This paper proposes to outline the concept and origin of Venture Capital, trace its growth, and highlight

the venture capital regulations. It has briefly explained about the Chandra Sekhar Committee recommendations, various types of Venture Capital Funds and the venture capital process in India. A simple case on first Venture Capital Fund in India, Technology Development & Information Company Of India Ltd., has also developed with concluding remarks. Introduction The venture capital investment helps for the growth of innovative entrepreneurships in India. Venture capital has developed as a result of the need to provide non-conventional, risky finance to new ventures based on innovative entrepreneurship. Venture capital is an investment in the form of equity, quasi-equity and sometimes debt - straight or conditional, made in new or untried concepts, promoted by a technically or professionally qualified entrepreneur. Venture capital means risk capital. It refers to capital investment, both equity and debt, which carries substantial risk and uncertainties. The risk envisaged may be very high may be so high as to result in total loss or very less so as to result in high gains The concept of Venture Capital Venture capital means many things to many people. It is in fact nearly impossible to come across one single definition of the concept. Jane Koloski Morris, editor of the well known industry publication, Venture Economics, defines venture capital as 'providing seed, start-up and first stage financing' and also 'funding the expansion of companies that have already demonstrated their business potential but do not yet have access to the public securities market or to credit oriented institutional funding sources. The European Venture Capital Association describes it as risk finance for entrepreneurial growth oriented companies. It is investment for the medium or long term return seeking to maximize medium or long term for both parties. It is a partnership with the entrepreneur in which the investor can add value to the company because of his knowledge, experience and contact base. The Origin of Venture Capital In the 1920's & 30's, the wealthy families of and individuals investors provided the start up money for companies that would later become famous. Eastern Airlines and Xerox are the more famous ventures they financed. Among the early VC funds set up was the one by the Rockfeller Family which started a special fund called VENROCK in 1950, to finance new technology companies. General Doriot, a professor at Harvard Business School, in 1946 set up the American Research and Development Corporation (ARD), the first firm, as opposed to a private individuals, at MIT to finance the commercial promotion of advanced technology developed in the US Universities. ARD's approach was a classic VC in the sense that it used only equity, invested for long term, and was prepared to live with losers. ARD's investment in Digital Equipment Corporation (DEC) in 1957 was a watershed in the history of VC financing. While in its early years vc may have been associated with high technology, over the years the concept has undergone a change and as it stands today it implies pooled investment in unlisted companies. Venture Capital in India In India the Venture Capital plays a vital role in the development and growth of innovative entrepreneurships. Venture Capital activity in the past was possibly done by the developmental financial institutions like IDBI, ICICI and State Financial Corporations. These

In 1973 a committee on Development of small and medium enterprises highlighted the need to faster VC as a source of funding new entrepreneurs and technology. Sources of these funds were the financial institutions. This source however depended a lot on the market vagaries. Venture Capital Investments in India The venture capital investment in India till the year 2001 was continuously increased and thereby drastically reduced. And with the minimum paid up capital requirements being raised for listing at the stock exchanges. In India. and 40 percent in 2000-01 there after venture capital investors slow down their investment. foreign institutional investors or pension funds and high net-worth individuals. there was a negative growth of 4 percent in 2001-02 it was continued and a 54 percent drastic reduction was recorded in the year 2002-2003. the need for Venture Capital was recognised in the 7th five year plan and long term fiscal policy of GOI. and registered with SEBI which (i) has a dedicated pool of capital raised in a manner specified in the regulations and (ii) invests in venture capital undertakings (VCUs) in accordance with these regulations. A Venture Capital Undertaking means a domestic company (i) whose shares are not listed on a recognised stock exchange in India and (ii) which is engaged in the business of providing services/production/manufacture of articles/things but does not include such activities/sectors as are specified in the negative list by SEBI with government approvalnamely. including a body corporate.promoted by ICICI and UTI. 1996 A Venture Capital Fund means a fund established in the form of a trust/company. The first private VC fund was sponsored by Credit Capital Finance Corporation (CFC) and promoted by Bank of India. Chart I Venture Capital Investments Source: The Economic Times SEBI Venture Capital Funds (VCFs) Regulations. Surprisingly. real estate. Credit Capital Venture Fund. The venture capital funds in India are listed in Annexure I. For a long time funds raised from public were used as a source of Venture Capital. non-banking financial companies (NBFCs). (TDICI) . 132 percent in 1999-00. and APIDC Venture Capital Ltd. At the same time Gujarat Venture Finance Ltd. Chart I shows that there was a tremendous growth by almost 327 percent in 1998-99.institutions promoted entities in the private sector with debt as an instrument of funding. gold financing. were started by state level financial institutions. Asian Development Bank and the Commonwealth Development Corporation viz. VC financing really started in India in 1988 with the formation of Technology Development and Information Company of India Ltd. activities not permitted under the industrial policy of the Government and any other activity which may be specified by SEBI in consultation with the Government from time to time. it became difficult for smaller firms with viable projects to raise funds from public. Registration .

Other related issues. by ICICI.00. VCFs promoted by Public Sector banks such as Canfina by Canara Bank and SBI-Cap by State Bank of India. Investments 5. Resource raising 4.25. commercial bank holding companies and other financial institutions. Harmonisation of multiplicity of regulations 2. Venture funds in India can be classified on the basis of the type of promoters. 2000.All VCFs must be registered with SEBI and pay Rs. Exit 6. high net worth individual investors. 2. Risk capital and Technology Finance Corporation Limited (RCTFC) by the Industrial Finance Corporation of India (IFCI) and Risk Capital Fund by IDBI. 4. controlled development financial institutions such as TDICI. 4. VCFs promoted by the foreign banks or private sector companies and financial institutions such as Indus Venture Fund. 6. 5.000 as registration fee for grant of certificate. 2. venture capital subsidiaries of corporations and private venture capital firms/ funds. VCF structures 3. SEBI regulations 7. Deal origination Screening Due diligence Evaluation) Deal structuring Post-investment activity Exist . 3. Credit Capital Venture Fund and Grindlay's India Development Fund. Company law related issues and 8. The recommendations pertain to 1. 2000 SEBI appointed the Chandrasekhar Committee to identify the impediments in the growth of venture capital industry in the country and suggest suitable measures for its rapid growth. Recommendations of SEBI (Chandrasekhar) Committee. 1 . Venture capital subsidiaries are established by major corporations. VCFs promoted by the state government-controlled development finance institutions such as Andhra Pradesh Venture Capital Limited (APVCL) by Andhra Pradesh State Finance Corporation (APSFC) and Gujarat Venture Finance Company Limited (GVCFL) by Gujarat Industrial Investment Corporation (GIIC) 3. 5. 1.000 as application fee and Rs. Types of Venture Capital Funds Generally there are three types of organised or institutional venture capital funds: venture capital funds set up by angel investors. The Venture Capital Investment Process: The venture capital activity is a sequential process involving the following six steps. that is. Its report was submitted in January. VCFs promoted by the Central govt.

The venture capitalists evaluate the quality of entrepreneur before appraising the characteristics of the product. is certain intermediaries who match VCFs and the potential entrepreneurs.Venture Capital Investment Process Deal origination: In generating a deal flow. urge to grow. trade fairs. carry out initial screening of all projects on the basis of some broad criteria. commercial orientation. Screening: VCFs. Due Diligence: Due diligence is the industry jargon for all the activities that are associated with evaluating an investment proposal. and intermediaries. The evaluation of ventures by VCFs in India includes. long-term vision. For example. VCFs in India expect the entrepreneur to have:. Deals may be referred to VCFs by their parent organisaions. foreign visits etc. The size of investment. geographical location and stage of financing could also be used as the broad screening criteria. Referral system is an important source of deals. trade partners. industry associations. active search system. the VC investor creates a pipeline of deals or investment opportunities that he would consider for investing in. Intermediaries is used by venture capitalists in developed countries like USA. Preliminary evaluation: The applicant required to provide a brief profile of the proposed venture to establish prima facie eligibility. conferences. before going for an in-depth analysis. . or product. Deal may originate in various ways. friends etc. seminars. managerial skills. referral system. or market scope. the screening process may limit projects to areas in which the venture capitalist is familiar in terms of technology. the proposal is evaluated in greater detail. Detailed evaluation: Once the preliminary evaluation is over. Most venture capitalists ask for a business plan to make an assessment of the possible risk and return on the venture. Business plan contains detailed information about the proposed venture.Integrity. market or technology. Another deal flow is active search through networks.

He also gets involved in shaping of the direction of the venture. they are: Equity : All VCFs in India provide equity but generally their contribution does not exceed 49 percent of the total equity capital. however.VCFs in India also make the risk analysis of the proposed projects which includes: Product risk. The entrepreneur has to pay both interest and royalty on sales. etc. VCFs charge royalty ranging between 2 to 15 percent. Income Note : It is a hybrid security which combines the features of both conventional loan and conditional loan. Other Financing Methods: A few venture capitalists. 2. riskiness and other factors of the enterprise. the effective control and majority ownership of the firm remains with the entrepreneur. Earned out arrangements specify the entrequreneur's equity share and the objectives to be achieved. and even install a new management team. making initial public offerings (IPOs). introduced by TCFC is an example. acquisition. Conditional Loan: It is repayable in the form of a royalty after the venture is able to generate sales. A Case on Technology Development & Information Company Of India Ltd. TDICI was incorporated in January 1988 with the support of the ICICI and the UTI. They play a positive role in directing the company towards particular exit routes. the amount. 3. Technological risk and Entrepreneurial risk. the venture capitalist and the venture company negotiate the terms of the deals. They buy shares of an enterprise with an intention to ultimately sell them off to make capital gains. Exit: Venture capitalists generally want to cash-out their gains in five to ten years after the initial investment. that is. This process is termed as deal structuring. It may not. Post Investment Activities: Once the deal has been structured and agreement finalised. but at substantially low rates. Market risk. Deal Structuring: In this process. Methods of Venture Financing Venture capital is typically available in three forms in India. In India. No interest is paid on such loans.20 crore and was completely committed to . A venture may exit in one of the following ways: 1. be desirable for a venture capitalist to get involved in the dayto-day operation of the venture. 4. The agreement also include the venture capitalist's right to control the venture company and to change its management if needed. the venture capitalist may intervene. actual rate depends on other factors of the venture such as gestation period. have started introducing innovative financial securities like participating debentures. The final decision is taken in terms of the expected risk-return trade-off as shown in Figure. The country's first venture fund managed by the TDICI called VECAUS ( Venture Capital Units Scheme) was started with an initial corpus of Rs. form and price of the investment. If a financial or managerial crisis occurs. Initial Public Offerings (IPOs) Acquisition by another company Purchase of the venture capitalist's shares by the promoter. or Purchase of the venture capitalist's share by an outsider. the venture capitalist generally assumes the role of a partner and collaborator. buyback arrangements. particularly in the private sector. Thus. The degree of the venture capitalist's involvement depends on his policy. cost-flow patterns.

120 crore. SYNERGY ART FOUNDATION. Director. Uttar Pradesh Venture Capital Fund Nariman Point. Though an attempt was also made to raise funds from the public and fund new ventures. it turned around in 1989 and showed an increase of over 70 percent in the turnover. The first project of the TDICI was loan and equity to a computer software company called Kale Consultants.42 lakh in equity in 1989. Assistant Professor. India Auto Ancillary Fund Nariman Point. Most of this money has been used for the company's innovative art library scheme at least paintings to corporate clients. It showed an annual growth of 70-80 percent in the turnover. which runs art galleries in Mumbai and Chennai and plans to set up in Pune and Delhi too. Canbank Venture Capital Fund Limited. Indian Institute of Management. for his immense help and encouragement and Dr. Appropriate changes have to be made to the existing systems in order that venture capitalists find it easier to realize their investments after holding on to them for a certain period of time. Kareem Towers. VECAUS-I. TEMPTATION FOODS.40 lakh from the TDICI. Hyderabad. It manufactures a range of meters used in power stations in collaboration with the ABB Metra Watt of Germany. for his motivation and inspiration) Annexure I Some important Venture Capital Funds in India 1. Mumbai 400 021 10. which exports frozen vegetables and fruits. Gujarat Venture Capital Fund 1995 Ashram Road Ahmedabad 380 009 7. Information Technology Fund. S S S Kumar. R K Mishra. Present Status: At present the TDICI is administering two UTI –mobilised funds under VECAUS-I and II. APIDC Venture Capital Limited . Chennai 600 017 5. After making cash losses totaling Rs. Osmania University. Mumbai 400 021 11.37 small and medium enterprises. Hyderabad 500 001 2. Mumbai 400 021 . Institute of Public Enterprise. Industrial Venture Capital Limited. Orissa Venture Capital Fund Nariman Point Mumbai 400 021 12. Babukhan Estate. The TDICI invested Rs. At present many investments of venture capitalists in India remain on paper as they do not have any means of exit.50 lakh in its equity. Auto Ancillary Fund Opp. the venture capitalists had hardly any impact on the economic scenario for the next few years. a Mumbai based software firm. Bangalore 3. Gujarat Venture Capital Fund 1997.20 crore invested under the first fund. Tamilnadu Infotech Fund Nariman Point. Nariman Point. Some of the projects financed by the TDICI are discussed below. RISHABH INSTRUMENTS of Nasik got Rs. MASTEK . the Rs. 1994. Finance and Accounting Area. Thyagaraya Road. Ahmedabad 380 009 4. totaling Rs. The regulator has to liberalize the stringent policies and pave the way to the venture capital investors to park their funds in most profitable ventures. has already yielded returns totaling Rs. Ashram Road. located in PUNE. Signals Enclave. went public just three years later. had received Rs.25 lakh from the TDICI as convertible loans which were converted into equity on march 31. Conclusion In recent years the growth of Venture Capital Business has been drastically decreasing due to many reasons. Karnataka Information Technology Venture Capital Fund Cunningham Rd Bangalore 8. Kozhikode. in November 1992. New Delhi 110 010 6. 16 crore to its investors. went public in November 1992. (The author acknowledges Prof. Mumbai 400 021 9.25 lakh in two bad years. IInd Floor. in which the TDICI invested Rs.1102.

McKinsey & Company . I M Pandey – Venture Capital Development Process in India. 1998 3. The Economic Times daily 10.18. The Securities and Exchange Board of India .13. Nariman Point. . National Venture Fund for Software and Information Technology Industry. June 1999 9. Editor and Publisher. 2. Indian Venture Capital Association . Chandigarh 160 017 15. September. Vol.An Overview of the Venture Capital Industry and Emerging Changes 7. Steven P. SICOM Venture Capital Fund Nariman Point Mumbai 400 021 14.SEBI (Venture Capital Funds) Regulations. 1996 4. I M Pandey – Venture Capital: The Indian Experience. Sudhir Sethi. Galante.sebi. Walden-India . 1998 5. Mumbai 400 021 References 1.1999 National Venture Capital Yearbook. New Delhi: Prentice 1996 8. Director. Technovation.Accessing Venture Capital Funds.US Venture Capital Industry – Industry Overview and Economics (Summary Document). The Private Equity Analyst newsletter . Punjab Infotech Venture Fund 18 Himalaya Marg. NVCA and Venture Economics . www.IVCA Venture Activity 1997 6.

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.