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Symbiosis International University

Name :AKSHAY AGARWAL

Submitted To : Dr.BhartiAhuja

DECLARATION

I, (AkshayAgarwal) student of BBA of (SYMBIOSISINTERNATIONAL UNIVERSITY), hereby declare that the Assignment On Venture Capitalis submitted by me for the partialfulfillment of course objectives for the(BBA)Degree.

I assure that this project is the result of our own efforts and all the information and facts furnished in this Project are based on our intensive study.

Date: 09.02.2012

Name:Akshay Agarwal

ACKNOWLEDGEMENT

I, (Akshay Agarwal), express my sincere gratitude to Dr.BhartiAhuja for giving me the opportunity to work under his guidance onthe Assignment on Venture Capital. I am grateful to Teachers and other friends for their valuable suggestions in the execution of project work.

I am also thankful to other staff that guided and helped me very kindly at each and every step whenever we required.

I also acknowledge & convey thanks to the library staff, computer department of SYMBIOSIS INTERNATIONALUNIVERSITY for their king and valuable support.

Date: 09.02.2012

Name:-Akshay Aagrwal

What Is Venture Capital?


The composer of the term "venture capital" is unknown, and there is no standard definition of it. It is, however, generally agreed that the traditional venture-capital era began in earnest in 1946, when General Georges Doriot, Ralph Flanders, Karl Compton, Merrill Griswold and others organized American Research & Development (AR&D), the first (and, after it went public, for many years the only) public corporation specializing in investing in illiquid securities of early stage issuers. One way to define traditional "venture capital," therefore, is to repeat General Doriot's rules of investing, the thought being that an investment process entailing Doriot's rules is, by definition, a venture-capital process. According to Doriot, investments considered by AR&D involved:

new technology, new marketing concepts, and new product application possibilities; a significant, although not necessarily controlling, participation by the investors in the company's management; investment in ventures staffed by people of outstanding competence and integrity (herein the rule often referred to in venture capital as "bet the jockey, not the horse"); products or processes which have passed through at least the early prototype stage and are adequately protected by patents, copyrights, or trade-secret agreements (the latter rule is often referred to as investing in situations where the information is "proprietary" (proprietary information)); situations which show promise to mature within a few years to the point of an initial public offering or a sale of the entire company (commonly referred to as the "exit strategy"); opportunities in which the venture capitalist can make a contribution beyond the capital dollars invested (often referred to as the "value-added strategy").

General Doriot's boundary conditions are to be treated with great deference because it is commonly agreed that Doriot is the single most significant figure in postwar traditional venture capital. Not only did he provide AR&D with its primary guidance (until it was acquired by Textron), but he also introduced a significant percentage of today's senior venture capitalists to the business through the courses he taught at Harvard Business School. And he showed the world how a traditional venture-capital investment strategy could produce enormous rewards when AR&D's modest investment in Digital Equipment Corporation (DEC) ballooned into investor values in the billions. Parenthetically, in the eyes of the public of his day, Doriot's record at AR&D included only a few "home runs"-DEC in particular-and a bunch of losers, leading inexperienced observers to conclude that a well-managed venture portfolio should concentrate on the long ball, so to speak-

the one investment that will return two or three hundred times one's money and justify a drab performance by the rest of the portfolio. This fallacious conclusion fostered the 1960s notion that an ultra-high-risk strategy is characteristic of venture-capital investing, with managers plunging exclusively into new and untried schemes with the hope of "winning big" every now and then. In fact, the AR&D strategy was never tied to the solo home run. Moreover, venture strategies have become highly varied. Some venture pools focus in whole or in part on late-round investments: infusions of cash shortly before the company is planning to go public, for example. Moreover, as outlined subsequently, buyouts involving mature firms are a popular venture strategy, as are socalled turnarounds, investments in troubled companies, including some actually in bankruptcy. And some funds are hybrids, sharing more than one strategy, even including a portion of the assets invested in public securities. The point is that a venture manager balances risk against reward; a "pre-seed" investment should forecast sensational returns, while a late-round purchase of convertible debt will promise a more modest payoff. The term "venture capital" is grammatically multifaceted. General Doriot's exegesis specifies a certain type of investment as characteristic of the venture universe. He assumes, a priori, the proposition that venture capital involves a process, the making and managing (and ultimately selling) of investments. In addition, the phrase is sometimes used as an adjective applied to players in the game; that is, "venture-backed companies," meaning the portfolio opportunities in which the venture-capital partnerships or "funds" invest. The phrase becomes a noun when it describes the capital provided by individuals, families, and firms, which entities, along with the partnership managers, are called venture capitalists. In terms of the people involved, venture capital is an intense business. The symbiotic relationship between the venture capitalist and his investment (assuming he is the "lead investor," meaning the investor most closely identified with the opportunity) is such that each professional can carry a portfolio of no more than a handful of companies. The investors are usually experienced professionals with formal academic training in business and finance and on-the-job training as apprentices at a venture fund or financial institution. Their universe is still relatively small; they and their advisers tend to be on a first-name basis, veterans of a deal or two together. And the work is hard, particularly since on-site visits impose an enormous travel burden. The venture-capital process, before it was so labeled, has existed for centuries; antedating American Research & Development, it is as old as commercial society itself. In the last century, for example, Vanderbilt interests financed Juan Trippe in the organization of Pan American Airways, Henry Ford was financed by Alexander Malcolmson, and Captain Eddie Rickenbacker was able to organize Eastern Airlines in the 1930s with backing from the Rockefellers. However, the era of professionally managed venture capital-pools of money contributed by unrelated investors and organized into separate legal entities, managed by experts according to stated objectives, set forth in a contract between managers and investors, describing a structured activity, an activity that conforms to definite (albeit changing) patterns and rules-is a process that dates from the organization of AR&D. In sum, the term venture capital can be applied in a number of ways: to investments, people, or activities. With full appreciation for the multiple uses of the term, the thrust and emphasis of this book (although by no means exclusively) is on venture capital of the type which is compatible

with the Doriot rules. First, venture capital is an activity involving the investment of funds. It ordinarily involves investments in illiquid securities, which carry higher degrees of risk (and commensurately higher possibilities of reward) than so-called traditional investments in the publicly traded securities of mature firms. The venture-capital investor ordinarily expects that his participation in the investment (or the participation of one of the investors in the group which he has joined, designated usually as the "lead investor") will add value, meaning that the investors will be able to provide advice and counsel designed to improve the chances of the investment's ultimate success. The investment is made with an extended time horizon, required by the fact that the securities are illiquid. (In this connection, most independent venture funds are partnerships scheduled to liquidate ten to twelve years from inception, in turn suggesting that a venture-capital investment is expected to become liquid somewhere around four to six years from initial investment.) Since the most celebrated rewards in the past have generally accrued to investments involving advances in science and technology to exploit new markets, traditional venture-capital investment is often thought of as synonymous with high-tech start-ups. However, as stated earlier, that is not an accurate outer boundary, even in the start-up phase. For example, the technology of one of the great venture-capital winners-Federal Express-is as old as the Pony Express, and it would take a great stretch of the imagination to perceive of fast-food chains such as McDonald's as involving additions to our store of scientific learning. But, whether high or low tech, the traditional venture capitalist thrives when the companies in which he invests have an advantage over potential competition in a defined segment of the market, often referred to as a "niche." The product or service is as differentiated as possible, not a "commodity." Exploitation of scientific and technological breakdowns has, historically, been a principal way (but not the only way) for emerging companies to differentiate themselves from their more mature and better-financed competitors.
The Origin of Venture Capital In the 1920's & 30's, the wealthy families of and individuals investors provided the start up money for companies that would later become famous. Eastern Airlines and Xerox are the more famous ventures they financed. Among the early VC funds set up was the one by the Rockfeller Family which started a special fund called VENROCK in 1950, to finance new technology companies. General Doriot, a professor at Harvard Business School, in 1946 set up the American Research and Development Corporation (ARD), the first firm, as opposed to a private individuals, at MIT to finance the commercial promotion of advanced technology developed in the US Universities. ARD's approach was a classic VC in the sense that it used only equity, invested for long term, and was prepared to live with losers. ARD's investment in Digital Equipment Corporation (DEC) in 1957 was a watershed in the history of VC financing. While in its early years vc may have been associated with high technology, over the years the concept has undergone a change and as it stands today it implies pooled investment in unlisted companies. Venture Capital in India In India the Venture Capital plays a vital role in the development and growth of innovative entrepreneurships. Venture Capital activity in the past was possibly done by the developmental financial institutions like IDBI, ICICI and State Financial Corporations. These institutions promoted entities in the private sector with debt as an instrument of funding.

For a long time funds raised from public were used as a source of Venture Capital. This source however depended a lot on the market vagaries. And with the minimum paid up capital requirements being raised for listing at the stock exchanges, it became difficult for smaller firms with viable projects to raise funds from public. In India, the need for Venture Capital was recognised in the 7th five year plan and long term fiscal policy of GOI. In 1973 a committee on Development of small and medium enterprises highlighted the need to faster VC as a source of funding new entrepreneurs and technology. VC financing really started in India in 1988 with the formation of Technology Development and Information Company of India Ltd. (TDICI) - promoted by ICICI and UTI. The first private VC fund was sponsored by Credit Capital Finance Corporation (CFC) and promoted by Bank of India, Asian Development Bank and the Commonwealth Development Corporation viz. Credit Capital Venture Fund. At the same time Gujarat Venture Finance Ltd. and APIDC Venture Capital Ltd. were started by state level financial institutions. Sources of these funds were the financial institutions, foreign institutional investors or pension funds and high net-worth individuals. The venture capital funds in India are listed in Annexure I. Venture Capital Investments in India The venture capital investment in India till the year 2001 was continuously increased and thereby drastically reduced. Chart I shows that there was a tremendous growth by almost 327 percent in 1998-99, 132 percent in 1999-00, and 40 percent in 2000-01 there after venture capital investors slow down their investment. Surprisingly, there was a negative growth of 4 percent in 2001-02 it was continued and a 54 percent drastic reduction was recorded in the year 2002-2003. Chart I Venture Capital Investments

Source: The Economic Times

SEBI Venture Capital Funds (VCFs) Regulations, 1996 A Venture Capital Fund means a fund established in the form of a trust/company; including a body corporate, and registered with SEBI which (i) has a dedicated pool of capital raised in a manner specified in the regulations and (ii) invests in venture capital undertakings (VCUs) in accordance with these regulations. A Venture Capital Undertakingmeans a domestic company (i) whose shares are not listed on a recognised stock exchange in India and (ii) which is engaged in the business of providing services/production/manufacture of articles/things but does not include such activities/sectors as are specified in the negative list by SEBI with government approvalnamely, real estate, non-banking financial companies (NBFCs), gold financing, activities not

permitted under the industrial policy of the Government and any other activity which may be specified by SEBI in consultation with the Government from time to time. Registration All VCFs must be registered with SEBI and pay Rs.25,000 as application fee and Rs. 5,00,000 as registration fee for grant of certificate. Recommendations of SEBI (Chandrasekhar) Committee, 2000 SEBI appointed the Chandrasekhar Committee to identify the impediments in the growth of venture capital industry in the country and suggest suitable measures for its rapid growth. Its report was submitted in January, 2000. The recommendations pertain to 1. Harmonisation of multiplicity of regulations 2. VCF structures 3. Resource raising 4.Investments 5.Exit 6.SEBI regulations 7. Company law related issues and 8. Other related issues. Types of Venture Capital Funds Generally there are three types of organized or institutional venture capital funds: venture capital funds set up by angel investors, that is, high net worth individual investors; venture capital subsidiaries of corporations and private venture capital firms/ funds. Venture capital subsidiaries are established by major corporations, commercial bank holding companies and other financial institutions. Venture funds in India can be classified on the basis of the type of promoters. 1 . VCFs promoted by the Central govt. controlled development financial institutions such as TDICI, by ICICI, Risk capital and Technology Finance Corporation Limited (RCTFC) by the Industrial Finance Corporation of India (IFCI) and Risk Capital Fund by IDBI. 2. VCFs promoted by the state government-controlled development finance institutions such as Andhra Pradesh Venture Capital Limited (APVCL) by Andhra Pradesh State Finance Corporation (APSFC) and Gujarat Venture Finance Company Limited (GVCFL) by Gujarat Industrial Investment Corporation (GIIC) 3. VCFs promoted by Public Sector banks such as Canfina by Canara Bank and SBI-Cap by State Bank of India. 4. VCFs promoted by the foreign banks or private sector companies and financial institutions such as Indus Venture Fund, Credit Capital Venture Fund and Grindlay's India Development Fund. The Venture Capital Investment Process: The venture capital activity is a sequential process involving the following six steps. 1. 2. 3. 4. Deal origination Screening Due diligence Evaluation) Deal structuring

5. Post-investment activity 6. Exist

Venture Capital Investment Process 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 organisaions, 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: In this process, the venture capitalist and the venture company negotiate the terms of the deals, that is, the amount, form and price of the investment. This process is termed as deal structuring. The agreement also include the venture capitalist's right to control the venture company and to change its management if needed, buyback arrangements, acquisition, making initial public offerings (IPOs), etc. Earned out arrangements specify the entrepreneur's equity share and the objectives to be achieved. 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 dayto-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. 2. 3. 4. Initial Public Offerings (IPOs) Acquisition by another company Purchase of the venture capitalist's shares by the promoter, or Purchase of the venture capitalist's share by an outsider.

Methods of Venture Financing Venture capital is typically available in three forms in India, they are: 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. Income Note : It is a hybrid security which combines the features of both conventional loan and conditional loan. The entrepreneur has to pay both interest and royalty on sales, but at substantially low rates. Other Financing Methods: A few venture capitalists, particularly in the private sector, have started introducing innovative financial securities like participating debentures, introduced by TCFC is an example. A Case on Technology Development & Information Company Of India Ltd. TDICI was incorporated in January 1988 with the support of the ICICI and the UTI. The country's first venture fund managed by the TDICI called VECAUS ( Venture Capital Units Scheme) was started with an initial corpus of Rs.20 crore and was completely committed to 37 small and medium enterprises. The first project of the TDICI was loan and equity to a computer software company called Kale Consultants. Present Status: At present the TDICI is administering two UTI mobilised funds under VECAUS-I and II, totaling Rs.120 crore. the Rs.20 crore invested under the first fund, VECAUS-I, has already yielded returns totaling Rs. 16 crore to its investors. Some of the projects financed by the TDICI are discussed below. MASTEK , a Mumbai based software firm, in which the TDICI invested Rs.42 lakh in equity in 1989, went public just three years later, in November 1992. It showed an annual growth of 70-80 percent in the turnover. TEMPTATION FOODS, located in PUNE, which exports frozen vegetables and fruits, went public in November 1992. The TDICI invested Rs.50 lakh in its equity. RISHABH INSTRUMENTS of Nasik got Rs.40 lakh from the TDICI. It manufactures a range of meters used in power stations in collaboration with the ABB Metra Watt of Germany. After making cash losses totaling Rs.25 lakh in two bad years, it turned around in 1989 and showed an increase of over 70 percent in the turnover. SYNERGY ART FOUNDATION, which runs art galleries in Mumbai and Chennai and plans to set up in Pune and Delhi too, had received Rs.25 lakh from the TDICI as convertible loans which were converted into equity on march 31, 1994. Most of this money has been used for the company's innovative art library scheme at least paintings to corporate clients. Conclusion In recent years the growth of Venture Capital Business has been drastically decreasing due to many reasons. The regulator has to liberalize the stringent policies and pave the way to the venture capital investors to park their funds in most profitable ventures. Though an attempt was also made to raise funds from the public and fund new ventures, the venture capitalists had hardly any impact on the economic scenario for the next few years. At present many investments of venture capitalists in India remain on paper as they do not have any means of exit. Appropriate changes have to be made to the existing systems in

order that venture capitalists find it easier to realize their investments after holding on to them for a certain period of time. (The author acknowledges Prof. R K Mishra, Director, Institute of Public Enterprise, Osmania University, Hyderabad, for his immense help and encouragement and Dr. S SS Kumar, Assistant Professor, Finance and Accounting Area, Indian Institute of Management, Kozhikode, for his motivation and inspiration) Annexure I Some important Venture Capital Funds in India 1. APIDC Venture Capital Limited ,1102, 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. Auto Ancillary Fund Opp. Signals Enclave, New Delhi 110 010 6. Gujarat Venture Capital Fund 1995 Ashram Road Ahmedabad 380 009 7. Karnataka Information Technology Venture Capital Fund Cunningham Rd Bangalore 8. India Auto Ancillary Fund Nariman Point, Mumbai 400 021 9.Information Technology Fund, Nariman Point, Mumbai 400 021 10.TamilnaduInfotech Fund Nariman Point, Mumbai 400 021 11. Orissa Venture Capital Fund Nariman Point Mumbai 400 021 12. Uttar Pradesh Venture Capital Fund Nariman Point, Mumbai 400 021 13. SICOM Venture Capital Fund Nariman Point Mumbai 400 021 14. Punjab Infotech Venture Fund 18 Himalaya Marg, Chandigarh 160 017 15. National Venture Fund for Software and Information Technology Industry, Nariman Point, Mumbai 400 021

Norwestwest Venture Partners:


Norwest Venture Partners (NVP) is a global, multi-stage investment firm that manages more than $3.7 billion in capital. Based in Palo Alto, California, the firm has subsidiaries in Mumbai and Bengaluru, India and Herzelia, Israel. NVP makes early to late stage venture and growth equity investments in U.S. and global companies across a wide range of sectors including: information technology, business services, financial services and consumer. NVP has actively partnered with entrepreneurs to build great businesses for more than 50 years and has funded over 500 companies since inception.
FOUNDED 1961 INVESTMENT REGIONS Global (U.S., India, Israel, China); more than 65 active portfolio companies globally; 500 companies since Inception.

CAPITAL UNDER MANAGEMENT $3.7 billion; (Current fund $1.2 billion)

INVESTMENT STAGE Early-stage venture projects with world-class technologies and entrepreneurs; later-stage companies with existing customers, strong sales and top tier management and co-investors; growth equity companies with strong market positions, significant revenue and net income traction. INVESTMENT FOCUS Systems and IT Infrastructure (Communications Systems, Enterprise Systems, Semiconductor & Components, Storage, Security, Cloud Infrastructure and Mobile); Software (SaaS/Cloud, Application Software, Enterprise Software and Mobile); Internet & Consumer (Enabling Internet Technologies, Consumer Services, Media, Mobile, Gaming and Retail &eCommerce); Services (Technology Enabled Services, Communications Services, Infrastructure Services and Financial Services); Healthcare; Energy Technology ABOUT NVP INVESTMENT TEAM NVPs seasoned investment professionals pride themselves on funding disruptive, game changing companies. The team has a combination of deep operational and financial experience, industry knowledge and late stage investment expertise, which gives NVP real-world insight into the business issues facing todays companies. Managing Partner PromodHaque was ranked as a top dealmaker on the annual Forbes Midas List for nine years, and in 2004, Forbes named him the #1 venture capitalist. General Partner Matt Howard appeared on the Forbes Midas List for three years, and Managing Partner George Still marked his fourth appearance on the list in 2011, the same year that Partner Tim Chang made his Midas debut. INVESTMENT TEAM
Robert Abbott, General Partner Kurt Betcher, Administrative Partner and CFO Sonya Tarnow Brown, Partner Timothy Chang, Partner Jeff Crowe, General Partner Casper de Clercq, Partner VabGoel, General Partner Joshua Goldman, General Partner PromodHaque, Managing Partner Dr. Ryan A. Harris, Partner Jon Kossow, General Partner Matthew Howard, General Partner Jim Lussier, General Partner Venkat Mohan, General Partner Sergio Monsalve, Principal DrorNahumi, Partner George Still, Managing Partner David Su, Vice President

NVP INDIA TEAM


Sohil Chand, Managing Director, NVP India Mohan Kumar, Executive Director, NVP India

Niren Shah, Managing Director, NVP India Sumer Juneja, Vice President, NVP India

NVP VALUE PROPOSITION 50-year track record of collaborating with entrepreneurs to build great companies Consistently ranked in the top quartile of VC firms Strong network of global relationships and extreme dedication to its companies Deep operating and financial experience

REPRESENTATIVE PAST INVESTMENTS