A

PROJECT REPORT
ON

STUDY ON VENTURE CAPITAL
MASTERS OF COMMERCE
BANKING & FINANCE
PART -1
2015-2016
SUBMITTED BY:

JIGNA M. BHANUSHALI
ROLL NO – 01
PROJECT GUIDE

MR. BOSCO PETTER
SK SOMAIYA COLLEGE OF ARTS SCIENCE AND
COMMERCE, VIDYAVIHAR (EAST), MUMBAI – 400077

1

CERTIFICATE
This is to certify that MS. JIGNA M. BHANUSHALI of M.Com (BANKING
AND FINANCE) Semester- 1(2015-16) has successfully completed the project on
Study on venture capital under the guidance of Mr. Bosco petter

________________

________________

Course Coordinator

Principal

________________
Project Guide/Internal Examiner
_______________
External Examiner
Date:

2

DECLARATION

I JIGNA M. BHANUSHALI student of class in M.com (BANKING &
FINANCE) PART 1 (SEM-1), ROLL NO.01 , academic year 2015-2016
Studying at S.K. SOMAIYA COLLEGE OF ARTS, SCIENCE AND
COMMERCE, hereby declare that the work done on the project Entitled “Study
on VENTURE CAPITAL” is true and original and any Reference used in this
project is duly acknowledged.

Date:
Place:
_________________
Student Signature
JIGNA M. BHANUSHALI
Roll No. 01

3

ACKNOWLEDGEMENT
Talent and capabilities are of course necessary but opportunities and good guidance
is very important things without which no person can climb those infant ladders
towards progress.
With regard to my project I would like to thank each and every one who offered
help, guidance and support whenever required.
I take immense pleasure in thanking Mr.BOSCO PETTER. and other staff for their
support and guidance in the project work.
I am extremely grateful to my Mr. BOSCO PETTER SIR

for his valuable

guidance and kind suggestions.
Finally and yet importantly I would like to express my heartfelt thanks to my
beloved parents and friends for their blessings, my classmates for their help and
wishes for the successful completion of this project.

_______________
JIGNA M. BHANUSHALI

4

INDEX

SR.NO

PARTICULARS

PAGE

1.
2.
3.
4
5.

NO.
Introduction
9-10
Features of venture capital
11
Venture capital spectrum/stages
12-13
Venture capital investment process
14-15
Difference between venture capital and other funds 16-17

6.
7.
8.
9.
10.
11.
12.
13.

(private equity )
Venture capital in India
Rise of venture capital in India
Regulation of the business of venture capital
Problems of venture capital in India
Problems had to be solved but haven’t solved yet
Case study
Conclusion
Biblography

EXECUTIVE SUMMARY

5

18-20
21-25
26-31
32-33
34-36
37-44
45
46

First I need to clarify: I use venture capital in the title of this post because so many
people in the real world apply the phrase venture capital to any investment that
isn’t friends and family, personal savings, or a business ally establishing a joint
venture. Technically that’s the wrong phrase because venture capital is really only
a small number of professional investment firms charged with professionally
investing other people’s money in startups or growth companies.
Real venture capital is a very rarified subset of investment in startups. Most of it
comes in amounts in millions of dollars, invested in companies that are already
launched, growing, and needing follow-on investment. That happens fewer than
5,000 times in an average year in the U.S. And that 5,000-per-year venture capital
investment compares to roughly six million startups in an average year in the U.S.
If your startup is really a candidate for venture capital, you know that already, and
you know how and where to get it. If you are that one-in-a-million company that
gets venture capital right at the beginning, then hats off; you should be very proud.
What you are probably looking for, if you’re reading this post, is angel investment.
Angel investors invest in about 75,000 startups in an average year, in the U.S.
Angel investments are way more likely than venture capital to occur in a new
company. A first investment in a new company is usually called seed, or seed stage,
and almost all of that is from angel investors.
For more on the difference between venture capital and angel investors, try this
post: What’s the Difference Between Angel Investors and VC?
And for more on what angel investors want, how to approach them, mistakes to
avoid, try this link: articles and posts on angel investors in bplans.com.

6

With that as background, here’s my summary of how to find investors for your
startup:
1. Review your startup’s suitability for investment. You need to have five
essentials: good growth potential, scalability, defensibility, an experienced
and credible management team, and a reasonable prospect for eventual exit.
For more on those, click here. And you have to have them in the eyes of the
investors, not just your own assessment. Many investors would add a sixth:
traction. By that they mean hard evidence of market need and productmarket fit, with users, subscribers, clients, distributors, customers, or
something else, depending on the nature of your business.
2. Have at the very least a lean business plan finished. The lean plan
includes strategy, tactics, milestones, metrics, and essential numbers on
projected sales, spending and cash flow. For working with investors you
should have a summary memo that summarizes that plan, and a pitch deck
ready to go too – both of these are outputs of the plan. Beyond the lean plan,
you’ll want to have an executive summary, a pitch deck, and – unless the
pitch and summary cover these well, additional descriptions of the
management team, competitive edge, and market analysis. If you’re
operating in Internet space in the present market, make sure you are
generating traffic and focusing on marketing much more than profits.
3. Develop your summary. Summaries are critical to the investment process.
You don’t send business plans to investors until they’ve asked for them.
Instead, you send summaries to establish interest. Many investors prefer
emails with a summary memo attached (just a few short paragraphs) to indepth written summaries, so you need to prepare both: a compelling pitch
7

deck to communicate with investors, and a brief but exciting email, one page
at most, outlining the growth prospects, type of business, and potential
investor payoff.
4. Select investors carefully. Don’t shop your plan. Instead, research your
potential angel investors carefully, looking for deal size, industry, and
geographic preferences that match your plan. I suggest you register and
participate in gust.com, an angel investor platform that is free to
entrepreneurs; and also Angel List, 500 Startups, and keep your eyes open
for others.
5. Approach selected investors correctly. For the angels whose criteria match
your plan, find out how they want you to communicate with them. Gust.com
and the others have their own procedures, and it’s good to follow their lead.
Know whether your target investors prefer email summaries, summary
documents, pitch decks, phone calls, or whatever. This is a matter of
millions of dollars, so do it right.
6. Make sure you have a good relationship with an experienced
attorney.You definitely need the right legal help to make a real deal. Make
sure your attorney has been through similar deals; if not, then they should
recommend a specialist instead. Investment deals are serious business.

8

INTRODUCTION

Venture capital (VC) is money provided to seed, early-stage, emerging and
emerging growth companies. The venture capital funds invest in companies in
exchange for equity in the companies it invests in, which usually have a novel
technology

or business

model in

high

technology

industries,

such

as biotechnology and IT. The typical venture capital investment occurs after
the seed funding round as the first round of institutional capital to fund growth
(also referred to as Series A round) in the interest of generating a return through an
eventual exit event, such as an IPO or trade sale of the company. Venture capital is
a type of private equity.[1]
In

addition

with angel

investing, equity

crowdfunding and

other seed

funding options, venture capital is attractive for new companies with limited
operating history that are too small to raise capital in the public markets and have
not reached the point where they are able to secure a bank loan or complete a debt
offering. In exchange for the high risk that venture capitalists assume by investing
in smaller and less mature companies, venture capitalists usually get significant
control over company decisions, in addition to a significant portion of the
company's ownership (and consequently value).
Venture capital is also associated with job creation (accounting for 2% of US
GDP),[2] the knowledge

economy,

and

used

as

a

proxy

measure

of innovation within an economic sector or geography. Every year, there are nearly
2 million businesses created in the USA, and 600–800 get venture capital funding.
9

According to the National Venture Capital Association, 11% of private sector jobs
come from venture-backed companies and venture-backed revenue accounts for
21% of US GDP.
It is also a way in which the private and the public sector can construct an
institution that systematically creates networks for the new firms and industries, so
that they can progress. This institution helps identify and combine pieces of
companies, such as finance, technical expertise, marketing know-how, and
business models. Once integrated, these enterprises succeed by becoming nodes in
the search networks for designing and building products in their domain.

10

Features of Venture Capital

Under venture capital finance the lender provides financial support to a company
which is in early stage of development, though it involves risk but at the same time
is has the potential for generating abnormal returns for venture capitalist. Given
below are some of the features of venture capital –
1. Venture capital involves not only investing money but also active participation
in the management of the company by the person who has made investments in the
company.
2. Venture capitalist divests his or her holding once the investments has generated
returns in accordance with the venture capitalist desired return.
3. Venture Capital Financing is in the form of equity participation rather than
giving it as loan or debt.
4. Venture Capital Financing is usually done for companies which are small level
or medium level and also relatively newly formed companies are the preferred
choice of venture capitalist.
5. Venture capitalist does Venture Capital Financing in order to make a capital gain
on equity investment at the time of exit.

11

VENTURE CAPITAL SPECTRUM / STAGES
Venture Capital Funding is a form of private equity wherein the investor has a
minority interest in the business. Typically it extends over a few years from
ideation to exit.
Clearly there are different stages to venture capital funding of a business. Schilit
review offers an understanding into the various stages of venture capital investing.
Funding varies from stage to stage. Given below is a table of the stages.
Stage

Details

Stage 1: Seed stage

A business idea is funded. This initial funding
is used for product development and market
research.

Stage 2: Early stage financing

Funding is provided for initial operation
before commercial production ensues and
sales begin.

Stage 3: Formative funding

This includes seed stage and early stage
funding.

Stage 4: Later stage funding

Funding provided for commercial operation
and sales, but before an initial public offering
(IPO).

Early stage funding can be either start-up or first stage funding. In start-up
financing capital is provided for initial operations and testing. This would include

12

product development and initial marketing. First stage funding is provided for
initial commercial production and sales.
Under the later stage funding there can be second stage, third stage and mezzanine
funding.
The second stage funding is provided to the company for expansion even though
it is not profitable despite commercial production and sales.
In third stage funding, capital is provided for major expansion, for example, in
Simply Switch’s case for aggressive marketing of its service for awareness and
adoption.
Mezzanine as the name suggests is a kind of bridge funding that will help the
company prepare for its journey between its expansion of capacity and the IPO.
Simply switch might have availed this between gathering more adopters and
having its stake acquired by Daily Mail and General Trust.
Financing through all stages, seed funding to mezzanine, is referred to as balanced
stage financing.

VENTURE CAPITAL INVESTMENT PROCESS
13

Venture capital is regarded as “risk capital”. This can be termed as the capital that
is being invested in a project where in there is a fair bit of risk involved when
investing. This risk is basically involved either in case of future profit or a regular
and consistent cash flow for the investment. The best example for venture capital
investment process is the investment in shares or equity. In venture capital
investment process, there are ample chances of high return; however, there is a
huge risk when you are investing in stocks. But there is a saying – No Risk No
Gain. Thus, to earn well, you will have to take some amount of risk.
Everyone, rather to say the investors, says that when you are investing somewhere
it’s always better to know more and do quite a bit of research before making any
decision and initiate the investment. There is no harm in researching than to repent
after losing in a blind fold investment. After all it’s your hard earned money and
it’s your responsibility. There are few questions that can arise when comes to
venture capital investment process and its related processes. Let’s take a closer
look at them through the course of this article .
It is essential that you know and understand a few important points before making
your choice for a venture capital investment process. These points can be
summarised as follows:
 Venture capital investment process is very different from traditional banking
and venture capital investment process is also nowhere related to the
traditional banking and investment process.
 True to its sense, venture capital investment process ideally meets the
modern socio-economic needs and also brings a significant positive impact
over the economy of the place.
 The venture capital investment process drives new industries.

14

 Venture capital investment process involves high risk, but at the same time it
creates and brings in more wealth than any other traditional investment
processes.
 Venture capital investment process is mainly focused towards or rather it is
regarded as people and pedestrian oriented business.
 Venture capital investment process at the same time is a growth and exit
oriented process. It is also an internationally oriented process too.
 Venture capital investment process first started in the US and today it has
matured in the Continental Europe. Even Asia and South America too are not
far behind and readily following the venture capital investment process.
 Venture capital investment process is a sought after business choice in which
the venture capitalists invest in the entrepreneurial business, which may be
small or new in nature. However, it is imperative to discern whether these
businesses have the potential to grow in the near future. In case yes, venture
capital investment process can actually be a long term goal and investment.
 The venture capital investment process patterns show that the venture
capitalists generally prefer or mostly invest their money in the market for
anywhere between 3 and 7 years. Sometimes this number also increases, if
the investment is not a dead investment for the investor.
 The venture capital investment process firms squeeze money for the
investment from various sources. Most of the UK firms, especially the
institutional investors, try extracting the fund from external sources such as
the pension funds and insurance companies.

DIFFERENCE BETWEEN VENTURE CAPITAL AND
OTHER FUNDS (PRIVATE EQUITY )

15

 Private equity is sometimes confused with venture capital because they both
refer to firms that invest in companies and exit through selling their
investments in equity financing, such as initial public offerings (IPOs).
However, there are major differences in the way firms involved in the two
types of funding do things. They buy different types and sizes of companies,
they invest different amounts of money and they claim different percentages
of equity in the companies in which they invest.

 Private equity firms mostly buy mature companies that are already
established. The companies may be deteriorating or not making the
profits they should be due to inefficiency. Private equity firms buy these
companies and streamline operations to increase revenues. Venture capital
16

firms, on the other hand, mostly invest in start-ups with high growth
potential.
 Private equity firms mostly buy 100% ownership of the companies in which
they invest. As a result, the companies are in total control of the firm after
the buyout. Venture capital firms invest in 50% or less of the equity of the
companies. Most venture capital firms prefer to spread out their risk and
invest in many different companies. If one start-up fails, the entire fund in
the venture capital firm is not affected substantially.

 Private equity firms invest $100 million and up in a single company. These
firms prefer to concentrate all their effort in a single company, since they
invest in already established and mature companies. The chances of absolute
losses from such an investment are minimal. Venture capitalists spend $10
million or less in each company, since they mostly deal with start-ups with
unpredictable chances of failure or success.

 Private equity firms can buy companies from any industry, while venture
capital firms are limited to start-ups in technology, biotechnology and clean
technology. Private equity firms also use both cash and debt in their
investment, but venture capital firms deal with equity only.

VENTURE CAPITAL IN INDIA

17

EVOLUTION OF VENTURE CAPITAL IN INDIA
The Indian ecosystem for financing early-stage companies commenced during the
technology boom in the late 1990s. Investors and entrepreneurs alike were trying to
18

understand the ideas of innovation, entrepreneurship and scale, especially in the
context of India. The boom, however, did not last long, with the meltdown in 2001
of the technology investing space. In 2003, when Aavishkaar began investing, the
investor landscape was as barren as ever, with very few investors—and even fewer
entrepreneurs—on the horizon. Given the vacuum, it was difficult to visualize the
huge leaps that the early-stage investing space would make over the subsequent
decade.
In the mid-2000s, the word “exit” was only a theoretical concept, and most
investors had little clarity on this critical subject. With virtually no equity support
beyond the limited initial investment round, funded entities with aggressive
revenue growth rates were the exception rather than the rule. Without expansion,
exits were bound to be a challenge. Fast-forward to 2015: the entire ecosystem has
seen a sea change, from the nature of early-stage businesses and their financing
requirements, to the nature and quantity of funding available.
On the demand side, the amount of funding required—even by start-ups or earlystage companies—has increased substantially not only for the initial investment
amount but also for subsequent rounds of funding. While a decade ago,
entrepreneurs might have been hesitant to seek more than INR10 million to INR20
million, today INR100 million to much larger amounts is the norm. In fact, Series
A rounds of several hundred million Rupees for an “only-on-paper” company are
not unheard of, even in traditional sectors. And once an early-stage company gains
traction, its funding demands grow exponentially.
On the supply side, though the number of equity funds that invest in start-ups has
increased substantially, there remains a relatively small group that will invest in
unproven start-ups in the traditional brick-and-mortar space. But the picture
19

brightens

considerably

once

such

companies

reach

the

early-growth

stage. Although the majority of early-growth capital is being routed to nontraditional sectors—online sales, mobile payments, rural marketing and delivery—
such funding has become much easier for traditional brick-and-mortar businesses
as well, especially in the health care- and agriculture-related sectors. Once a
company has validated its business and financial model, raising subsequent rounds
of equity is almost assured.
Supplementing early-stage equity funds are the new breed of venture debt
funds. While equity is required for long-term funding needs, venture debt funds
can step in for specific, time-bound requirements, such as bridge funding, pending
the closing of an on-going equity round or working capital finance against a
specific order (rather than general working capital funding on an on-going basis).
These increased funding requirements of early-stage companies—combined with
the availability of appropriate capital—create a very conducive environment for
funding un-validated business models.
While the ecosystem in India has evolved, there are several countries which closely
reflect the India of a decade ago. Aavishkaar recently launched a fund focused on
investments in select South Asian and Southeast Asian countries other than
India. These countries are likely to experience a journey similar to India’s. Early
investors who take the risks associated with a currently-underdeveloped VC
ecosystem can gain in-country experience by the time the system evolves and
competition intensifies.

RISE OF VENTURE CAPITAL IN INDIA

20

The Indian government's budget for 2014-15 is clearly an investorfriendly one with a slew of provisions and funds earmarked for startups in India. Also, a start-up fund worth Rs 10,000 crore is being
mulled by the government. According to Finance Minister Arun
Jaitley, it will be "equity, quasi-equity, soft loan and other risk capital
for

start-ups."

This is encouraging news although angel investors and venture
capitalists (VCs) have kept the start-up ecosystem thriving in India till
date. Venture capital is an investment in the form of shares or a later
stock option in potentially high-risk businesses. The beneficiary
companies are usually small or medium-sized firms, requiring seed or
early-stage funding for innovation and development of technology or
products with high growth potential. High annual returns ranging
from

25-75%

are

expected

on

such

investments.

Venture capital can be injected in different stages of a start-up
lifecycle:
1. In the initial development stage as 'seed capital' for converting an
idea

into

a

commercially

viable

entity.

2. Implementation or 'start-up capital' when all is ready to commence
production.
3. Additional capital to overcome manufacturing teething problems.
21

4. Establishment capital to facilitate rapid expansion of an established
company.
Venture capital is a long-term investment and involves active
participation and help from the investor for the development of the
company. Often, the presence of the VC investor/s gives the company
commercial
Indian

and

venture

capital

financial
market

and

clout.
investments

Venture capitalism in India began in 1986 with the start of the
economic liberalisation. In 1988, the Indian government formalised
venture capital by issuing a set of guidelines. Initially, venture capital
or VC was limited to subsidiaries set up IDBI, ICICI and the IFC, and
focused

on

large

industrial

concerns.

But the turning point came when the well-established start-ups by
Indians in the Silicon Valley convinced foreign investors that India
had the talent and the scope for economic development and growth.
Over the years, more and more private investors from India and
abroad

have

entered

the

Indian

venture

capital

market.

In the early stages, venture capital investments were mainly in the
manufacturing sector. However, with changing trends and increased
liberalisation, companies in consumer services and consumer retail
space emerged as top contenders for VC funding, attracting almost
22

50% of total VC investments. Other key industries included IT and ITrelated

services,

electronics,

software

biotechnology

finance/insurance,

public

development,
and

pharmaceuticals,

sector

entertainment,

telecommunications,

disinvestment,

banking

and

media

and

and

education.

A completely new field that is attracting venture capital is agriculture.
This has been fuelled by the realisation that food security is a vital,
long-term necessity. Studies suggest that in future, for every Rs 100
increase

in

GDP,

Rs

41

will

be

spent

on

food.

At the recently held Global AgInvesting Conference, data released
indicated that agro businesses would provide better returns of about
11%,

compared

to

3-5%

yield

from

bonds

and

equities.

Agriculture could well become the new Mecca for venture capital
investments. Leading VC firms such as Venture Dairy, Anterra Capital
(a spin-off of Rabobank's proprietary venture capital investment
team), SAEF (Small Enterprise Assistance Funds) and Rabo Equity
Advisors' India Agribusiness Fund have already entered this market.
Promoting

VC

funding

in

India

Since 1988, ICICI has played a prominent role in promoting venture
capital investments in India and currently manages funds over $2
billion.
23

In fact, India recorded a 13% increase in the amount invested against
the global rise of 2%. At $45.8 million, India posted an all-time-high
median value at the profitable stage in 2013, the highest value ever
seen in any market across all of the development stages since 2007.
Early-stage funding has gone down and more funds have been
diverted to later, more profitable stages or spread out in multilevel
funding, indicating that investors are cautious about high risks.
However, top players such as Sequoia Capital, Rabobank, Google
Venture, Seed Venture Fund and World Bank's IFC are investing in
India. IFC is the leading investor here, with $1.4 billion.
Most VC investors, both local and global, have leveraged the Mauritius
Treaty route to invest in India because tax is only payable in the
country of the investor's residence. The SEBI (Securities and Exchange
Board of India) can work towards further simplifying the investment
procedures

and

offer

attractive

IPO

and

M&A

exit

ratios.

However, the crucial challenge will be the development of responsible
financial and management skills in the invested companies, and
understanding the local conditions by foreign investors. A positive
factor is that India has a large pool of English-speaking, trained and
skilled

manpower.

24

Another trigger to invest in India is that both China and India are the
top two growing global economies. The new pro-business Indian
government has also inspired confidence and foreign investment
worth Rs 17,000 crore has already been made. So the prospects look
rosy for the growth of venture capital in India.

REGULATION OF THE BUSINESS OF VENTURE
CAPITAL IN INDIA
25

Chris Bovaird has cited a practitioner’s definition of venture capital as follows: the
provision of risk-bearing capital, usually in the form of a participation in equity, to
companies with high growth potential. In addition, the venture capital company
provides some value added in the form of management advice and contribution to
overall strategy. The relatively high risks for the venture capitalists are
compensated by the possibility of high return, usually through substantial capital
gains in the medium term .
Venture Capital is money granted by qualified who advance and administer swiftly
increasing companies that have the potential to enlarge as momentous economic
contributors. It is the progression of investing private equity in companies to offer
considerable potential to grow to a large extent and reward investors in market.
Venture capital tenders institutional investors and high-net-worth individual’s high
returns and burly diversification benefits from very low correlations with other
asset classes.
Venture Capital firms characteristically supervise multiple funds formed over
intervals of several years. Funds are illiquid but as companies in the portfolio go
public or are sold, the investors comprehend their returns. A broad rule for the
breakdown of returns among VC company investments is 40% will be complete
losses, 30% will be "living dead," with the remaining 30% generating substantial
returns on the original investment. The big winners yield 10 or more times the
original investment. Venture capital has also been defined as investment in small or
medium sizes unlisted companies with the investors participating, in some degree,
in the management progress.

26

The explanation of venture capital that commands the widest acceptability, is that it
is a separate asset class, often labeled as private equity, Private equity investment
sits at the furthest end of the risk-rewards spectrum from government bonds and
can broadly describe equity investment in private companies not quoted on the
stock market.
ARD (American Research and Development) Corporation, one of the few venture
capital firms created after the war. Incorporated on June 6, 1946, under
Massachusetts law, ARD was aimed at aiding ‘in the development of new or
existing businesses into companies of stature and importance,’ as Doriot described
in the company’s first annual report.
Regulatory framework of Venture Capital in India
Venture Capital in India governs by the SEBI[8] Act, 1992 and SEBI (Venture
Capital Fund) Regulations, 1996. According to which, any company or trust
proposing to carry on activity of a Venture Capital Fund shall get a grant of
certificate from SEBI. However, registration of Foreign Venture Capital Investors
(FVCI) is not obligatory under the FVCI regulations . Venture Capital funds and
Foreign Venture Capital Investors are also covered by Securities Contract
(Regulation) Act, 1956, SEBI (Substantial Acquisition of Shares & Takeover)
Regulations, 1997, SEBI (Disclosure of Investor Protection) Guidelines, 2000.

Constitution of Venture Capital Funds
There are three layers of structured or institutional venture capital funds i.e.
venture capital funds set up by high net worth individual investors, venture capital

27

subsidiaries of corporations and private venture capital firms/ funds. Venture funds
in India can be divided on the basis of the type of promoters.
1. Venture Capital Funds promoted by the Central government 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. It is 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. Also, promoted by Public Sector banks such as Canfina and SBI-Cap.
4. Venture Capital Funds promoted by the foreign banks or private sector
companies and financial institutions such as Indus Venture Fund and Grindlay's
India Development Fund
Eligibility and Investment Criteria for Venture Capital Fund
For Venture Capital Funds it is required that Memorandum of Association or Trust
Deed must have main objective to carry on action of Venture Capital Fund
including prohibition by Memorandum of Association & Article of Association for
making an invitation to the public to subscribe to its securities. Further, it is
required that Director or Principal Officer or Employee or Trustee is not caught up
28

in any litigation connected with the securities market and has not at any time been
convicted of any offence involving moral turpitude or any economic offence. Also,
in case of, body corporate, it must have been set up under Central or State
legislations and applicant has not been refused certificate by SEBI.
A Venture Capital Funds may generate investment from any investor (Indian,
Foreign or Non-resident Indian) by means of issue of units and no Venture Capital
Fund shall admit any investment from any investor which is less than five Lakhs.
Employees or principal officer or directors or trustee of the VCF or the employees
of the fund manager or Asset Management Company (AMC) are only exempted. It
is also mandatory that VCF shall have firm commitment of at least five Crores
from the Investors before the start of functions by the VCF. Disclosure of
investment strategy to SEBI before registration, no investment in associated
companies and duration of the life cycle of the fund is compulsorily being done. It
shall not invest more than twenty five percent of the funds in one Venture Capital
Undertaking. Also, minimum 66.67% of the investible funds shall be utilized in
unlisted equity shares or equity linked instruments of Venture Capital Undertaking.
It is also mandatory that not more than 33.33% of the investible funds may be
invested by way of following as stated below:1. Subscription to IPO of a Venture Capital Undertaking (VCU)
2. Debt or debt instrument of a VCU in which VCF has already made an
investment by way of equity
3. Preferential allotment of equity shares of a listed company subject to lock in
period of one year
4. The equity shares or equity linked instruments of a monetarily weak company or
a sick industrial company whose shares are listed.
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5. SPV (special purpose vehicles) which are created by VCF for the purpose of
making possible investment.
RBI and Investment Criteria
A foreign venture capital investor proposing to carry on venture capital activity in
India may register with the Securities and Exchange Board of India (“SEBI”),
subject to fulfilling the eligibility criteria and other requirements contained in the
SEBI Foreign Venture Capital Investor Regulations. The SEBI Foreign Venture
Capital Investor Regulations prescribe the following investment guidelines, which
can impact overall financing plans of foreign venture capital funds.
a) The foreign venture capital investor must disclose its investment strategy and
life cycle to SEBI, and it must achieve the investment conditions by the end of its
life cycle.
b) At least 66.67 per cent of the investible funds must be invested in unlisted equity
shares or equity linked instruments.
c) Not more than 33.33 per cent of the investible funds may be invested by way of:
· Subscription to initial public offer of a venture capital undertaking, whose shares
are proposed to be listed.
· Debt or debt instrument of a venture capital undertaking in which the foreign
venture capital investor has already made an investment, by way of equity.
· Preferential allotment of equity shares of a listed company, subject to a lock-in
period of one year.

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· The equity shares or equity linked instruments of a financially weak or a sick
industrial company (as explained in the SEBI FVCI Regulations) whose shares are
listed.
A foreign venture capital investor may invest its total corpus into one venture
capital fund.
Tax Matters related to Venture Capital Fund
Indian Venture Capital Funds are allowed to tax payback under Section 10(23FB)
of the Income Tax Act, 1961. Any income earned by an SEBI registered Venture
Capital Fund (established either in the form of a trust or a company) set up to raise
funds for investment in a Venture Capital Undertaking is exempt from tax. It will
also be extensive to domestic VCFs and VCCs which draw overseas venture
capital investments provided these VCFs/VCCs be conventional to the guidelines
pertinent for domestic VCFs/VCCs. On the other hand, if the Venture Capital Fund
is prepared to forego the tax exemptions available under Section 10(23F) of the
Income Tax Act, it would be within its rights to invest in any sector.

PROBLEMS OF VENTURE CAPITAL IN INDIA

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VCF is in its nascent stages in India. The emerging scenario of global
competitiveness has put an immense pressure on the industrial sector to improve
the quality level with minimisation of cost of products by making use of latest
technological skills. The implication is to obtain adequate financing along with the
necessary hi-tech equipments to produce an innovative product which can succeed
and grow in the present market condition. Unfortunately, our country lacks on both
fronts. The necessary capital can be obtained from the venture capital firms who
expect an above average rate of return on the investment. The financing firms
expect a sound, experienced, mature and capable management team of the
company being financed. Since the innovative project involves a higher risk, there
is an expectation of higher returns from the project. The payback period is also
generally high (5 - 7 years).
The various problems/ queries can be outlined as follows :
(i) Requirement of an experienced management team.
(ii) Requirement of an above average rate of return on investment.
(iii) Longer payback period.
(iv) Uncertainty regarding the success of the product in the market.
(v) Questions regarding the infrastructure details of production like plant location,
accessibility, relationship with the suppliers and creditors, transportation facilities,
labour availability etc.
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(vi) The category of potential customers and hence the packaging and pricing
details of the product.
(vii) The size of the market .
(viii) Major competitors and their market share.
(ix) Skills and Training required and the cost of training.
(x) Financial considerations like return on capital employed (ROCE), cost of the
project, the Internal Rate of Return (IRR) of the project, total amount of funds
required, ratio of owners investment (personnel funds of the entrepreneur),
borrowed capital, mortgage loans etc. in the capital employed.

PROBLEMS HAD TO BE SOLVED BUT HAVENT SOLVED YET.

33

Reinventing communications. Venture investors poured tons of cash into media
and entertainment over the last half-decade. But they did so in a perversely riskaverse way: they made investments dependent on 20th century advertising and
communications, instead of investments focused on reinventing it. Any teenager
could have told you five years ago that trying to cram the mediascape full of even
more ads was an idea even worse than the CueCat – and today, consumers are
turning off and tuning out communications from firms like never before.
Reconceiving capital markets. Here’s one of the most common complaints you’ll
hear from a venture investor: the big banks aren’t interested in taking startups
public anymore, and the IPO window’s closed. A clear signal that the capital
markets are broken is being broadcast – and instead of seeing a crystal-clear
opportunity for reinvention, venture capitalists see an immovable barrier? Feel the
lame yet? With revolutionaries like that, who needs beancounters?
Business models for public goods. Here’s the paradox of the digital economy:
digital goods are also public goods. So how do we capture value from them? It’s a
tough problem – but most venture funds haven’t even tried most of the emerging
solutions (here are some: turn goods into services, amplify scarcity, and
democratize pricing). What does it say whena band – Radiohead – is better able
to break new ground in developing business models for public goods than venture
investors?
Business models for radical responsibility. Over the last decade, it’s become
increasingly clear that the radical irresponsibility of industrial-era business is
deeply unsustainable. That irresponsibility must become radical responsibility. Yet,
the trailblazers of making radical responsibility economically viable are non-profits

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and social businesses – not venture funds, who have been deeply reluctant to
explore the economic possibilities of responsibly powered business models.
Discovering new sources of advantage. Most venture capitalists accept the
orthodoxy that sources of advantage are fixed – and that’s the single biggest
mistake they make. Advantage isn’t fixed and permanent. New industries and
markets are powered by new sources of advantage – which create economic
growth. When the IT industry was born, owning the standard became a critical
source of advantage. When biotech was born, experimentation sprang to life.
We’ve never needed new sources of advantage more than we do today. The
industries and markets of the 21st century cannot be powered by yesterday’s
sources of advantage. Brands are losing relevance; cost advantage is often an
illusion; differentiation is too often simply skin-deep; and market dominance stifles
innovation and creativity – to name just a few. Yet, tomorrow’s sources of
advantage remain largely unexplored – because venture investors have been
systematically underinvesting in discovering them.
Here’s the point.
If venture investors can’t solve problems like these – are they
obsolete? Probably. That’s because in a radically decentralized world, anyone can
invent tomorrow’s industries and markets – yes, anybody. Want to be a radical
innovator? Solve one of these problems – or check my Manifesto for the Next
Industrial Revolution for a different set of big problems that need solving.
Fire away with questions, criticisms, or more problems that need solving in the
comments, check out the first part of my commentary if you’ve got a sec – and
hopefully, some of the questions you raise will be discussed by the VLab’s panel.
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CASE STUDY

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FMCG start-up to bite into chocolates

After almost a year since Goldman Sachs and Mitsui Global invested behind
Global Consumer .Products, the FMCG start up is now ready to enter the
chocolates category by launching its own brand early next year. Hiring a slew of
FMCG professionals from companies like Perfetti, Hindustan Unilever, Britannia,
Ferraro and Cadbury Kraft, it intends making a initial foray into the four southern
states with its new brand of chocolates.
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Speaking to Business line, A. Mahendran , Chairman & Managing Director, Global
Consumer Products said, ``We call ourselves a synthetic start up as we now have
both financial and human capital. Our chocolates foray will be in the value for
money segment and will include confectionary like mints, gum and candy for
which we are building distribution in southern India.’’
Currently, Cadbury Kraft dominates the chocolates category with more than 60 per
cent share along with new entrants like Ferraro and Mars.
The new FMCG start up would be subcontracting its manufacturing across the
product categories it plans to enter in future like energy drinks, juices, packaged
water and snacks along with chocolates. Recently it has hired FMCG professionals
like Anuradha Narsimhan (former Marketing Head of Britannia Industries) and
even has the former director of Perfetti , Ashok Dhingra on its board of directors.
Global Consumer Products is also open to forging JVs with Japanese companies
waiting to enter India since it has the Tokyo based Mitsui Global as a PE investor
in the company.
`` The Mitsui Group also has a foods company and they could license some of the
food brands to us or they could help us with forming JVs with FMCG companies
wanting to enter India in specialised categories like noodles which need
technology,’’ added Mahendran. Mitsui Foods, a part of Mitsui Group also has a
host of brands which could get licensed to the Indian start up. `` Mitsui Foods in
Japan has the Royal tea and Coffee brands which get licensed to us, added
Mahendran. Having built iconic brands like Goodknight and Hit, Mahendran has
been the former Managing Director of Godrej Consumer Products before he
launched its own FMCG start up nearly a year ago with an investment of Rs. 315

38

crore from Goldman Sachs and Mitsui Global who have picked up 80 per cent in
his company for the next five years.
``We are looking at a sales turnover of Rs. 1200 crore in the next five years after
which we will either sell out or list the company since we on the build, operate and
transfer model,’’ said Mahendran. Ajoy Misra, Managing Director & CEO of Tata
Global Beverages, is reluctant to enter the tea and coffee capsule segment in India.
This is despite having acquired an Australian brand called Map, which has
products in this category.While the largest tea company is staying away from
entering a new segment, a young start-up – Indulge Beverages – has taken upon
itself the onus of creating and building the hot beverage capsule segment.
Similarly, Global Consumer Products, a year-old company started by A Mahendran
, former Managing Director & CEO of Godrej Consumer Products, has recently
launched its chocolate brand Luv It targeted at 15-30 year olds. Mahendran has
plans to get into more new categories like fat-free chips.
These examples point to the increasing number of food & beverage start-ups taking
the risk of entering untapped segments where the bigger FMCG players have
stayed away.
“Agility is lost when you are part of a big fat FMCG company. We are a synthetic
start-up as we have capital adequacy and flexibility to launch new products which
are not ‘Me Too’ and have not been tried by the large FMCG companies,’’ said
Mahendran, Chairman & Managing Director, Global Consumer Products, which
has received $50 million from Goldman Sachs and Mitsui Global.
Most of the new start-ups have been launched by former FMCG executives who
have worked in big companies such as Coca-Cola, Godrej Consumer Products and
PepsiCo.“We can afford to be more nimble than the regular FMCG companies who
take more time to innovate with products and typically like to take fewer risks. We
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already have seed capital of $2 million available to experiment and create brands in
new categories like tea and coffee capsules,”says Tuhin Jain, Co-Founder, Indulge
Beverages, who earlier worked with Pepsi Co.Armed with new and innovative
product ideas, these start-ups seem to have easy access to funds.
Hector Beverages, for example, raised $20 million from Sequoia Capital and
Catamaran Ventures and set up its second manufacturing facility. The company,
started by former Coca-Cola employees, has made it big with Paper Boat brand,
with juice flavours such as aam panna and sattu.“We are the first beverage brand to
launch drinks which are close to nature using traditional recipes.
Today, we are well funded and can experiment with new offerings and packaging
with our Paper Boat brand,’’ says Neeraj Kakkar, Founder & CEO, Hector
Beverages.
2. A synthetic startup
Mahendran, the former Managing Director of Godrej Consumer Products, calls his
new venture in the FMCG space a synthetic startup. Global Consumer Products
Pvt. Ltd.,(GCPPL) his new venture, has launched its first brand – Luvit – in the
chocolates and confectionary space. He calls it a synthetic startup simply because
he believes it had three elements of a large company – adequacy of capital, topnotch team and systems and processes – from day one Arumugham Mahendran is a
well-known name in FMCG circles. From brand marketers to feet-on-street
distributors, everyone knows him thanks to his achievements in the past and
deep understanding of the consumer goods space. After all, he’s credited with
building two major household brands – Good knight and HIT – which were
category creators in the insecticides space.Prior to founding GCPPL, Mahendran
was Managing Director of Godrej Consumer Products, where he was credited with
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launching several brands in the Indian market and completed eight acquisitions
between 2009 and 2011. In the last three years of his leadership, the company’s
share price rose by 238 per cent, and the company grew at a CAGR of 26 per cent
with revenues of Rs. 7,100 crores. It is this track record that attracted two global
investors – Goldman Sachs and Mitsui Global Investment to invest Rs 315 crore
into GCPPL. The company was setup with the goal of building a FMCG platform
starting with the confectionary category, and next the food and beverage segment.
In this story, Mahendran gives us a glimpse into his key learnings from the past
and vision behind setting up this new venture.
The early days The first year of operations at GCPPL was dedicated to setting up
the infrastructure, innovation funnel, supply chain and distribution. This meant
attracting a high quality team, setting up the distribution partners and such.
Mahendran says, “In one year, I believe, we’ve done a very good job of setting up,
what I believe is the foundation of any good FMCG business. We’ve attracted
talent from all walks of life and setup a very good team.” (The company has hired
from various FMCG majors including Perfetti, Hindustan Unilever, Britannia,
Ferraro and Cadbury Kraft).
The company recently launched the ‘LuvIt’ brand of chocolates and
confectionaries and is gearing up for the next phase – that of brand building.
Mahendran believes that brand building is the single most crucial element of
winning in FMCG. “Some people seem to believe it is distribution, but I believe it
is the brand. If your brand doesn’t attract the consumer, there won’t be off take and
the distribution network will reject you,” he explains. He should know. After all,
Mahendran has spent several decades in the consumer space, including a few years
in the chocolates segment, when the Hershey’s brand had a partnership with Godrej
Group.

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Mahendran also draws his lessons from another brand close to his heart – the
mineral water brand, Cherios. His wife built this brand and that journey, which he
watched from close quarters, led him to several learnings about the beverage
segment.
The FMCG leader is also convinced that brand building is an art, not a science. “It
certainly cannot be taught at business schools; like art, it has to be learnt on the
job.” While Brand LuvIt, is using analytics and social media tools, in addition to
market insights from AC Neilson (a global marketing research firm), Mahendran is
bringing in all his experience to the table to shape up the brand. Brand LuvIt
In the early days, this new chocolate brand will target the young in 25 cities across
the south. It has roped in South Indian movie actor Siddharth as its brand
ambassador. Bright packaging, with positioning of “to LiveIt. OwnIt. LuvIt” is
core to its advertising and brand activation campaigns. The company has appointed
a network of over 80 distributors and has launched in Andhra Pradesh, Telangana,
Tamil Nadu, Kerala, Karnataka and Puducherry markets.
From a pricing perspective, the chocolates are available in 9 variants and 14 SKUs,
and are priced from Rs. 5 to Rs. 45. The sub brands are christened Dairy Rich,
ChocWich, Caramelicious, Crazypops and Chocopops.The press release of the
launch gives a simple, two-word explanation to the choice of brand ambassador.
“Siddharth, the ‘chocolate boy’ of the South is our brand ambassador”, it reads.
Mahendran is convinced that such simple yet attention-to-detail ridden approach is
crucial to break through the clutter in this segment.The Brand man It is impossible
to have a conversation with Mahendran when he doesn’t rattle off brand names. In
our chat, he spoke about brands he’s been closely associated with, Good Knight,
Hit and the various brands in the Godrej stable. He’s been a careful student of the
various MNC brands coming into India. “I believe a number of multi-national
come in to India with an already adult brand. The brand architecture is already set
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in a Western market and they try to bring it here. However, I do think it is
important, at least in India, to build and nurture brands from scratch. It is like a
child and you let it grow. It is not possible to expect quick results, and this, I
believe a number of foreign brands expect when they enter the country. Winning
market share takes time,” he explains.The next category After the confectionary
space, GCPPL plans to enter the food and beverage segment. “We’ll probably
begin with fruit juices and water,” says Mahendran without revealing too much.
After that, there is personal and household care, a segment he’s very familiar with,
but he’s tight-lipped to reveal further plans. Mahendran is also investing
reasonably in product differentiation. “As in any segment, this is extremely crucial.
It is important to have our R&D and innovation funnel working well.”
Mahendran believes his biggest learning from the past is the need for capital
adequacy to build a solid company in the FMCG sector. “There are three aspects
that are crucial – systems & processes, adequacy of capital and a top-notch team.
These three elements are what makes Global a synthetic startup,” he explains. The
point Mahendran is trying to make is that, it is fairly difficult to build a typical
startup in this segment where one of these three elements is lacking. “You cannot
spend all your effort building the product and not have money to invest in
distribution,” he explains.On a parting note, he adds, “One area that I need to pick
up is the social media world”. As an FMCG leader, Mahendran has probably seen
it all; but the frantic pace at which the social web is shaping up consumer behavior
is probably something he has not witnessed first-hand. Mahendran knows it and
he’s ready to fire on all cylinders. One thing is for sure: he’s Luvin’ it.
3.Packaged food start-up Global Consumer Products is planning a bigger play in
the FMCG market, especially in the confectionery and beverages segments. The
company, founded by ex-MD of Godrej Consumer Product, A Mahendran, was
43

conceptualised a year ago with a capital of Rs 315 crore from Goldman Sachs and
Mitsui Ventures.As part of the FMCG foray, the company on Tuesday launched its
first product, Livit brand of chocolates, initially in the southern market. Chairman
& MD Mahendran told reporters here that the company, which he calls a synthetic
start-up, will foray into the snacks and beverages segment in 3-4 months for which
technology will be brought in from Spain.“We will launch snacks and beveages,
including fruit juice, in the existing common categories or even create new
categories,” he said.The company acquired a local water packaging brand Cherio
in Chennai some four months ago and would use this platform to develop the
beverages vertical. The company will be competing with heavyweights such as
Mars, Nestle India, Mondelez International, ITC and Dabur India.Mahendran said
the company would adopt a asset-light model of manufacturing. Livit brand of
chocolate products are being launched in the Andhra Pradesh, Telangana and
Kerala markets, with Tamil Nadu and Puducherry going live today. Karnataka will
follow next week. The company has come out with nine variants of LuvIt in
different chocolate formats like moulded chocolates, enrobed wafers, panned
chocolates and caramel-nougat bars at price points ranging between Rs 5 and Rs
45.Anuradha Narasimhan, executive vice-president, sales & mareketing, Global
CP, said the company is targeting the youth segment in the age bracket 15-30 years
for its chocolates.On the overall chocolate industry she said the domestic market
size is around Rs 7,000 crore and is growing at 25% annually. “There is high scope
for differentiation and growth. The southern markets accounts for around 30% of
the national market of which Tamil Nadu is the largest,” Narasimhan said

CONCLUSION

44

The study provides that maturity if the still nascent Indian venture market is
imminent .
Venture capitalists in Indian have notice of newer avenues and regions to expand .
VCs have moved beyond IT service but are cautions in exploring the right business
model , for finding apportunities that generate better returns for investors .
In terms of impediments to expansion , few concerning factors to VCs include ;
unfavorable political and regulatory environments compared to other countries ,
difficulty

in

achieving

successful

exists

and

administrative

delays

in

documentation and approval .
In spite of few non attracting factors , Indian apportunities are no doubt promising
which is evident by the large number of new entrants in past years as well in
coming days . nonetheless the market is challenging for successful investment .
Therefore venture capitalists response are upbeat about the attractiveness of the
Indian as a place to do the business .

BIBLOGRAPHY

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 BOOKS
 Taneja satish , “venture capital” .
 Chary T Satyanarayan , “venture capital – concepts &
Applications”.
 MAGAZINE :
 Sharma kapil , an Analysis of venture Capital industry in india .
 WEBSITES :





WWW.IVCA.ORG
WWW.VENTUREINTELLIGENCE.IN
WWW.NCVA.ORG
WWW.ECONOMICSTIMES.INDIATIMES.COM
WWW.100VENTURES.COM
WWW.DELOITE.COM

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