For years Western governments, corporations, business reporters, management consultants and

economic scholars have been persistent on the power change happening within the world
economies. During the past decades the Tiger Economies in Asia and the BRICS countries that
consists of Brazil, Russia, India, China and South Africa have delivered remarkable growth rates and
challenged the traditional global economic landscape. The change from a primarily Western
dominated economic agenda to a global outlook have modified the business models of many
corporations, since manufacturing costs are cheaper in many emerging markets, and the fact that
consumers in those markets are getting wealthier. “However, up until ten years ago the venture
capital (VC) and private equity (PE) funds predominantly operated in North America and Europe. The
institution of VC and PE funds has existed for nearly 60 years. Initially, the VC and PE funds invested
primarily in the U.S. and Canada, however, during the 1980s the business model thoroughly spread
to Europe. Up until the millennium more than 90% of all VC and PE investments were still focused in
the mature markets in Europe and North America. Nevertheless, since 2008 when the financial crises
stroke the mature markets, more of the VC and PE funds have been investing in emerging market.
The reason is that the emerging markets are experiencing rapid growth, while mature economies
have stagnated or even shrunk.” Among developing countries, India has a big role in VC industry. “In
India the VC industry started in 1964, although it has been formally recognized under developed
markets like of the US since 1940’s.” Prior to Pre-globalization, India witnessed a very slow growth
but after 1991, India experienced tremendous growth in the quantum of deals, total investments,
deals lot etc. “India saw the largest increase in deal activity among the big Asia-Pacific markets in
2010. Although still far below the 2007 peak of US $17 billion, last year’s total deal values more than
double from that of 2009 to US $9.5 billion including VC, infrastructure private equity investments
and real estate investments.” Introduction 2 Venture capital in India has been in receipt of
governmental impetus over several decades. The structural changes in the legal and tax systems
along with improvement in general economic conditions have propelled India into the foreground of
international venture capital and private equity markets. “According to Price Waterhouse Coopers
(PWC) Global private Equity report 2008, India was the recipient of highest PE-VC report investments
in Asia-Pacific Region and is only behind from US and UK worldwide. India had moved from 14th
rank with a share of only 1.5% in 2004 to 3rd rank with a share of 7% in total PE-VC investment
worldwide in 2007. Transfer of know-how from leading venture capital markets like the US, has
allowed for a steep learning curve.” The market investors consider the PE markets in India to
continue to grow and evolve in 2011 and beyond. However short term nervousness in the capital
markets in 2011 and high priced corporate debt, kept valuations down. Still healthy macroeconomic
condition continues to support India’s status as a preferred destination for investors. India’s
fundamentals will continue to attract eager PE investors and bolster the confidence of limited
partners. The pace and strength of the industry’s future growth would be accelerated if valuations in
India become more attractive and exits continue to build on the momentum established in 2010.
Indian promoters are gradually coming to recognize PE as a patient source of active capital that can
help builds their businesses. The PE industry will need to work closely with their investor companies
and invest in further educating other Indian promoters about the PE and VC value proposition.
India’s PE and VC industry is far from reaching its full potential. As per report the biggest barrier
holding India back is because of lack in the regulatory support. Indian policymakers still do not
regard PE and VC as a distinct asset class nor do they give sufficient attention to creating a regulatory
environment for more conducive to industry growth thereby still behind the PE markets of United
States. Venture capital plays a vital role and has been an important driver of innovation,
entrepreneurship and economic growth in US and around the world for the past few decades. New
technologies fueled by availability of capital and other resources were not only able to create
substantial economic value, but also rewarded entrepreneurs handsomely and generated high
returns for VC investors. Introduction 3 The opening decade of the 21st century has been a clutter of
macroscopic and microscopic actions that have redefined how business is done inside and outside
the national borders. From regional economic slowdown, market instability, rising significance of
emerging markets to movement of skilled workers, capital and technology, the perception of value
creation has been continuously evolving and with it, the flow of investment. Investors have made a
beeline for geographies and asset classes where value is created, where value can be retained and
where value has the potential to be scaled substantially. 1.1 Insight of Private Equity Investment vs.
Contemporary Indices India has provided that opportunity for private equity (PE) investors. As
presented in fig. 1.1, the last 7 years have seen PE investments rise and in part reflecting investor
sentiment and evolving realities in an emerging economy. A cursory analysis of progress in the level
of private equity investments in India charted against Bombay Stock Exchange Sensitive Index (BSE).
Figure 1.1: Analytical chart of PE investment, GDP Growth, DOW Jones and BSE for the period 2005-
2012 Q1 Introduction 4 Looking to the movement of the Sensex in comparison to the PE inflows, an
evident trend that emerged during 2005-12 period is that rising equity index and resultant “feel
good” outlook, boosted PE investments which moved in tandem. An exception to this trend was
2007(Q2). It is noteworthy that investments in India peaked in during 2007(Q3), almost exactly
coinciding with the Dow Jones Industrial Average (DJIA) peak. The rising PE investments raised equity
valuations and the Sensex peaked one quarter later in 2007(Q4). This quarter saw PE investors
reacting to the unrealistic valuation expectations by cutting down their investments and while the
Sensex continued to rise, investments in Indian businesses saw a decline as did India’s GDP rate.
Despite a decline in the GDP growth to 6.1% in 2012 (Q1), the last couple of quarters have seen an
increasing trend in the Sensex and a consequent recovery in the PE investments. Increasing domestic
consumption by a burgeoning middle class, which in combination with the strong private sector and
intellectual base, has fuelled cross-sector growth in India, making India a promising candidate for the
private equity investment going forward. The investment climate in the near future is likely to be
determined by the impact of market volatility, economic growth rate and the regulatory framework.
1.2 Sectoral Analysis of VC Investment in India Among the entire years real estate sector continues
to be the most attractive sector among the investors. Among all the years it is gaining the highest
percentage by the investors. After real estate, technology sector finds uniform attractiveness
amongst investors. The combination of adoption of smart phones and tablets combined with mobile
internet is viewed as a winning combination. After telecom sector medical devices and innovation in
healthcare delivery models have also caught investor attention. The least priority sector among all
the above sectors is biotech sector. India’s strength in the IT and ITes sector first received
prominence in the late 1990s and early 2000s. Y2K risk mitigation services provided by domestic
companies gave global investors confidence in India’s IT capabilities. Consequently, 60% of PE
Introduction 5 investments in the early part of the decade can be attributed to the IT sector. The
peak year 2007 witnessed a shift in the focus towards real estate, construction and infrastructure
segments and telecom, media and entertainment which comprised more than 50% of the total PE
investments during the year as presented in the Fig. 1.2. Figure 1.2: VC Investments in India in
various sectors for the period April 2007- January 2013 While investments continued in the real
estate and construction sector in 2010, at a total investment of around USD 2 billion, the power and
energy sector topped in terms of value. The year 2011 saw a shift in the investments within real
estate and infrastructure sector from commercial and residential to large infrastructure projects
such as airports, ports and roads. The automotive sector also came in to focus in this year with the
Hero Group-Bain Capital deal. 1.3 Growth of PE/VC in India “VC and PE funds make available
monetary capital to companies while receiving equity in exchange.” VC and PE funds are especially
essential and appropriate in countries where credit markets are limited; since they can provide
finances to companies with high potential if debt-financing is not an option. Furthermore, by
Introduction receiving equity in the operating companies, the VC and PE funds get ownership in
companies and can through their knowledge and capabilities influence the companies. Figure 1.3:
“VC and PE funds make fewer and often larger investments than investment funds, and therefore
spend more time on each investment. The funds do not just act as stockholders, but is typically also
involved in the daily management. Due to the fact that the funds act as owners and management,
they reduce the agency problem and thereby the risk.” The agency difficulty typically exists between
the management and stakeholders, where the manager acts as agent for the principals, namely the
shareholders, and the man own wealth. When the funds own a large stake and at the same time set
the strategy for the company, they decrease the risk of an agency problem. “VC and PE are a
structured form of investment where up a fund and the fund operates as the financial link between a
limited group of investors and the operating company. The VC or PE fund is the legal entity where
the investors place their capital, which can then be used to acquire opera companies. The fund is
typically controlled by the VC or PE firm and the firm 1100 947 200 0 50 100 150 200 250 300 350
No. of Deals 2000 2001 receiving equity in the operating companies, the VC and PE funds get
ownership in companies and can through their knowledge and capabilities influence the
companies. : Growth of PE/VC in India for the period 2000 “VC and PE funds make fewer and often
larger investments than investment funds, and therefore spend more time on each investment. The
funds do not just act as stockholders, but is typically also involved in the daily management. Due to
the nds act as owners and management, they reduce the agency problem and thereby the risk.” The
agency difficulty typically exists between the management and stakeholders, where the manager
acts as agent for the principals, namely the shareholders, and the manager acts only with the
concentration of maximizing his own wealth. When the funds own a large stake and at the same
time set the strategy for the company, they decrease the risk of an agency problem. “VC and PE are
a structured form of investment where a VC or PE firm set up a fund and the fund operates as the
financial link between a limited group of investors and the operating company. The VC or PE fund is
the legal entity where the investors place their capital, which can then be used to acquire opera
companies. The fund is typically controlled by the VC or PE firm and the firm 947 691 470 1050 2200
7500 14234 110 76 60 71 140 209 Growth of PE/VC in India 2000-2007 (US$ Millions) Value of Deals
Number of Deals 2001 2002 2003 2004 2005 2006 6 receiving equity in the operating companies, the
VC and PE funds get ownership in companies and can through their knowledge and capabilities
influence the companies. Growth of PE/VC in India for the period 2000-2007 “VC and PE funds make
fewer and often larger investments than investment funds, and therefore spend more time on each
investment. The funds do not just act as stockholders, but is typically also involved in the daily
management. Due to the nds act as owners and management, they reduce the agency problem and
thereby the risk.” The agency difficulty typically exists between the management and stakeholders,
where the manager acts as agent for the principals, namely the ager acts only with the concentration
of maximizing his own wealth. When the funds own a large stake and at the same time set the
strategy a VC or PE firm set up a fund and the fund operates as the financial link between a limited
group of investors and the operating company. The VC or PE fund is the legal entity where the
investors place their capital, which can then be used to acquire operating companies. The fund is
typically controlled by the VC or PE firm and the firm 14234 307 0 2000 4000 6000 8000 10000
12000 14000 16000 US$ Millions 2007 Introduction 7 councils and administrates the fund.
Additionally, the firm is involved in the management of the operating company in order to manage
the company according to the strategy.” As discussed above, “VC and PE companies obtain equity
securities in the operating companies they invest in as major stakeholder. Typically, VC and PE funds
operate with an investment timeframe of 4 to 7 years, where the ultimate goal is to maximize
shareholder value.” “After the completion of investment period, where the fund has influenced and
developed the operating company through the capital injection and active ownership involvement,
the fund generates its return through a realization event predictably via trade sale or IPO.” “Due to
the fact that the business model is based on owning equity for a specific period of time, the VC and
PE funds are stimulated to maximize the shareholder value, since the return is based on the market
value of the equity. Additionally, given that VC and PE investments are comprehensive in terms of
size, length, concentration and involvement of investment, the funds expect high returns.”
“Traditionally, a high level of leverage has been a significant parameter of the business model of VC
and PE funds. The high gearing minimizes the level of tax payment due to the deductable interest
expenses. VC and PE funds are accordingly investing more frequently in emerging markets.” “The
reason being that the operating companies are more likely to attain impressive growth rates and
thereby deliver solid financial returns to the shareholders, because of the economic growth in the
emerging markets combined with the increased level of market capitalization, which necessitates a
sustainable demand for selling stakeholders’ rights.” Earlier the majority of VC and PE investments
determined on operating companies in Europe and North America, and the existing financial models
developed with the objective of evaluating operating companies persistent on internal factors. “A
commonly applied model used by financial analysts to evaluate the value of a company is Tobin’s Q
which predominantly focuses on the assets of the company.” Another more frequently used
valuation method is the discounted Introduction 8 cash flow model (DCFM), which simply discounts
future projected cash flows to present value so as to calculate the potential of the investment. The
last example of an existing financial model evaluating the value of an operating company is the
weighted average cost of capital model. This model analyzes the current capital structure of a
company based on cost of debt and equity, and compares the capital structure to the competitors in
the industry. Common for these three examples are that they focus on the operating companies, and
competitors, but do not include country-specific factors. The reasoning is presumably that these
financial models are developed based on theoretical and empirical knowledge of the mature
markets, since the majority of investments have been conducted in the North America and Europe
up until the millennium. Thus, the financial models focusing only on internal factors for the
operating company are adequate due to the relatively stable market conditions in these regions.
Nevertheless, given that more VC and PE funds are investing in budding markets, it is appropriate to
critically challenge the importance of the financial models used today. I assume that the returns on
investments generated by VC and PE funds in emerging markets are more likely to be affected more
severely by country-specific factors than in mature markets. There exists a gap in the academic and
normative literature, since none existing financial models analyze how country-specific factors affect
the returns of the VC and PE funds. It is problematic that the funds have little knowledge and
normative models to rely on in regards to evaluate the attractiveness of the country where they
want to invest, especially, since more investments focus on emerging markets. 1.4 Objectives of the
study The objective of this work is to outline the present status of the venture capital and private
equity industry in India and to find the changes that could be effected in the present environment to
enable venture capital grow at a fast pace and Introduction 9 accelerating the economic growth.

The following are the main objectives of the study to assess the role of VC and PE in the promotion
of Indian market:

1. The focus of this study looked at the lifecycle of VCPE investments, i.e., from the time of
investment in the company till their exit from the investment, as well as areas related to
investments such as investment decision making, structure of investments, and valuation. 2.
Research that has focused on the recent growth phase of the VCPE industry in India has been
limited. Most of the studies have focused the Indian industry were either before the growth
phase or did not cover the growth phase in full, starting from the onset of growth till the
slowdown, caused by the global financial crisis. This study is an attempt to meet the gap in
research on the recent trends in the Indian VCPE industry. 3. To identify the legal framework
formulated by SEBI to encourage VC activity in Indian Economy as well as to know the impact of
political, economic and geographical factors on VC investments. 4. To suggest measures to
streamline the existing structural framework and to identify the future prospects of VC and PE in
Indian capital market along with suggesting the ways and means to explore the new arising
opportunities. 5. The study highlighted some of the lesser known features of the Indian VCPE
industry such as the characteristics of the investee firm at the time of VCPE investment, the
duration of VCPE investments in the firm, and the timing and mode of exit by the investors. The
objective is to provide a holistic understanding of the Indian VCPE industry to enable the
creation of a policy environment to sustain the growth of the industry.
Venture Capital: Where Does It Come From? Entrepreneurs depend on different sources of
capital in order to finance their ventures, although entrepreneur’s own capital or personal
savings is the important source of capital (Aldrich, 1999). Alternatively, serial entrepreneurs or
you can say those individuals who launch several ventures over time try out some tricks as they
may liquidate their stakes in their earlier ventures and then they re-invest their money in a new
venture (Wright et al., 1997). Another source of capital may come from casual investors
collectively known as the ‘3Fs’ (family, friends, and fools). These investor’s expectations about a
good return are set in a relaxed way as they provide limited amount for investments, and
Existing personal relationships with the entrepreneur will play an important role in the informal
investor’s decision to provide financing (Harrison & Dibben, 1997). Another source of capital is
banks; these providers of capital provide it in the form of loans. Nevertheless, banks do not
want to face the high levels of risk associated with equity investing in entrepreneurial ventures.
In between these two major sources i.e. an entrepreneur’s own capital and informal investors
and bank loans there are three major sources of equity finance available to entrepreneurs: •
Classic or Professional venture capitalists (VCs) • Business angels (BAs) • Corporate venture
capitalists (CVCs). Venture Capital & Private Equity: Conceptual Framework 66 These three
investor types differ according to the source of investment funds, typical scope and size of
investments, primary motive(s) for investing, investment criteria, reporting requirements, and
exit issues. 3.4.1 Venture Capitalists: The Risk-Takers Venture capitalists (VCs) invest equity from
those groups which are professionally managed and have a lot of money. Funds are raised from
various parties who act as limited partners, in an investment hub referred to as a venture capital
fund. To maintain limited liability, limited partners are not directly involved in specific
investment decisions. Therefore the funds for the limited partners are managed by VC making
investments in a collection of entrepreneurial ventures. The following Table 3.1 compares the
three venture capital investor types on the basis of their characteristicsTable 3.1: Characteristics
of VC Providers Professional Venture Capitalists (VC) Business Angel (BA) Corporate Venture
Capitalist (CVC) Sources of Funds • Investing funds of outside limited partners • Investing their
own money • Investing corporate funds Legal form • General Partnership • Private Individual •
Subsidiary of a large firm Typical size of Investment • $ 2-10M • $ 50-100K • $ 2-20M Financing
Stages • All Stages • Seed & start up • All stages, later preferred Geographic proximity
preferences • Close proximity is preferred • Very close proximity is preferred • Proximity less
important Motive for the investment • Equity growth only • Equity growth and personal •
Strategic and equity growth Investment Criteria • Growth Prospects • Great Management •
Growth and mentoring prospects • Strategic value and fit Finding Investor Reaching agreement
• Easy to find • Lengthy and extensive due diligence • Hard to find • Relatively quick to reach
agreement when fit • Few but easy to find • Hard to meet ‘fit’ requirements Reporting
requirements • Regularly timed reporting requirements • Financially focused • Varies by
individual • Generally light • Regularly timed reporting requirements • Strategically focused
Involvement level method • Moderate • Board membership director through syndicate • Low to
extremely high, informal • Low to moderate • Informal or board Exit planning method • Planned
• IPO / trade sale • Often unplanned • Trade sale • Often unplanned • Acquisition/trade
sale/IPO Venture Capital & Private Equity: Conceptual Framework 67 Venture capital firm is a
group of VCs who co-manage one or more VC funds. Venture capital firms commonly have more
than one fund under management at all times. Large firms even have multiple funds which are
specialized by industry sector or stage of development mainly because of the limited life
(typically 10 years) of a venture capital fund. Firm strategy and reputation is one of the factors
because of which the total amount of money a venture capital firm has under management in
its numerous funds varies. Most venture capital firms have $100 to $500 million in capital under
management. The Investment decisions are made by the VCs (partners of the venture capital
firm). These partners are even involved in the venture capital firm’s day-to-day operations.
Venture capital firms are small, flat organizations (Wasserman, 2005; 2003). For the expenses
such as managing the fund and the salaries for the VCs the firm receives an annual management
fee (typically 1 to 2.5 % of the fund’s committed capital) from its limited partners. The venture
capital firm also gets a share (generally 20 %) of the profits of the fund that is divided up among
the VCs and this share is known as ‘carried interest’. The Firms also differs on their choice of
stage for financing though major venture capital firms invest in all stages of venture financing,
there are some individual firms who focus on particular venture stages (seed, start-up,
expansion, and buyout). VCs invest in seed financings in a meek manner as compared to BAs.
Seed Financing: The Ongoing Process The Concept of Seed financing has arisen for the ventures
that are still developing their technology, business concept (one or both). In Seed Financing,
Funds are used to develop the technology and business concept to a high level so that the
venture can attract start-up financing. VCs typically focus on the track records of the
entrepreneurs and they judge them according to their status. In the earliest stages, the world-
class status of the entrepreneurs is especially important. As time goes on, the demonstrated
ability of the CEO to bring venture to the market increases in importance. It is not unusual for
the CEO to be replaced as the venture growth explodes (Tybee & Bruno, 1984). In order to assist
in growth and to monitor progress, VCs stay highly involved with their portfolio companies and
expect regular reporting from the entrepreneur (Busenitz et al., 2004). Nevertheless the
entrepreneurs are particularly interested in upholding ownership control of the Venture Capital
& Private Equity: Conceptual Framework 68 venture; this issue is only of indirect interest to the
VC. For the VCs the motivation of the entrepreneur is a matter of concern as the VCs do not
want to run the entrepreneur’s business. Nevertheless, while an individual VC rarely takes a
majority stake in the venture, VCs repeatedly assert that control of the board of directors should
be in the hands of a syndicated group of venture capital investors. These interests hint at the
fact the entrepreneurs should not come across as being passionate with ownership percentages.
The favored exit mechanisms for the VC are an initial public offering (IPO) and trade sale. They
planned their way to exit way before the investments are made. In order to avoid the last
minute personal bitterness with the entrepreneurs, VCs have developed highly homogeneous
terms of agreement and prefer to let their lawyers establish the details of the agreement with
the entrepreneurs’ lawyers. 3.4.2 Business Angles: The Investors from Paradise The entities who
invest their own capital in new ventures are collectively known as BAs (Business Angels), they
are generally those entrepreneurs who have sold their companies and wish to invest their
money, and also they might be the retired senior executives of large companies. BAs just as the
VC’s have interest in equity growth but many of them also came to venture capital investing by
the chance to be heavily involved in a stimulating venture to leverage their industry contacts
and expertise ,to mentor the development of a promising young entrepreneur (one or both).
Thus BAs are motivated to invest in businesses where they have knowledge and experience
(Harrison & Mason, 1996). Here the entrepreneurs have to determine whether the BA’s primary
interest is to generate a profit or to mentor as well. The BAs can be divided in two major
categories, one who resemble the VC in many ways and the other who want closer ties and
involvement with the entrepreneur; in the case of the second type, interfering can become an
issue for the entrepreneur. Naturally, BAs will take modest levels of ownership in the new
venture, averaging 10 to 15% of ownership in initial deals. The following table provides some
contextual information in comparing financing stages in terms of the venture’s characteristics,
the purpose of the funding, the typical VC investor, and the benefits provided by the VC, and the
major trouble spots. Venture Capital & Private Equity: Conceptual Framework 69 Table 3.2 :
Financing Stages Seed Financing Start-up Financing Expansion Financing Buy-out Financing
Characteristics of Venture • 1-2 entrepreneur • Underdeveloped technology and business
concept • Business plan is not validated • Management team in place • Product ready for
marketing • A pilot and other information about the product are available • Marketing has been
started • Venture is ready to start growing expanding • Established company Main purpose of
the funding • Enabling research and development • Developing business concept • Establishing
the marketing and sales activities • Launching full scale marketing activities • MBO • LBO •
Delisting Typical venture capital investment • Business angel (BA) • Sometimes corporate
venture capitalist (CVC) • VC • CVC • Sometimes BA • VC • CVC • VC Main expertise or benefit
beyond money provided by the venture capitalists • Structure discipline, sounding board and
attraction of additional (external) funding (BA, VC, CVC) • Insights how to establish the venture’s
legal form (VC) • Technological Insights (CVC) • Marketing experience, recruiting help, contacts,
help with follow-on financing (VC) • Technological insights, test marketing and piloting
possibilities (CVC) • Reputation benefits (VC, CVC) • Marketing experience, recruiting help,
contacts help with followon financing, help to plan and execute the exit • Technological insights,
test marketing and piloting possibilities (CVC) • Reputation benefits (VC, CVC • Legal and other
expertise how to execute a buy-out deal (VC) Major trouble spots of venture capital funding,
from entrepreneurs point of view • Time consuming to locate, negotiate and close the deal •
Involvement (e.g. reporting requirements and governance) with a VC requires a lot of time •
Early Stage Company does not have very much to back up the valuation of the venture and the
valuation might be very low. • Time consuming to locate, negotiate and close the deal •
Involvement (e.g. reporting requirements and governance) with a VC requires a lot of time •
CVC might want to direct the strategy of the venture • Time consuming to locate, negotiate and
close the deal • Involvement (e.g. reporting requirements and governance) with a VC requires a
lot of time • Time consuming to locate, negotiate and close the deal • Involvement (e.g.
reporting requirements and governance) with a VC requires a lot of time Venture Capital &
Private Equity: Conceptual Framework 70 There is a rare chance of opposition among the BAs
and the VCs for the deals. BAs usually avoid the face off as either they invest in seed stage deals
with the hope that they will grow into ventures that fascinate start-up financing from VCs, or
they invest in the ventures with small growth potential as they do not attract VC that much. But
the BAs still look for good returns from these small growth potential ventures and because the
amount invested is considerably less the out-andout value of the potential return can be much
smaller than the VC’s. The entrepreneurs who usually favor familiar relationships with their
investors, BAs may represent them a suitable source of risk capital. In the case of BA-Supported
ventures the main exit mechanism is trade sale. The terms are usually directly exchanged
between the BA and the entrepreneur and agreements will be much less official and
standardized than with VCs. 3.4.3 Corporate Venture Capitalists: The Intellectual Investors
Another source of equity finances for the entrepreneurs is Corporate Venture Capitalist. The
CVCs acts as a financial intercessor of a non-financial company. The primary interest of CVCs lies
in acquiring strategic benefits for their parent operating company. Their priority is to provide
benefits to their corporate parent by investing in ventures that add value to their parent. As the
venture become successful the CVC’s parent company will have the inside track on eventually
attaining total ownership of the venture. Consequently, CVCs mostly invest in ventures whose
line of business is exactly associated to the parent’s fundamental business. A CVC whose parent
is well-recognized in the marketplace can provide extensive benefits to the entrepreneur for
example access to distribution channels, R&D support, and direct sales to the mother company.
Moreover, CVC look for a strong reporting requirement and often focus on the strategic fit
between the investor and investee. A common exit method for the CVC is acquisition or trade
sale, and the exit route is often unplanned. As far as the entrepreneur’s opinion is concern a big
threat with CVCs is the appropriation of technology secrets by them. CVCs are not that much
concerned with venture exit, in its place they leave the conditions open. Terms tend to be
standard and formally negotiated. Entrepreneurs should be mindful of the fact that all the three
major investors represent partially coinciding and corresponding Venture Capital & Private
Equity: Conceptual Framework 71 sources of finance. The corresponding involves the timing and
amount of capital provided. BAs lean towards to be keener than VCs to invest at the very
earliest stages; nevertheless, the amount of funding available for a single infusion is much larger
from VCs and CVCs than from BAs. VCs are more risk unfavorable and they usually prefer shorter
investment prospects. Additionally, BAs are highly inspired by the basic reward of their
involvement in the management of the venture. CVCs make investments of changing size as
compared with BAs and VCs. CVCs strategic interest in the venture means that they can happily
to pay higher prices for equity but also present an important risk of using the venture’s
knowledge to create direct competition for the venture. Entrepreneurs should be interested in
the investor’s potential of adding value beyond cash. In fact, in some cases, the potential
valueadding services can be the primary reason for entrepreneurs to seek venture capital. An
Example of This Scenario David Marquardt (a VC at a firm called TV) invested $1 million into
Microsoft Corp. In Late 1980’s Marquardt heard that Bill Gates had invited his first outside
investor and he deceptively proclaimed that ‘They absolutely didn’t need our money, but they
wanted outside counsel and I was the first venture capitalist they had talked to who understood
their business.’ Marquardt gained a place on the Microsoft board of directors as he knew Bill’s
language regarding computer technology
Venture Capital Financing: A Series of Footsteps The growth of an enterprise follows a life cycle
as shown in the diagram below. The requirements of funds vary with the life cycle stage of the
enterprise. Even before a business plan is prepared the entrepreneur invests his time and
resources in surveying the market, finding and understanding the target customers and their
needs. At the seed stage, the entrepreneurs continue to fund the venture with own or family
funds. At this stage the funds are needed to solicit the consultant’s services in formulation of
business plans, meeting potential customers and technology partners. Next the funds would be
required for development of the product/process and producing prototypes, hiring key people
and building up the managerial team. This is followed by funds for assembling the
manufacturing and marketing facilities in that order. Finally the funds are needed to expand the
business and attaint the critical mass for profit generation. Venture capitalists cater to the needs
of the entrepreneurs at different stages of their enterprises. Depending upon the stage they
finance, venture capitalists are called angel investors, venture capitalist or private equity
supplies/Investor.
Venture capital was started as early stage financing of relatively small but rapidly growing
companies. However various reasons forced venture capitalists to be more and more involved in
expansion financing to support the development of existing portfolio companies. With
increasing demand of capital from newer business, Venture capitalists began to operate across a
broader spectrum of investment interest. This diversity of opportunities enabled Venture
capitalists to balance their activities in term of time involvement, risk acceptance and reward
potential, while providing ongoing assistance to developing business. Different venture capital
firms have different attributes and aptitudes for different types of Venture capital investments.
Hence there are different stages of entry for different Venture capitalists and they can identify
and differentiate between types of Venture capital investments, each appropriate for the given
stage of the investee company, these are:

Early Stage Finance • Seed Capital • Start up Capital • Early/First Stage Capital • Later/ Third
Stage Capital 3.5.2 Later Stage Finance : The Mature Stage • Expansion/ Development Stage
Capital • Replacement Finance • Management Buy-Out and Buy-Ins • Turnarounds •
Mezzanine/ Bridge Finance Not all business firms pass through each of these stages in a
sequential manner. For instance seed capital is normally not required by service based ventures.
It applies largely to manufacturing or research based activities. Similarly second round finance
does not always follow early stage finance. If the business grows successfully it is likely to
develop sufficient cash to fund its own growth, so does not require venture capital for growth.
The table 3.3 below shows risk perception and time orientation for different stages of venture
capital financing.