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INTRODUCTION
VENTURE:
CAPITAL:
VENTURE CAPITAL:
VENTURE CAPITALISTS:
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Venture capital is a means of financing fast-growing private companies.
Finance may be required for:
The start up,
Development/ expansion, &
Modernization
Of a company. Growing businesses always require capital. There are a
number of different ways to fund growth.
These include the owner's own capital, arranging debt finance or seeking
an equity partner, as is the case with venture capital.
With venture capital, the venture capitalist acquires an agreed proportion of
the equity of the company in return for the requisite funding. Equity finance
offers the significant advantage of having no interest charges. It is patient
capital that seeks a return through long-term capital gain rather than
immediate and regular interest payments.
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• Become part-owners and typically require a seat on the company's
board of directors.
• They tend to take a minority share in the company and usually do not
take day-to-day control.
HISTORY
Beginnings of modern venture capital:
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The earliest origins of venture capital can be traced back to the medieval
Islamic mudaraba partnership. In terms of protecting the entrepreneur, sharing
the risks, losses and profits the two systems of finance are remarkably similar.
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merchant banking industry in the United States, a situation that was quite
exceptional in developed nations.
Not only was the lax regulation of this situation very heavily criticized at
the time, this industrial policy differed from that of other industrialized
rivals—notably Germany and Japan—which at that time were gaining ground
in automotive and consumer electronics markets globally. However, those
nations were also becoming somewhat more dependent on central bank and
elite academic judgment, rather than the more diffuse way that priorities were
set by government and private investors in the United States.
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1. Venture capital general partners: (Also known in this case as "venture
capitalists" or "VCs") are the executives in the firm. In other words the
investment professionals. Typical career backgrounds vary, but VCs come
from either an operational or a finance background.
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STRATEGIC ROLES
• Serving Board
• Business Consultant
• Financier
SOCIAL/ SUPPORTIVE
• Coach/ Mentor
• Conflict resolver
NETWORKING ROLES
• Management recruiter
• Professional contact
• Industrial contact
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Lack of liquidity: Since the project is expected to run at start-up stage for
several years, liquidity may be a greater problem.
High risk: The risk of the project is associated with management, product and
operations.
Unlike other projects, the ones that run under the venture finance may be
subject to a higher degree of risk, as their result is uncertain or, at best,
probable in nature.
However, a venture capitalist looks not only for high-technology but the
innovativeness through which the project can succeed.
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increasing the viability of the Business. It isan important avenue
where the venture Capitalist keeps an open eye.
1. The Management
2. The Idea
3. Valuation
4. Exit
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• People management skills;
• Ability to spot technology and market trends;
• Wide network of contacts;
• Knowledge of all facets of business — marketing, Finance and HR;
• Judgment to evaluate them on the basis of integrity and ability;
• Patience to pursue the final goal;
• Drive to guide budding entrepreneurs; and
• Empathy with entrepreneurs.
Economy Oriented-
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• Helps in industrialization of the country
• Helps in the technological development of the country
• Generates employment
• Helps in developing entrepreneurial skills
Investor oriented-
• Benefit to the investor is that they are invited to invest only after
company starts earning profit, so the risk is less and healthy growth of
capital market is entrusted.
• Profit to venture capital companies.
• Helps them to employ their idle funds into productive avenues.
Entrepreneur oriented:
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ADVANTAGES
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2. A UNIQUE PRODUCT: Is the company having a proprietary or
differentiated product? Does the product offer benefits over existing products?
Does it have patent or other proprietary protection to forestall competitors?
6. HOME RUN POTENTIAL: Finally, the venture capitalist wants to see the
possibility of hitting a "home run" by investing in the company. Most venture
capitalists won't be interested unless the company can grow to at least $25
million in sales within five years.
Equity:-
Conditional Loans:-
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PROCESS OF VENTURE CAPITAL
1. Deal origination
2. Screening
3. Evaluation or due diligence
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4. Deal structuring
5. Post-investment activities and exit
POST INVESTMENT
ACTIVIES/ EXIT
DEAL STRUCTURING
DUE DILIGENCE
SCREENING
DEAL ORIGINATION
The venture capital industry in India has become quite proactive in its
approach to generating the deal flow by encouraging individuals to come up
with their business plans. Consultancy firms like Mckinsey and Arthur
Anderson have come up with business plan competitions on an all India
basis through the popular press as well as direct interaction with premier
educational and research institutions to source new and innovative ideas. The
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short listed plans are provided with necessary expertise through people who
have experience in the industry.
2. Screening VCFs carry out initial screening of all projects on the basis of
some broad criteria. For example the screening process may limit projects to
areas in which the venture capitalist is familiar in terms of technology, or
product, or market scope. The size of investment, geographical location and
stage of financing could also be used as the broad screening criteria.
• BACKROUND
• MARKET AND COMPETITORS
• TECHNOLOGY AND MANUFACTURING
• MARKETING AND SALES STRATEGY
• ORGANIZATION AND MANAGEMENT
• FINANCE AND LEGAL ASPECT
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The pricing thus calculated is rationalized after taking in to
consideration various economic scenarios, demand and supply of
capital, founder's/management team's track record, innovation/
unique selling propositions (USPs), the product/service size of the
potential market, etc.
4. Deal Structuring Once the venture has been evaluated as viable, the
venture capitalist and the investment company negotiate the terms of the deal,
i.e. the amount, form and price of the investment. This process is termed as
deal structuring.
The investee companies would like the deal to be structured in such a way
that their interests are protected. They would like to earn reasonable return,
minimize taxes, have enough liquidity to operate their business and remain in
commanding position of their business.
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The instruments to be used in structuring deals are many and varied. The
objective in selecting the instrument would be to maximize (or optimize)
venture capital's returns/protection and yet satisfy the entrepreneur's
requirements. The different instruments through which a Venture Capitalist
could invest a company include: Equity shares, preference shares, loans,
warrants and options.
5. Post-investment Activities and Exit Once the deal has been structured and
agreement finalized, the venture capitalist generally assumes the role of a
partner and collaborator. He also gets involved in shaping of the direction of
the venture. This may be done via a formal representation of the board of
directors, or informal influence in improving the quality of marketing, finance
and other managerial functions.
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1976: The seed capital scheme was introduced by IDBI.
1986-87: the Government levied a 5 per cent cess on all know-how payments
to create a venture capital fund by IDBI. ICICI also became a partner of the
venture capital industry in the same year.
1988-89:
Several venture capital firms are incorporated in India and they are
promoted either by financial institutions, such as IDBI, ICICI, IFCI, State-
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level financial institutions and public sector banks, or promoted by foreign
banks/private sector financial institutions such as Indus Venture Capital Fund,
Credit Capital Venture Fund, and so on. Hence, the total pool of Indian
venture capital today stands over Rs 5,000 crore.
Venture capital is also often described as "the early stage financing of new
and young enterprises seeking to grow rapidly".
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in partnership with local state financial institutions and SIDBI. These include Andhra
Pradesh, Karnataka, Delhi, Kerala and Tamil Nadu.
The Venture capital firms in India can be categorized into the following four groups:
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➢ Private Venture Capital Funds promoted by the foreign banks/private sector
companies and financial institutions such as Indus Venture Capital Funds, Credit Capital
Venture Funds and Grindlay’s India Development Fund.
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Major player of venture capital India
➢ IDBI Venture Capital Fund
This was established in1986 with the objective to finance projects whose
requirements range between Rs. 5 lakhs to 2.5 crores. The promoters’ stake
should be at least 10percent for the ventures below Rs. 50 lakhs and
15percent for those above 50 lakhs. Financial assistance is extended in the
form of unsecured loans involving minimum legal formalities. Interest at
concessional rate of 9percent is charged during technology development
and trial run of production stage and it will be 17percent once the product
is commercially traded in the market by the financially assisted firm. IDBI
venture capital funds extends its financial assistance to the ventures likely
to be engaged in the fields of chemicals, computer software, electronics,
bio-technology, non-conventional energy, food products, refractories and
medical equipments.
This venture Capital fund was jointly floated by Industrial Credit &
Investment Corporation of India (ICICI) and Unit Trust of India (UTI) to
finance the projects of professional technocrats who take initiative in
designing and developing indigenous technology in the country.
Technology Development and Information Company of India Limited
(TDICI) was launched with an authorized capital base of Rs. 20 crores and
the same was targeted to be increased to Rs. 40 to 50 crores. TDICI favours
the firms seeking financial assistance for developing information
technology, management consultancy, pharmaceutical, veterinary
biological, environmental, engineering, non-conventional sources of energy
and other innovative services in the country.
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➢ Risk Capital and Technology Finance Corporation Ltd. (RCTFC)
IFCI had sponsored in 1985, Risk Capital Foundation (RCF) to give positive
encouragement to the new entrepreneurs. RCF was converted into RCTFC
on 12th January, 1988. It provides both risk capital and technology finance
and roof to innovative entrepreneurs and technocrats for their technology
oriented ventures.
Small Industrial Development Bank of India (SIDBI)
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State Bank of India, Canara Bank, Grindlays Bank and many other banks have participated
in the venture capital fund building Industry in order to provide financial assistance to the
projects associated with high risks. SBI venture capital is monitored through SBI capital
markets. Canbanks venture capital functions through Canbank. Financial services and
India Investment Fund represents the venture capital launched by Grindlays Bank
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Literature Review
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Literature Review
Whenever Indian policy makers have to encourage any industry. The usual practic
e isto grant that the industry tax breaks for a limited period. This definitely acts as
a positive incentive for that industry. However, what is required is a throughunderst
anding of the industry requirement framing and implementation of aggregativestrat
egy for its development. VC funds are not even registered with SEBI in
spite of all the benefit available. VC industry is one, which will today prepare a
base for astrong tomorrow. What is need for the development of VC industry is not
only tax breaks but simpler procedures legislation for simplified exit form invest
ment, moretransparency and legal backing to participate in business amongst
other
things.
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operations. Through a case based approach Lloyd et. al. (1995) explored the aspect
of deal structuring and post investment staging of venture capitalists through
venture
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RESEARCH
METHODOLOGY
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Research Methodology
Acc. to Kerlinger,
• Magazine
• Journal
• Newspaper
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Objective of the Study
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DATA ANALYSIS &
INTERPRETATIONS
To find out the venture capital investment vol in india Method of financing
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Instrument Rs million %
equity share 6318.12 63.8
Redeemable preference share 2154.46 21.54
Nonconvertible debt 873.01 8.73
Convertible instrument 580.02 5.8
Other instrument 75.85 0.75
Total 10,000.46 100
Rs in million ,
reedemable
prefernce share ,
Rs in million , non Rs in million ,
2154.46
conertible debt , convertible debt ,
873.01 580.02 Rs in million , other
instument , 75.85
Interpretation:
This diagram shows the venture capital financing in equity shareand sec
ondly they invest in redeemable preference shares to get higher returns
Contributor of funds
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Contributor Rs mm %
Foreign institution investor 13426.47 52.46
All India financial institution 6252.90 24.43
Multilateral Development agencies 2133.64 8.34
Other banks 1541 .00 6.02
Private sector 412.53 1.61
Foreign investor 570 2.23
Public sector 324.44 1.27
Nationalized bank 278.67 1.09
Non resident 235.5 0.92
Sate financial institution 215 0.84
Other public 115.52 0.45
Insurance co 85 0.33
Mutual funds 4.5 0.02
Total 25595.17 100.00
Interpretation:This table shows the highest contribution of fund FII and secondlyAIFI to
develop the Industry. Financing by investment stage
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Investment in industry
Investment by Industry
As in the previous year, the maximum investment has been made in industrial products
and machinery followed by investment in computer software and service. There is an
interesting change here compared to the previous year. In 1998 the total of the
investments in computer software and hardware put together exceeds investments in
industrial products and machinery. In the previous year, the total investment in industrial
products and machinery exceeded that in the computer industry. This is a clear indication
that investment in the IT industry, as a whole is attracting greater attention, compared to
other industries. This is in keeping with global trends.
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Investment by Stages of Financing
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OBJECTIVE NO 2
The problem faced by venture capitalist
Scalabilit
The Indian software segment has recorded an impressive growth over the
last fewyears and earns large revenues from its export earnings, yet our
share in the globalmarket is less than 1 per cent. Within the software
industry, the value chain rangesfrom body shopping at the bottom to
strategic consulting at the top. Higher valueaddition and profitability as
well as significant market presence take place at thehigher end of the
value chain. If the industry has to grow further and survive the fluxit
would only be through innovation. For any venture idea to succeed there
should bea product that has a growing market with a scalable business
model. The IT industry(which is most suited for venture funding because
of its "ideas" nature) in India tillrecently had a service centric business
model. Products developed for Indian marketslack scale.
Mindsets
Venture capital as an activity was virtually nonexistent in India. Most venture
capitalcompanies want to provide capital on a secured debt basis, to establish
ed businesseswith profitable operating histories. Most of the venture capital
units were offshoots of financial institutions and banks and the lending mindse
t continued. True venturecapital is capital that is used to help launch products
and ideas of tomorrow. Abroad,this problem is solved by the presence of `
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angel investors’. They are typically wealthyindividuals who not only provide
venture finance but also help entrepreneurs to shapetheir business and make
their venture successful.
Exit
The exit routes available to the venture capitalists were restricted to the IPO
route.Before deregulation, pricing was dependent on the erstwhile CCI
regulations. Ingeneral, all issues were under priced. Even now SEBI guideli
nes make it difficult for pricing issues for an easy exit. Given the failure of
the OTCEI and the revisedguidelines, small companies could not hope for a
BSE/ NSE listing. Given the dullmarket for mergers and acquisitions, strategic
sale was also not available.
Valuation
The recent phenomenon is valuation mismatches. Thanks to the software
boom, most promoters have sky high valuation expectations. Given this, it is
difficult for deals toreach financial closure as promoters do not agree to a
valuation. This coupled withthe fancy for software stocks in the bourses
means that most companies are preponingtheir IPO’s. Consequently, the
number and quality of deals available to the venturefunds getsreduced
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OBJECIVE NO 3
To study the future prospect of venture capital
financing
With the advent of liberalization, India has been showing remarkable growth
in theeconomy in the past 10 12 years. The government is promoting growth
capacityutilization of available and acquired resources and hence entrepreneur
development, by liberalizing norms regarding venture capital. While only eigh
domestic venture capital funds were registered with SEBI during 19961998,
14 fundshave already been registered in 1999 -2000.
Institutional interest is growing andforeign venture investments are also on the
rise. Many state governments have alsoset up venture capital funds for the IT
sector in partnership with the local statefinancial institutions and SIDBI.
These include Andhra Paradesh, Karnataka, Delhi,Kerala and Tamil Nadu.
The other states are to follow soon.In the year 2000, the finance ministry
announced the liberalization of tax treatmentfor venture capital funds to
promote them & to increase job creation. This is expectedto give a strong
boost to the non resident Indians located in the Silicon Valley andelsewhere
to invest some of their capital, knowledge and enterprise in these ventures.
A Bangalore based media company, G r a y c e l l Ltd., has recently obtained
VCinvestment totaling about $ 1.7 mn. The company would be creating and
marketing branded web based consumer products in the near future.
The following points can be considered as the harbingers of VC financing in
India:-
a.Existence of a globally competitive high technology.
d.Vast pool of existing and ongoing scientific and technical research carried byl
arge number of research laboratories.
e. Initiatives taken by the Government in formulating policies to encourageinve
stors and entrepreneurs.
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Findings
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Findings
During the preparation of my report I have analyzed many things which are
following:-
• A number of people in India feel that financial institution are not only
conservatives but they also have a bias for foreign technology & they do not Trust
on the abilities of entrepreneurs.
• Venture Capital Financing is still not regarded as commercial activity.
• Restricted scope of Venture Capital in India to hi-tech project
• Ambiguous government policy towards inter-corporate investment and issue of shares to
the entrepreneurs at below per value or in the form of a “ guest equity”.
• . Focus on specific industry
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Limitations of Study
2.The data required was secondary & that was not easily available.
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Suggestions
The investment should be made in the later stage
• The government allow or encourage pension fund and insurance company
to make investment in the venture capital
• The entry of private sector should be encourage
• Tax concession and exemption given to the investor
• The government offer attractive opportunity to foreign investor to invest
in Indian venture capital firms
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Conclusion
Venture capital can play a more innovation and development role in
a developingcountry like India. It could help the rehabilitation of sick
unit through people withideas and turnaround management skill. A l
arge number of small enterprises in India because sick unit even be
fore the commencement of production of production.Venture capita
list could also be in line with the developments taking place in their
parent compay
.Yet another area where can play a significant role indeveloping co
untries is theservice sector including tourism, publishing, healthcare
etc. they could also providefinancial assistance to people coming out
of the universities, technical institutes etc.who wish to start their o
wn venture with or without hightech content,but involvinghigh risk
.Thi s would encourage the entrepreneurial spirit. It is not only initial
funding which is need from the venture capitalists, but the should als
o simultaneously provide management and marketing expertisea real
critical aspect of venturecapitalists, but they also simultaneously pro
vide management and marketingexpertisea real critical aspect of vent
ure capital in developing countries. Which canimprove their effecti
veness by setting up venture capital cell in R&D and other scientific
generation, providing syndicated or consortium financing and acing
as business incubators
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BIBLIOGRAPHY & ANNEXURE
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Bibliography
1.
JOURNALS
•
APPLIED FINANCE VENTURE STAGE INVESTMENTPRE
FERENCE IN INDIA, VINAY KUMAR, MAY, 2004.
•
ICFAI JOURNAL OF APPLIED FINANCE MAY- JUNE
•
VIKALPA VOLULMLE 28, APRI L- JUNE 2003
•
ICFAI JOURNAL OF APPLIED FINANCE, JULY- AUG.
2.BOOKS
•
I.M. Panday- venture capital development process in India
•
I. M. Panday- venture capital the Indian experience,
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APPENDIX-
List of Venture Capital Companies in India
1. 20th Century Finance Corporation Limited
Centre Point
Dr.Ambedkar Road
Parel
Mumbai - 400012
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10. eVentures India
(Consultair Investments Private Limited)
Khetan Bhavan
8 Jameshedji Tata Road
Churchgate
Mumbai - 400020
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18. Small Industries Development Bank of India (SIDBI)
SIDBI Venture Capital Limited
Nariman Bhavan
227 Vinay K. Shah Marg
Nariman Point
Mumbai - 400021
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