Professional Documents
Culture Documents
ON
Study of Venture Capital
in India and its Aspects
Acknowledgement
No Learning is proper and effective without
Proper Guidance
Every study is incomplete without having a well plan and concrete exposure to the
student. Management studies are not exception. Scope of the project at this level is
very wide ranging. On the other hand it provide sound basis to adopt the theoretical
knowledge and on the other hand it gives an opportunities for exposure to real time
situation.
This study is an internal part of our MBA program and to do this project in a short
period was a heavy task.
Intention, dedication, concentration and hard work are very much essential to
complete any task. But still it needs a lot of support, guidance, assistance, cooperation of people to make it successful.
I bear to imprint of my people who have given me, their precious ideas and times to
enable me to complete the research and the project report. I want to thanks them for
their continuous support in my research and writing efforts.
Table of Content
1. Introduction
2. Significance of Study
3. Objective of Study
4. Research Methodology
Literature Review
Conceptual Framework
Operational Definition
5. Analysis & Interpretation
6. Findings
7. Suggestions
8. Conclusion
9. Limitation
10.Bibliographies
11. Annexure
ANNEXURE I NAME OF VENTURE CAPITAL FIRMS OUT
SIDE OF INDIA
ANNEXURE II NAME OF VENTURE CAPITAL FIRMS IN
INDIA.
Introduction
A number of technocrats are seeking to set up shop on their own and capitalize on
opportunities. In the highly dynamic economic climate that surrounds us today, few
traditional business models may survive. Countries across the globe are realizing
that it is not the conglomerates and the gigantic corporations that fuel economic
growth any more. The essence of any economy today is the small and medium
enterprises. For example, in the US, 50% of the exports are created by companies
with less than 20 employees and only 7% are created by companies with 500 or more
employees. This growing trend can be attributed to rapid advances in technology in
the last decade. Knowledge driven industries like InfoTech, health-care, entertainment
and services have become the cynosure of bourses worldwide. In these sectors, it is
innovation and technical capability that are big business-drivers. This is a paradigm
shift from the earlier physical production and economies of scale model. However,
starting an enterprise is never easy. There are a number of parameters that contribute
to its success or downfall. Experience, integrity, prudence and a clear understanding
of the market are among the sought after qualities of a promoter. However, there are
other factors, which lie beyond the control of the entrepreneur. Prominent among
these is the timely infusion of funds. This is where the venture capitalist comes in,
with money, business sense and a lot more.
When considering an investment, venture capitalists carefully screen the technical and
business merits of the proposed company. Venture capitalists only invest in a small
percentage of the businesses they review and have a long-term perspective. They also
actively work with the company's management, especially with contacts and strategy
formulation.
Venture capitalists mitigate the risk of investing by developing a portfolio of young
companies in a single venture fund. Many times they co-invest with other professional
venture capital firms. In addition, many venture partnerships manage multiple funds
simultaneously. For decades, venture capitalists have nurtured the growth of
America's high technology and entrepreneurial communities resulting in significant
job creation, economic growth and international competitiveness. Companies such as
Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems,
Intel, Microsoft and Genetech are famous examples of companies that received
venture capital early in their development.
(Source: National Venture Capital Association 1999 Year book)
investor. While this type of individual investment did not totally disappear, the
modern venture firm emerged as the dominant venture investment vehicle. However,
in the last few years, individuals have again become a potent and increasingly larger
part of the early stage start-up venture life cycle. These "angel investors" will mentor
a company and provide needed capital and expertise to help develop companies.
Angel investors may either be wealthy people with management expertise or retired
business men and women who seek the opportunity for first-hand business
development.
by
the
venture
capitalists.
These
are:
1. Management: The strength, expertise & unity of the key people on the board bring
significant credibility to the company. The members are to be mature, experienced
possessing working knowledge of business and capable of taking potentially high
risks.
2. Potential for Capital Gain: An above average rate of return of about 30 - 40% is
required by venture capitalists. The rate of return also depends upon the stage of the
business cycle where funds are being deployed. Earlier the stage, higher is the risk
and hence the return.
3. Realistic Financial Requirement and Projections: The venture capitalist requires
a realistic view about the present health of the organization as well as future
projections regarding scope, nature and performance of the company in terms of scale
of operations, operating profit and further costs related to product development
through Research & Development.
4. Owner's Financial Stake: The financial resources owned & committed by the
entrepreneur/ owner in the business including the funds invested by family, friends
and relatives play a very important role in increasing the viability of the business. It is
an important avenue where the venture capitalist keeps an open eye.
A Brief History
The concept of venture capital is not new. Venture capitalists often relate the story of
Christopher Columbus. In the fifteenth century, he sought to travel westwards instead
of eastwards from Europe and so planned to reach India. His far-fetched idea did not
find favor with the King of Portugal, who refused to finance him. Finally, Queen
Isabella of Spain decided to fund him and the voyages of Christopher Columbus are
now empanelled in history.
The modern venture capital industry began taking shape in the post World War II
years. It is often said that people decide to become entrepreneurs because they see
role models in other people who have become successful entrepreneurs. Much the
same thing can be said about venture capitalists. The earliest members of the
organized venture capital industry had several role models, including these three:
American Research and Development Corporation, formed in 1946, whose biggest
success was Digital Equipment. The founder of ARD was General Georges Doroit, a
French-born military man who is considered "the father of venture capital." In the
1950s, he taught at the Harvard Business School. His lectures on the importance of
risk capital were considered quirky by the rest of the faculty, who concentrated on
conventional corporate management.
J.H. Whitney & Co also formed in 1946, one of whose early hits was Minute Maid
juice. Jock Whitney is considered one of the industrys founders.
The Rockefeller Family, and in particular, L S Rockefeller, one of whose earliest
investments was in Eastern Airlines, which is now defunct but was one of the earliest
commercial airlines.
The Second World War produced an abundance of technological innovation, primarily
with military applications. They include, for example, some of the earliest work on
micro circuitry. Indeed, J.H. Whitneys investment in Minute Maid was intended to
investing. First Congress slashed the capital gains tax rate to 28% from 49.5%. Then
the Labor Department issued a clarification that eliminated the pension funds act as an
obstacle to venture investing. At around the same time, there was a number of highprofile IPOs by venture-backed companies. These included Federal Express in 1978,
and Apple Computer and Genetech Inc in 1981. This rekindled interest in venture
capital on the part of wealthy families and institutional investors. Indeed, in the
1980s, the venture capital industry began its greatest period of growth. In 1980,
venture firms raised and invested less than US$600 million. That number soared to
nearly US$4bn by 1987. The decade also marked the explosion in the buy-out
business.
The late 1980s marked the transition of the primary source of venture capital funds
from wealthy individuals and families to endowment, pension and other institutional
funds. The surge in capital in the 1980s had predictable results. Returns on venture
capital investments plunged. Many investors went into the funds anticipating returns
of 30% or higher. That was probably an unrealistic expectation to begin with. The
consensus today is that private equity investments generally should give the investor
an internal rate of return something to the order of 15% to 25%, depending upon the
degree of risk the firm is taking.
However, by 1990, the average long-term return on venture capital funds fell below
8%, leading to yet another downturn in venture funding. Disappointed families and
institutions withdrew from venture investing in droves in the 1989-91 periods. The
economic recovery and the IPO boom of 1991-94 have gone a long way towards
reversing the trend in both private equity investment performance and partnership
commitments.
In 1998, the venture capital industry in the United States continued its seventh straight
year of growth. It raised US$25bn in committed capital for investments by venture
firms, who invested over US$16bn into domestic growth companies US firms have
traditionally been the biggest participants in venture deals, but non-US venture
investment is growing. In India, venture funding more than doubled from $420
million in 2002 to almost $1 billion in 2003. For the first half of 2004, venture capital
investment rose 32% from 2003.
Investment Philosophy
The basic principal underlying venture capital invest in high-risk projects with the
anticipation of high returns. These funds are then invested in several fledging
enterprises, which require funding, but are unable to access it through the
conventional sources such as banks and financial institutions. Typically first
generation entrepreneurs start such enterprises. Such enterprises generally do not have
any major collateral to offer as security, hence banks and financial institutions are
averse to funding them. Venture capital funding may be by way of investment in the
equity of the new enterprise or a combination of debt and equity, though equity is the
most preferred route.
Since most of the ventures financed through this route are in new areas (worldwide
venture capital follows "hot industries" like InfoTech, electronics and biotechnology),
the probability of success is very low. All projects financed do not give a high return.
Some projects fail and some give moderate returns. The investment, however, is a
long-term risk capital as such projects normally take 3 to 7 years to generate
substantial returns. Venture capitalists offer "more than money" to the venture and
seek to add value to the investee unit by active participation in its management. They
monitor and evaluate the project on a continuous basis.
The venture capitalist is however not worried about failure of an investee company,
because the deal which succeeds, nets a very high return on his investments high
enough to make up for the losses sustained in unsuccessful projects. The returns
generally come in the form of selling the stocks when they get listed on the stock
exchange or by a timely sale of his stake in the company to a strategic buyer. The idea
is to cash in on an increased appreciation of the share value of the company at the
time of disinvestment in the investee company. If the venture fails (more often than
not), the entire amount gets written off. Probably, that is one reason why venture
capitalists assess several projects and invest only in a handful after careful scrutiny of
the management and marketability of the project.
To conclude, a venture financier is one who funds a start up company, in most cases
promoted by a first generation technocrat promoter with equity. A venture capitalist is
not a lender, but an equity partner. He cannot survive on minimalism. He is driven by
maximization: wealth maximization. Venture capitalists are sources of expertise for
the companies they finance. Exit is preferably through listing on stock exchanges.
This method has been extremely successful in USA, and venture funds have been
credited with the success of technology companies in Silicon Valley. The entire
technology industry thrives on it
Length of investment:
Venture capitalists will help companies grow, but they eventually seek to exit the
investment in three to seven years. An early stage investment make take seven to ten
years to mature, while a later stage investment many only take a few years, so the
appetite for the investment life cycle must be congruent with the limited partnerships
appetite for liquidity. The venture investment is neither a short term nor a liquid
investment, but an investment that must be made with careful diligence and expertise.
:
1. Pre seed Stage: Here, a relatively small amount of capital is provided to an
entrepreneur to conceive and market a potential idea having good future prospects.
The funded work also involves product development to some extent.
4. Second Stage: In the Second Stage of Financing working capital is provided for
the expansion of the company in terms of growing accounts receivable and inventory.
Equity: All VCFs in India provide equity but generally their contribution does not
exceed 49 percent of the total equity capital. Thus, the effective control and majority
ownership of the firm remains with the entrepreneur. They buy shares of an enterprise
with an intention to ultimately sell them off to make capital gains.
Conditional Loan: It is repayable in the form of a royalty after the venture is able
to generate sales. No interest is paid on such loans. In India, VCFs charge royalty
ranging between 2 to 15 percent; actual rate depends on other factors of the venture
such as gestation period, cost-flow patterns, riskiness and other factors of the
enterprise.
Venture capital partners (also known as "venture capitalists" or "VCs") may be former
chief executives at firms similar to those which the partnership funds. Investors in
venture capital funds are typically large institutions with large amounts of available
capital, such as state and private pension funds, university endowments, insurance
companies and pooled investment vehicles.
Most venture capital funds have a fixed life of ten yearsthis model was pioneered
by some of the most successful funds in Silicon Valley through the 1980s to invest in
technological trends broadly but only during their period of ascendance, to cut
exposure to management and marketing risks of any individual firm or its product.
In such a fund, the investors have a fixed commitment to the fund that is "called
down" by the VCs over time as the fund makes its investments. In a typical venture
capital fund, the VCs receive an annual "management fee" equal to 2% of the
committed capital to the fund and 20% of the net profits of the fund. Because a fund
may run out of capital prior to the end of its life, larger VCs usually have several
overlapping funds at the same timethis lets the larger firm keep specialists in all
stage of the development of firms almost constantly engaged. Smaller firms tend to
thrive or fail with their initial industry contactsby the time the fund cashes out, an
entirely new generation of technologies and people is ascending, whom they do not
know well, and so it is prudent to re-assess and shift industries or personnel rather
than attempt to simply invest more in the industry or people it already knows
Significance of Study
Venture capitalists not only support high technology projects they also fianc any
risky idea, they provide funds (a) if one needs additional capital to expand his existing
business or one has a new & promising project to exploit (b) if one cannot obtain a
conventional loan the requirement terms would create a burden during the period the
firm is struggling to grown.
It is the ambition of many talented people in India to set up their own venture if they
could get adequate & reliable support. Financial investment provides loans & equity.
But they do not provide management support, which is often needed by entrepreneurs.
But the venture capital industries provide such support along with capital also.
Venture capitalist acts a partner not a financier.
Objective No. 1
Instruments
Rs million
Per cent
Equity Shares
6,318.12
63.18
2,154.46
21.54
873.01
8.73
Convertible Instruments
580.02
5.8
Other Instruments
75.85
0.75
Total
10,000.46
100
Interpretation: This diagram shows the venture capital financing in equity share
and secondly they invest in redeemable preference shares to get higher returns.
Contributors of Funds
Contributors
Rs. mn
Per cent
13,426.47
52.46%
6,252.90
24.43%
2,133.64
8.34%
Other Banks
1,541.00
6.02%
Foreign Investors
570
2.23%
Private Sector
412.53
1.61%
Public Sector
324.44
1.27%
Nationalized Banks
278.67
1.09%
235.5
0.92%
215
0.84%
Other Public
115.52
0.45%
Insurance Companies
85
0.33%
Mutual Funds
4.5
0.02%
Total
25,595.17
100.00%
Interpretation: This table shows the highest contribution of fund FII and secondly
AIFI to develop the Industry.
Investment Stages
Rs million
Number
Start-up
3,813.00
297
Later stage
3,338.99
154
1,825.77
124
Seed stage
963.2
107
Turnaround financing
59.5
Total
10,000.46
691
Interpretation: This diagram shows the highest finance is received by the venture
in startup stage of any venture.
Financing By Industry
Industry
Rs million
2,599.32
Computer Software
1,832
Consumer Related
1,412.74
Medical
623.8
500.06
Other electronics
436.54
385.09
Biotechnology
376.46
Energy related
249.56
Computer Hardware
203.36
Miscellaneous
1,380.85
Total
10,000.46
Financing By States
Investment
Maharashtra
Tamil Nadu
Andhra Pradesh
Gujarat
Karnataka
West Bengal
Haryana
Delhi
Uttar Pradesh
Madhya Pradesh
Kerala
Goa
Rajasthan
Punjab
Orissa
Dadra & Nagar Haveli
Himachal Pradesh
Pondicherry
Rs million
2,566
1531
1372
1102
1046
312
300
294
283
231
135
105
87
84
35
32
28
22
Bihar
16
Overseas
413
Total
9994
Source IVCA (2005-06)
The Management
Most businesses are people driven, with success or failure depending on the
performance of the team. It is important to distinguish the entrepreneur from the
professional management team. The value of the idea, the vision, putting the team
together, getting the funding in place is amongst others, some key aspects of the role
of the entrepreneur. Venture capitalists will insist on a professional team coming in,
including a CEO to execute the idea. One-man armies are passe. Integrity and
commitment are attributes sought for. The venture capitalist can provide the strategic
vision, but the team executes it. As a famous Silicon Valley saying goes "Success is
execution, strategy is a dream".
The Idea
The idea and its potential for commercialization are critical. Venture funds look for a
scalable model, at a country or a regional level. Otherwise the entire game would be
reduced to a manpower or machine multiplication exercise. For example, it is very
easy for Hindustan Lever to double sales of Liril - a soap without incremental capex,
while Gujarat Ambuja needs to spend at least Rs4bn before it can increase sales by
1mn ton. Distinctive competitive advantages must exist in the form of scale,
technology, brands, distribution, etc which will make it difficult for competition to
enter.
Valuation
All investment decisions are sensitive to this. An old stock market saying "Every
stock is a buy at a price and vice versa". Most deals fail because of valuation
expectation mismatch. In India, while calculating returns, venture capital funds will
take into account issues like rupee depreciation, political instability, which adds to the
risk premia, thus suppressing valuations. Linked to valuation is the stake, which the
fund takes. In India, entrepreneurs are still uncomfortable with the venture capital
"taking control" in a seed stage project.
Exit
Without exit, gains cannot be booked. Exit may be in the form of a strategic sale
or/and IPO. Taxation issues come up at the time. Any fund would discuss all exit
options before closing a deal. Sometimes, the fund insists on a buy back clause to
ensure an exit.
Portfolio Balancing
Most venture funds try and achieve portfolio balancing as they invest in different
stages of the company life cycle. For example, a venture capital has invested in a
portfolio of companies predominantly at seed stage; they will focus on expansion
stage projects for future investments to balance the investment portfolio. This would
enable them to have a phased exit. In summary, venture capital funds go through a
certain due diligence to finalize the deal. This includes evaluation of the management
team, strategy, execution and commercialization plans. This is supplemented by legal
and accounting due diligence, typically carried out by an external agency. In India, the
entire process takes about 6 months. Entrepreneurs are advised to keep that in mind
before looking to raise funds. The actual cash inflow might get delayed because of
regulatory issues. It is interesting to note that in USA, at times angels write checks
across the table.
The Indian banking system has shown remarkable growth over the last two decades.
The rapid growth and increasing complexity of the financial markets, especially the
capital market have brought about measures for further development and
improvement in the working of these markets. Banks and development financial
institutions led by ICICI, IDBI and IFCI were providers of term loans for funding
projects. The options were limited to conventional businesses, i.e. manufacturing
centric. Services sector was ignored because of the "collateral" issue.
Equity was raised from the capital markets using the IPO route. The bull markets of
the 90s, fuelled by Harshad Mehta and the FIIs, ensured that (ad) venture capital was
easily available. Manufacturing companies exploited this to the full.
The services sector was ignored, like software, media, etc. Lack of understanding of
these sectors was also responsible for the same. If we look back to 1991 or even 1992,
the situation as regards financial outlay available to Indian software companies was
poor. Most software companies found it extremely difficult to source seed capital,
working capital or even venture capital.
Most software companies started off undercapitalized, and had to rely on loans
or overdraft facilities to provide working capital. This approach forced them to
generate revenue in the short term, rather than investing in product development. The
situation fortunately has changed.
Research Methodology
REDMEN & MORY defines,Research as a systematized effort to gain now
knowledge.
It is a careful investigation for search of new facts in any branch of knowledge. The
purpose of research methodology section is to describe the procedure for conduction
the study. It includes research design, sample size, data collection and procedure of
analysis of research instrument.
Research always starts with a question or a problem. Its purpose is to find answers to
questions through the application of the scientific method. It is a systematic and
intensive study directed towards a more complete knowledge of the subject studied.
RESEARCH DESIGN:
Acc. to Kerlinger, Research design is the plan structure & strategy of
investigation conceived so as to obtain answers to research questions and to control
variance.
Acc. to Green and Tull, A research design is the specification of methods and
procedures for acquiring the information needed. It is the overall operational pattern
or framework of the project that stipulates what information is to be collected from
which sources by what procedures.
Its found that research design is purely and simply the framework for a study that
guides the collection and analysis of required data.
Research design is broadly classified into
DATA COLLECTION
Secondary data
Secondary data is the data which is already collected by someone and complied for
different purposes which are used in research for this study. It includes:
Internet
Magazine
Journal
Newspaper
Literature Review
According to Subash and Nair, (May 2005)
According to theses persons though the modern concept of venture capital stated
during 1946 and now practiced by almost all economies around the world, there
seems to be a slowdown of venture capital activities after 2000.There may be a long
list of reasons for this situation, where people feel more risky to put their money in
new and emerging ventures. Hardly 5% of the total venture capital investment
globally is given to really stage ventures. In all the years people around the world has
seen the potentiality of venture capital in promoting different economies of the world
by improving the standard of living of the people by expanding business activities,
increasing employment and also generating more revenue to the government
These teams are adept at dealing with risk because of their impeccable past
experience.
The study brings out four important variables which are highly unique to
successful venture in India. They are:
capitalists' co-investing strategy. The study finds that even through venture capitalists
fix tight milestones and time lines they themselves contribute to many of the delays
that are experienced by a typical start up firm. This is because of the hierarchical coinvesting partners and the lack of understanding within the venture capitalist coinvestors as to what role they individually play in the development of their portfolio
company.
Deal origination:
In generating a deal flow, the VC investor creates a pipeline of deals or investment
opportunities that he would consider for investing in. Deal may originate in various
ways. referral system, active search system, and intermediaries. Referral system is an
important source of deals. Deals may be referred to VCFs by their parent
organizations, trade partners, industry associations, friends etc. Another deal flow is
active search through networks, trade fairs, conferences, seminars, foreign visits etc.
Intermediaries is used by venture capitalists in developed countries like USA, is
certain intermediaries who match VCFs and the potential entrepreneurs.
Screening:
VCFs, before going for an in-depth analysis, carry out initial screening of all projects
on the basis of some broad criteria. For example, the screening process may limit
projects to areas in which the venture capitalist is familiar in terms of technology, or
product, or market scope. The size of investment, geographical location and stage of
financing could also be used as the broad screening criteria.
Due Diligence:
Due diligence is the industry jargon for all the activities that are associated with
evaluating an investment proposal. The venture capitalists evaluate the quality of
entrepreneur before appraising the characteristics of the product, market or
technology. Most venture capitalists ask for a business plan to make an assessment of
the possible risk and return on the venture. Business plan contains detailed
information about the proposed venture. The evaluation of ventures by VCFs in India
includes;
Preliminary evaluation: The applicant required to provide a brief profile of the
proposed venture to establish prima facie eligibility.
Detailed evaluation: Once the preliminary evaluation is over, the proposal is evaluated
in greater detail. VCFs in India expect the entrepreneur to have:- Integrity, long-term
vision, urge to grow, managerial skills, commercial orientation.
VCFs in India also make the risk analysis of the proposed projects which includes:
Product risk, Market risk, Technological risk and Entrepreneurial risk. The final
decision is taken in terms of the expected risk-return trade-off as shown in Figure.
Deal Structuring: Structuring refers to putting together the financial aspects of the
deal and negotiating with the entrepreneurs to accept a venture capitals proposal and
finally closing the deal. To do a good job in structuring, one needs to be
knowledgeable in areas of accounting, cash flow, finance, legal and taxation. Also the
structure should take into consideration the various commercial issues (ie what the
entrepreneur wants and what the venture capital would require protecting the
investment). Documentation refers to the legal aspects of the paperwork in putting the
deal together. The instruments to be used in structuring deals are many and varied.
The objective in selecting the instrument would be to maximize (or optimize) venture
capitals returns/protection and yet satisfies the entrepreneurs requirements. The
instruments could be as follows:
Instrument
Issues
Loan
Clean vs secured
Interest bearing vs non interest bearing
convertible vs one with features (warrants)
1st Charge, 2nd Charge,
loan vs loan stock
Maturity
Preference shares
Warrants
Common shares
In India, straight equity and convertibles are popular and commonly used. Nowadays,
warrants are issued as a tool to bring down pricing.
A variation that was first used by PACT and TDICI was "royalty on sales". Under
this, the company was given a conditional loan. If the project was successful, the
company had to pay a % age of sales as royalty and if it failed then the amount was
written off. In structuring a deal, it is important to listen to what the entrepreneur
wants, but the venture capital comes up with his own solution. Even for the proposed
investment amount, the venture capital decides whether or not the amount requested,
is appropriate and consistent with the risk level of the investment. The risks should be
analyzed, taking into consideration the stage at which the company is in and other
factors relating to the project. (eg exit problems, etc).
Post Investment Activities:
Once the deal has been structured and agreement finalized, the venture capitalist
generally assumes the role of a partner and collaborator. He also gets involved in
shaping of the direction of the venture. The degree of the venture capitalist's
involvement depends on his policy. It may not, however, be desirable for a venture
capitalist to get involved in the day-to-day operation of the venture. If a financial or
managerial crisis occurs, the venture capitalist may intervene, and even install a new
management team.
Exit:
Venture capitalists generally want to cash-out their gains in five to ten years after the
initial investment. They play a positive role in directing the company towards
particular exit routes. A venture may exit in one of the following ways:
1. Initial Public Offerings (IPOs)
2. Acquisition by another company
3. Purchase of the venture capitalist's shares by the promoter,
4. Purchase of the venture capitalist's share by an outsider
Objective No.2
Scalability
The Indian software segment has recorded an impressive growth over the last few
years and earns large revenues from its export earnings, yet our share in the global
market is less than 1 per cent. Within the software industry, the value chain ranges
from body shopping at the bottom to strategic consulting at the top. Higher value
addition and profitability as well as significant market presence take place at the
higher end of the value chain. If the industry has to grow further and survive the flux
it would only be through innovation. For any venture idea to succeed there should be
a product that has a growing market with a scalable business model. The IT industry
(which is most suited for venture funding because of its "ideas" nature) in India till
recently had a service centric business model. Products developed for Indian markets
lack scale.
Mindsets
Venture capital as an activity was virtually non-existent in India. Most venture capital
companies want to provide capital on a secured debt basis, to established businesses
with profitable operating histories. Most of the venture capital units were offshoots of
financial institutions and banks and the lending mindset continued. True venture
capital is capital that is used to help launch products and ideas of tomorrow. Abroad,
this problem is solved by the presence of `angel investors. They are typically wealthy
individuals who not only provide venture finance but also help entrepreneurs to shape
their business and make their venture successful.
Exit
The exit routes available to the venture capitalists were restricted to the IPO route.
Before deregulation, pricing was dependent on the erstwhile CCI regulations. In
general, all issues were under priced. Even now SEBI guidelines make it difficult for
pricing issues for an easy exit. Given the failure of the OTCEI and the revised
guidelines, small companies could not hope for a BSE/ NSE listing. Given the dull
market for mergers and acquisitions, strategic sale was also not available.
Valuation
The recent phenomenon is valuation mismatches. Thanks to the software boom, most
promoters have sky high valuation expectations. Given this, it is difficult for deals to
reach financial closure as promoters do not agree to a valuation. This coupled with the
fancy for software stocks in the bourses means that most companies are preponing
their IPOs. Consequently, the number and quality of deals available to the venture
funds gets reduced
Some other major problems facing by venture capitalist in India are:
a. Requirement of an experienced management team.
b. Requirement of an above average rate of return on investment.
Longer payback period.
c. Uncertainty regarding the success of the product in the market.
d. Questions regarding the infrastructure details of production like plant location,
accessibility, relationship with the suppliers and creditors, transportation
facilities, labour availability etc.
e. The category of potential customers and hence the packaging and pricing
details of the product.
f. The size of the market.
g. Major competitors and their market share.
[Source Pandey, I. M., Venture Capital The Indian Express VIth Edition (2006)]]
Objective No. 3
Nadu.
The
other
states
are
to
follow
soon.
In the year 2000, the finance ministry announced the liberalization of tax treatment for
venture capital funds to promote them & to increase job creation. This is expected to
give a strong boost to the non resident Indians located in the Silicon Valley and
elsewhere to invest some of their capital, knowledge and enterprise in these ventures.
A Bangalore based media company, Gray cell Ltd., has recently obtained VC
investment totaling about $ 1.7 mn. The company would be creating and marketing
branded web based consumer products in the near future.
The following points can be considered as the harbingers of VC financing in India:a. Existence of a globally competitive high technology.
b. Globally competitive human resource capital.
f. Initiatives of the SEBI to develop a strong and vibrant capital market giving
the adequate liquidity and flexibility for investors for entry and exit.
In a recent survey it has been shown that the VC investments in India's I.T. - Software
and services sector (including dot com companies)- have grown from US $ 150 million
in 1998 to over US$ 1200 million in 2008. The credit can be given to setting up of a
National Venture Capital Fund for the Software and I.T. Industry (NFSIT) in association
with various financial institutions of Small Industries and Development Bank of India
(SIDBI). The facts reveal that VC disbursements as on September 30, 2002 made by
NFSIT totaled Rs 254.36 mn.
Source www.evaluesevrve.com
Findings
During the preparation of my report I have analyzed many things which are
following:
A number of people in India feel that financial institution are not only
conservatives but they also have a bias for foreign technology & they do not trust
on the abilities of entrepreneurs.
Some venture fails due to few exit options. Teams are ignorant of international
standards. The team usually a two or three man team. It does not possess the
required depth In top management. The team is often found to have technical
skills but does not possess the overall organization building skills team is often
short sited.
Limitations of Study
1. The biggest limitation was time because the time was not sufficient as there
was lot of information to be got & to have it interpretation
2. The data required was secondary & that was not easily available.
3. Study by its nature is suggestive & not conclusive
4. Expenses were high in collecting & searching the data.
Suggestions
1. The investment should be in turnaround stage. Since there are many
sick industries in India and the number is growing each year, the
venture capitalists that have specialized knowledge in management can
help sick industries. It would also be highly profitable if the venture
capitalist replace management either good ones in the sick industries.
2. It is recommended that the venture capitalists should retain their basic
feature that is tasking high risk. The present situation may compel
venture capitalists to opt for less risky opportunities but is against the
spirit of venture capitalism. The established fact is big gains are
possible in high risk projects.
3. There should be a greater role for the venture capitalists in the
promotion of entrepreneurship. The Venture capitalists should promote
entrepreneur forums, clubs and institutions of learning to enhance the
quality of entrepreneurship.
Bibliography
1. JOURNALS
APPLIED
FINANCE
VENTURE
STAGE
INVESTMENT
2. BOOKS
www.indiainfoline.com
www.vcapital.com
www.investopedia.com
www.vcinstitute.com
ANNEXURE I
Venture capital firms
Examples of venture capital firms include:
Accede Partners
Austin Ventures
Atlas Venture
Battery Ventures
Benchmark Capital
Fidelity Ventures
Health Cap
Hummer Wimbled
Sequoia Capital
Trelys
ANNEXURE II
Some important Venture Capital Funds in India
1. APIDC Venture Capital Limited, , Babukhan Estate, Hyderabad 500 001
2. Canbank Venture Capital Fund Limited, IInd Floor, Kareem Towers, Bangalore.
3. Gujarat Venture Capital Fund 1997, Ashram Road, Ahmedabad 380 009
4. Industrial Venture Capital Limited, Thyagaraya Road, Chennai 600 017
5. Gujarat Venture Capital Fund 1995 Ashram Road Ahmedabad 380 009
6. Karnataka Information Technology Venture Capital Fund Cunningham Rd Bangalore
7. India Auto Ancillary Fund Nariman Point, Mumbai 400 021
8. Information Technology Fund, Nariman Point, Mumbai 400021
9. Tamilnadu InfoTech Fund Nariman Point, Mumbai 400021
10. Orissa Venture Capital Fund Nariman Point Mumbai 400021
11. Uttar Pradesh Venture Capital Fund Nariman Point, Mumbai 400021
12. SICOM Venture Capital Fund Nariman Point Mumbai 400 021
Conclusion
Venture capital can play a more innovation and development role in a developing
country like India. It could help the rehabilitation of sick unit through people with
ideas and turnaround management skill. A large number of small enterprises in India
because sick unit even before the commencement of production of production.
Venture capitalist could also be in line with the developments taking place in their
parent companies.
Yet another area where can play a significant role in developing countries is the
service sector including tourism, publishing, healthcare etc. they could also provide
financial assistance to people coming out of the universities, technical institutes etc.
who wish to start their own venture with or without high-tech content, but involving
high risk. This would encourage the entrepreneurial spirit. It is not only initial funding
which is need from the venture capitalists, but the should also simultaneously provide
management and marketing expertise-a real critical aspect of venture capitalists, but
they also simultaneously provide management and marketing expertise-a real critical
aspect of venture capital in developing countries. Which can improve their
effectiveness by setting up venture capital cell in R&D and other scientific generation,
providing syndicated or consortium financing and acing as business incubators.