain and conso%idate their osition as %ayers in the g%o&a% $arket. Cor orate 'enturing $ode%s )ou%d ro&a&%y &enefit Indian co$ anies )ho are %arge %ayers in the Indian $arket in another fi'e to 1A years &y ena&%ing the$ to di'ersify and at the sa$e ti$e he% start u co$ anies. Mu%tinationa%s %ed &y Inte% are the &est e+a$ %es of cor orate 'enturing in an Indian conte+t.

Con%ortiu0 Finan!in'
=here the ro5ect cost is high 06s 1AA $i%%ion or $ore1 and a sing%e fund is not in a osition to ro'ide the entire 'enture ca ita% re*uired then 'enture funds $ay act in consortiu$ )ith other funds and take a %ead in $aking in'est$ent decisions. This he% s in di'ersifying risk &ut ho)e'er it has not &een 'ery successfu% in the India case.

In the organi4ed sector( there are a nu$&er of %ayers o erating in India )hose acti'ity is not $onitored &y the association. /dd together the infusion of funds &y o'erseas funds( ri'ate indi'idua%s( 2ange%3 in'estors and a host of financia% inter$ediaries and the tota% oo% of Indian !enture Ca ita% today( stands at 6s5A&n( according to industry esti$atesP The ri$ary $arkets in the country ha'e re$ained de ressed for *uite so$e ti$e no). In the %ast t)o years( there ha'e &een 5ust H4 initia% u&%ic offerings 0I:Os1 at the stock e+changes( %eading to an in'est$ent of 5ust 6s14.24&n. That3s %ess than 12O of the $oney raised in the re'ious t)o years. That $akes the conser'ati'e esti$ate of 6s36&n in'ested in co$ anies through the !enture Ca ita%.:ri'ate 7*uity route a%% the $ore significant. #o$e of the co$ anies that ha'e recei'ed funding through this route inc%ude; Q Mastek( one of the o%dest soft)are houses in India Q >eo$etric #oft)are( a roducer of soft)are so%utions for the C/D.C/M $arket Q 6uksun #oft)are( :une-&ased soft)are consu%tancy Q <inditron( $akers of e$&edded soft)are Q :o)erTe% Boca( distri&utor of te%eco$ uting roducts for the Indian $arket Q 6ediff on the Det( Indian )e&site featuring e%ectronic sho ing( ne)s( chat( etc

&.) Fa"ourite% o# the In"e%tor%

Though the InfoTech co$ anies are a$ong the $ost fa'ored &y 'enture ca ita%ists( co$ anies fro$ other sectors a%so feature e*ua%%y in their ortfo%ios. The hea%thcare sector )ith har$aceutica%( $edica% a %iances and &iotechno%ogy industries a%so get $uch attention in India. =ith the deregu%ation of the te%eco$ sector( te%eco$$unications industries %ike Ri Te%eco$ and $edia co$ anies %ike FT! and Te%e'ision 7ighteen ha'e 5oined the %ist of fa'orites. #o far( these trends ha'e &een in kee ing )ith the g%o&a% course.

<o)e'er( recent de'e%o $ents ha'e sho)n that India is $aturing into a $ore de'e%o ed $arket %ace, uncon'entiona% in'est$ents in a ga$ut of industries ha'e s rung u a%% o'er the country. Thi% in!lu$e%> In$u% Lea'ue Clothin'( a co$ any set u &y eight for$er e$ %oyees of ready$ade gar$ents giant Madura( )ho set u sho on their o)n to de'e%o a uni*ue 'irtua% organi4ation that )i%% %icense g%o&a% a are% &rands and se%% the$( )ithout o)ning any $anufacturing units. They drea$ to &ui%d a net)ork of 2(5AA out%ets in three years and to &e a$ong the to three ready$ade &rands. Shopper% Stop( Mu$&ai3s re$ier de art$enta% store inno'ates )ith retai%ing and decides to go g%o&a%. This dea% is facing so$e a ro'a%s. Air#rei'ht( the courier-co$ any )hich has &een gro)ing at a ra id ace and needed funds for hea'y in'est$ents in techno%ogy( net)orking and aircrafts. PiFFa Corner( a Chennai &ased i44a de%i'ery co$ any that is set to take on g%o&a% giants %ike :i44a <ut and Do$inos :i44a )ith its inno'ati'e ser'icing strategy. Car $e%i'ner Dilip Chha9ria( )ho %ans to turn his studio( )here he re$ode%s and o'erhau%s cars into fancy designer ieces of auto$ation( into a co$ any )ith a turno'er of 6s1.5&n 0u fro$ 6s4A$n today1. ro&%e$s in getting regu%atory

&.- Pro0otion Strate'ie%

There is inade*uate f%o) of a %ications for 'enture financing in India. The need is ro$otiona% efforts not on%y to increase the f%o) of a %ications &ut a%so to o u%ari4e the generic idea of 'enture financing. The ro$otion efforts of 'enture ca ita% funds in India cou%d &e c%assified as Contacting 6BD organisations Conducting se$inars and industria% $eets )here the sa%ient features of 'enture ca ita% sche$es can &e resented to ros ecti'e entre reneurs Creation of infor$ation ser'ices

:ro$otion of entre reneuria% acti'ities !enture "airs in )hich the $e$&ers of the !C industry %isten to entre reneurs a&out their ne) ideas and &usiness ro ositions !enture Ca ita% Det)orks and /ssociations

&.2 In!enti"e%
6ecogni4ing the i$ ortance of 'enture ca ita%( the go'ern$ent introduced $a5or %i&era%isation of ta+ treat$ent for 'enture ca ita% funds and si$ %ification of rocedures. These inc%uded the fo%%o)ing;

#7BI )as recogni4ed as the sing%e noda% agency. / ne) c%ause 023"B1 in #ection 1A of Inco$e Ta+ /ct )as introduced )ith effect fro$ 1st March 2AAA. This c%ause stated that any inco$e( of a 'enture ca ita% co$ any or a 'enture ca ita% fund( fro$ any in'est$ents $ade in 'enture ca ita% undertaking( )ou%d not &e inc%uded in co$ uting the tota% inco$e.

#ection 115F )as a%so introduced in the Inco$e Ta+ /ct )ith effect fro$ the assess$ent year 2AA1-A2 to esta&%ish a !C ass through. This $eans that the !C rofits )i%% not &e ta+ed t)ice. The regu%ated !C "und 0)ith #7BI1 )ou%d &e e+e$ ted fro$ ta+ 0su&5ect to certain conditions1 &ut the !C in'estor )i%% ha'e to ay ta+.

7ar%ier on( if a !C" )ished to a'ai% certain ta+ &enefits( the !C" had to e+it fro$ in'est$ents $ade in a 'enture ca ita% undertaking 0!CF1 )ithin t)e%'e $onths of the !CF o&taining a %isting. <o)e'er( this re*uire$ent )as done a)ay around Do'e$&er 2AAA. The "inance Bi%% 2AA1( ro oses to a$end section 1A 023 "B1 so as to ro'ide that a !CC . !C" )i%% continue to &e e%igi&%e for e+e$ tion under section 1A 023 "B1( e'en if the shares of the !CF( in )hich the !CC . !C" has $ade the initia% in'est$ent( are su&se*uent%y %isted in a recogni4ed stock e+change in India.

&.( Initiati"e%
There ha'e &een a nu$&er of initiati'es &y the >o'ern$ent as )e%% as the industry to a'e )ay for a &usiness and regu%atory en'iron$ent that is conduci'e to ne) 'enture de'e%o $ent and to inno'ation at the user end. #o$e of the initiati'es in the ast ha'e inc%uded those &y the Ministry of "inance( the #ecurities( 7+change Board of India 0#7BI1( Ministry of Infor$ation Techno%ogy 0for$er%y De art$ent of 7%ectronics1( #tate >o'ern$ents( "inancia% Institutions( the Indian !enture Ca ita% /ssociation. These initiati'es resu%ted in the a'ai%a&i%ity of $ore than F#I 5AA $i%%ion of 'enture funds for Indian 'entures during 1888-2AAA. =ith the gro)ing rea%isation of the i$$ense otentia% offered &y Indian techno%ogy co$ anies( funding o ra id%y increasing. The >o'ern$ent of India has a%ready taken %auda&%e ste s to faci%itate the creation of an en'iron$ent that is conduci'e for 'enture ca ita% funds and start-u s in India. These inc%ude;

ortunities are

introduction of s)eat e*uity( a%%o)ing 'enture ca ita% funds to offset %osses incurred in one co$ any against rofits fro$ another and esta&%ish$ent of go'ern$ent faci%itated 'enture ca ita% funds.

<o)e'er( the resent regu%atory fra$e)ork is sti%% not enough to ro'ide for an en'iron$ent that %ays stress on encouraging the f%o) of 'enture funds( easy e+it o tions 0for either arty1( $entoring( non-*ua%ified a'ai%a&i%ity of funds( and f%o) of u&%ic funds for enter rise &ui%ding in India.

India needs to encourage the gro)th of risk ca ita% &y acting on three fronts; 1. The >o'ern$ent of India and Indian financia% institutions shou%d cata%yse the rocess &y creating Israe%?s @o4$a-%ike funds. This )i%% sti$u%ate co$ etition &ut a%so rotect entre reneurs fro$ ine'ita&%e risks.

2. India shou%d a$end its regu%atory fra$e)ork so that the !C funds can earn a reasona&%e return on their risk ca ita%. 3. India shou%d acti'e%y ro$ote the infusion of !C ski%%s and ca a&i%ities( either &y attracting g%o&a% !C funds or attracting $anagers fro$ these funds. <o)e'er( the a&o'e $o'es need to &e su&stantiated )ith the ear%iest i$ %e$entation of the reco$$endations of the #7BI Co$$ittee on !enture Ca ita%.

&.1* SPECIAL PURPOSE VE3ICLE The De#inition

/n account( ad$inistered &y a third the$anage$ent in trust. arty that ho%ds shares &ought &ack &y

T3E ADVANTAGES >reater security for %enders i$ ro'es credit rating Jo)ers the cost of ca ita%

T3E DISADVANTAGES Jess contro% o'er cash f%o)s generated &y ro5ect Ta+ treat$ent of #:! sti%% unc%ear

Better $anage$ent of de&t/d$inistration fees can &e high re ay$ent 7na&%es ne) 'entures to raise funds. 6e*uires intensi'e $onitoring &y trustee

&.11 SPECIAL PURPOSE VE3ICLE The De#inition

/n account( ad$inistered &y a third $anage$ent in trust. arty that ho%ds shares &ought &ack &y the

T3E ADVANTAGES >reater security for %enders i$ ro'es credit rating Jo)ers the cost of ca ita%

T3E DISADVANTAGES Jess contro% o'er cash f%o)s generated &y ro5ect Ta+ treat$ent of #:! sti%% unc%ear

Better $anage$ent of de&t/d$inistration fees can &e high re ay$ent 7na&%es ne) 'entures to raise funds. 6e*uires intensi'e $onitoring &y trustee

Chapter A Venture Capitali%t A 4e, pla,er A.1 Role o# Venture Capitali%t 0ana'er%?9an4er

A.& Di##eren!e 9et een VC an$ 0one,

VENTURE CAPITALISTS A 4e, pla,er

A.1 Role o# "enture Capitali%t%
Con'entiona% financing genera%%y e+tends %oans to co$ anies( )hi%e !C financing in'ests in e*uity of the co$ any. Con'entiona% financing %ooks to current inco$e i.e. di'idend and interest( )hi%e in !C financing returns are &y )ay of ca ita% a reciation. /ssess$ent in con'entiona% financing is conser'ati'e i.e. %o)er the risk( higher the chances of getting %oan. On the other hand !C financing is a risk taking finance )here otentia% returns out)eigh risk factors. !enture Ca ita%ists a%so %end $anage$ent su $any other faci%ities. They e'en %isting. !Cs e+tend need &ased su ort and ro'ide entre reneurs )ith rocess. !Cs

artici ate in the $anage$ent

genera%%y in'est in un%isted co$ anies and $ake rofit on%y after the co$ any o&tains ort in a nu$&er of stages of in'est$ents un%ike sing%e round financing &y con'entiona% financiers. !C3s are in for %ong run and rare%y e+it &efore 3 years. To sustain such co$$it$ent !C and ri'ate e*uity grou s seek e+tre$e%y high returnsS a return of 3AO in ru ee ter$s. / &ank or an "I )i%% fund a ro5ect as %ong as it is sure that enough cash f%o) )i%% &e generated to re ay the %oans. !C is not a %ender &ut an e*uity artner. !enture ca ita%ists take higher risks &y in'esting in an ear%y-stage co$ any )ith %itt%e or no history( and they e+ ect a higher return for their high-risk e*uity in'est$ent. Internationa%%y( !Cs %ook at an interna% rate of return 0I661 north of 4AO %us. In India( the idea% &ench$ark is in the region of an I66 of 25O for genera% funds and $ore than 3AO for IT-s ecific funds. =ith res ect to in'esting in a &usiness( institutiona% 'enture ca ita%ists %ook for a'erage returns of at %east 4A er cent to 5A er cent for start-u funding. #econd and %ater stage funding usua%%y re*uires at %east a 2A er cent to 4A er cent return co$ ounded er annu$. Most fir$s re*uire %arge ortions of e*uity in e+change for start-u financing.

The VC Philo%oph, /s against Bought out dea%s 0BODs1( !Cs carry out 'ery detai%ed due di%igence and $ake 2-H year in'est$ents. The !Cs a%so hand-ho%d and nurture the co$ anies they in'est in &esides he% ing the$ reach I:O stage )hen 'a%uations are fa'oura&%e. !C"s he% entre reneurs at four stages; idea generation( start-u ( ra$ -u and fina%%y in the e+it. /ccording to Indian !enture Ca ita% /ssociation( a%$ost 41O 06s 5146.4A $1 of the tota% 'enture ca ita% in'est$ent is in start-u ro5ects fo%%o)ed &y 6s 44HG.6A $ in %ater stage ro5ects and on%y 6s G2.85 in turnaround ro5ects . Ma5ority ha'e in'ested in on%y three stages of in'est$ent( indicating that $ost !Cs in India ha'e not started de'e%o ing niches for in'esting )ith regard to the stages of ro5ects. The $ain difficu%ty in ear%y stage funding are re%ated to %ack of e+it o ortunities as

ro&a&i%ity of an I:O or &uy out &y of !C stake is %ess due to %ack of understanding for e'a%uation of the kno)%edge &ased co$ anies co$ ared to the co$ anies in the traditiona% sectors. #o$e such !Cs are; ICICI 'entures( Dra er( #IDBI and /nge%s. / art fro$ finance( 'enture ca ita%ists $arketing su risks and re)ards and ro'ide net)orking( $anage$ent and ort as )e%%. The 'enture ca ita%ist is a &usiness artner( sharing the ro'ides strategic( o erationa% and financia% ad'ice to the

co$ any &ased on e+ erience )ith other co$ anies in si$i%ar situations.

7ana'e0ent o# in"e%tee #ir0% The 'enture funds add 'a%ue to the co$ any &y acti'e in'o%'e$ent in running of enter rises in )hich they in'est. This is ca%%ed 9hands on9 or 9 ro-acti'e9 a roach. Dra er fa%%s in this category. Incu&ator funds %ike e-'entures a%so ha'e a si$i%ar a roach to)ards their in'est$ent. <o)e'er there can &e 9hands off9 a roach %ike that of Chase. ICICI !entures fa%%s in the %i$ited e+ osure category. In genera%( 'enture funds )ho fund seed or start u s ha'e a c%oser interaction )ith the co$ anies and ad'ice on strategy( etc )hi%e the in'est in $ore $ature stories. A.& Di##eren!e 9et een a "enture !apitali%t an$ 9an4er%?0one, ri'ate e*uity funds treat their e+ osure %ike any other %isted in'est$ent. This is artia%%y 5ustified( as they tend to

0ana'er%
Banker is a $anager of other eo %e?s $oney )hi%e the 'enture ca ita%ist is &asica%%y an in'estor. !enture ca ita%ist genera%%y in'ests in ne) 'entures started &y technocrats )ho genera%%y are in need of entre reneuria% aid and funds. !enture ca ita%ists genera%%y in'est in co$ anies that are not %isted on any stock e+changes. They $ake rofits on%y after the co$ any o&tains %isting. The $ost i$ ortant difference &et)een a 'enture ca ita%ist and con'entiona% in'estors and $utua% funds is that he is a s ecia%ist and %ends $anage$ent su a%so ort and

Q Q Q

"inancia% and strategic %anning O&tain &ank and other de&t financing /ccess to internationa% $arkets and techno%ogy

Q Q Q

Introduction to strategic artners and ac*uisition targets in the region 6egiona% e+ ansion of $anufacturing and $arketing o erations O&tain a u&%ic %isting

Differences

Point% O&5ecti'e <o%ding eriod Instru$ents :ricing Co%%atera% O)nershi Contro%

Venture Finan!e Maximize return 2-5 years

De9t Finan!e Interest ay$ent #hort.%ong ter$

Co$$on shares( con'erti&%e &onds(Joan( factoring( %easing o tions( )arrants :rice earnings ratio( net tangi&%e assets Interest s read !ery rare @es Minority shareho%ders( rights &oard $e$&ers @es Do rotection(Co'enants Increased %e'erage

I$ act on Ba%ance sheet6educed %e'erage of financed 7+it Mechanis$

:u&%ic offering( sa%e to third arty( sa%e toJoan re ay$ent entre reneur

Chapter : :ro3s and Tuo3s of !C" 5.1 5.2 5.3 #uccess factors Critica% factor :ro&%e$s faces &y !C"

:.1 Su!!e%% #a!tor% o# VCF%

1. Industry-s ecific concentration of in'est$ents yie%ds &etter returns than geogra hica%%y concentrated in'est$ents. 2. Det)orking )ith industria% artners is i$ ortant since these target co$ anies are otentia% c%ients and e+it artners. 3. Det)orking )ith uni'ersities and research institutes he% s identify ne) techno%ogies and in'est$ent targets. 4. Concentrating in'est$ents in carefu%%y se%ected co$ anies sho)ing internationa% ro$ise )i%% yie%d &etter returns than distri&uting the ca ita% across se'era% s$a%%er in'est$ents. It is crucia% that 'enture ca ita%ists acti'e%y su internationa% contacts. 5. =ith res ect to the returns fro$ the fund( it is 'ita% that ade*uate ca ita% is reser'ed for further in'est$ent in the &est in'est$ent targets and for $aintaining the ho%dings unti% the e+it. 6. Koint in'est$ents )ith artners ro'iding added 'a%ue contri&ute to the success of the target co$ anies and i$ ro'e the returns fro$ the fund. ort the gro)th and internationa%isation of the co$ anies through their industry-s ecific kno)-ho) and

5.2 Criti!al Fa!tor%

In 1888( #7BI 0#ecurities and 7+change Board of India1 had set u a co$$ittee under the Chair$anshi of Mr. E. B. Chandrasekhar to %ook into the issues of 'enture ca ita% in India. The 6e ort of the E. B. Chandrasekhar Co$$ittee on 'enture ca ita% identified the fo%%o)ing as critica% factors for the success of !C industry in India;

The regu%atory( ta+ and %ega% en'iron$ent shou%d %ay an ena&%ing ro%e. This e$ hasi4es the faci%itating and ro$otiona% ro%e of regu%ation. Internationa%%y( 'enture funds ha'e e'o%'ed in an at$os here of structura% f%e+i&i%ity( fisca% neutra%ity and o erationa% ada ta&i%ity. /nd )e need to ro'ide regu%atory si$ %icity and structura% f%e+i&i%ity on the sa$e %ines. There is a%so the need for a %e'e% %aying fie%d &et)een do$estic and offshore 'enture ca ita% in'estors. This has a%ready &een done for the $utua% fund industry in India.

In'est$ent( $anage$ent and an e+it o tion shou%d ro'ide f%e+i&i%ity to suit the &usiness re*uire$ents and shou%d a%so &e dri'en &y g%o&a% trends. !enture ca ita% in'est$ents ha'e ty ica%%y co$e fro$ high net )orth indi'idua%s )ho ha'e risk taking ca acity. #ince high risk is in'o%'ed in 'enture financing( 'enture in'estors g%o&a%%y seek in'est$ent and e+it on 'ery f%e+i&%e ter$s( )hich ro'ides the$ )ith certain %e'e%s of rotection. #uch e+it shou%d &e ossi&%e through I:Os and $ergers . ac*uisitions on a g%o&a% &asis and not 5ust )ithin India.

There is a%so the need for identifying and increasing the do$estic oo% of funds for 'enture ca ita% in'est$ent. In F#( a art fro$ high net )orth indi'idua%s and ange% in'estors( ension funds( insurance funds( $utua% funds etc. ro'ide a 'ery &ig source of $oney. The share of cor orate funding is a%so increasing and it )as as high as 25.8 ercent in the year 188G as co$ ared to 2 ercent in 1885. Cor orations are a%so setting u their o)n 'enture ca ita% funds. #i$i%ar a'enues need to &e identified in India a%so.

=ith increasing g%o&a% integration and $o&i%ity of ca ita% it is i$ ortant that Indian 'enture ca ita% fir$s as )e%% as 'enture financed enter rises &e a&%e to ha'e

ortunities for in'est$ent a&road. This )ou%d not on%y enhance their a&i%ity to

generate &etter returns &ut a%so add to their e+ erience and e+ ertise to function successfu%%y in a g%o&a% en'iron$ent. =e need our enter rises to &eco$e g%o&a% and create their o)n success stories. Therefore( auto$atic( trans arent and f%e+i&%e nor$s need to &e created for such in'est$ents &y do$estic fir$s and enter rises.

!enture ca ita% shou%d &eco$e an institutiona%ised industry financed and $anaged &y successfu% entre reneurs( rofessiona% and so histicated in'estors. >%o&a%%y( 'enture ca ita%ists are not $ere%y finance ro'iders &ut are a%so c%ose%y in'o%'ed )ith the in'estee enter rises and ro'ide e+ ertise &y )ay of $anage$ent and $arketing su ort. This industry has de'e%o ed its o)n ethos and cu%ture. !enture ca ita% has on%y one co$$on as ect that cuts across geogra hy i.e. it is risk ca ita% in'ested &y e+ erts in the fie%d. It is i$ ortant that 'enture ca ita% in India &e a%%o)ed to de'e%o 'ia rofessiona% and institutiona% $anage$ent

Infrastructure de'e%o $ent a%so needs to &e su as kno)%edge incu&ators for su

rioritised using go'ern$ent

ort and ri'ate $anage$ent. This in'o%'es creation of techno%ogy as )e%% orting inno'ation and ideas. 6BD a%so needs

to &e ro$oted &y go'ern$ent as )e%% as other organisations. The a&o'e re ort )as )e%% recei'ed &y the >o'ern$ent and fe) issues ha'e a%ready &een reso%'ed.

:.@

Pro9le0% 'enerall, a%%o!iate$ ith Venture Capital

1. The risk associated )ith true 'enture ca ita% is greater than )hen ro'iding ca ita% to an esta&%ished &usiness. Des ite the &est efforts and intentions( so$e start-u s )i%% not succeed. That is si$ %y art of the ga$e. In today?s $arket( though( es ecia%%y if dea%ing )ith high%y %e'eraged cor orations( )e ha'e seen there is su&stantia% risk associated )ith )e%% esta&%ished &usinesses as )e%% as )ith start-u s. The risk is different( though( and re)ard trade-off. 2. Most in'estors ha'e an unrea%istic 'ie) of 'enture ca ita%. They e+ ect the high returns u&%ici4ed )ith res ect to successfu% ne) 'entures &ut do not )ant to take the attendant risk. Conse*uent%y( such in'estors go into the $arket %ace %ooking for o ortunities( c%ai$ing to offer 'enture ca ita%( &ut ne'er finding an in'est$ent that $eets their re*uire$ents. 3. Most 'enture fund $anagers co$e fro$ &anking( rofessiona% $oney $anage$ent or cor orate $anage$ent, )hi%e so$e co$e direct%y fro$ &usiness schoo% and ha'e &een e$ %oyees of 'enture ca ita% fir$s for their entire career. Conse*uent%y( the 'ast $a5ority of 'enture ca ita% co$ any e$ %oyees - at any %e'e% - ha'e no actua% 9'enture9 or entre reneuria% e+ erience( articu%ar%y )ith start-u s. / %ack of e+ erience and understanding trans%ates into a %ack of co$fort )ith the creation hase of a &usiness and a re%uctance to in'est in such dea%s. 4. 7ntre reneurs( in genera%( ha'e different goa%s( $oti'ations and ersona%ities than &ankers or cor orate e+ecuti'es( )ho $ay e+ ect to see eo %e %ike the$se%'es as c%ients. These differences can often create a ga &et)een the 'enture ca ita%ist and the entre reneur sufficient to resu%t in a re5ection of the &usiness ro osa% irres ecti'e of the $erits of the &usiness. 5. The rinci a% source of ca ita% for $ost entre reneurs is friends and fa$i%y. Once that source runs out 0if it e+ists at a%%1( 'enture ca ita% co$ anies $ay &e the on%y a%ternati'e to o&tain funding )hich( $ost %ike%y( are s$a%% or insufficient in co$ arison to the cost of( for instance( &ui%ding a factory or &uying a rofita&%e going concern. "e) 'enture ca ita% co$ anies )ant to s end the ti$e e'a%uating s$a%% dea%s eo %e ro'iding true 'enture ca ita% recogni4es this risk-

)hen( )ithin the constraints of their in'esting %i$its and in the sa$e a$ount of ti$e( they cou%d artici ate in fe)er &ut %arger dea%s. 6. Three key e%e$ents to a successfu% ne) 'enture are 0not in order of riority1; a good idea( ade*uate ca ita% and good $anage$ent. / fai%ure of any one of these e%e$ents can doo$ the enter rise. Due ri$ari%y to a %ack of e+ erience in the creation or start-u hase( 'enture ca ita% co$ anies are often %acking in their a&i%ity to e'a%uate and recogni4e; 0a1 a 9good idea9 &ecause ideas and the ro5ections associated )ith the$ are so intangi&%e( un%ike - so they think - the ro5ections of an esta&%ished co$ any, 0&1 9ade*uate ca ita%9 for a start-u &ecause traditiona% 'enture ca ita% co$ anies $ay not ha'e the e+ erience to understand )hether the entre reneur?s goa%s can &e achie'ed )ith the ca ita% re*uested or to he% a ro riate ca ita% re*uire$ents for a start-u , 0c1 the resence or a&sence of ade*uate entre reneuria% $anage$ent( )hich can &e different than that of a %arge esta&%ished cor oration, a good e+a$ %e of )hich )as the changing need of / #cu%%ey. H. Des ite the fact that $any fund $anagers )i%% say that inade*uate $anage$ent is the ri$ary reason for &usiness fai%ure( they )i%% rare%y de'ote ti$e to assist $anage$ent to he% achie'e a greater %ike%ihood of success. Conse*uent%y( so$e in'est$ents are destined to fai% fro$ the start, and $any fir$s use e'eryone e%se?s fai%ures as a reason for the$ to a'oid start-u s. G. Many co$ anies and indi'idua%s co$ %ain that they ha'e $oney to in'est in 9good9 ro5ects( &ut none can &e found. "irst( )hat is 9good9 for one erson or fir$ $ay not &e 9good9 for another. That definition is guided &y goa%s and re*uire$ents of the indi'idua% in'estor. /n o%der in'estor $ay &e %ooking for inco$e )hi%e a younger in'estor $ay &e %ooking for a reciation. Often( those goa%s are unrea%istic as a %ied to 'enture ca ita%. %e Co$ uters )hen it re %aced #te'en Ko&s )ith Kohn the entre reneur deter$ine the

ChapterG) Ca%e Stu$ie% ).1 ).& ).@ Ca%e %tu$,G1 Ca%e %tu$,G& Ca%e %tu$,G@

Ca%e Stu$ie%
).1 Ca%e Stu$,G1> Ri%e o# U; e!ono0,
The econo$ic i$ act of ri'ate e*uity and 'enture ca ita% on the FE; Eee ing Jondon and the FE the centre of the 7uro ean industry :ri'ate 7*uity and 'enture ca ita% $akes a 'a%ua&%e contri&ution to the econo$y genera%%y &y ha'ing a ositi'e effect on the co$ anies in )hich ri'ate e*uity is in'ested. In addition( the industry $akes a 'ery significant contri&ution to the financia% ser'ices industry and in articu%ar %ays an i$ ortant ro%e in $aintaining the City of Jondon as 7uro e?s re$ier financia% centre and he% ing to &ui%d it as the )or%d?s re$ier financia% centre. The industry has sho)n incredi&%e gro)th o'er the %ast fe) years( &oth in ter$s of the funds it has raised and the ca ita% it $anages and in the %e'e% of in'est$ent that is $ade( )ith gro)th co$es res onsi&i%ity as )e%% as o ortunity. The gro)th of the industry has increased its rofi%e and )ith that rofi%e co$es a %egiti$ate interest in )hat the industry is doing fro$ the u&%ic( the ress and of course the regu%atory authorities. The industry is current%y facing t)o $a5or re'ie)s - &y the "#/ in the Discussion a er they recent%y u&%ished and &y the Treasury focusing on the ta+ation( not 5ust of ca ita% gains $ade &y the industry( &ut a%so the ca ita% gains $ade &y the risk-taking entre reneurs and $anage$ent tea$ that as an industry !C" &ack. /chie'ing the right outco$e for the industry fro$ the ta+ re'ie) and continuing to ensure regu%ation is a ro riate and not &urdenso$e are t)o 'ita% tasks the British !enture Ca ita% /ssociation 0B!C/1 and the industry faces. The /VCA an$ it% or4 The B!C/ is the industry &ody that re resents the FE ri'ate e*uity and 'enture ca ita% industry.

:ri'ate e*uity $eans the e*uity financing of co$ anies at $any stages in the %ife of a co$ any fro$ start-u transactions. !enture ca ita% as a ter$ ty ica%%y co'ers ear%y stages of start-u or gro)th funding or e+ ansion ca ita%. The ter$ &uy-outs 0MBO( MBI( etc1 refers to using - ri'ate e*uity to finance the change in o)nershi of a co$ any. The co$$on threads - and hence the ter$ ri'ate e*uity - is that the in'est$ents $ade in un*uoted e*uity 0i.e. not u&%ic%y *uoted e*uity1 and into co$ anies that ha'e rea% gro)th otentia% )hich can &e turned around or transfor$ed under ri'ate e*uity o)nershi as o osed to &eing constant%y in the s ot%ight that ha'ing a *uoted share rice $eans for a u&%ic co$ any. The B!C/ re resents the )ho%e cross section of the ri'ate e*uity industry in the FE - fro$ s$a%% seed stage 'enture funds a%% the )ay through to the %arge ri'ate e*uity fir$s )ho focus a%$ost e+c%usi'e%y on &uy-outs and )ho are a%$ost &eco$ing househo%d na$es today. B!C/ $e$&ershi co$ rises )e%% o'er 8AO of a%% FE-&ased ri'ate e*uity and 'enture ca ita% funds and their ad'isors. The ro%e of the B!C/ is to ensure that the FE industry is ro er%y re resented to o%iticians and o%icy $akers here at =est$inster( across the FE and in Brusse%s. The in$u%tr,H% e!ono0i! i0pa!t The sur'ey sho)s once again that ri'ate e*uity-&acked co$ anies are a significant dri'er in the FE econo$y and its g%o&a% co$ etiti'eness. Eey findings of this re ort sho) once again that in the fi'e years to 2AA5.2AA6; Q The gro)th of e$ %oy$ent in ri'ate e*uity-&acked co$ anies )as faster than &oth "T#7 1AA and "T#7 25A co$ anies 08O a 's 1O and 2O res ecti'e%y1 through e+ ansion a%% the )ay through to &uy-outs of esta&%ished co$ anies that in today?s )or%d can &e 'ery significant and %arge

Q #a%es gre) faster in ri'ate e*uity-&acked co$ anies co$ ared )ith "T#7 1AA and 25A co$ anies 08O 's. HO and 5O1 Q 7+ orts fro$ ri'ate e*uity-&acked co$ anies gre) at a faster rate than the nationa% gro)th rate 06O 's. 2O1 Q In'est$ent gre) faster than the nationa% a'erage 01GO 's 1O1 It is no) )e%% esta&%ished that the erfor$ance of ri'ate e*uity-&acked co$ anies significant%y strengthens the FE econo$y and i$ ro'es internationa% co$ etiti'eness and creates 5o&s at a considera&%y faster rate than other ri'ate sector co$ anies. It is no) esti$ated that co$ anies that ha'e recei'ed ri'ate e*uity funding account for the e$ %oy$ent of around 2.G $i%%ion eo %e in the FE( e*ui'a%ent to 18O of FE ri'ate sector e$ %oyees. It is a%so significant to note that 82O of co$ anies that res onded to the sur'ey said that )ithout ri'ate e*uity the &usiness )ou%d not ha'e e+isted at a%% or )ou%d ha'e de'e%o ed %ess ra id%y. The reason for this is that ri'ate e*uity in'est$ent is $ore than 5ust the ro'ision of ca ita%. 6es ondents to the sur'ey noted that strategic direction( financia% ad'ice and he% )ith contacts )ere key )ays in )hich ri'ate e*uity fir$s had he% ed )ith the de'e%o $ent of their &usinesses. It is esti$ated that co$ anies )hich ha'e &een ri'ate e*uity-&acked generated tota% sa%es of U424 &i%%ion( e+ orts of U4G &i%%ion and contri&uted o'er U26 &i%%ion in ta+es. The figures in the 7cono$ic I$ act #ur'ey de$onstrate c%ear%y that ri'ate e*uity&acked &usinesses are acti'e across a%% regions of the FE and are 'a%ua&%e contri&utors to the )ea%th of these regions.

The i0pa!t o# the pri"ate eDuit, in$u%tr, a% a U; #inan!ial %er"i!e The FE ri'ate e*uity industry is %aying an increasing%y significant ro%e as a source of re'enue for fir$s o erating )ithin the &roader financia% and rofessiona% ser'ices industry( contri&uting to the o'era%% i$ etus that these industries ro'ide to the FE econo$y. 2AA5 data sho)s that; Q :ri'ate e*uity-re%ated acti'ities generated esti$ated fee re'enue for financia% and rofessiona% ser'ices fir$s of o'er U3.3 &i%%ion( re resenting around HO of the tota% annua% turno'er of the FE financia% ser'ices industry. Q There are $ore than 5(5AA indi'idua%s 03(5AA of )hich are in'est$ent rofessiona%s1 e$ %oyed in so$e 26A ri'ate e*uity( 'enture ca ita%( funds-of-funds and secondaries in'est$ent fir$s in the FE. Q The FE has a net)ork of around H5A financia%( rofessiona% and &usiness ser'ices fir$s ro'iding ad'isory and financia% su engaged in ri'ate e*uity-re%ated acti'ities. Q Taken together( there are o'er 1A(AAA high%y ski%%ed rofessiona%s e$ %oyed across o'er 1(AAA fir$s engaged either direct%y or indirect%y in acti'ities. Q "or e'ery ri'ate e*uity e+ecuti'e in'esting direct%y in FE co$ anies( there are 2.3 fu%% ti$e e*ui'a%ent ad'isors or finance e+ecuti'es ro'iding s ecia%ist ad'ice and ser'ices. Q "inancia%( rofessiona% and other &usiness ser'ices e+ecuti'es )orking on ri'ate e*uity-re%ated $andates in 2AA5 generated an a'erage of U5AA(AAA er head in fees. ri'ate e*uity-re%ated ort to ri'ate e*uity and 'enture ca ita% oo% of c%ose to 6(HAA e+ecuti'es fir$s. They e$ %oy a fu%% ti$e e*ui'a%ent

Q :ri'ate e*uity-&acked transactions account for a significant ro ortion of tota% MB/ acti'ity in the FE )ith a%$ost 3AO of a%% FE in'est$ent &anking fees fro$ MB/ and %oan financing &eing deri'ed fro$ ri'ate e*uity &acked transactions in 2AA5. Q The FE ri'ate e*uity industry has %ong attracted ca ita% in'est$ent fro$ outside its o)n shores( )ith a%$ost U5A &i%%ion of foreign in'est$ent into FE ri'ate e*uity funds o'er the ast si+ years. Q "urther$ore( t)o-thirds of the tota% ca ita% in'ested &y FE fir$s o'er the sa$e eriod )as co$$itted to co$ anies )ithin the FE( de$onstrating a ositi'e net inf%o) of ca ita% into the FE econo$y. In"e%t0ent a!ti"it, B!C/ are an industry that in'ests across a%% sectors( fro$ start-u s to &uy-outs( a%% around the FE( across continenta% 7uro e and around the )or%d. In 2AA5( FE ri'ate e*uity acti'ity increased to its highest e'er %e'e%s( in ter$s of funds raised( ri'ate e*uity in'est$ents $ade and a%so di'est$ents. <ere are a fe) key figures that i%%ustrate the sca%e of )hat )e do; Q "unds raised fro$ in'estors reached U2H.3 &i%%ion. Q 1(535 co$ anies )ere financed. Q =or%d)ide in'est$ent &y FE ri'ate e*uity fir$s increased &y 21O in 2AA5 to U11.H &i%%ion fro$ U8.H &i%%ion in 2AA4. Q Co$ anies financed at start-u stage increased &y 8O to 2AG. By any $easure( the FE ri'ate e*uity and 'enture ca ita% industry is a FE success story. /nd yet it is disa ointing that des ite the fact that the &enefits of ri'ate e*uity as an asset c%ass are so c%ear that %ast year GAO of B!C/ in'estors ca$e fro$ o'erseas( )ith 45O co$ing fro$ the F#.

The ri$ary o&5ecti'e of the ri'ate e*uity industry is to dri'e returns to its in'estors and )hi%e it is a good thing that )e can attract in)ard in'est$ent( it is a ity that the &eneficiaries of the ca ita% gains created &y this industry redo$inant%y accrue to o'erseas in'estors.

U; pri"ate eDuit, an$ "enture !apital in$u%tr, i% a 'oo$ %tron' /riti%h %u!!e%% %tor,. Ma5or in'est$ent attract into the FE fro$ o'erseas( B!C/ $ake $a5or in'est$ent around the FE in'esting in co$ anies( creating 5o&s and &ui%ding &usinesses( and they in'est across continenta% 7uro e and around the )or%d &ringing returns ho$e for the &enefit of their in'estors. This industry has &enefited fro$ a strong cross :arty consensus that understands the i$ ortant ro%e B!C/ econo$y co$ etiti'e and dyna$ic. This su %ay in kee ing the FE ort is $uch a reciated.

:ri'ate e*uity in'est$ent shou%d not &e regarded as an end in itse%f( &ut rather as art of a %ife cyc%e of a &usiness. The ri'ate e*uity $ode% &rings together a&so%ute a%ign$ent of interest &et)een in'estor and $anage$ent. This ena&%es a&so%ute focus on agreed ur ose( the a&i%ity to achie'e change s)ift%y and efficient%y and a co$ %ete concentration on the direction of the &usiness.

6.2 Ca%e Stu$,G &> Sili!on Valle,H% %u!!e%%. !enture ca ita%ists su %y the funds to &udding entre reneurs )ho )ant to start their

o)n co$ anies - and 4AO of such dea%s in the F# take %ace in #i%icon !a%%ey. !enture ca ita%ists a%so he% and e'en $anage$ent su ort. nurture those co$ anies to success( su %ying

introductions to otentia% custo$ers or artners( assistance )ith raising $ore funds(

/nd 'enture ca ita% has &een one of the e+traordinary gro)th industries in the !a%%ey( )ith the a$ount of $oney in'ested in 'enture ca ita% funds rising in the decade fro$ I1&n in 188A to I2A&n in 1888 - and near%y dou&%ing again to I35&n in 2AAA. Dot.!o0 #allGout /nn =in&%ad( founder of 'enture ca ita% fir$ <u$$er =in&%ad( )ith I1&n in funds under $anage$ent( )as one of the 'icti$s of the dot.co$ fa%%-out. <er co$ any had &acked one of the &iggest and $ost )e%%-kno)n internet co$ anies se%%ing to consu$ers( :ets.co$( )hich sto ed trading des ite $i%%ions of do%%ars in ri'ate in'est$ent and an enthusiastic stock $arket f%otation. In her s%eek( )ooden-&ea$ed offices in #an "rancisco?s ne)%y fashiona&%e #oMo district( )hich has &eco$e a &eacon for dot.co$ co$ anies( she e+ %ained )hat )ent )rong. In her 'ie)( the increasing fren4y in the stock $arket for internet co$ anies )hate'er their &usiness %an or chances of rofita&i%ity - had $eant that too $any co$ anies had &een funded and &rought to the stock $arket too *uick%y. Too $any ine+ erienced 'entures. eo %e ca$e into the 'enture ca ita% $arket %ace( )ith

financiers( &ankers( and &ig co$ anies a%% re ared - e'en des erate - to &ack internet

"und raising difficu%ties /t one oint( she says( I1&n a )eek )as &eing offered to entre reneurs - attracting too $any eo %e )ho )ere 9$ercenaries not $issionaries9 to the )or%d of enter rise. But )hen the $arket )oke u ( and dot.co$ and tech stocks crashed in / ri%( it &eca$e i$ ossi&%e for e'en )e%%-$anaged internet co$ anies to raise additiona% $oney. :ets.co$ and other e-tai%ers needed $ore ca ita% to gro) - and that )as no %onger a'ai%a&%e at any rice. Do)( she says( it is un%ike%y that anyone )ou%d fund any internet co$ any for at %east the ne+t t)o years( and e-tai%ers( or dot.co$ co$ anies se%%ing to consu$ers( are the 9$ad co) disease9 of the 'enture ca ita% )or%d - no one )i%% touch the$ at a%%. /nd in future( the ace of in'est$ent )i%% &e s%o)er and $ore $easured( taking 3-5 years to &ring co$ anies to the stage at )hich they can &e f%oated on the stock $arket - and that 'enture ca ita%ists )i%% resu$e their ro%e of 9co$ any coach9 rather than ure dea%-$akers. :rofit ho es di$$ed /nd no)( one of the factors %i$iting the further e+ ansion of 'enture ca ita% fir$s is their need to s end $ore ti$e $anaging their e+isting ortfo%io - 9tending to the sick and needy9 in the )ords of the chief of one dot.co$ that has sur'i'ed( O&ongo?s Kohn <unt. Mr Eno&%auch says that in the height of the eu horia one year ago( 'enture ca ita%ists &egan to &e%ie'e that they cou%d $ake a rofit on near%y any co$ any they &acked. But no)( they e+ ect on%y a&out one in fi'e of the co$ anies they &ack to &eco$e a $a5or success - &ut those successes( )ith returns of 1A-2A ti$es in'est$ent( )i%% sti%% $ake the )ho%e fund rofita&%e. !ita% ro%e !enture ca ita%ists )i%% sti%% %ay a 'ita% ro%e as cata%ysts for #i%icon !a%%ey?s future.

It )as the resence of the )or%d?s $ost so histicated 'enture ca ita% industry that attracted Kohn <unt of O&ongo fro$ the FE to #an "rancisco. !enture ca ita%ists ha'e %ayed a crucia% art in %aunching his co$ any( )hich ro'ides the soft)are for e%ectronic )a%%ets used for sho ing on the internet.

O&ongo )as created in the offices of 'enture ca ita% fir$ #e*uoia( )ho introduced the FE &ased co$ any( then ca%%ed #$art ort( to its #i%icon !a%%ey ri'a%( Cha&i - and they agreed to $erge )ith each other 3A $inutes into the $eeting. #unny out%ook /nd O&ongo?s other 'enture ca ita% artner( /t%as( %ayed a centra% ro%e in he% ing the$ secure their first custo$er( the %arge F# &ank Citi&ank. It is net)orks %ike these )hich )i%% secure the future of the !a%%ey( according to historian and city %anner /nna Jee #a+enian. Do)here e%se ha'e 'enture ca ita%ists such a c%ose connection )ith their industry( she argues( )ith $ost $o'ing fro$ &eing entre reneurs the$se%'es. Their understanding of the techno%ogy( the $arkets( and the co$ etition $eans that entre reneuria% kno)%edge is shared and is transferred $ore *uick%y here than any)here e%se. It is that cu%ture that )i%% ensure that( des ite the shar change in $arket senti$ent( #i%icon !a%%ey )i%% re$ain the )or%d?s high-tech incu&ator.

Ca%e Stu$,G@> Failure o# Analo' De"i!e% Enterpri%e%

In 18GA( /na%og De'ices esta&%ished a cor orate 'enture rogra$( /na%og De'ices 7nter rises 0/D71( to generate &oth attracti'e financia% returns and strategic &enefits in the for$ of %icensing agree$ents and ac*uisitions. "unding )as /$oco( and /D7 had in'ested I26 $i%%ion in 11 fir$s &y 18G5. That 'ery year /$oco ceased contri&uting ca ita%( and the /D7 rogra$ )as ro'ided &y

sus ended. /round this ti$e( /na%og De'ices took a IH $i%%ion charge against earnings, in 188A( )ith $ost of the ortfo%io %i*uidated( it took another I12 $i%%ion charge. Of the 11 fir$s in /D73s ortfo%io( 1A )ere ter$inated( ac*uired &y other co$ anies at unattracti'e 'a%uations( or re%egated to the 9%i'ing dead.9 On%y one fir$ u%ti$ate%y )ent u&%ic. In this case( /D73s stake )as so di%uted &y a $erger that it )as )orth on%y a&out I2 $i%%ion at the ti$e of the offering. =hat )ent )rongV C%ear%y( the /D7 structura% fai%ings; 1. :rogra$ $anagers )ere ha$ ered &y the %ack of a c%ear o&5ecti'e. Instead( they had a threefo%d $ission; to in'est in fir$s ursuing techno%ogies re%e'ant to the ongoing &usiness of /na%og De'ices and /$oco( to o&tain o tions to ac*uire fir$s of interest to /na%og3s $anage$ent( and to generate high financia% returns. 2. /na%og De'ices3 researchers( seeing scarce resources &eing de'oted to /D7( resented the rogra$. /%so( /$oco on%y co$$itted to fund the rogra$ for fi'e years( considera&%y %ess ti$e than )as needed to gro) the ear%y-stage co$ anies. 3. Incenti'es of the 'arious arties a ear to ha'e &een i$ ro er%y a%igned. The $anage$ent of /na%og !entures &e%ie'ed that they )ere insufficient%y re)arded( and /$oco did not share in the rofits generated. rogra$ e+hi&its a%% three of the c%assic

Cha ter - H SURVE1 AND CONCLUSION

Sur"e,>
"or getting a&out ractica% kno)%edge of )orking of !C"s( sur'ey )as conducted in 3 fir$s na$e%y #IDBI 0#$a%% Industria% De'e%o $ent Bank of India1( KM 7*uity "und( ID"C 7*uity "und. "o%%o)ing *uestions )ere asked and so$e of the ans)ers gi'en )ere; 11 =hat do !C" %ooks for in e'a%uating a ne) co$ anyV Most critica% e%e$ent !C" %ooks for. /- Business otentia%( Co$ any &ackground( core %an( :ro$oter detai%s. B- >ro)th( $anage$ent( 'a%ue( Business $ode%( 'a%uation e+ ectation( return e+ ected. C- :ro$oter N 'ery carefu%( understanding( rofi%e and &ackground. Inter retation- !C" %ooks for good rofi%e and &ackground of ro$oter( &usiness otentia% and $anage$ent for e'a%uating in a ne) co$ any. 21 <o) is &usiness %an resentedV / - :resentation( ca%%ing( e+ecuti'e( e-$ai%( ad'isors. B N :resentation( "inancia% $ode%( $g$t $eeting( $atter of con'enience to &oth :ro$oter and !C". C N Based on &usiness %an and industry in re%ation to its gro)th( otentia%( gro)th( returns. :resentation is done in front of In'est$ent &anker 0$idd%e$an &et)een !C" and :ro$oter1. Inter retation- Business %an is resented through 'arious )ays %ike resentation( financia% $ode%( etc. )hiche'er is $ore con'enient for &oth arties. 31 <o) do !C"s define their contri&utionV /- By ro'iding faci%ities through sche$es %ike #tarted In'est$ent and #$art Money. B- Best ractices( /d'ice for a roaching to financia% $arket( etc.

C- /

oint$ent( issues( tie u s )ith go'ern$ent( tie u )ith ortfo%io co$ any(

e*ui $ents( training( 'enturing in ne) areas( &roader 'ie) and thinking. Inter retation- !C"s defines their contri&utions &y sho)ing the :ro$oters correct )ay for taking a ro riate ste s. 41 =hat are the $i%estones in achie'ing )hether the co$ any )i%% achie'e their goa%V / N Mi%estones are %aid do)n during agree$ent in to %ine and &otto$ %ine re'enue. Ter$ sheet docu$entation is signed &y ro$oter. B N Through co$ anies rofit nu$&ers and tota% sa%es. C N /%% the $i%estones are noted do)n in shareho%der3s agree$ent. Inter retation- The %and$arks are decided &y the !C"s and :ro$oter during signing of agree$ent &et)een the$. 51 =hat are the $a5or trends in !C" industryV / N Jatest trend is interest in Bio-tech sector. B N F co$ing sectors %ike Jogistics( B:O( "inancia% #er'ices( 6ea% 7state. C N /%% u co$ing sectors es ecia%%y Trans ort and Jogistics. Inter retation- The trends in !C"s industry de ends u on ty e of fir$s( as a%% of the$ ha'e interests in different sectors for financing. 61 =hat co$ anies in !C" $ight $ake interesting in'est$ents. / - De ends u on the sector )hich is &oo$ing at that ti$e. B N #a$e as a&o'e said sectors. C N The &est sector in today3s scenario is IT sector )hich )i%% &e &ack&one for econo$y. Inter retation- The co$ anies the$se%'es sho)s as interested in'esting sectors to !C"s &y their erfor$ance. H1 <o) %ong does it take to $ake in'est$ent or artici ation decisionV / N Taken after a %ong rocedure of in'estigation gets o'er fro$ 6-G )eeks. B N It takes 1A days so$eti$es and a%so get e+tent u to 3-4 $onths. C N Jengthy rocess as in'estigation a&out ro$oter is done. Then too it takes 3-5 $onths.

Inter retation- Ti$e taken &y !C"s for in'est$ent decision is fro$ 1A days ti%% 34 $onths. It a%so so$eti$e e+tents ti%% 6 $onths. G1 Critica% features of an agree$ent &et)een !C" and :ro$oter. / N 7+it o tions( 6ight to a oint a BOD( Interna% /uditor( :ro5ects. 7'en $ain ste s taken &y ro$oter shou%d &e consu%ted &y !C". B N Ji*uidity e'ent( seat in BOD( Minority rotection rights( &ig decisions to &e consu%ted. C N 6ights and O&%igations of :ro$oter( Board seat( 6ights to see co$$ittee( !eto 6ight. Inter retation- The $ost critica% features are se%ecting e+it o tions( rights and o&%igations of 'enture ca ita%ists( and $a5or decisions shou%d &e consu%ted )ith !C". 81 7+it o%icies fo%%o)ed &y !C"s. /- I:O( #e%%ing stake to 3rd arty( :ro$oter3s &uy&ack fro$ !C"( Drag-a%ong B Tag-a%ong. B- #e%%ing to strategic( B%ock dea%( I:O. C- I:O( :ro$oter3s &uy&ack( #e%%ing stake( Co$&ination of ro$oter3s &uy&ack and se%%ing stake. Inter retation- There are 3 &asic e+it o tions &een fo%%o)ed &y !C"s a%% o'er the )or%d. 1A1 6isk ana%ysis. / N 6isk de ends u on ty e of co$ any( $arket( e+it risk( ro er in'est$ent done or not( cu%tura% risk( co$ etition. B N If 'a%uation does not gro) as er e+ ectation then &usiness %an fai%s. C N #cenario &ui%ding. 6isk in ter$s of ro$oter( re'enue( cost 0as o erating e+ enses1. 7'en on otentia% of ro$oter. Inter retation- The risk ana%ysis 'aries as er de ending on the situation.

Note> /s er the ans)ers gi'en for the fo%%o)ing *uestions( / resents #IDBI( B resents KM 7*uity "und and C N ID"C 7*uity "unds. Inter retation is short conc%usion of a%% ans)ers.

Con!lu%ion>
7ar%ier atterns of gro)th or fai%ure in 'enture ca ita% industries in other countries and regions indicate that the e'o%ution of 'enture ca ita% see$s to &e either entry into a se%f reinforcing s ira%( such as occurred in #i%icon !a%%ey and Israe%( or gro)th and stagnation( as occurred in Minnesota in the 18GAs or the Fnited Eingdo$ unti% recent%y. >i'en India3s )ish to de'e%o a high-techno%ogy industry funded &y 'enture ca ita%( it is necessary to kee i$ ro'ing the en'iron$ent &y si$ %ifying the o%icy and regu%atory structure 0inc%uding e%i$inating regu%ations that do not necessary functions such as consu$er rotection1. The =or%d Bank( )ith its agenda of decreasing go'ern$ent regu%ation( funded the creation of the first 'enture ca ita% funds. Though these funds e+ erienced %itt%e success( they )ere the &eginnings of a rocess of %egiti$iti4ing 'enture in'esting and they )ere a training ground for 'enture ca ita%ists )ho %ater esta&%ished ri'ate 'enture ca ita% funds. It is un%ike%y that the 'enture ca ita% industry cou%d ha'e &een successfu% )ithout the de'e%o $ent of the soft)are industry and a genera% %i&era%i4ation of the econo$y. Of course( this is not entire%y sur rising( &ecause an institution as co$ %icated as 'enture ca ita% cou%d not e$erge )ithout a $ini$a%%y su orti'e en'iron$ent. This en'iron$ent &oth er$itted the e'o%ution of the 'enture ca ita% industry and si$u%taneous%y a%%o)ed it to &egin changing that en'iron$ent and initiating a co-e'o%utionary dyna$ic )ith other institutions. India sti%% re$ains a difficu%t en'iron$ent for 'enture ca ita%. 7'en in 2AA6 the Indian go'ern$ent re$ains &ureaucratic and high%y regu%ated. To encourage the gro)th of 'enture ca ita% )i%% re*uire further action( and it is %ike%y that the go'ern$ent )i%% continue and e'en acce%erate its efforts to encourage 'enture ca ita% in'esting. The ro%e of the go'ern$ent cannot &e a'oided; it $ust address ta+( regu%atory( %ega%( and currency e+change o%icies( since $any of these affect &oth 'enture ca ita% fir$s and erfor$

the co$ anies that they finance. More $echanis$s need to &e de'e%o ed to reduce risk if funds for 'enture ca ita% $ust co$e fro$ u&%ic%y he%d financia% institutions $anaged &y high%y risk-a'erse $anagers. In short( LVCF i% neIt en'ine #or e!ono0i!al 'ro th #or all !ountrie% in the =orl$J.

Su''e%tion% #or 'ro th o# VCF>

Venture !apital industry is at the take off stage in India. It can %ay a cata%ytic ro%e in the de'e%o $ent of entre reneurshi ski%% that re$ains une+ %oited a$ong the young and energetic technocrats and other rofessiona%%y *ua%ified ta%ents. It can he% ro$ote ne) techno%ogy and hi-tech industries( )hich in'o%'e high risk &ut ro$ises attracti'e rate of return. In order to ensure success of "enture !apital in India( the fo%%o)ing suggestions are offered;

0i1 7+e$ tion.Concession for Capital >ains; Capital gains %a) re resents a hurd%e to the success of "enture !apital financing. The earnings of the #un$% de end ri$ari%y on the a reciation in stock 'a%ues. "urther( the !apital gains $ay arise on%y after 3 to 4 years( of in'est$ent and that the ro5ects( &eing in ne) risky areas( $ay not e'en succeed. Capital gains &y cor orate &odies in India are ta+ed at a $uch in'est$ent risk and %ong gestation eriod this is a deterrent to the de'e%o $ent of !C"s.

The &enefit of the !apital gains( under section 4G of the /ct is not significant. <ence( it )ou%d &e ad'isa&%e that a%% %ong ter$ !apital gains earned &y !CCs shou%d &e e+e$ ted fro$ ta+ or su&5ect to concessiona% f%at rate. "urther( !apital gains rein'ested in ne) "enture shou%d a%so &e e+e$ ted fro$ ta+. #ection 52071 of the /ct shou%d &e a$ended to gi'e effect to this. 0ii1 De'e%o $ent of #tock Markets; >uide%ines issued &y finance $inistry ro'ides for the sa%e of in'est$ent &y )ay of u&%ic issue at the rice to &e decided on the &asis of &ook 'a%ue and earning ca acity. <o)e'er( this $ethod $ay not gi'e the &est a'ai%a&%e rices to "enture fund as it )i%% not &e a&%e to consider future gro)th otentia% of the in'ested co$ any. One of the $a5or factors )hich contri&uted to the success of "enture #un$% in the =est is de'e%o $ent of secondary and tertiary stock $arkets. These $arkets do not ha'e %isting

re*uire$ents and are s read o'er a%% i$ ortant cities and to)ns in the country. These stock $arkets ro'ide e+ce%%ent disin'est$ents $echanis$ for "enture #un$%. In India( ho)e'er( stock $arket is not de'e%o ed &eyond a fe) i$ ortant cities. #uccess of "enture !apital fund de ends 'ery $uch u on rofita&%e disin'est$ents of the !apital contri&uted &y it. In F# and FE secondary and tertiary $arkets he% ed in acco$ %ishing the a&o'e. <o)e'er( in India( ro$otion of such $aker is not feasi&%e in the re'ai%ing circu$stances as such %aisse4 faire o%icy $ay attack ersons )ith u%terior $oti'es in the &usiness to the deter$ent of genera% u&%ic. <o)e'er( stock $arket o eration $ay &e started at $an &y $ore &ig cities )here( say( the nu$&er of stock e+changes can &e increased to 5A. "urther( er$ission to transact in un%isted securities )ith suita&%e regu%ation )i%% ensure firsthand contact &et)een "enture fund and in'estors. 0iii1 "isca% Incenti'es; "isca% incenti'es $ay &e gi'en in the for$ of %o)ering the rate of inco$e ta+. It can &e acco$ %ished &y; 0i1 / !apital %ication of ro'isions a %ica&%e to non-cor orate entities for ta+ing %ong ter$ gains.

0ii1 /n a%%o)ance to #un$% si$i%ar to section GA-CC of Inco$e Ta+ /ct( say 2A ercent of the in'est$ent in ne) "enture )hich can &e a%%o)ed as deduction fro$ the inco$e. 0i'1 :ri'ate #ector :artici ation In F# and FE )here the econo$y is do$inated &y ri'ate sector( de'e%o $ent of "enture fund $arket )as ossi&%e due to 'ery significant ro%e %ayed &y ri'ate sector )hich is often )i%%ing to ut $oney in high risk &usiness ro'ided higher returns are e+ ected. The guide%ines &y finance $inistry ro'ide that non- institutiona% ro$oter3s share in the !apital of "enture fund cannot e+ceed 2A ercent of tota% !apital, further they cannot &e the sing%e %argest e*uity ho%ders. The ri'ate sector( &ecause of this ro'ision( $ay not %ike to ro$ote "enture fund &usiness. :ro$otion of "enture #un$% &y ri'ate sector( in addition to u&%ic financia%

institution and &anks( is reco$$ended as;

:ri'ate sector is in ad'antageous osition as co$ ared to financia% institutions and &anks to ro'ide $anageria% su a oo% of e+ erienced ort to ne) 'entures as %eading industria% house ha'e rofessiona% $anagers in a%% fie%ds of $anage$ent 'i4.

$arketing( roduction and finance. The %eading &usiness houses )i%% &e a&%e to raise #un$% fro$ the in'esting u&%ic )ith re%ati'e ease. 0'1 6e'ie) the 7+isting Ja)s Today3s need is to re'ie) the constrains under 'arious %a)s of the country and reso%'e the issue that cou%d co$e in the )ay of gro)th of the inno'ati'e $ode of financing. #uita&%e e+e$ tion shou%d &e gi'en fro$ #ection 43 / of the co$ anies /ct to "enture !apital finance co$ anies so that they are not re*uired to co$ %y )ith se'era% ro'isions of the /ct a %ica&%e to u&%ic %i$ited co$ anies. /$end$ent of #ection HH of the Co$ anies /ct is re*uired to ena&%e the ne) "enture !apital co$ anies to &uy &ack their shares at the ti$e of disin'est$ents &y !C "inance Co$ anies.

Cei%ing on intero erate %oans and in'est$ent as s ecified in #ection 3HA and 3H2 of the co$ anies /ct shou%d &e re%a+ed in case of !C "inance Co$ anies and Venture Capital Co$ anies to ena&%e the$ to in'est suita&%e in ne)%y ro$oted co$ anies. The on%y in'est$ent a'ai%a&%e to the !C "inance co$ any for in'est$ent is e*uity shares. This restriction shou%d &e re%a+ed so that !C "inance Co$ any can finance through referentia% issues and conditiona% %oans. The sco e of !C shou%d not on%y &e confir$ed to start u finance &ut a%so &e &roadened to de'e%o $ent finance( e+ ansion and gro)th( &uyouts( $ergers and a$a%ga$ation. The restriction on in'est$ent of GAO of the entire #un$% )ithin a eriod of 3 years shou%d &e re$o'ed. 0'i1 Ji$ited :artnershi The :ractice of the %i$ited artnershi as in 'ogue in FE shou%d &e er$itted in order to ro$ote integration of o&5ect &et)een the $anagers and contri&utors for the success of "enture !apital ro5ects.

Chapter 2

AnneIure G.1 #7BI >uide%ines and 6egu%ations G.2 Certificate of 6egistration G.3 Ta+ /s ects G.4 In'est$ent conditions and restrictions

AnneIure
G.1 SE/I Gui$eline% an$ Re'ulation%> In the a&sence of an organised !enture Ca ita% industry ti%% a%$ost 188G( indi'idua% in'estors and de'e%o $ent financia% institutions %ayed the ro%e of 'enture ca ita%ists in India. 7ntre reneurs ha'e %arge%y de ended u on offerings and %ending &y the financia% institutions. In 18H3 a co$$ittee on De'e%o $ent of #$a%% and Mediu$ 7nter rises high%ighted the need to foster 'enture ca ita% as a source of funding ne) entre reneurs and techno%ogy. Thereafter so$e u&%ic sector funds )ere set u &ut the acti'ity of 'enture ca ita% did not gather $o$entu$ as the thrust )as on high-techno%ogy ro5ects funded on a ure%y financia% rather than a ho%istic &asis. Jater( a study )as undertaken &y the =or%d Bank to e+a$ine the ossi&i%ity of de'e%o ing !enture Ca ita% in the ri'ate sector( &ased on )hich the >o'ern$ent of India took a o%icy initiati'e and announced guide%ines for !enture Ca ita% "unds 0!C"s1 in India in 18GG. <o)e'er( these guide%ines restricted setting u of !C"s &y the &anks or the financia% institutions on%y. Thereafter( the >o'ern$ent of India issued guide%ines in #e te$&er 1885 for o'erseas in'est$ent in !enture Ca ita% in India. "or ta+-e+e$ tion ur oses( guide%ines )ere a%so issued &y the Centra% Board of Direct Ta+es 0CBDT1 and the in'est$ents and f%o) of foreign currency into and out of India ha'e &een go'erned &y the 6eser'e Bank of India?s 06BI1 re*uire$ents. "urther( as a art of its $andate to regu%ate and to de'e%o the Indian ca ita% $arkets( the #ecurities and 7+change Board of India 0#7BI1 fra$ed the #7BI 0!enture Ca ita% "unds1 6egu%ations( 1886. These guide%ines )ere further a$ended in / r 2AAA )ith the o&5ecti'e of fue%%ing the gro)th of !enture Ca ita% acti'ities in India. ri'ate %ace$ents( u&%ic

In the %ate 188As( the Indian go'ern$ent &eca$e a)are of the otentia% &enefits of a hea%thy 'enture ca ita% sector. Thus in 1888 a nu$&er of ne) regu%ations )ere

ro$u%gated. #o$e of the $ost significant of these re%ated to %i&era%i4ing the regu%ations regarding the a&i%ity of 'arious financia% institutions to in'est in 'enture ca ita%. :erha s the $ost i$ ortant of these )ent into effect in / ri% 1888 and a%%o)ed &anks to in'est u to 5 ercent of their ne) funds annua%%y in 'enture ca ita%. The $ain statutes go'erning 'enture ca ita% in India inc%uded the #7BI3s 1886 !enture Ca ita% 6egu%ations( the 1885 >uide%ines for O'erseas !enture Ca ita% In'est$ents issued &y the De art$ent of 7cono$ic /ffairs in the Ministry of "inance( and the Centra% Board of Direct Ta+es3 0CBDT1 1885 >uide%ines for !enture Ca ita% Co$ anies 0%ater $odified in 18881. In ear%y 2AAA( do$estic 'enture ca ita%ists )ere regu%ated &y three go'ern$ent &odies; the #ecurities and 7+change Board of India 0#7BI1( the Ministry of "inance( and the CBDT. "or foreign 'enture ca ita% fir$s there )as e'en greater regu%ation in the for$ of the "oreign In'est$ent :ro$otion Board 0"I:B1( )hich a ro'es e'ery in'est$ent( and the 6eser'e Bank of India 06BI1( )hich a ro'es e'ery disin'est$ent. #ince #7BI is res onsi&%e for o'era%% regu%ation and registration of !C"( $u%ti %e regu%atory re*uire$ents shou%d &e har$oni4ed and conso%idated )ithin the fra$e)ork of #7BI 6egu%ations to faci%itate unifor$( hass%e-free( sing%e )indo) c%earance. Re'i%tration o# a "enture !apital #un$ / %icant shou%d fo%%o) the rocedure gi'en &e%o) so as to e+ edite the registration &y ste after getting

rocess. <o)e'er( #7BI )i%% a%so guide the a %icant ste

a %ication for registration as a 'enture ca ita% fund. Dor$a%%y( a%% re %ies are sent )ithin 21 )orking days fro$ the date of getting each co$$unication fro$ the a %icant during the rocess of registration. Thus( the tota% ti$e eriod for registration de ends on ho) fast the re*uire$ents are co$ i%ed )ith &y the a %icant. Main re*uire$ents under #7BI 0!enture Ca ita% "unds1 6egu%ations( 1886; The fo%%o)ing are the e%igi&i%ity criteria for grant of a certificate of registration as er regu%ation 4 of #7BI 0!enture Ca ita% "unds1 6egu%ations 1886. "or the ur ose of grant of a certificate of registration( the a %icant has to fu%fi% the fo%%o)ing( na$e%y;-

0a1 If the a %ication is $ade &y a co$ any( 0i1 Me$orandu$ of association has as its $ain o&5ecti'e( the carrying on of the acti'ity of a 'enture ca ita% fund, 0ii1 It is rohi&ited &y its $e$orandu$ and artic%es of association fro$ $aking an in'itation to the u&%ic to su&scri&e to its securities, 0iii1 Its director or rinci a% officer or e$ %oyee is not in'o%'ed in any

%itigation connected )ith the securities $arket )hich $ay ha'e an ad'erse &earing on the &usiness of the a %icant, 0i'1 Its director( offence. 0'1 It is a fit and ro er erson. rinci a% officer or e$ %oyee has not at any ti$e &een

con'icted of any offence in'o%'ing $ora% tur itude or any econo$ic

0&1 If the a %ication is $ade &y a trust 0i1 The instru$ent of trust is in the for$ of a deed and has &een du%y registered under the ro'isions of the Indian 6egistration /ct( 18AG 016 of 18AG1, 0ii1 The $ain o&5ect of the trust is to carry on the acti'ity of a 'enture ca ita% fund, 0iii1 The directors of its trustee co$ any( if any( or any trustee is not in'o%'ed in any %itigation connected )ith the securities $arket )hich $ay ha'e an ad'erse &earing on the &usiness of the a %icant, 0i'1 The directors of its trustee co$ any( if any( or a trustee has not at any ti$e( &een con'icted of any offence in'o%'ing $ora% tur itude or of any econo$ic offence, 0'1 The a %icant is a fit and ro er erson.

0c1 If the a %ication is $ade &y a &ody cor orate 0i1 It is set u Jegis%ature. 0ii1 The a %icant is er$itted to carry on the acti'ities of a 'enture ca ita% fund. 0iii1 0i'1 The a %icant is a fit and ro er erson. The directors or the trustees( as the case $ay &e( of such &ody cor orate ha'e not &een con'icted of any offence in'o%'ing $ora% tur itude or of any econo$ic offence. 0'1 The directors or the trustees( as the case $ay &e( of such &ody cor orate( if any( is not in'o%'ed in any %itigation connected )ith the securities $arket )hich $ay ha'e an ad'erse &earing on the &usiness of the a %icant. 0d1 The a %icant has not &een refused a certificate &y the Board or its certificate has not &een sus ended under regu%ation 3A or cance%%ed under regu%ation 31. or esta&%ished under the %a)s of the Centra% or #tate

/ %ication for 6egistration; /n a %icant shou%d a %y for registration in for$ a rescri&ed under "irst #chedu%e of #7BI 0!enture Ca ita% "unds1 6egu%ations 1886 a%ong )ith re*uisite fees. /%% docu$ents shou%d &e enc%osed as s ecified in the for$. Additional information: 1. / co$ %ete %ist of your associate co$ anies registered )ith #7BI( and a%so indicate the ca acity in )hich they are registered a%ong )ith the #7BI 6egistration nu$&er, 2. #tate )hether the a %icant is registered )ith #7BI in any ca acity.

3. / co$ %ete %ist of your grou co$ anies registered )ith #7BI( and a%so indicate the ca acity in )hich they are registered )ith #7BI a%ong )ith their #7BI 6egistration nu$&er. 4. =hether the a %icant or the inter$ediary( as the case $ay &e or its )ho%e ti$e director or $anaging artner has &een con'icted &y a Court for any offence in'o%'ing $ora% tur itude( econo$ic offence( securities %a)s or fraud 5. =hether any )inding u orders ha'e &een assed against the a %icant or the inter$ediary. 6. =hether any orders under the Inso%'ency /ct ha'e &een discharged. H. =hether any order restraining rohi&iting or de&arring the a %icant or its )ho%e ti$e director fro$ dea%ing in securities in the ca ita% $arket has &een assed &y #7BI or any other regu%atory authority and a eriod of three years fro$ the date of the e+ iry of the eriod s ecified in the order has not e%a sed, G. =hether any order cance%ing the certificate of registration of the a %icant on the ground of its indu%ging in insider trading( fraudu%ent and unfair trade ractices or assed against the

a %icant or any of its directors( or erson in $anage$ent and ha'e not &een

$arket $ani u%ation has &een assed &y #7BI and a eriod of three years fro$ the date of the order has not e%a sed , 8. =hether any order( )ithdra)ing or refusing to grant any %icense. a ro'a% to the a %icant or its )ho%e ti$e director )hich has a &earing on the ca ita% $arket( has &een assed &y #7BI or any other regu%atory authority and a eriod of three years fro$ the date of the order has not e%a sed. 1A. 0a1 Detai%s of registration of your co$ any.associate.grou co$ anies 0to &e gi'en se arate%y1( )hich are registered. re*uired to &e registered )ith 6eser'e Bank of India

06BI1 as a Banking co$ any or Don Banking "inance Co$ any or in any other ca acity and address0es1 of concerned &ranch office0s1 of 6BI. 0&1 Detai%s of disci %inary action taken &y 6BI against you or any of your grou .associate co$ anies. :%ease a%so infor$ us in case there is any defau%t in re ay$ent of de osits &y you or any of your grou . associate co$ anies. / %icant can su&$it 2no o&5ection certificate3 fro$ 6BI for getting registered )ith #7BI( to e+ edite the registration rocess. Other Documents to be submitted to SEBI 11 Me$orandu$ and /rtic%es of /ssociation of a %icant co$ any( e+ecuted co y of trust deed if the fund is &eing set u as a trust and $ain o&5ecti'e of constitution in case of &ody cor orate. 21 7+ecuted co y of In'est$ent Manage$ent /gree$ent( if a %ica&%e. 31 Disc%ose in detai% the in'est$ent strategy as re*uired under regu%ation 120a1 of the #7BI 0!enture Ca ita% "unds1 6egu%ations( 1886. /%so state the target si4e of the fund a%ong )ith the rofi%e of the in'estors of the fund. 41 /n undertaking to the effect that the fund )i%% not enter into any 'enture ca ita% acti'ity if it fai%s to raise a co$$it$ent of at %east 6s. fi'e crore as

re*uired under 6egu%ation 11031 of #7BI 0!enture Ca ita% "unds1 6egu%ations( 1886. 51 Co ies of %etters of co$$it$ent fro$ in'estors in su a$ount ro osed to &e raised &y the fund. 61 Fndertaking that the 'enture ca ita% fund )i%% not $ake in'est$ent in any area %isted under Third #chedu%e to #7BI 0!enture Ca ita% "unds1 6egu%ations( 1886. H1 !enture Ca ita% "und sha%% disc%ose the duration. %ife cyc%e of the fund. ort of the target

Grant of Certificate of Registration Once a%% a&o'e re*uire$ents ha'e &een co$ %ied )ith and re*uisite fees as registration as a 'enture ca ita% fund. er

#econd #chedu%e to 6egu%ations ha'e &een aid( #7BI )i%% grant certification of

G.2 Certi#i!ate o# Re'i%tration 2AA6 Certificate of registration as "enture !apital fund I. In e+ercise of the o)ers conferred &y su&-section 011 of section 12 of the securities /nd e+change Board of India /ct( 1882( 015 of 18821 read )ith the regu%ation $ade There under( the &oard here&y grants a certificate of registration to ------------------------------------------------------------------------as a "enture !apital fund su&5ect to the conditions s ecified in the /ct and in the regu%ations $ade there under. II. The 6egistration Du$&er of the "enture !apital fund is ID.!C. . Date; :%ace; MFMB/I By order #d."or and on &eha%f of #ecurities and 7+change Board of India Inco$e Ta+ &enefits In order to encourage the de'e%o $ent of "enture !apital #un$%( the inco$e Ta+ /ct( 1861 e+e$ ts the inco$e of a "enture !apital fund fro$ Inco$e Ta+. Inco$e of a "enture !apital fund Wsection 1A023"B1X 0on and fro$ "inancia% @ear 1888-2AAA1 /ny inco$e of a "enture !apital fund 0!C"1 or a "enture !apital co$ any 0!CC1 set u to raise #un$% for in'est$ent in a "enture !apital undertaking 0!CF1 is e+e$ t.

!CC $eans a co$ any )hich has &een granted a certificate of registration &y #7BI and )hich fu%fi%s the conditions %aid do)n &y #7BI )ith the a ro'a% of the Centra% >o'ern$ent.

!CF $eans a do$estic co$ any )hose share are not %isted in a recogni4ed stock e+change in India and )hich is engaged in the &usiness for roducing ser'ices( roduction or $anufacture of an artic%e or thing &ut does not inc%ude acti'ities or sectors )hich are s ecified &y #7BI )ith a a ro'a% of the Centra% >o'ern$ent.

2.@. TaI A%pe!t%>

!C"s ha'e &een ro'ided co$ %ete inco$e ta+ re%a+ation 0Ku%y 18851 and e+e$ tion fro$ %ong-ter$ !apital gains ta+ after they are %isted on stock e+changes. #hares ha'e to &e he%d for at %east 12 $onths to en5oy ta+ e+e$ tion. / %ock-in eriod of three years is ho)e'er a %ica&%e for un%isted shares. The "inance /ct( 1885 ro'ided W#ection 1A 023 "1 of the IT /ctX inco$e ta+

e+e$ tion on any inco$e &y )ay of di'idends or %ong-ter$ !apital gains of a "enture !apital fund or a "enture !apital co$ any fro$ in'est$ents $ade &y )ay of e*uity shares in a "enture ro osa%. To en5oy ta+ e+e$ tion the "enture !apital co$ any has to o&tain a ro'a% and satisfy rescri&ed conditions. The Centra% Board of Direct Ta+es 0CBDT1 issued guide%ines( on 1G-H-1885 s ecifying that the rescri&ed authority for a ro'a% for e+e$ tion under #ection 1A 023"1 of Inco$e Ta+ /ct is Director of Inco$e Ta+ 07+e$ tion1. The conditions for a ro'a% are; it is registered )ith the #7BI 0guide%ines of 13.2.1886 discussed &e%o)1, it in'ests GA ercent of its tota% $onies &y ac*uiring e*uity shares of "enture !apital undertakings, it in'est GA ercent of its tota% aid-u !apital in ac*uiring e*uity share of the it sha%% not in'est $ore than 2A ercent 0Budget for 188H-G raised it fro$ 5 to "enture !apital undertakings, 2A ercent.1it sha%% not in'est $ore than 4A ercent in the e*uity !apital of one "enture undertakings

it sha%% $aintain &ooks of account( and su&$it audited accounts to the

Director( Inco$e Ta+ 07+e$ tion1.

2.A. In"e%t0ent !on$ition% an$ re%tri!tion%

/ "enture !apital fund $ay raise $oney fro$ any source( )hether Indian( foreign or non resident Indian &y )ay of issue of units. Do "enture !apital fund sha%% acce t any in'est$ent fro$ any in'estor %ess than 6s5(AA(AAA. <o)e'er this condition is not a %ica&%e to;G.2.1 G.2.2 e$ %oyees or the rinci a% officer or directors of the "enture !apital fund has &een esta&%ished as a trust e$ %oyees of the fund $anager or asset $anage$ent co$ any for the ur ose of the se regu%ations( fund raised $eans actua% $oney raised fro$ in'estors for su&scri&ing to the securities of the "enture !apital fund and inc%udes $oney that is raised fro$ the author of the trust 0in case the "enture !apital fund has &een esta&%ished as a trust1 &ut does not inc%ude the aid u !apital of the trustee co$ any( if any. G.2.3 7ach sche$e %aunched or fund set u &y a "enture !apital fund sha%% ha'e fir$ co$$it$ent fro$ the in'estors for contri&ution &y the "enture !apital fund.

/%% in'est$ent $ade or to &e $ade &y a "enture !apital fund sha%% &e su&5ect to the fo%%o)ing conditions( na$e%y;a. "enture !apital fund sha%% disc%ose the in'est$ent strategy at the ti$e of a %ication for registration, &. "enture !apital fund sha%% not in'est $ore than 25O cor us of the fund in one "enture !apital undertaking , sha%% not in'est in the associated co$ anies, and

$. "enture !apital fund sha%% $ake in'est$ent in the "enture !apital undertaking as enu$erated &e%o) 0i1. at %east H5O of the in'esti&%e #un$% sha%% &e in'ested in un%isted e*uity shares or e*uity %inked instru$ents. <o)e'er( if the "enture !apital und seeks a'ai% of &enefits under the re%e'ant ro'isions of the Inco$e Ta+ /ct a %ica&%e to a "enture !apital fund( it sha%% &e re*uired to disin'est fro$ such in'est$ents )ithin a eriod of one year fro$ the Date on )hich the shares of the "enture !apital undertaking are %isted. In a recogni4ed stock 7+change. 0ii1. Dot $ore than 25O of the in'esti&%e fund $ay &e in'ested &y )ay of; a. su&scri tion to initia% u&%ic offer of a "enture !apital

undertaking )hose shares are ro osed o &e %isted su&5ect to %ock-in eriod of one year, &. de&t or de&t instru$ent of a "enture !apital undertaking in )hich the "enture !apital fund has a%ready $ade an in'est$ent &y )ay of e*uity.

Li%t o# Venture Capital Co0panie% in In$ia >G

1. 20th Century Finance Corporation Limited Centre Point Dr.Ambedkar Road Parel Mumbai - 400012 AIG In"e%t0ent Corporation 5A%ia6 Li0ite$ India - 6e resentati'e Office 2634 O&eroi To)ers Dari$an :oint Mu$&ai - 4AAA21 A!uit, Strate'i! Finan!ial% Pri"ate Li0ite$ 14 #antosh( 2nd f%oor 242 Jady Ka$shed5i 6oad Mu$&ai - 4AAA2G AIA Capital In$ia Pri"ate Li0ite$ 8B <ansa%aya Barakha$&a 6oad De) De%hi - 11AAA1 Allian!e DL< Pri"ate EDuit, Fun$ 4A4 . 4A5 :restige Centre :oint H 7d)ard 6oad Banga%ore - 56AA52 Allian!e Venture Capital A$"i%or% Li0ite$ 6AH 6ahe5a Cha$&ers "ree :ress Kourna% 6oad( Dari$an :oint Mu$&ai - 4AAA21 APIDC Venture Capital Li0ite$ 11A2 B%ock /( 11th f%oor Ba&ukhan 7state( Basheer&agh <ydera&ad - 5AAAA1 Can9an4 Venture Capital Fun$ Li0ite$ 2." Earee$ To)ers( 11th f%oor 18.5 -18.6 Cunningha$ 6oad Banga%ore - 56AA52 Draper International 5In$ia6 Pri"ate Li0ite$ !2A3 :restige Meridian -1 M.>. 6oad Banga%ore - 56AAA1

2.

3.

4.

5.

6.

H.

G.

8.

1 A.

eVenture% In$ia 5Con%ultair In"e%t0ent% Pri"ate Li0ite$6 Ehetan Bha'an G Ka$eshed5i Tata 6oad Churchgate Mu$&ai - 4AAA2A GE Capital Ser"i!e% In$ia Li0ite$ /I"/C# Bui%ding 1 6afi Marg De) De%hi - 11AAA1 Gu8arat Venture Finan!e Li0ite$ :re$chand <ouse /nne+e( 1st f%oor Behind :o u%ar <ouse /shra$ 6oad /h$eda&ad - 3GAAA8 3S/C Pri"ate EDuit, 7ana'e0ent 7auritiu% Li0ite$ /shoka 7state( 3rd f%oor 24 Barakha$&a 6oad De) De%hi - 11AAA1 ICICI Se!uritie% an$ Finan!e Co0pan, Li0ite$ 41.44 #trand :a%ace M.Desai Marg Co%a&a Mu$&ai - 4AAAA5 ICICI Venture Fun$% 7ana'e0ent Co0pan, Li0ite$ 0for$er%y TDICI1 6ahe5a :%a4a( 4th f%oor 1H Co$$issariat 6oad D?#ou4a Circ%e Banga%ore - 56AA25 IF/ Venture Capital Finan!e Li0ite$ G.1 Midd%eto)n 6o) Ca%cutta - HAAAH1 In$u%trial De"elop0ent /an4 o# In$ia IDBI To)er Cuffe :arade Mu$&ai - 4AAAA5

1 1.

1 2.

1 3.

1 4.

1 5.

1 6. 1 H.

1 G.

S0all In$u%trie% De"elop0ent /an4 o# In$ia 5SID/I6 SID/I Venture Capital Li0ite$

Dari$an Bha'an 22H !inay E. #hah Marg Dari$an :oint Mu$&ai - 4AAA21 1 8. Tata In"e%t0ent Corporation Li0ite$ 7)art <ouse( 3rd f%oor <o$i Modi #treet "ort Mu$&ai - 4AAAA1 Te0pleton In$ia Pri"ate EDuit, Fun$ 125 "ree :ress <ouse Dari$an :oint Mu$&ai - 4AAA21 Vi%ta Venture% DB# Cor orate C%u& 26 Cunningha$ 6oad Banga%ore - 56AA52 =al$enGNi44o In$ia 7ana'e0ent Co0pan, Li0ite$ One #i%'erstone 284 Jinking 6oad Ehar 0=est1 Mu$&ai - 4AAA52

2 A.

2 1.

2 2.

/i9lio'raph,
/oo4% Indian 'enture ca ita% $arket( - 7'a%ueser'e Indian !enture Ca ita% /ssociation - I!C/ !enture /cti'ity

=e9%ite% ))).se&i.go'.in ))).)iki edia.co$ ))).econo$icsti$es.co$ ))).'entureca ita%.co$ ))).in'esto edia.co$

Ne %paper% . 7cono$ic Ti$es Ti$es of India