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Y.M.Satish1, Jalauk.M.Ujalambkar2, Nandana.Bhat3
Venture capital is a growing business of recent origin in the area of industrial financing in India. The various financial institutions set-up in India to promote industries have done commendable work. However, these institutions do not come up to the benefit of risky ventures when they are undertaken by new or relatively unknown entrepreneurs. They contend to give debt finance, mostly in the form of term loan to the promoters and their functioning has been more akin to that of commercial banks. The financial institutions have devised schemes such as seed capital scheme, Risk capital Fund etc., to help new entrepreneurs. However, to evaluate the projects and extend financial assistance they follow the criteria such as safety, security, liquidity and profitability and not potentially. The capital market with its conventional financial instruments/ schemes does not come much to the benefit or risky venture. New institutions such as mutual funds, leasing and hire purchase Company’s have been established as another leasing and hire purchase Company’s have been established as another source of finance to industries. These institutions also do not mitigate the problems of new entrepreneurs who undertake risky and innovative ventures. India is poised for technological revolution with the emergence of new breed of entrepreneurs with required professional temperament and technical knowhow. To make the innovative technology of the entrepreneurs a successful business venture, support in all respects and more particularly in the form of financial assistance is all the more essential. This paper highlights the current status of entrepreneurs in India and financial problems faced by them along with this, the paper includes the solutions for these problems in terms of venture capital, its trends and current status in India and growth potential of the venture capital is concentrated. This paper also distinguishes the venture capital from regular source of finance to the entrepreneurs.
1. Asst. Professor, Department of Management Studies, M S Ramaiah Institute of Technology. 2. Student, Department of Management Studies, M S Ramaiah Institute of Technology. 3. Student, Department of Management Studies, M S Ramaiah Institute of Technology.
Venture capital derives its value from brand equity. taking higher risks with the expectation of higher rewards and having a long-term orientation. By financing the technology. constructive criticism. industry contacts etc as they bring to table the benefits at a significantly lower management agency cost. much of this capital is used for establishing technology and expanding business. sustainable. besides helping research and development projects to turn into commercial production. professional image. domain knowledge. Venture capital fund activities generally include financing new and rapidly growing companies that are specially knowledge-based. purchase equity/quesiequity securities. Venture capital plays an important role in financing hi tech projects. A Venture capital fund strives to provide entrepreneurs with the support they need to create upscaleable business with sustainable growth. venture capital assists in fostering the growth and development of entrepreneurs.INTRODUCTION A form of equity financing designed especially for funding high risk and high reward project is known as Venture Capital. adding value to the company through active participation. In western countries. upscaleable companies. . while providing their contributors with outstanding returns on investment for the higher risks they assume. assisting in the development of new products or services.
options or convertible securities. The investments are generally made in the form of cash in exchange for shares in the invested company. The objective is to make capital gains by selling of the investment once the enterprise becomes profitable. the venture capitalist gives his marketing. planning and management skills to the new firm. The European Venture Capital Association has described it as “risk finance for entrepreneurial growth oriented companies. growth companies with a view to generate an appreciable return.term Investment Venture financing is a long term illiquid investment in that it is not repayable on demand. Characteristics of Venture Capital Equity Participation Venture financing is actual or potential equity participation through direct purchase of shares. say 5 to 10 years. In most of the cases. More than finance. Participation in Management Venture financing ensures continued participation of the venture capitalist in the management of the business. Long.” Venture Capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms. an appreciable degree of managerial and technical expertise is also provided. and investments for medium or long term to maximize returns. . This helps protect and enhance the investment through active involvement and support to the business. In India SEBI guidelines govern the operations of the venture capital funds. It requires a long-term investment attitude that requires VC firms to wait for a long period.VENTURE CAPITAL Venture Capital (VC) represents funds made available for startup firms and small businesses that have the potential to grow exceptionally. It is a partnership with the entrepreneur in which the investor can add value to the company because of his knowledge and experience. high-potential. Venture Capital is typically provided for early-stage. technology. to make appreciable profits. VC is a private equity capital and is also referred to as risk capital.
com Seed or Concept Stage Financing: While in this stage. increase production. and to add product lines where applicable. Start-up Financing: The venture capitalist provides the start-up financing when the firm is set up to manufacture a product or provide a service. As this is a period of rapid growth.Stages of Financing Source: 1000ventures. to finance rapidly increasing account receivables. sales tend to grow upwards. and build the corporate infrastructure and the distribution system. This is to facilitate full scale manufacturing and further business growth First-stage Financing: With the venture finally launched & initial transactions achieved. attain established breakeven. capital from this stage is used for funding expansion activities such as meeting increasing marketing expenses to enter new markets. The investor is usually given a small amount of capital to come up with a working prototype of the intended product. The funding from this stage is used to propel sales. the venture is still in an idea formation stage and its product and service is not fully developed. The company rapidly accumulates account receivables and inventory. . Second-stage Financing: Sales at this stage start to increase at a fast pace. cut unit costs. enhance productivity.
cost flow patterns. product improvement and further expansion. Bridge financing is a short-term form of financing used to prepare a company for its IPO. It is a hybrid security which combines the feature of both conventional and conditional loan. Methods of Venture Financing The financing pattern of the deal is an extremely important element in venture financing. No interest is paid on these loans. Income Note: This method is unique to India. Equity: Equity is the most desirable form of financing. . Conventional Loan: In this form of assistance. Bridge Financing: At this stage.Third stage Financing: At this stage. an interest free loan is provided during the implementation period under the condition that royalty be paid on sales. but at substantially low rates. a lower fixed rate of interest is charged till the assisted units become commercially operational. the firm is a success and investment bankers agree to take it public within about 6 months’ time. risk and other factors. Money from this stage is used to increase plant capacity. the future of the firm is very bright as sales continue to grow rapidly. marketing. The loan is to be repaid according to a pre-determined schedule as soon as the company starts generating sales and income. The shares are then sold either to the promoter at a negotiated price under buy back agreement or to the general public in the secondary market at a profit. the actual rate depends on various factors such as gestation period. These shares are retained by them till the assisted projects making profit. after which the loan carries normal or higher rate of interest. working capital. The loan has to be repaid according to a pre-determined schedule of repayment as per terms of loan agreement. Customers are happy. The entrepreneur has to pay both interest and royalty on sales. Conditional Loan: In this form of venture financing. In India. royalty charges are typically between 2 and 15 %. Venture financing can take different form such as those outlined below. VC firms participating in equity do so through direct purchase of shares but their stake does not exceed 49%.
Ph. controlled development financial institutions Technology Development and Information Company of India Ltd. Securities and Exchange Board of India Act was amended which empowered SEBI to register and regulate the Venture Capital Funds in India. in 1988. Government of India. Venture Capital Funds in India: Venture funds in India can be classified on the basis of the type of promoters: 1. The venture capital funds and venture capital companies in India were regulated by the Guidelines issued by the Controller of Capital Issues.VCFs promoted by the Central govt. by ICICI • Risk capital and Technology Finance Corporation Limited (RCTFC) by the Industrial Finance Corporation of India (IFCI) .VENTURE CAPITAL IN INDIA The venture capital industry in India is of relatively recent origin. 1996 SEBI issued its regulations in this regard. Financial Problems faced by Entrepreneurs: Source: Problems Entrepreneurs Face. Subsequently. in December.Director. (TDICI). by Gwen Richtermeyer. These regulations replaced the Government Guidelines issued earlier. In 1995.D.
but I would argue that these are the first two dimensions to consider as they should help entrepreneurs more quickly find the right direction for their financial strategy. Ultimately. VCFs promoted by the state government-controlled development finance institutions • • 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 the foreign banks or private sector companies and financial institutions such as: • • • Indus Venture Fund Credit Capital Venture Fund Grindlay's India Development Fund.• Risk Capital Fund by IDBI. In other words. There are financing structures for companies that have small potential and structures for companies that have big potential. How to Finance Startup Business: How entrepreneurs finance their company is one of the most critical decisions that they will make during the course of their startup. VCFs promoted by Public Sector banks • Can Bank Venture Capital Fund by Canara Bank • SBI-Cap by State Bank of India. 2. While there are a number of other considerations. There is not a one size fits all strategy for capitalizing a company. the way in which you elect to finance your company should at a high-level be determined by 1) how big of a business opportunity it presents and 2) how much capital is required to breakeven. 4. . The 2x2 chart below should help to illustrate how to think about which fundraising category that they are in. financing a startup properly boils down to aligning the financing structure with the business opportunity and capital needs. The structure of their financing will be one of the key drivers of the financial return from their venture.
Not Viable: If your business requires significant capital. but is not poised to become a large business you may not be able to find a viable funding source. you should probably go back to the drawing board and find another opportunity to pursue. by raising less capital entrepreneurs will be able to avoid accruing a large amount of liquidity preference.while requiring little capital to achieve breakeven. you should probably pursue venture capital. Additionally. You will either need to find dumb money or trick savvy investors into believing your company has bigger prospects. If your company falls into this category.Venture Capital: If you have a big idea that can generate at least $50M in revenue and the business requires millions of dollars to get the company to a cash flow positive position. Bootstrap: If you have the potential to build a small business .one that generates single-digit or low double-digit millions in revenue . you have a lifestyle business. In my opinion lifestyles business are best financed when the founders take as little outside capital as possible . If there is a significant amount of liquidity preference in the company.these are companies where it's really only exciting for founders if they own a large percentage of the equity. . it may be difficult for the entrepreneurs to realize a meaningful payout when the sell the company.
Industry Investments: The above graph shows the venture capital investment in different industries till 2006. It is observed from the figure that major portion of the investments is in construction and real estate and bio technology industries. . Fresh Investments: From the above figure it can be observed that major portion of the fresh investment of venture capital finance will be in construction and real estate along with IT services.
semiconductor. wireless.The Opportunity • High Growth in Technology and Knowledge based Industries (KBI) • KBI growing fast and mostly global. • Several emerging centers of innovation – biotech. less affected by domestic issues. Growth of Venture Capital in India: Source: Indian Venture Capital Association . • India moving beyond supplier of low-cost services to higher-value products. IT. • Ability to build market leading companies in India that serve both global and domestic markets. • Quality of entrepreneurship on ascending curve. pharmaceutical.
IT Service Sector The following graph indicates the growth of venture capital and angel investments in India's IT software and services sector: It must be noted that during 1999.000 percent from Rs. 50. 20 new venture capital funds have registered with SEBI.000 crore by 2008. went to technology firms. And this figure is expected to grow to Rs. In fact. 20 new venture capital funds have registered with SEBI.000 percent from Rs. with its strengths in innovation and IT technology has attracted several Venture Capital firms. In 2000 alone. taking the total number to 30. 2. An analysis of financing by investment stages indicate the following figures: . 2. taking the total number to 30. 70 crore to projected Rs. In fact. VC or Angel investments in high tech firms in India have grown by over 5.200 crore between 1996 and 2000. India too. And this figure is expected to grow to Rs.200 crore between 1996 and 2000. 50.000 crore by 2008. approximately 80 percent of the estimated US$ 30 billion worth of venture capital invested in United States. 70 crore to projected Rs. VC or Angel investments in high tech firms in India have grown by over 5. In 2000 alone.
Atal Behari Vajpayee launched this fund in December 1999. thereby achieving better valuations and offering alternate exit routes to the investors. 100 crore and is a dedicated IT Fund with a focus on small-scale sector. The objective of the fund. NASDAQ. is to enable these units to achieve rapid growth rates and develop and maintain global competitiveness. NFSIT has a corpus fund of Rs. Software products require rigorous risk evaluation for which high degrees of expertise including international linkages are required. International linkages will help the assisted units to get a listing with foreign stock markets viz. The fund endeavors to develop international networking and enable assisted units to attract co-investments from international venture capitalists. Govt. in association with Ministry of Information Technology. the major contributors to the funds were: National Venture Capital Fund for Software and Information Technology Small Industries Development Bank of India (SIDBI). besides meeting total financial requirements of the units. The fund managed to attract a number of high-class professionals as investment managers in the Asset Management Company. has set up a 10 year close ended venture capital fund called the "National Venture Fund for Software and IT industry" (NFSIT).Further. . Prime Minister. of India. A portion of the Fund has been earmarked for incubation projects that involve high risks and might be used for development of software products.
.30 crore to set up a venture capital fund. The Fund will primarily invest in India and may on a case-to-case basis consider investment overseas. technology with early stage investments. Narayana Murthy.13 per cent of his stake in Infosys for Rs 174.R. or about 22 percent of her total holding. wife of Infosys co-founder and chief mentor N. sold 2 million shares. smart individuals to be based in Bangalore.30 crore through market sale on the Bombay and National Stock exchange. and will help entrepreneurs across sectors such as healthcare. The Venture Capital Fund will encourage and support young entrepreneurs having brilliant business ideas. In order to ensure the agility of his new venture fund. Murthy said his new venture capital fund will be called 'Catamaran'. the Infosys founder will initially hire some 3-4 young. Narayana Murthy had earlier sold 0.Narayana Murthy as venture Capitalist: Infosys Technologies. said on Thursday its chairman's wife sold company shares worth $92million for setting up a venture capital fund. retail. Sudha Murthy. the company said in a filing. on the Bombay Stock Exchange on Thursday. India's second-largest software exporter. Murthy had sold eight lakh shares of Infosys for an aggregate value of Rs 174.
CONCLUSION The venture capital funds can play a catalytic role in the development of entrepreneurship skill that remains unexploited among the young and energetic technocrats in India. India is poised for technological revolution with the emergence of new breed of entrepreneurs with required professional temperament and technical knowhow. support in all respects and more particularly in the form of financial assistance is all the more essential. . However. The various financial institutions set-up in India to promote industries have done commendable work. To make the innovative technology of the entrepreneurs a successful business venture. Venture capital is a growing business of recent origin in the area of industrial financing in India. VCFs can help promote new technology and hi-tech industries. which involve high risk but promises attractive rate of return. these institutions do not come up to the benefit of risky ventures when they are undertaken by new or relatively unknown entrepreneurs.
71-93.REFERENCES • • • • VC Deloitte Survey 2006 Creating an Environment:Developing Venture Capital in India Rafiq Dossani and Martin Kenney May 2001 Venture capital investment in the indian market sajai singh. Indian Venture Capitalists (VCs): Investment Evaluation Criteria . Financial Management.ivca. Vikas Publication. Venture Capital: Concepts and Application. • www. Pg 455 – 486. 10. Vol. j.wikipedia. partner. Chapter 23. Pandey I M. 7. Macmillian. • • Chary T Satyanarayana. Bangalore. pp. sagar associates.org www. 2005. India. 9e. No. 2004. Mishra A K.org • . • ICFAI Journal of Applied Finance.
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