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Venture capital is capital typically provided by outside investors for financing of new.A venture capitalist (VC) is a person who makes such investments. Finance may be required for the startup. . development/expansion or purchase of a company via a mechanism such as in a management buyout.VENTURE CAPITAL Venture capital is a means of financing fast-growing private companies.Venture capital investments generally are high risk investments but offer the potential for above average returns.A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. 10/22/2010 3 . . . growing or struggling businesses. .

The growth was aided in large part by the creation in 1958 of the federal Small Business Investment Company program. relying primarily on the resources of wealthy families. The number of such specialized investment firms. In 1946. began to boom in the late 1950s. Hundreds of SBICs were formed in the 1960s.HISTORY OF VC USA is the birth place of Venture Capital Industry as we know it today. eventually to be called venture capital firms. ARD was eventually profitable.8 percent annual rate of return over its twenty-five years as an independent firm. and many remain in operation today. 10/22/2010 4 . During most its historical evolution. providing its original investors with a 15. a publicly traded. American Research and Development Corporation (ARD). the market for arranging such financing was fairly informal. ARD's best known investment was the start-up financing it provided in 1958 for computer maker Digital Equipment Corp. closed-end investment company was formed.

Thereafter some public sector funds were set up but the activity of venture capital did not gather momentum as the thrust was on high-technology projects funded on a purely financial rather than a holistic basis. 10/22/2010 5 . public offerings and lending by the financial institutions. individual investors and development financial institutions played the role of venture capitalists in India. In 1973 a committee on Development of Small and Medium Enterprises highlighted the need to foster venture capital as a source of funding new entrepreneurs and technology. Entrepreneurs have largely depended upon private placements.VENTURE CAPITAL: INDIAN CONTEXT Early Beginnings In the absence of an organised Venture Capital industry till almost 1998.

Further. However. 1996. based on which the Government of India took a policy initiative and announced guidelines for Venture Capital Funds (VCFs) in India in 1988. guidelines were also issued by the Central Board of Direct Taxes (CBDT) and the investments and flow of foreign currency into and out of India have been governed by the Reserve Bank of India's (RBI) requirements. the Government of India issued guidelines in September 1995 for overseas investment in Venture Capital in India. these guidelines restricted setting up of VCFs by the banks or the financial institutions only. the Securities and Exchange Board of India (SEBI) framed the SEBI (Venture Capital Funds) Regulations. These guidelines were further amended in Apr 2000 with the objective of fuelling the growth of Venture Capital activities in India.VENTURE CAPITAL: INDIAN CONTEXT Regulatory Guidelines & Framework Later. For tax-exemption purposes. as a part of its mandate to regulate and to develop the Indian capital markets. Thereafter. a study was undertaken by the World Bank to examine the possibility of developing Venture Capital in the private sector. 10/22/2010 6 .

3 billion. understood globally as "independently managed. till 1998. dedicated pools of capital that focus on equity or equity-linked investments in privately held. Figures available from private sources indicate that overall funds committed are around US$ 1. Investible funds are less than 50% of the committed funds and actual investments are lower still . However.VC IN INDIA ± POLICY SUPPORT Industry Size. Some overseas investment has also come through the Mauritius route. high-growth companies". around Rs. 30 billion had been committed by domestic VCFs and offshore funds which are members of IVC]. some domestic VCFs were registered with SEBI. 10/22/2010 7 . Figures from the Indian Venture Capital Association (IVCA) show that. the venture capital industry. is relatively in a nascent stage in India. Activity and Participants Pursuant to the regulatory framework mentioned above.

in his 1999 budget speech. Also keeping in view the need for a global perspective it was decided to associate Indian entrepreneurs from Silicon Valley in the committee. 10/22/2010 8 . The Finance Minister of India. there is an acute need for higher investment in venture capital activities. there is undoubtedly tremendous potential for venture capital activity in India." The SEBI committee on Venture Capital was set up in July. announced that "for boosting high-tech sectors and supporting first generation entrepreneurs. 1999 to identify the impediments and suggest suitable measures to facilitate the growth of venture capital activity in India.VC IN INDIA ± POLICY SUPPORT Policy Support Given the proper environment and policy support.

This makes it a high-risk. therefore.Venture capitalists provide networking. . high return investment.This very blend of risk financing and hand holding of entrepreneurs by venture capitalists creates an environment particularly suitable for 10/22/2010 9 knowledge and technology based enterprises. information and complementary resources. in return for the provision of capital. . In the broadest sense.VC. management and marketing support as well. venture capital connotes financial as well as human capital.IN INDIA ± OBJECTIVES AND VISION Venture capital is valuable not just because it makes risk capital available at the early stages of a project but also because of the expertise of venture capitalist that leads to superior product development.Venture capitalists finance innovation and ideas which have potential for high growth but with inherent uncertainties.In the global venture capital industry. . . . . skills. investors and investee firms work together closely in an enabling environment that allows entrepreneurs to focus on value creating ideas and allows venture capitalists to drive the industry through ownership of the levers of control.

The venture capitalist is experienced in the process of preparing a company for an initial public offering (IPO) and facilitating in trade sales.The venture capitalist is able to provide strategic. providing contacts in international markets. ‡ Mentoring . co-investments with other venture capital firms when additional rounds of financing are required. ‡ Facilitation of Exit .The venture capitalist is a business partner. sharing the risks and rewards. operational and financial advice to the company based on past experience with other companies in similar situations. introductions to strategic partners and.ADVANTAGES OF VENTURE CAPITAL Venture capital has a number of advantages over other forms of finance. The venture capitalist may also be capable of providing additional rounds of funding should it be required to finance growth. which provides a solid capital base for future growth. such as : ‡ Finance . if needed. ‡ Alliances . such as in recruiting key personnel.The venture capitalist also has a network of contacts in many areas that can add value to the company. 10/22/2010 10 .The venture capitalist injects long-term equity finance. Venture capitalists are rewarded by business success and the capital gain. ‡ Business Partner .

motivated management teams clear strategies large but carefully defined target markets proven abilities to outperform the competition innovation 11 10/22/2010 . At its best.WHAT DO VC¶S LOOK IN AN ENTREPRENEUR ? '(Venture capital) certainly isn't about quick trading profits in the stock market. Executive Chairman. Castle Harlan Australian Mezzanine Partners Here's what member funds are likely to look for when they talk to entrepreneurs with fresh idea : ± ± ± ± ± strong.µ Bill Ferris. it is about helping entrepreneurs grow really great companies.

as a venture capitalist typically seeks : ± Superior Businesses ± Quality and Depth of Management ± Corporate Governance and Structure ± Venture capitalists are put off by complex corporate structures without a clear ownership and where personal and business assets are merged. ± Appropriate Investment Structure ± An Exit Plan 10/22/2010 12 .What does a VC look for? Venture capital is not suitable for all businesses.

not to expect a speedy response. Negotiating Investment. Preliminary Screening. It is important. 1. If so. The investment process can take up to three months. a meeting will be arranged with the entrepreneur/management team to discuss the business plan.What does the Investment Process entail ? The investment process begins with the venture capitalist conducting an initial review of the proposal to determine if it fits with the firm's investment criteria. Approvals and Investment Completed. 10/22/2010 13 . and 3. It is advisable to plan the business financial needs early on to allow appropriate time to secure the required funding. and sometimes longer. therefore. 2.

major debt obligations and significant variations of plans). Matters requiring venture capitalist approval (such as auditors. Composition of the board of directors. Rights of CO-sale Warranties. annual budgets. Liquidity (exit) plans. Reporting . This could include : ± ± ± ± ± ± ± ± Amount and terms of investment.What does the Investment Process entail ? Contd« What are the various Legal Terms used while drafting an Agreement ? It is likely that a shareholders' agreement would be prepared containing the rights and obligations of each party. major asset purchases. employment contracts. Dividend reports. monthly accounts. 14 10/22/2010 .

Media/Entertainment .Software Products (Mainly Enterprise-focused) .Banking .AREAS OF INDIAN VC INVESTMENT .Retail 10/22/2010 15 .Pharmaceuticals .IT and IT-enabled services .Bio Technology/Bio Informatics .PSU Disinvestments .Wireless/Telecom/Semiconductor .Electronic Manufacturing .

Financial projections 9. Executive Summary 2. Background on the company 3. The management team 8. Market analysis 5. Amount and use of finance required and exit opportunities 10/22/2010 16 . Business operations 7. Marketing 6. The product or service 4.What are essential areas to be covered in your business plan? 1.

Most importantly.INDIAN VC INDUSTRY ISSUES AND CHALLENGES Indian VC yet to be established as a sustainable asset class among institutional investors. like Israel has successfully done 10/22/2010 17 . Exit challenges exist mainly due to shallow capital markets and dull M&A environment for small companies. Moreover a limited amount of true ³risk-capital´ impacts entrepreneurial activity. India is yet to create a brand-name for IPled companies.

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