‘’ A STUDY ON VENTURE CAPITALISM IN INDIA

A PROJECT SUBMITTED TO

UNIVERSITY OF MUMBAI FOR PARTIAL COMPLETION

OF DEGREE OF

BACHELOR OF MANAGEMENT STUDIES

UNDER THE FACULTY OF COMMERCE

BY

BHAKTI BHALCHANDRA PARKAR

UNDER THE GUIDANCE OF

MISS. PRANALI SHINDE

MODERN EDUCATION SOCIETY’S

D.G. RUPAREL COLLEGE OF ARTS, SCIENCE AND COMMERCE MAHIM,

MUMBAI-400 016

MARCH 2024

MODERN EDUCATION SOCIETY’S

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 D.G Ruparel College of Arts, Science & Commerce

Mahim, Mumbai-400 016

CERTIFICATE

This is to certify that Ms. BHAKTI BHALCHANDRA PARKAR has worked and
duly completed her Project Work for the degree of Bachelor of Management Studies
under the faculty of Commerce in the subject of _____________________________
and her project is entitled ‘’ A STUDY OF VENTURE CAPITALISM IN INDIA’
under my supervision.

I further certify that the entire work has been done by the learner under my guidance
and that no part pf it has been submitted previously for any Degree or Diploma of any
University.

It is her work and facts reported by her personal findings and investigations

__________________ ______________________

SEAL OF THE COLLEGE [MISS. PRANALI SHINDE]

Date of Submission : __/__/_____

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 DECLARATION BY LEARNER

I the undersigned Miss. BHAKTI BHALCHANDRA PARKAR here by, declare that
the work embodied in this project work titled ‘’ A STUDY OF VENTURE
CAPITALSM IN INDIA’’ forms my own contribution to the research work carried out
under the guidance of Miss. PRANALI SHINDE is a result of my own research work
and has not been previously submitted to any other University for any other Degree
Diploma to this or any other University.

Wherever reference has been made to previous works of others, it has been clearly
indicated as such and included in the bibliography.

1. Here by further declare that all information of this document has been obtained
and presented in accordance with academic rules and ethical conduct.

________________
Miss. PRANALI SHINDE

Certified by
____________________
Miss. PRANALI SHINDE

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 ACKNOWLEDGE

To list who all have helped me is difficult because they are so numerous and the depth is so
enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimensions
in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do this
project.

I would like to thank my Principal, Dr. DILIP MASKE required for completion pf this
project for providing the necessary facilities.

I take this opportunity to thank our Coordinator Dr. VIDYA PATIL for her moral support
and guidance.

I would also like to express my sincere gratitude towards my project guide Miss. PRANALI
SHINDE whose guidance and care made thee project successful.

I would like to thank my College Library, for having provided various reference books and
magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me in
the completion of the project especially mu Parents and Peers who supported me throughout
the project.

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SR TOPIC PG.NO
NO
Ch.1 Introduction
1.1 An understanding on venture capitalism in India
1.2 Venture capitalism in India
1.3 Venture capital- international scenario
1.4 Advantages and disadvantages of venture capitalism
1.5 Venture capital funds
1.6 Evaluation of venture proposal
1.7 Role played by venture capitalism
1.8 Venture capital financing
1.9 Exist routes
1.10 Future of venture capitalism
1.11 Legal framework of venture capital
Ch.2 Research methodology
2.1 Purpose of research
2.2 Research design
2.3 Data collection
2.4 Research instrument
2.5 Research limitation
2.6 Objectives

Ch.3 Literature review

Ch.4 Data analysis, Interpretation and presentation
Ch.5 Conclusion and suggestions
Ch.6 Bibliography
Ch.7 Appendix

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 CHAPTER 1- INTRODUCTION

Venture Capital is another method of financing in form of equity participation. Venture

capital financing refers to financing of new high- risk ventures promoted by qualified
entrepreneurs who lack experience and funds to give shape to their ideas. A venture capitalist
in equity or debt securities floated by such entrepreneurs who undertake highly risky ventures
with a potential of success. Venture capital is form of equity financing suitable for small to
medium business

Venture capital is financing that provide funds to startup companies and small business that
are believed to have long term growth potential. For startups without to capital markets,
venture capital is a significant source of money. Venture capital firms invest in these early-
stage companies in exchange of their equity, an ownership on the companies they invest in.
Venture capitalist take on the risk of financing risky start-up in the hopes that some of the
firms they support will become successful.

The Venture capital sector is the most vibrant industry in the financial markets today. Venture
capital is money provide by professionals who invest alongside management in young, rapidly
growing companies that have the potential to develop into significant economic contributors.
Venture capital is an important source of equity for stat0up companies. Venture capital can be
visualized as ‘’YOUR IDEAS AND OUR MONEY’’ of developing business. Venture
capitalist are people who pool financial resources from high-net-worth individuals, corporate,
pension funds, insurance companies, etc. to invest in high-risk return venture that are unable
source funds regular channels like bank and capital market. The venture capital industry in
India has really taken off in. Venture capitalist not only provide monetary resource but also
help in the entrepreneur with guidance in formalizing his ideas into a viable business venture.

Finance may be required for: The start up, Development/ expansion and Modernization of a
company. Growing businesses always require capital. There are several different ways to fund
growth. These include the owners on capital, arranging debt finance or seeking an equity
partner, as in the case with venture capital. With 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

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return through long term capital gain rather than immediate and regular interest payment.
Venture capital investors are exposed, therefore, to the risk of the company failing.

As a result, the venture capitalist must invest in companies that have the ability to grow very
successfully and give higher than average return to compensate for the risk. Venture capital
may be viable source of financing for the business. Hile they generally invest in businesses
that are more established and ingoing, some do fund start-ups. In general, they tend to invest
in high technology businesses such as research and development, electronics, and computer.
Venture capitalist deal more in large sums of money, numbering into the millions of dollars,
so they are generally well suited to businesses that are going grand from the start or have
grown and require gigantic expansion.

With technology and knowledge-based ideas set to drive the global economy in the coming
millennium, and given the inherent strength by the way of its human capital, technical skills,
cost competitive work force, research and entrepreneurship, India can unleash a revolution of
wealth creation and rapid economic growth in a sustainable manner. However, for this to
happen, there is a need for risk finance adventure capital environment, which can leverage
innovation, promote technology and harness knowledge-based ideas.

The concept of Venture capital is very recent as compared to USA, UK, EUROPE, ISRAEL
etc. Venture capital functions were run by development financial institutions such as the IDBI
[Industrial Development Bank of India], ICICI Bank, and State Financial corporations.
Publicly raised funds were the main source of Venture capital. This source of financing was
however threatened by market vagaries and following the raising of minimum paid up capital
requirements for being listed ay stock exchanges problems were in store for small firms with
feasible projects.

Venture capital industry in India is moving is a faster phase and inherits lots of potential for
growth. Venture capital industry is translucent that is there is no clear visibility about
functioning, pattern, and trends in the Venture Capital investments. This study is an attempt to
provide insights about the Venture Capital investment trends across various sectors. The
rational for the concentration of venture capital investments in few sectors and driving forces
for the tremendous growth is assessed. Thereby, emphasis the growth of Venture capital
industry and encourage potential entrepreneurs to avail benefits of Venture Capital
investments.
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 1.1 AN UNDERSTANDING ON VENTURE CAPITALISM IN INDIA

VENTURE CAPITAL IS GENERALLY PROVIDED TO FIRMS WITH THE

FOLLOWING CHARACTERISTICS:

 Newly floated companies that do not have access to sources such as equity capital and/or other
related instruments.

 Firms, manufacturing products or services that have vast growth potential.

 Firms with above average profitability.

 Novel products that are in the early-stage of their life cycle.

 Projects involving above-average risk.

 Turnaround of companies

Venture capital derives its value from the brand equity, professional image, constructive criticism, domain
knowledge, industry contacts; they bring to table at a significant lower management agency cost.

VENTURE CAPITALIST

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VENTURE CAPITALISTS: A venture capitalist is a person who makes such investment, these include
wealthy investors, investment banks, other financial institutions other participants.

When someone refers to venture capitalist, the image that comes in mind is Mr. Money bags. We all think
venture capitalist as someone who is sitting on millions of dollars and who with the have of his magic wand
turns your dreams into reality. Well, if that is what you think is all about why run after him –‘’play Santa
yourself’’.

Venture capitalist is like any other professionals who is paid for doing his job, yes, venture capitalist is
nothing but a fund manager whose job is to manage funds that are raised. A venture capitalist gets a fee to
invest in companies that interest his investors.

With venture capital, the venture capitalist acquires an agreed proportion of the equity of the company in
return for the requisite funding. Venture capital investors are exposed, therefore, to the risk of the company
failing is high. As a result, the venture capitalist invest in companies that have ability to grow very
successfully and give higher than average returns to compensate for the risk.

Venture capitalist invest in high-technology businesses such as research and development, electronics
and computers. Venture capitalist deal more in large sums of money numbering into he millions of dollars,
so they are generally well suited to business that are going grand from the start or have grown and require
gigantic expansion.

TASK OF VENTURE CAPITALISTS

When venture capitalists invest in a business, they

 Become part-owners and typically require a seat on the company board of directors.

 They tend to take a minority share in the company and usually do not take day-to-day control.

 Professionals venture capitalists act as mentors and aim to provide support and advice on a range of
management and technical issues.

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  Assist the company to develop its full potential. The management supports is the most important
contribution of a venture capitalist. There are many sources of capital, but only venture capitalist can
provide experienced management input gained by helping many other companies successfully
conquer the inevitable problems and growing pains.

WHAT DO VENTURE CAPITALIST LOOK FOE WHILE INVESTING?

1. A GROWING MARKET: The venture capitalists see whether the company is targeting s substantial
and rapidly growing market. Does the company have a reasonable chance to successfully enter the
market and obtain a strong market position.

2. A UNIQUE PRODUCT: is the company having a proprietary or differentiated product? Does the
product offer benefit over existing products? Does it have patent or other proprietary protection to
forestall competitors?

3. IPO CANDIDATE OR ACQUISITION TARGET: Whether the company has the possibility of
growing quickly and becoming an attractive acquisition target or IPO candidate? Venture capitalists are
concerned about how they will realize liquidity and receive for their investment.

4. SOUND BUSINESS PLAN: Is the company’s strategy and business plan sound? Venture capitalists
expect to see a well-though-out, coherent business plan.

5. SIGNIFICANT GROSS PROFIT MARGIN: Can the product or service generate significant gross
profit margins [40 percent or more]? Large profit margins give a company room for the error and
enhance its attractiveness for a possible IPO or acquisition.
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 capitalist will not be interested unless the
company can grow to at least 25 million in sales within 5 years.
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FACTOR TO BE CONSIDER BY VENTURE CAPITALIST IN SELCTION OF
INVESTMENT PROPOSAL.

There are basically four elements in financing of ventures which are studied by the venture capitalists. There
are:

1. MANAGEMENT: The strength, expertise and unity of the key people on the board bring significant
credibility to the company. The members are to be mature, experienced working knowledge of
business and capable of taking potentially high risk.

2. POTENTIAL OF CAPITAL GAIN: An above average rate of return of about 30-40% is required by
venture capitalists. The rate of return also depends upon the stage of the business cycle where funds
are being deployed. Earlier stage, higher the risk and hence the return.

3. REALISTIC FINANCIAL REQUIREMENT AND PROECTIONS: The venture capitalist require

a realistic view about the present health of the organizations well as the future projections regarding
scope, nature and performance of the company in terms of scale of operations, operating profit and
further costs related to product development through Research and Development.

4. OWNER’S FINANCIAL STAKE: The financial resources owned and committed by the
entrepreneur/owner in the business including the funds invested by the family, friends and relatives
play a very important role in increasing the viability of the business. It is an important avenue where
the venture capitalist keeps an open eye.

THE KEY FACTORS FOR THE SUCCESS OF ANY PROJECT UNFER THE
CONSIDERATION OF A VENTURE CAPITALIST ARE:

 Clear and objective thinking.

 Operational experience, especially in a start-up

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  Firm grasp of numbers of numbers

 People management skills

 Ability to spot technology and market trends

 Wide networks of contacts

 Knowledge of all facts of business- marketing, finance

 Judgement to evaluate them on the basis of integrity and ability

 Patience to pursue the final goal

 Drive to guide bidding entrepreneurs and

 Empathy with entrepreneurs.

DIFFERENCE BETWEEN A VENTURE CAPITALIST AND BANKERS/MONEY

MAKERS:

 Banker is a manager of other people’s money while the venture capitalist is basically an investor.

 Venture capitalist generally invest in new ventures started by technocrats who generally are in need
of entrepreneurial aid and funds.

 Venture capitalist generally invest in companies that are not listed on any stock exchanges

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  They make profit only after the company obtains listing.

 The most important difference between a venture capitalist and convectional investor and mutual
funds is that he is a specialist and lends management support and also

 Financial and strategic planning

 Recruitment of key personnel

ORIGIN OF VENTURE CAPITAL

The story of venture capital is very much like the history of mankind. In the fifteenth century, Christopher
Columbus sought to travel westwards instead of eastwards from Europe and so planned to reach India. His
far-fetched ideas did not find favor with the king of Portugal, who refused to finance him. Finally, Queen
Isabella of Spain decide to fund him and the voyages of Christropher Columbus are now empaneled in
history and thus evolved the concept of venture capital.

Before World War 2 [1939-1945] venture capital was primarily the domain of wealthy individuals and
families J.P. MORGAN, the Wallenbergs, the Vanderbilts, the Whitneys, the Rockefellers and the Warburgs
were notable investors in private companies.

The modern venture capital industry began taking shape in the post World-War 2 It is often said that people
decide to become entrepreneurs because they see role models in other people who have become
entrepreneurs because they see role models in other people who have become successful entrepreneurs.
Much the same can be said about venture capitalists.

The earliest members of the organized venture capital industry had several role models, including these
three:

American Research and Development Corporation:

ARDC became the first institutional private-equity investment firm to raise capital from sources other than
wealthy families. Unlike most present-day venture capital firms, ARDC was a publicly-traded company.

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Formed in 1946, whose biggest successful investment was its 1957 funding of Digital Equipment
Corporation, the founder of ARDC was General Georges Doroit, a French-born military man who is
considered “the father of venture capital”. In the 1950s, he taught at the Harvard Business School. His
lectures on the importance of risk capital were considered quirky by the rest of the faculty, who concentrated
on conventional corporate management.

J.H. Whitney & Co:

Also formed in 1946, the company developed an innovative method for delivering nutrition to American
soldiers, later known as Minute Maid orange juice and was sold to The Coca-Cola Company in 1960. Jock
Whitney is considered one of the industry’s founders.

The Rockefeller Family:

Among the early VC funds set up was the one by the Rockefeller Family which started a special fund called
VENROCK in 1950, to finance new technology companies. L S Rockefeller, one of those earliest
investments was in Eastern Airlines, which is now defunct but was one of the earliest commercial airlines
and Xerox are the more famous ventures financed by the Rockfelers.

HISTORY OF VENTURE CAPITAL

The origin of venture capital can be traced to USA in 19th century. After the Second World War in 1946, the
American Research and Development was formed as first venture organization which financed over 900
companies. Venture capital had been a major contributor in development of the advanced countries like UK,
Japan and several European countries. In USA, the venture capital funds got a boost after the creation of
Small Business Investment Company under the Small Business Investment Act in 1958.

By 1962, there were 585 such companies with 205 million in capital between them. However, these
companies ran into difficulties due to lack of understanding of venture capital principles on the part of the
management land their inexperience. In the appropriate government legislation also contributed to the
failures. Learning from the experience of 60’s new venture capital companies were formed which were
better structured and organized in 70’s. These were the years when venture capitalist became more involved
in development financing both for their portfolios and for new investment.
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The pool of capital employed which stood at Rs.2.5 billion in 1975 surged significantly to 7.6 billion by the
end of 1982 due to tax reduction in 1978. In 1988 there were 587 active capital firms, out of which 200
formed the core of the industry. There were 24.1 billion in funds under the management. The buoyancy in
American venture capital activity was due to abundant technological opportunities for the creation and
commercialization of new goods and services, freedom of foreign investment in the U.S.A large potential
gains associated with equity and management participation in high technology ventures and tax relief.

The Indian Private Equity and Venture Capital Association was established in 1993 and is based in New
Delhi, the capital of the India. IVCA is a member based national organization that represents Venture capital
and Private equity firms, promotes the industry within India and throughout the world and encourages
investment in high growth companies. It enables the development of venture capital and private equity
industry in India and to support entrepreneurial activity and innovation. The IVCA also serves as a powerful
platform for investment funds to interact with each other.

IVCA members comprise Venture capital firms, Institutional investors, Banks, Business incubators,
Angel investor groups, financial advisers, Accountants, Lawyers, Government bodies Academic institutions
and other service providers to the venture capital and private equity industry. Members represent most of the
active venture capital and private equity firms in India. These firms provide capital for seed ventures, early-
stage companies, later stage expansion, and growth finance for management buying/buy-outs of established
companies.

ROLE OF VENTURE CAPITAL

Venture capital is rapidly becoming popular in different parts of the world because of the crucial role it plays
in fostering industrial development by exploring vast and untapped potentialities and overcoming threats.
Venture capitalist plays this role with the help of following major functions. Venture capitalist provides
finance as well as skills to new enterprises and new ventures of existing ones based on high technology
innovations. It provides „seed capital funds‟ to finance innovations even in the pre-start stage. In the
development stage that follows the conceptual stage venture capitalist develops a business plan (in
partnership with the entrepreneur) which will detail the market opportunity, the product, the development,
and financial needs. In this crucial stage, the venture capitalist has to assess the intrinsic merits of the
technological innovation, ensure that the innovation is directed at a clearly defined market opportunity and
satisfied himself that the management team at the helm of affairs is competent enough to achieve the targets
of the business plan.

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 Therefore, venture capitalist helps the firm to move to the exploitation stage, i.e., launching of the
innovation. While launching the innovation the venture capitalist will seek to establish a time frame for
achieving the predetermined development marketing, sales and profit targets. In each investment, as the
venture capitalist assumes absolute risk, his role is not restricted to that of a mere supplier of funds but that
of an active partner with total investment in the assisted projects. Thus, venture capitalist is expected to
perform not only the role of a financier but also a skilled faceted intermediary supplying a broad spectrum of
specialist services – technical, commercial, managerial, financial, and entrepreneurial. Venture capitalist fills
the gap in the owner’s funds in relation to the quantum of equity required to support the successful launching
of a new business or the optimum scale of operations of an existing business. It acts as a trigger in launching
new business and as a catalyst in stimulating existing firms to achieve optimum performance. Venture
capitalists job extends even as far as to see that the firm has proper and adequate commercial banking
receivable financing. Venture capitalist assists the entrepreneurs in locating, interviewing, and employing
outstanding corporate achievers to professionalism the firm.

FEATURES OF VENTURE CAPITAL

Venture capital is not just an injection of the money but also an input needed to set-up the firm, design its
marketing strategy and organize the manage it. The basic objective of investment is not profit but capital
appreciation at the time of disinvestments. Once the venture has reached the full potential the venture
capitalist disinvests his holding either to the promoters or in the market.

THE MAIN FEATURE OF VENTURE CAPITAL:

 LONG-TIME HORION- In general venture capital undertakings take a longer time- say 5-10 years
at a minimum- to come out commercially successful one should thus be able to wait patiently for the
outcome of the venture.

 LACK OF LIQUIDITY: since the project is expected to run at start up stage foe several years,
liquidity may be greater problem.

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  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 higher degree of risk.

 HIGH-TECH: venture capital finance caters largely to the needs of first-generation entrepreneurs
who are technocrats, with innovative technological businesses ideas that have not so far been tapped
in the industrial field.

 EQUTIY PARTICIPATION AND CAPITAL GAINS: Venture capitalist invest his money in terms
of equity or quasi-equity. He does not look for any dividend or other benefits, but when the project
commercially succeeds, then he can enjoy the capital gain which in his main benefit. Otherwise, he
will be losing his entire investment.

 PARTICIPATION IN MANAGEMENT: Unlike the traditional financier or banker, venture

capitalist can provide managerial expertise to entrepreneurs beside money.

IMPORTANCE OF VENTURE CAPITAL.

Few reasons for which active Venture Capital Industry is important for India include:

 Innovation: needs risk capital in a largely regulated, conservative, legacy financial system.

 Job Creation: large pool of skilled graduates in the first and second tier cities Patient capital: Not flighty,
unlike FIIs.

 Creating New Industry Clusters: Media, Retail, Call Centre’s and back-office processing, trickling down
to organized effort of support transportation services like office services, catering, transportation.

 Developing Entrepreneurship: Venture capital has played a major role in developing entrepreneurship in
India by building up professional companies which compete globally. Smart money available: It has made

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smart money available for projects which cannot be funded by conventional methods like IPOs (Initial
Public Offer).

1.2 VENTURE CAPITAL IN INDIA.

Indian tradition of VC for an industry goes back to more than 150 years when many of the managing
agency houses acted as venture capitalist providing both finance and management skill to risky projects. It
was the managing agency system through which Tata Iron and Steels and era press mills were able to raise
equity capital from the investing public. The Tata also initiated a managing agency house, named Investment
Corporation of India in 19377 which by acting as venture capitalist, successfully promoted bi-tech
enterprises such as CEAT tires.

Associated Bearings National Rayon' the early form of venture capital enables the entrepreneurs to raise
large amount of funds and yet retain management control. After the mobilizing of managing agency system,
the public sector term lending institutions meet a part of venture capital requirements through seed capital
and risk capital for hitech industries which were not able to meet promoter’s contribution. However, all these
institutions supported only proven and sound technology while technology development remanded largely
confirmed to government labs and academic institutions. Many hi-tech industries, thus found it impossible to
obtain financial assistance from banks and other financial institutions due to unproven technology
conservative attitude, risk awareness and rigid security parameters. Venture capital's growth in India passed
through various stages.

In 1973 R.S. Bhatt Committee recommended formation of Rs.100crore venture capital fund, the Seventh
Five Year Plan emphasis need for developing a system of funding venture capital. Industrial Finance
Corporation of India set up the Risk Capital Foundation in 1975 with a view to providing special assistance
to new entrepreneurs, particularly technologists and professionals for promoting medium-sized industrial
projects. Further, with a view to assisting entrepreneurs who have skills but lack finance to bring in the
requisite promoter’s contribution, Industrial Development Bank of India (IDBI) introduced two seed capital
schemes, viz., State financial corporations special share capital schemes under which SFCs extend special
share capital assistance to projects in the small-scale sector from their special class of share capital
contributed jointly by the concerned state Government and IDBI and IDBI‟s own scheme for such assistance

18
(operated mainly through State Industrial Development Corporation / State Financial corporation) in respect
of medium- sized projects costing up to Rs.2crores.

In 1985 the IDBI introduced venture capital fund scheme to assist industry’s efforts for technological
advancements. In 1986, Industrial Credit and Investment Corporation of India (ICICI) also launched a
venture capital scheme to encourage new techno crafts in the private sector in new fields of high technology
with inherent risk. Under this scheme ICICI assists projects, with initial investment not exceeding
Rs.2crores, in the form of equity or conditional loan with flexible charges and repayment period or
conventional loan. Later there were two new funds were launched.

The first one was called India fund floated by the International Division of Merrill Lynch with
subscription by non-resident Indians living mainly in the UK and Western Europe is managed by the UTI.
The second one is the venture capital fund with an initial capital of Rs.10crores established in December
1986 by IDBI to provide equity capital for pilot plants attempting commercial applications of indigenous
technology and to adapt previously imported technology to wider domestic application. The Research and
Development Cess Act was enacted in May 1986 which introduced a cess of 5% on all payments made for
purchase of technology from abroad. The levy also provided the source for the venture capital funding.

United Nations development Program in 1987 on behalf of Government examined the possibility of
developing venture capital in private sector. Technology Policy Implementation Committee in the same year
also recommended the same provisions.

Formalized venture capital book roots when venture capital guidelines were by Comptroller of Capital
Issues in November, 1988.To undertake the task on a continuous and systematic basis, the Industrial Credit
and Investment Corporation set up with the UTI, The Technology Development and Information Company
of India Ltd.‟ (TDICI) in 1989. TDICT has started providing venture capital, R & D funds and technical and
managerial services including Technology and Information. The ICICI also established in 1988 with UTI,
Venture Capital Fund with Rs.20 crores, subscribed equally by ICICI and UTI. The fund is being used for
providing assistance mainly in the form of equity, conditional loans and convertible debenture, to set up
technological ventures which have potential for fast growth. Started in 1989, the first private VC fund was
sponsored by Credit Capital Finance Corporation (CFC) and promoted by Bank of India, Asian Development
Bank and the Common wealth Development Corporation Viz. Credit Capital Venture Fund.

19
 In July, 1990 the Gujarat Industrial Corporation Ltd., launched a venture capital finance scheme through a
newly registered subsidiary with the help of the Capital Trust Fund worth Rs.24 crores to cater to projects
which will enhance the growth of the national economy. The new subsidiary “Gujarat Venture Finance Ltd”
would financially support the entrepreneur having both indigenous and imported technologies not tried
before in the country. This organization would finance venture capital entirely through equity participation.

In the private sector a few venture capital funds have been established. One such fund is Indus Venture
Capital Fund (IVCF). This venture capital has been set up with a capital of Rs.21 crore contributed by
several Indian and international institutions. The fund provides both equity capital as well as managerial
support to entrepreneurs. The other private venture capital firms set up in India are Credit Capital Venture
Fund, Twentieth Century Finance Company and Infrastructure Leasing and Financial Services Ltd.

The formalization of the Indian venture capital community began in 1993 with the formation of the
Indian Venture Capital Association (IVCA). This was followed by the SEBI (Venture Capital Funds)
Regulations, 1996 ("VCF Regulations"), for regulating and promoting the activities of domestic venture
capital funds. With a view of channelizing and promoting foreign participation in venture capital funds the
SEBI in 2000 announced the SEBI (Foreign Venture Capital Investor) Regulations, 2000 ("FVCI
Regulations") enabling foreign venture capital and private equity investors to register with it and avail of
certain benefits. The eligibility criteria for any company to obtain the status of a Foreign Venture Capital
Fund (FVCI) have also been listed in the Regulations. It is not mandatory for a FVCI to register with SEBI.
However, SEBI and the Reserve Bank of India have extended certain benefits to funds registered under the
register.

WHAT IS VENTURE CAPITAL?

 VENTURE: A business project or activity specially one that involves risk.

 CAPITAL: Fund employed in any business activity. Most important factor of production. No economic
entity can function without capital.

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FIVE CRITICAL SUCCESS FACTORS HAVE BEEN IDENTIFIED FOR THE
GROWTH OF VENTURE CAPITAL IN INDIA, NAMELY:

 The regulatory, tax and legal environment should play an enabling role as internationally venture funds
have evolved in an atmosphere of structural flexibility, fiscal neutrality, and operational adaptability.

 Resources raising, investment, management and exit should be as simple and flexible as needed and driven
by global trends.

 Venture capital should become as institutionalized industry that protects investors and investor firms,
operating in an environment suitable for raising the large amounts of risk capital needed and for spurring
innovation through start-up firms in a wide range of high growth areas.

 In view of increasing global integration and mobility of capital it is important that Indian venture capital
funds as well as venture finance enterprises are able to have global exposure and investment opportunities.

 Infrastructure in the form of incubators and R & D need to be promoted using government support and
private management as has successfully been done by countries such as the US, Israel, and Taiwan. This is
necessary for faster conversion of R&D and technological innovation into commercial products.

ISSUED FACED BY VENTURE CAPITAL IN INDIA

The Indian venture capital industry, at the present, is at crossroads. Following are the major issues faced by
this industry:

 Limitation on structuring of Venture Capital Funds (VCFs): VCFs in India are structured in the form
of a company or trust fund and are required to follow a three-tier mechanism-investors, trustee company and
AMC. A proper tax-efficient vehicle in the form of ‘Limited Liability Partnership Act’, which is popular in
USA, is not made applicable for structuring of VCFs in India. In this form of structuring, investors’ liability
towards the fund is limited to the extent of his contribution in the fund and formalities in structuring of fund
are simpler.

 Problem in rising of funds: In USA primary sources of funds are insurance companies, pensions funds,
corporate bodies etc; while in Indian domestic financial institutions, multilateral agencies and state
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government undertakings are the main sources of funds for VCFs. Allowing Pension funds, Insurance
companies to invest in the VCFs would enlarge the possibility of setting up of domestic VCFs. Further, if
Mutual Funds are allowed to invest up to percent of their corpus in VCFs by SEBI, it may lead to increased
availability of fund for VCFs.

 Lack of Inventive to Investors: Presently, high net worth individuals and corporate are not provided with
any investments in VCFs. The problem of raising funds from these sources further gets aggravated with the
differential tax treatment applicable to VCFs and mutual funds. While the income of the Mutual funds is
totally tax exempted under Section 10(23D) of the Income Tax Act income of domestic VCFs, which provide
assistance to small, and medium enterprise is not totally exempted from tax. In absence of any inventive, it is
extremely difficult for domestic VCFs to raise money from this investor group that has a good potential.

 Absence of ‘angel investors’: In Silicon Valley, which is a nurturing ground for venture funds financed IT
companies; initial/ seed stage financing is provided by the angel investors still, the company becomes
eligible for venture funding. There after Venture Capitalist through financial support and value added inputs
enables the company to achieve better growth rate and facilitate its listing on stock exchanges. Private equity
investors typically invest at expansion/ later stages of growth of the company with large investments. In
contrast to this phenomenon, Indian industry is marked by an absence of angel investors.

 Limitations of investment instruments: As per the section 10(23FA) of the Income Tax Act, income from
investments only in equity instruments of venture capital undertakings is eligible for tax exemption; whereas
SEBI regulations allow investments in the form of equity shares or equity related securities issued by
company whose shares are not listed on stock exchange. As VCFs normally structure the investments in
venture capital undertakings by way of equity and convertible instruments such as optionally/ Fully
Convertible Debentures, Redeemable Preference shares etc., they need tax breaks on the income from equity
linked instruments.

 Domestic VCFs Offshore Funds: The domestic VCFs operations in the country are governed by the
regulations as prescribed by SEBI and investment restrictions as placed by CBDT for availing of the tax
benefits. They pay maximum marginal tax 35 percent in respect of non-exempt income such as interest
through Debentures etc., while off- shore funds which are structured in tax havens such as Mauritius are able
to overcome the investment restriction of SEBI and also get exemption from Income Tax under Tax

22
Avoidance Treaties This denies a level playing field for the domestic investors for carrying out the similar
activity in the country.

 Limitation on industry segments: In sharp contrast to other countries where telecom, services and
software bag the largest share of venture capital investments, in India other conventional sectors dominate
venture finance. Opening up of restrictions, in recent time, on investing in the services sectors such as
telecommunication and related services, project consultancy, design and testing services, tourism etc, would
increase the domain and growth possibilities of venture capital.

 Anomaly between SEBI regulations and CBDT rules: CBDT tax rules recognize investment in
financially weak companies only in case of unlisted companies as venture investment whereas SEBI
regulations recognize investment in financially weak companies, which offers an attractive opportunity to
VCFs. The same may be allowed by CBDT for availing of tax exemption on capital gains at a later stage.
Also, SEBI regulations do not restrict size of an investment in a company. However, as per Income tax rules,
maximum investment in a company is restricted to less than 20 per cent of the raised corpus of VCF and
paid-up share capital in case of Venture Capital Company. Further, investment in company is also restricted
up to 40 per cent of equity of Investee Company. VCFs may place the investment restriction for VCFs by
way of maximum equity stake in the company, which could be up to 49 per cent of equity of the Investee
Company.

 Limitations on Exit Mechanism: The VCFs, which have invested in various ventures, have not been able
to exit from their investments due to limited exit routes and due to unsatisfactory performance of OTCEI.
The threshold limit placed by various stock exchanges acts as deterrent for listing of companies with smaller
equity base. SEBI can consider lowering of threshold limit for public/listing for companies backed by VCFs.
Buy-back of equity shares by the company has been permitted for unlisted companies, which would provide
exit route to investment of venture capitalists.

 Legal Framework: Lack of requisite legal framework resulting in adequate penalties in case of
suppression of facts by the promoters-results in low returns even from performing companies. This has
bearing on equity investments particularly in unlisted companies.

VENTURE CAPITAL REGULATION IN INDIA

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 The public sector financial institutions, SBI, scheduled banks, foreign banks and their subsidiaries are
eligible for setting the VC funds with the min. size of Rs. 10 cr. and a debt equity ratio of 1:1.5.

 NRI investment up to 74% on a repatriable basis and 25% -40% on a non-repatriable basis.

 The VC companies and VC funds can be set up as a joint venture between stipulated agencies and non-
institutional promoters. But the equity holding of such promoters should not exceed 20% and should not be
the largest single holder.

VC assistance should go to enterprises with a total investment of not more than Rs. 10 cr.

 The VC companies (VCC) and VC funds (VCF) should be managed by professionals and should be
independent of parent organizations.

 A person holding a position or full-time chairman/ president/CEO/MD or whole-time director in a

company will not be allowed to hold the same position simultaneously in the VCC/VCF.

Listing of VCC/VCF can be according to the prescribed norms and underwriting of issues at the promoter’s
discretion.

 The VCC/VCF will not be allowed to undertake activities such as trading, money market operations, bill
discounting, inter corporate lending. They will be allowed to invest in leasing to the extent of 15% of the
total funds developed.

 The investment of revival of risk units will be treated as part of VC activities.

The VC assistance should be extended to the enterprise having investment of Rs. 10cr in the project. The
technology involved should be new, untried or improved over the other technologies. The promoters should
be new, professionally, or technically qualified with inadequate resources.

1.3 VENTURE CAPITAL: INTERNATIONAL SCENARIO

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 Venture Capital funds are privately owned and constitute the largest source of equity capital. There are
several venture capital firms in Greater Boston, San Francisco, New York, Chicago, and Dallas. The
electronic units in these areas got a start from these firms. The ventures financed were risky but carried more
than proportionate promise of high return. The venture capital funds take a good deal of interest in the units
financed by them and assist the companies with several financial, managerial, and technical services.

The sources of venture capital in the USA are several. Individuals make venture capital investments
directly or indirectly. In direct investment individual or partnership of the individuals raise the proposal. In
the indirect approach, venture capitalist appraises the proposal and presents his evaluation to the investors.
Venture capitalist developers venture situations in which to invest. For this trouble, venture capitalist
receives 20 to 25 percent of the ultimate profits of the partnership know as carried interest. He also collects
an annual fee of 2 percent (of capital lent or invested in equity) to cover costs. Apart from individuals,
investors include institutions such as pension funds, life insurance companies and even universities. The
institutional investors invest about 10 percent of their portfolio in the venture proposals. Specialist venture
capital funds in U.S.A. have about $30 billion on an annual basis to seek-out promising start-ups and take in
them. In Japan there are about 55 active venture firms with funds amounting to $ 7 billion (1993). Venture
capital funds are also extant in U.K., France, and Korea.

U.K., venture capital activity flourished through the years, since 1980. There were only 10 companies in
the market supplying venture capital. In 1987 Britain had 140 such companies with total investments of £
800 million. The major factors contributing to this phenomenal growth in venture capital activity in Britain
were strengthening of the enterprise culture, i.e., public acceptability of being in business of taking risks for
oneself, of starting a business, of trying to make a profit and development of the listed securities market.
Both these factors were the outcome of strong government support, the government loan guarantee scheme
and business expansion scheme to render fiscal and financial incentives to venture capitalists.

The British venture capital funds have certain special characteristics. They have come into existence to
fill a potential gap in the market unfilled by the banks or the various government schemes. That potential is
for close involvement in the management of the Company being backed and, in the panning, and ownership
of the company over a period of perhaps 5 to 7 years. Some venture capitalists provide funds even right from
the research stage.

VENTURE CAPITAL IN DEVELOPING COUNTRIES

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 Venture capital as such has not been a popular source of financing in developing countries. Only a few
Asian countries made serious efforts to establish venture capital organization. These VC organizations were
usually set up by development banks as subsidiaries or separately managed funds. Besides in some
developing counties such as Philippines and Argentina, commercial banks constituted VCs organizations.
However, it is interesting to observe that private sector organizations did not take much interest in setting up
venture capital firms until recently. In some countries, VC firm came into existence with the support of
International Finance Corporation (IFC) since 1978. For example, IFC played a crucial role in setting up
SOFINNOVA in Spain, VIBES in Philippines, IPS in Kenya, KDIC in Korea and SEA VI in South East
Africa.

In recent years few VC firms have come up in countries such as Korea, Taiwan and Malaysia on the
initiative of some private sector institution. In Korea, for example, number of VC firms has been established
with the help of Korea Technology Advancement Corporation (KTAC). KTAC is a venture Capital group set
up in 1974 with the sole objective of investing in high tech business, especially by commercializing the
R&D results from the Korean Advanced instituted for Services and Technology. Foreign venture Capital
firms have not been in existence in developing counties excepting Taiwan which has been able to attract
foreign VC firms since the initiation of the venture capital in 1983.Venture capital organizations in these
countries have not been made much headway because of several factors. One such factor is dearth of funds
available for funding high risk technology ventures. Another factor contributing to slow growth of VC firms
is absence of entrepreneurial approach among development banks and commercial banks. These institutions
have also been found lacking flexibility, drive and managerial skills needed for venture financing. Further,
inefficient performance of the government, and sponsored VCFs have retarded the growth of venture capital
companies. Absence of tax incentives is another crucial factor responsible for slow growth of the companies.
In several developing countries including India tax laws favor debt against equity.

Finally, disinvestments factor has hindered the progress of VC firms in developing countries. Investors
are attracted towards equity investment only they are assured of making capital games by disposing of equity
shares. Unfortunately, financial markets in most of the developing countries are not properly developed to
provide scope for sales of shares as and when desired by their holders.

1.4 ADVANTAGES AND DISADVANTAGES OF VENTURE CAPITAL

A] ADVANTAGES OF VENTURE CAPITAL

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 Venture capital has made significant contribution to technological innovations and promotion of
entrepreneurism. Many of the companies like Apple, Lotus, Intel, Micro etc. have emerged from small
business set up by people with ideas but no financial resources and supported by venture capital.

Advantages of venture capital are:

1. Providing a relatively large amount of capital before a company goes public.

2. Many VCs are provide.

3. Managerial or technical advice for companies they invest in.

4. 3. Successful VCs bring legitimacy to new ventures they invest in.

5. 4. VCs may attract other investors

There are abundant benefits to economy, investors and entrepreneurs provided by venture capital.

1. Economy Oriented:

 Helps in industrialization of the country.

 Helps in the technological development of the country.

 Generates employment.

 Helps in developing entrepreneurial skills.

2.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.

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 Helps them to employ their idle funds into productive avenues.

3.Entrepreneur oriented:

 Finance - The venture capitalist injects long-term equity finance, which provides a solid capital base for
future growth. The venture capitalist may also be capable of providing additional rounds of funding should it
be required to finance growth.

 Business Partner - The venture capitalist is a business partner, sharing the risks and rewards. Venture
capitalists are rewarded by business success and the capital gain.

 Mentoring - The venture capitalist is able to provide strategic, operational and financial advice to the
company based on past experience with other companies in similar situations.

 Alliances - The venture capitalist also has a network of contacts in many areas that can add value to the
company, such as in recruiting key personnel, providing contacts in international markets, introductions to
strategic partners and, if needed, co-investments with other venture capital firms when additional rounds of
financing are required.

 Facilitation of Exit - The venture capitalist is experienced in the process of preparing a company for an
initial public offering (IPO) and facilitating in trade sales.

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B] DISADVANTAGES OF VENTURE CAPITAL

Loss of control is one of the disadvantages faced by entrepreneurs. Drawbacks associated with equity
financing in general can be compounded with venture capital financing. You could think of it as equity
financing on steroids. With a large injection of cash and professional and possibly aggressive investors, it is
likely that your VC partners will want to be involved. The size of their stake could determine how much say
they have in shaping your company’s direction.

Minority ownership status is another disadvantage depending on the size of the VC firm’s stake in your
company, which could be more than 50%, you could lose management control. Essentially, you could be
giving up ownership of your own business

Another disadvantage is delays in funding because venture capital investing involves a large amount of
capital exchange, a venture capitalist may not be willing to extend all requested funding at the same time.
This means business owners may have certain milestones to reach prior to receiving the financing they
initially requested, which could put additional undue pressure on them. Delays in funding could also come
by way of an extended vetting process of the start-up business asking for finance.

The biggest problem is the mind-set of the people who relate high returns and high risky project to
low/moderate return with collateral security to safe guard their investment. All these combined to a slow
start to the industry.

(a) LICENSE FOR PROJECT: For any project to be started a license is to be obtained from the
appropriate issuing authority. This has led to intermittent delays in the implementation of the projects
thereby leading to loss of credibility of the project.

(b) SCALABILITY: The Indian IT industry has recorded a tremendous growth in past few years. Yet
the market share of the IT industry in Global Market is less than 1 per cent. If the industry has to
grow further and survive the flux it would only be through innovation.

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 (c) MIND-SET: Venture capital as an activity was virtually non-existent in India. Most venture capital
companies want to provide capital on a secured debt basis, to established businesses with profitable
operating histories.

(d) EXIT: The exit routes available to the venture capitalists were restricted to the IPO route. Before
deregulation, pricing was dependent on for the erstwhile CCI regulations. In general, all issues were
underpriced. Even now SEBI guidelines make it difficult for pricing issues an easy exit.

1.5 VENTURE CAPITAL FUNDS

WHAT IS A VENTURE CAPITAL FUND?

A Venture Capital Fund (VCF) strives to provide entrepreneurs with the support they need to create up-
scalable business with sustainable growth, while providing their contributors with outstanding returns on
investment, for the higher risks they assume.

The SEBI guidelines define a 'Venture Capital Fund' as "VCF means a Fund established in the form of
a trust or a company including a body, corporate and registered under SEBI VCF Regulations which has a
dedicated pool of capital, is raised in the manner specified under the SEBI VCF Regulations and invests in
“venture capital undertaking” in accordance with the SEBI VCF Regulations.

HOW VENTURE CAPITAL FUNDS BEINGS IN INDIA?

In 1988, the Indian government issued its first guidelines to legalize venture capital operations. They
allowed state-controlled banks and financial institutions to establish venture capital subsidiaries. As a result,
venture capital funding became an extension for developing financial institutions such as ICICI, IDBI,
SIDBI, and State Finance Corporations.

In absence of an independent and organized venture capital industry in India. Until 1998, individual
investors and developmental financial institutions played the role of venture capitalists. Entrepreneurs were
largely dependent on private placements, public offerings and lending by financial institutions.

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 In 1999, Indian Government set up National Venture Capital Fund for the Software and IT Industry
(NFSIT), which was its commitment to the Indian software-driven IT industry. NFSIT, set up in association
with various financial institutions and the industry, operates under the umbrella of the Small Industries
Development Bank of India (SIDBI). The objective of the fund is to encourage entrepreneurship in the areas
of software, services, dot.com and other IT related sectors in which India has inherent as well as acquired
competency.

The fund was launched by prime minister Atal Behari Vajpayee, who has emerged as a strong proponent
of India's software-driven IT industry. The fund will be looking at supporting entrepreneurship in high
growth sectors. The fund is expected to be a key component in addressing the rapidly growing demand for
venture capital in India.

The THREE PRIMARY CHARACTERISTICS OF VENTURE CAPITAL FUNDS which make them
eminently suitable as a source of risk finance are:

 That it is equity or quasi equity investment,

 It is long term investment and,

 It is an active form of investment.

WHAT IS A VENTURE CAPITAL UNDERTAKING?

A Venture Capital Undertaking means a domestic company, (I) whose shares are not listed on a recognized
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 are specified
in the negative list by SEBI with government approval. Venture funds, both domestic and offshore, have
been around in India for some years now. The rejection ratio is very high. The only difference being exit, if
one buys a listed security, one can exit at a price but with an unlisted security, exit becomes difficult. Real
estate, non-banking financial companies (NBFCs), gold financing, 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.

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THE OBJECTIVE OF INDIAN VENTURE CAPITAL FUNDS:

 Financing and development of high technology businesses,

 To provide financial assistance for attaining commercial application of indigenous technology or adapting
imported technology for wider domestic application,

To provide risk capital to first generation entrepreneurs for setting up industrial projects and to accelerate the
pace and quality of technological innovations for products having application in industry, agriculture, health,
energy, and other areas beneficial to the development process in India.

CLASSIFICATION OF VENTURE CAPITAL FUNDS

Venture funds in India can be classified based on:

1. BASE FORMATION

 Financial Institutions Led by ICICI Ventures, RCTC, ILFS, etc.

 Private venture funds like Indus, etc.

 Regional funds like Warburg Pincus, JF Electra (mostly operating out of Hong Kong).

 Regional funds dedicated to India like Draper, Walden, etc.

 Offshore funds like Barings, TCW, HSBC, etc.

 Corporate ventures like Intel.

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2. INVESTMENT PHILOSOPHY

Early-stage funding is avoided by most funds apart from ICICI ventures, Draper, SIDBI and Angels.
Funding growth or mezzanine funding till pre-IPO is the segment where most players operate. In this
context, most funds in India are private equity investors.

3.SIZE OF INVESTMENT

The size of investment is generally less than US$1mn, US$1-5mn, US$5-10mn, and greater than US$10mn.
As most funds are of a private equity kind, size of investments has been increasing. IT companies generally
require funding limits of most funds and that is why the government is promoting schemes to fund startups
in general, and in IT.

4. VALUE ADDITION

The venture funds can have a totally "hands on" approach towards their investment like Draper or "hands
off" like Chase. ICICI Ventures falls in the limited exposure category. In general, venture funds who fund
seed or startups have a closer interaction with the companies and advice on strategy, etc while the private
equity funds treat their exposure like any other listed investment. This is partially justified, as they tend to
invest in more mature stories. A list of the members registered with the IVCA as of June 1999, has been
provided in the Annexure. However, in addition to the organized sector, there are several players operating in
India whose activity is not monitored by the association. Add together the infusion of funds by overseas
funds, private individuals, ‘angel’ investors and a host of financial intermediaries and the total pool of Indian
Venture Capital.

5.CONSORTIUM FINANCING

Where the project is Rs 100 million or more] and a single fund is not able to provide the entire venture
capital required then venture funds might act in consortium with other funds take a lead in making
investment decisions. This helps in diversifying risk but however it has not been very successful in the India
case.

VENTURE FUNDS IN INDIA CAN BE CLASSIFIED ON THE BASIS OF

THE,TYPES OF PROMOTERS:

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1] VCFS promoted by the central government-controlled development financial institutions such as
TDICI, by ICICI, Risk capital and technology finance corporation if India and risk capital fund by IDBI.

2] VCFs promoted by State Government-controlled development Finance Institutions such as Andra

Pradesh Venture Capital Limited [APVCL] by Andra Pradesh State Finance Corporation [APSFC and Gujrat
Venture Finance Company Limited by Gujrat Industrial Investment Corporation [GIIC]

3] VCFs promoted by Public Sector Banks such as Canfina by Canara Bank and SBI-cap by State Bank of
India.

4] VCFs promoted by the foreign banks or Private Sector companies and Financial Institutions such as
Indus Venture fund, Credit Capital Venture Fund and Grindlay’s India Development Fund.

ACCESSING VENTURE CAPITAL FUND

THE BUSINESS PLAN: The first step towards accessing venture capital funding is the preparation of
the business plan. The business plan should be able to provide information regarding the promoters, amount
if funding needed and the time period for which it is needed and how this funding is going to be paid back to
VC. To answer the above fundamental queries of a venture capital firm the business plan is to be structured
with the necessary information.

BUSINESS PLAN COVERAGE

EXECUTIVE SUMMARY

 A brief description of the company and the type of business

 A summary of the business nature

 A description of the experience and expertise of the management team

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  A summary of the product/service and competition

 A summary of financial history and projections

 Funds required and equity offered to the investors

 A description of use of proceeds

 The timing of returns on investment and exit routes offered to the investor

BUSINESS BACKGROUND.

 A brief history and nature of the business

 The industry details of the business involved in

 A summary of the failure of the business

PRODUCT/SERVICE

 A description of the product/service

 The uniqueness of the product

 The present status of product, that is a concept, prototype or product ready for market.

MARKET ANALYSIS

 The size of the potential market and market niche being pursued

 A projection of the trends and future size if the market place

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  The estimated market shares

 A description of the competition

 The marketing channels

 A summary of the potential customers

 The possibility of related or ne markets that can be developed.

SALES AND MARKETING STRATEGY

 The specific marketing techniques planned to be used

 The pricing plans and comparisons with pricing adopted by competitors

 The planned sales force and selling strategies for various accounts and markets.

 The specific approaches for capitalizing on each marketing channel and comparison with other
practices within the industry.

 Details of advertising and promotional plans.

 A descriptions of customer service- which markets will be covered by direct sales force, which by
distributors, representative or reseller.

PRODUCTION OPERATIONS.

 A descriptive of the production process.

 Details of the production costs, including labour force, equipment, technology involved, extent of
subcontract or outsourcing

36
  An organization chart showing the corporate structure

 A summary of the board directors and key employees and details of their skills and experience. A list
of the remuneration for all levels of staff.

 A proposed plan of how to retain key staff.

RISK FACTORS

 A description of the major problems and risk relating to the industry, the company and the products
markets.

FUNDS REQUESTED

 A description of the type of financing, such as equity only or a combination of equity and loan, and stock
options to the investor.

 The capital structure and ownership before and after the financing.

RETURN ON INVESTMENT AND EXIT

 Details of the timing and expected return of the investment

 A summary of the exit strategies, such as initial public offering, sale to a third party or management
buyout.

APPENDICES

 Resumes of key management and employees

 Detailed financial forecast and assumptions

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 Market research report

 Company literature and brochures and pictures of the product

A good business plan shows investors the quality and depth of a company’s corporate leadership and
indicates management’s ability to reach stated goals. These factors lie at the heart of the decision of a
venture capitalist to invest in the company’s future.

SELECTION OF VENTURE CAPITAL FUND

After the business plan is completed, the next step is to select the venture capital fund, which is suitable to
your proposal. The entrepreneur should first ascertain as to the investment strategy of the VC with regards to
the sector in which the VC is interested as well as the stage at which he chooses to fund the project. Based
on this information the entrepreneur should shortlist the suitable VCs who match his requirement and then
approach them financing from venture capital funds is available at various stages and different VCs provide
funding in some or all of the stages.

WHO INVESTS IN VENTURE CAPITAL FUNDS?

Institutional investors like insurance companies, banks, individual investors, financial institutions,
Governments are the broad category that generally invests in a VCF

TYPES OF VENTURE CAPITAL FUNDS

Venture capital funds could be from:

1. Incubators

2. Angel investors

3. Venture Capitalists (VCs)

4. Private Equity Players

INCUBATORS

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Incubators are an organization, platform or team of experienced professionals that helps startups bootstrap
during its early stages and often provides mentoring, guidance, co-working space and also at times some
funding. An incubator is a hardcore technocrat who works with an entrepreneur to develop a business idea,
and prepares a company for subsequent rounds of growth & funding. Examples of incubators in India are E-
Ventures, Infinity.

ANGEL INVESTORS

An angel is an experienced industry-bred individual with high net worth. These people provide capital for
needy but deserving business start-ups in exchange for convertible debt or ownership equity. These days
many of them are investing online through equity crowd funding.

Typically, an angel investor would:

 Invest only his chosen field of technology

 Take active participation in day-to-day running of the company

 Invest small sums in the range of USD 1-3 million

 Not insist on detailed business plans

 Sanction the investment in up to a month

 Help company for “second round” of funding

Example of Angle Investor:

1. Rajan Anandan, Managing Director – Sequoia Capital

Currently investing in startups spread across India and Sri Lanka, Rajan is also the co-founder of Blue Ocean
Ventures, the first seed fund in Sri Lanka. Rajan prefers to invest in B2B startups owned in partnership.

2. Anupam Mittal, Founder & CEO – People Group

The one to bring revolution in the Indian arranged marriage market. With his very successful venture
Shaadi.com, Anupam Mittal has become a prominent name in the angel investors’ network.

VENTURE CAPITALISTS (VCS)

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VCs are organizations raising funds from numerous investors & hiring experienced professional managers to
deploy the same. They typically:

 Invest over a spectrum over industries

 Have hand-holding “mentor” approach

 Insist on detailed business plans

 Invest into proven ideas/businesses

 Provide “brand” value to investee

 Invest between USD 2-5 million

PRIVATE EQUITY PLAYERS

Private equity is an alternate mode of private financing, which is composed of funds and investors that
directly invest in private companies. They are established investment bankers. Typically:

 Invest into proven/established businesses

 Have “financial partners” approach

 Invest between USD 5- 100 million.

MAJOR PLAYER OPERATING VENTURE CAPITAL FUNDS IN INDIA:

SIDBI VENTURE CAPITAL FUND:

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 SIDBI Venture Capital Limited (SVCL) is a wholly owned subsidiary of SIDBI, incorporated in July
1999. Their motive is to increase entrepreneurship by providing funds and other strategic inputs in order to
tap growing opportunities and increase ROI. Funds managed by SVCL are: National Venture Fund for
Software and Information Technology: It is a close ended 10-year fund with a corpus of 1 billion. SIDBI,
Ministry of information Technology (MIT), Govt. Of India and IDBI are the initial contributors to the fund.
The fund is almost fully divested.

Samridhi Fund: Samridhi Fund is close ended fund with a life of 7 years and had its initial closing on
June 18, 2013. Target sectors shall include, but not be limited to: Water & Sanitation, Affordable Healthcare,
Agriculture & Allied services, Clean Energy, Financial Inclusion, Education, Skill Building, etc.

Maharashtra State Social Venture Fund Maharashtra State Social Venture Fund (“MS Fund”), an
Alternative Investment Fund (“AIF”), was established on September 15, 2015 as a close ended unit scheme
of Maharashtra Laghu Vikas Trust (“Trust”). The Fund announced its Initial Closing on January 04, 2016.
The tenure of the Fund is 7 years. The Fund is registered with Securities & Exchange Board of India (SEBI).
The primary investment focus of MS Fund is to identify and invest in profitable and scalable business
ventures including innovative business model or new products & technologies which would have potential to
provide social benefits to the people of Maharashtra.

IFCI VENTURE CAPITAL FUNDS LIMITED (formerly known as The Risk Capital
and Technology Finance Corporation Ltd.):

The Risk Capital and Technology Finance Corporation Ltd., (RCTC) the subsidiary of IFCI provided
venture capital through technology- finance and development scheme to meet the specific needs of such
technology development. The RCTC, apart from providing assistance in the form of risk capital, is expected
to finance high tech projects in the form of venture capital for technology up gradation and development.
The assistance is provided in the form of short term conventional loan or interest free conditional loans
allowing profit and risk sharing with the project sponsors or equity participation.

In the year 2014-15, IFCI Venture has initiated setting-up of three funds viz.

 Venture Capital Fund for Scheduled Castes (VCF-SC)

 Green India Venture Fund – II

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 Small and Medium Enterprises Advantage Fund.

ICICI Ventures (formerly known as Technology Development and Information

Company of India Limited):

The venture capital fund was jointly created by Industrial Credit and Investment Corporation of India
(ICICI) and Unit Trust of India (UTI) in 1988 to finance projects of professional technocrats in the small and
medium size industries who take initiative in designing and developing indigenous technology in the
country.

TDICI‟s first venture capital fund of Rs.20 crores was subscribed equally by ICICI and UTI under the new
Venture Capital Unit Scheme I of UTI. Under the scheme TDICI sanctioned financial support of Rs.20 crore
to 40 projects which include computer hardware, computer integrated manufacturing system, tissue culture,
chemicals, food and feed technology, environmental engineering etc.

The TDICI‟s second venture Fund of Rs.100 crore has been contributed by UTI, ICICI, other financial
institutions, banks, corporate sector etc. By March 31, 1993, TDICI has disbursed Rs.25.81 crores to 42
companies under scheme I and Rs.79.29 crore to 79 companies under scheme II in a variety of industries
such as computer, electronics, biotechnology, medical, non-conventional energy etc. Many of these projects
are set-up by first generation entrepreneurs TDICI invests in companies with attractive growth and earnings
potential with a view to achieving long terms capital gain. TDICI involves in seed, start-up, and growth stage
companies in a wide spectrum of industrial sub-sectors. The Scheme seeks to assist technocrats involve in
developing commercially viable technologies or products, implementing indigenously developed yet
untested technologies on commercial scale, and adapting innovative technologies for domestic applications.
The assistance per project may be up to Rs.2 crore in the form of equity and/or conditional loan (with
flexible interest rates and repayment period). The equity in the project would be held for a period of 5-8
years and thereafter sold to the promoter (at a mutually price) or disposed in the secondary-market.

In 1998, ICICI purchased the 50% stake of UTI making the TDICI a fully owned subsidy. The name was
changed from TDICI to ICICI Ventures. ICICI Venture also has an affiliation with the Trust Company of the
West (TCW), which provides it a platform for networking Indian companies with global markets and
technology. ICICI Venture is one of the largest and most successful private equity firms in India with funds
under management in excess of USD 2 billion. ICICI Venture, over the years has built an enviable portfolio

42
of companies across sectors including pharmaceuticals, Information Technology, media, manufacturing,
logistics, textiles, real estate, etc. thereby building sustainable value. It has several “firsts” to its credit in the
Indian Private Equity industry. Amongst them are India’s first leveraged buyout (Info-media), the first real
estate investment (Cyber Gateway), the first mezzanine financing for acquisition (Arch Pharma labs) and the
first „royalty-based‟ structured deal in Pharmaceutical Research & Development (Dr. Reddy’s).

GUJARAT VENTURE FINANCE LTD (GVFL):

GVFL Ltd. (formerly Gujarat Venture Finance Limited) is widely regarded as the pioneer of venture
capital in India. It is an independent, board-managed, autonomous venture finance company based at
Ahmedabad, Gujarat (India). Started in 1990 at a World Bank initiative under the aegis of Gujarat Industrial
and Investment Corporation (GIIC), GVFL Ltd. is a classical venture capital company focused on funding
small and medium technology-based enterprises.

It provides financial support to the ventures whose requirements range between 25 lakhs and 2 crores.
GVFL provides finance through equity participation and quasi equity instruments. The firm engaged in bio-
technology, surgical instruments, conservation of energy and good processing industries are covered by
GVFL. Total Corporation of Rs.24 crores of the fund was co-financed by GIIC, IDBI, state level fiancé
corporation, some private corporate and the World Bank. Over the past two decades GVFL has spawned
seven Funds which have supported 81 companies.

Unique feature of GVFL’s approach has been its broad-spectrum support to its funded entities that ranged
from strategic direction to governance support.

ANDHRA PRADESH INDUSTRIAL DEVELOPMENT CORPORATION’S

VENTURE CAPITAL LTD. (APIDC-VCL):

The APIDL-VCL was launched in 1989 and specializes in small and medium sized companies. Provides
all stages of financing to all types of industry sectors in Andhra Pradesh. It focuses on IT and internet start-
ups who dream on operating internationally. The firm takes majority and minority stakes in its investments
and take part in the company’s monitoring and management. It also invests in businesses that drive the semi
urban and rural sector. Its investments do not go more than Rs.25 lakhs and expect a return of 30% in a
period of 5 to 7 years.

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CANARA BANK

Canara bank Venture is a prime domestic Venture Capital Fund. An experienced fund management
company, Canara bank Venture believes in adopting a General Fund philosophy and has a good portfolio of
investments in several promising sectors. The fund's corpus is contributed by Public Sector Banks and
Financial Institutions and Insurance companies. Over the last 20 Years Canara bank Venture has invested in
several promising companies, partnered progress and posted successful exits. Canara bank invest in
businesses with an established technological or market positioning edge and good growth potential. The
company has a well-qualified team to invest, manage and create value in its investee companies.

Canara bank Venture shall be investing from Emerging India Growth Fund (EIGF). EIGF is a Close
Ended, Domestic & General Fund set up to achieve long term capital appreciation from equity and equity
related investments in a broad-based portfolio of well-established Indian companies managed by
professional teams.

STATE BANK OF INDIA CAPITAL MARKETS LTD. (SBAICAP):

SBI Capital Markets Ltd. (SBICAP) is amongst the oldest players in the Indian Capital Markets and for a
number of years the bank has achieved a dominant market position in the Indian Primary Capital Markets.
The State Bank of India’s subsidiary SBI Capital Markets Ltd., extend venture capital assistance to technical
entrepreneurs who have good technique ability but lack financial strength. The support is by way of either
direct subscription or by way of underwriting support to the company. In any case direct participation will
not be in excess of 49% of the total paid up capital of the assisted unit. The projects in high priority, thrust
areas such as import substitute, high export potential, hi-tech options are preferred. The equity holdings of
assisted companies are generally disinvested in a period of three years either by way of sale to public, sale in
the OTC exchange of India, sale by private realty or by buy back arrangements with promotes or their
nominees.

INDUS VENTURE CAPITAL FUND:

Indus venture capital fund is one of the noteworthy private sector venture companies. It has been
promoted with a starting corpus of Rs.21 crores contributed by several Indian and international institutions
and companies. Indus venture Management Limited has been entrusted to manage the fund of Indus venture
capital fund. It provides equity and management support to the firms. Financial assistance is given to those
firms who confine their commercial operations in areas of health care products, electronics.
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KOTAK PRIVATE EQUITY GROUP (KPEG):

Kotak Private Equity Group is a specialist Private Equity arm of Kotak Mahindra Group. They are a leading
Private Equity Fund Manager focused on helping growing corporates and SME evolve into tomorrow's
industry leaders. KPEG provides these companies a combination of equity capital, strategic support and
other valueadded services, playing a pro-active role with the entrepreneur in building the business. They
invest in companies across a broad range of industries seeking capital for business expansions, acquisition
financing and buyout transactions. The size of the initial investment is usually between USD 15mn and
40mn depending on the nature of the company's business, stage of growth and its financing requirements.
KPEG also leads transactions greater than USD 40mn through co-investment from their reputed Limited
Partners, Kotak's international relationships and/or other Private Equity Funds. While the Kotak Group has
been associated with Private Equity investments since 1997, to bring a sharper focus to the Group's Alternate
Assets strategy, Kotak Mahindra Bank initiated its first structured third-party Private Equity Fund in early
2005. Since then, the Alternate Assets business of the Group has grown to around USD 1.4 billion under
management.

FIRST CARLYLE VENTURE MAURITIUS (FCVM):

FCVM, a collective investment scheme or investment holding company, was incorporated on June 19,
2000 in Mauritius as a public limited company limited by Shares under the Mauritius Companies Act, 1984.
FCVM is held by Carlyle Asia Venture Partners II, L.P. (“CAVP II”), CIPA Holdings L.P. (“CIPA
Holdings”), CAGP III and CAGP III Co- Invest. FCVM, CAGP III and CAGP III Co-Invest are advised and
managed by The Carlyle Group.

1.6 EVALUATION OF VENTURE PROPOSAL

Ventures need to be well prepared before they propose themselves to Venture Capitalists. The failure to
answer the questions raised by the VCs would decrease the chances of the venture being funded.

The following is a list of key questions the entrepreneur needs to have reasonable and thoughtful answers
to: At the beginning of any proposal, the venture capitalists will want a clear and concise overview of what
the company does, why it should be interesting, and why it would eventually lead to a large exit. So, it is
expected that the ventures cover the following:

 What does the company do?

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 What is unique about the company?

 What big problem does it solve?

 How big is the market opportunity?

 Where are you headquartered?

 How big can the company get?

Market

VCs need to have a clear picture and believe that the market opportunity is meaningfully large and growing,
so the venture will receive questions like:

 What is the actual addressable market?

 What percentage of the market do you plan to get over what period of time?

 How did you arrive at the sales of your industry and its growth rate?

 Why does your company have high growth potential?

Founders & Team

For many investors, the management team is the most important element in deciding whether to invest.
Ventures must show they are passionate, dedicated, and have enough experience. So, questions that need to
be anticipated are:

 Who are the founders and key team members?

 What relevant domain experience does the team have?

 What key additions to the team are needed in the short term?

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 Why is the team uniquely capable to execute the company’s business plan?

 How many employees do you have?

 What motivates the founders?

 How do you plan to scale the team in the next 12 months?

Products and Services

The venture must clarify what the company’s product or service consists of and why it is unique, so the
following questions are expected:

 Why do users care about your product or service?

 What are the major product milestones?

 What are the key differentiated features of your product or service?

 What have you learned from early versions of the product or service?

 Provide a demonstration of the product or service.

 What are the two or three key features you plan to add?

Competition

The company’s competitors will always be an issue and any entrepreneur who responds that “we do not have
competitors” will have credibility problems. So, make sure to anticipate the following questions:

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 Who are the company’s competitors?

 What gives your company a competitive advantage?

 What advantages does your competition have over you?

 Compared to your competition, how do you compete with respect to price, features, and performance?

 What are the barriers to entry?

Marketing and Customer Acquisition

The investors want to get a sense of how the company plans to market itself, the cost of acquiring a
customer, and the long-term value of a customer. So, be prepared for the following:

 How does the company market or plan to market its products or services?

 What is the company’s PR strategy?

 What is the company’s social media strategy?

 What is the cost of a customer acquisition?

Traction

A company that has gotten early traction in some way will be viewed positively, so be prepared to answer
these questions:

 What early traction has the company gotten (sales, traffic to the company’s website, app downloads, etc.,
as relevant).

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 How can the early traction be accelerated?

 How can the early traction be accelerated?

Risks

There inevitably are risks in any business plan, so these questions need to be answered thoughtfully:

 What do you see are the principal risks to the business?

 What legal risks do you have?

 Do you have any regulatory risks?

 Are there any product liability risks?

End Game

The investors will want to get a sense of when and how they will be able to exit and receive a return on their
investment, so they will ask:

 What is the likely exit – IPO or M&A?

 When do you see the exit happening?

 Who will be the likely acquirers?

1.7 ROLE PLAYED BY VENTURE CAPITAL

The following list outlines some of the specific roles of venture capitalists involved in the
development of a startup.

1) Identifies Suitable Companies for Investment Innovative industry-leading technologies being developed
under good management with potential for growth and commercialization are some of what Venture
Capitalists look for in a company. The Venture Capitalist can foster innovation by providing the financial
backing for development of new ideas, and this may also give companies some flexibility to broaden
their research and pursue different avenues of research, thus enhancing their chances at success.

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2) Identifies Value Drivers A Venture Capitalist with experience in biotech and business development can
assist companies in identifying and developing value drivers. This means identifying where to steer
corporate growth, and helping prioritize and allocate resources, based on what they believe will add the
most value to the company. Statistically, participation of a Venture Capitalist in the operations of a
business significantly increases the probability of a product making it through the pipeline to the market.

3) Establishes Milestones Venture Capitalists usually get a say in how the company is run, thus their role is
to cooperate with the company founders/ owners in determining operational milestones. Possible
milestones include patent acquisition, technology licensing, and reaching the stages of animal or clinical
trials. The milestones must be achievable and it is important that the partners see eye-to-eye, agreeing on
their defined objectives and priorities without either feeling restricted or in disagreement with the other.
Without a strong relationship and effective communication, the resulting friction can hurt the company as
concerns that funding may be withdrawn may circulate. Company founders can "shop" for a Venture
Capital to find the best match for them.

4) Develops a Strategic Plan the Venture Capitalists usually has some sort of term in mind limiting the
duration of their involvement with a company. They want a return on their investment within a period
and will plan an exit strategy based on the milestones set out in their agreement with the company. The
Venture Capitalist helps establish a strategic plan for each step of in the growth of the company using the
milestones as markers. The culminating result is most often a major event such as an initial public
offering (IPO) or acquisition, within 5-7 years.

5) Ensures Company Professionalization the Venture Capital helps to 56 professionalize a company by

identifying and recruiting competent Board and management members. Although the Venture Capital is
involved in the overall corporate plan, this ensures that the company is being managed on a day-to-day
basis by professionals with experience and business know-how. Startups are often founded by scientists
who have extensive research experience from obtaining a Ph.D. followed by years of R&D work, but
little or no business background. In many cases, the founders of new biotech companies are replaced by a
new CEO. The founder might remain on staff as the Chief Technical Officer (CTO), in other positions, or
on the Board of Directors.

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6) Provides Networking Opportunities Venture Capital can help a company plan for its future by identifying
and establishing sources of later financing. Venture Capitalists are business professionals who should be
fairly well connected through networking with other potential investors and advisors. They can use these
connections to help establish their companies in the marketplace by making introductions to technology-
collaboration partners throughout their networks.

7) Monitors the Competition Venture Capitalists are experts in business investing and are generally well
versed in the development of other companies. They have done their research before investing, therefore
are aware of the competition and what stage their R&D programs may be at. A continued vigilance is
important in the rush to have IP established, obtain new drug approval, and make it to the marketplace
ahead of the competition.

HOW VENTURE CAPITAL COMPANIES ADD VALUE

VCs can add more value to their portfolios through team building, operations, perspective, skill
building, customer development, analysis, and the network.

 TEAM BUILDING: Designing and recruiting for a startup’s most important asset, its human capital
base.

 OPERATIONS: Enhancing administrative, accounting, legal, and technological capabilities.

 PERSPECTIVE: Strategy, competitive positioning, defining the target market, and scoping the
product.

 SKILL BUILDING: Building the right skills, especially for senior management

 CUSTOMER DEVELOPMENT: Identifying and gaining access to the right customers

 ANALYSIS: How entrepreneur measure, understand and report the performance of their early- stage
companies.

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 NETWORK: The cheapest and sometimes most value-added service that an investor can provide is
access to his/her network, particularly to potential investors and acquirers.

The portfolio operator strategy has potential to boost returns.

A company’s need for these services is greatest in its earlier life. However, even among private equity funds
that invest in late-stage, stable, established companies, we see many such funds building portfolio operations
groups. Later-stage, private-equity firms clearly believe that their portfolio companies benefit from a similar
pool of operational talent, despite the fact that their companies are far more complete in their management
and developed in their strategy than the companies backed by VCs.

VENTURE CAPITAL FIRMS IN INDIA

The venture capital industry in India is still at a nascent stage with a view to promote innovation,
enterprise and conversion of scientific technology and knowledge-based ideas into commercial production, it
is very important to promote venture capital activity in India. India's recent success story in the area of
information technology has shown that there is a tremendous potential for growth of knowledge-based
industries. 58 This potential is not only confined to information technology but is equally relevant in several
areas such as bio-technology. Pharmaceuticals and drugs, agriculture, food processing, telecommunication,
services and the like. Given the inherent strength by way of its skilled and cost competitive manpower,
technology, research and entrepreneurship, with proper environment and policy support, India can achieve
rapid economic growth and competitive global strength in a sustainable manner. The Indian start up
ecosystem has grown from a few tech companies to thousands of innovative new ventures in the last decade.
This rapid growth of the Indian start-up’s ecosystem would not have been possible if venture capital firms
didn’t exist. Helping daring entrepreneurs build legendary companies, the VC firms are fuelling the vision of
thousands of entrepreneurs. These VC firms are helping entrepreneurs in bringing India to the digital world
map. This all are those Indian venture capital firms that are helping Indian entrepreneurs by providing them
with every resource they require to grow their start-up’s.

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These are the Venture Capital Firms in India:

1. SEQUOIA INDIA:
Sequoia India, for long, has been among the most prominent investors in the Indian startup
ecosystem. Contributing to the development of the Indian startup ecosystem for 14 years of its operations
in India, the VC fund has invested (directly or indirectly) in Zomato, Oyo, Ola, Un-academy, Druva,
Fresh-works, and Mu Sigma, among many others startups. Some of Sequoia India recent investments.

2. BLUME VENTURES:
Founded on the belief to create a fund that can move as fast as angel investors do, and yet be
institutionalized in its approach, Blume Ventures is one of India’s leading homes grown early-stage
venture capital firms. The venture capital firm has invested in startups hailing from every possible
industry. Some recent funding rounds in which Blume ventures has participated include-Turtle mint,
Insta mojo, Slice,

3. ACCEL:
Formerly known as Accel Partners, Accel with India-focused fund, participated in eight funding deals
Q3 quarter. Working with startups in seed early and growth-stage investments, the investment firm
counts Indian startups such as Cure fit and Swiggy among others in its portfolio. Accel India’s most
recent investment was on Oct 29, 2020, when fintech platform Credgenics raised $3.3M.

4. 100X.VC:

The Mumbai-based venture capital firm provides startups seed capital of INR 2.5 million. 100X.VC is the
first VC to invest in early-stage startups using India SAFE (India Simple Agreement for Future Equity)
Notes. The VC firm participated in nine funding deals in quarter Q3, including investments in seed-stage
startups from various sectors such as Mind peers, Battery Pool.

5. MUMBAI ANGELS NETWORK:

Started in 2006, Mumbai Angels Network (The MA Network) is India’s premier investment platform
focused on investments in new ventures. Presently, the venture investing platform has a 130+ strong
portfolio with 30+ exits. In Quarter Q3, Mumbai Angels was one of the investors in defence tech startup
Big Bang Boom Solutions and invested $1.5 Mn in Series A funding round. The investment platform has
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 invested in startups like Myntra, Purple, and Dhruva Space. Mumbai Angels Network also participated in
the $7 Mn worth seed funding round of Delhibased electric mobility startup Blue Smart.

6. KALAARI CAPITAL:
Passionate about investing in entrepreneurs, Kalari Capital manages funds of around $650M. With a
strong advisory team in Bangalore, Kalari Capital invests in early-stage, technology-oriented companies
in India. Kalari Capital’s portfolio includes startups like MYNTRA (exited), VERNACULAR.AI, Dream
11, SNAP DEAlL (Exited), Scoop Whoop, Win Zo, MALL91, among others. The most recent investment
made by Kalari Capital was on Dec 2, 2020, when Sign an AI-powered RPA platform for financial
services, raised $3M.

7. MATRIX PARTNERS INDIA:

Established in 2006, Matrix Partners India invests across a variety of sectors, including consumer
technology, B2B, enterprise, and fintech. Presently, the investment firm has $1B+ under management and
has made 60+ investments in India. The portfolio of the investment firm includes startups like OLA, DAILY
HUNT, Country Delight and CAMP K12.Some recent investments of Matrix Partners India include Country
Delight.

8. ELEVATION CAPITAL:

Elevation Capital, formerly known as SAIF Partners, is an early-stage venture capital firm. The VC firm
has startups like ACKO, First Cry, FINWEGO, Just Dial, Make My Trip, among many others in its portfolio.
Elevation Capital has had 47 exits, and its most notable exits include Urban Ladder, India MART, and
58.com. In November, Elevation Capital has invested in Country Delight (Series C), City Mall (Seed
Funding).

9. 30NE4 CAPITAL:

3one4 Capital is an early-stage venture capital firm based in Bangalore India. The firm’s focus areas
include machine-driven actionable intelligence services for the enterprise, enterprise automation, ambient
intelligence technologies, consumer products, fintech, media and multi-lingual content generation, and
health. The venture capital firm manages a corpus of INR 800 Cr (+$110Mil) and a portfolio of 50+
investments across the early stage. Some of the investments made by 3one4 include L iciouis, Bette place,
Open, Tone Tag, Darwin Box, Fair cent, Bug works, and Track- 3one4 Capital has made six investments
from August to October 2020. In October 2020, the firm invested in Better Place Safety Solutions, a startup

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providing businesses with contractor workforce management, including on boarding, training, and
background checks.

The Venture capital firms in India can be categorized into the following four groups:

 All India Development Financial Institutions sponsored Venture Capital Funds promoted by
the all-India development financial institutions such as Technology Development and Information
Company of India 61 Limited (TDICI) by ICICI, Risk Capital Technology Financial Corporation
Limited (RCTCF) by IFCI and Risk Capital Fund by IDBI.

 State Finance Corporations sponsored Venture Capital Funds promoted by the state-level
developmental financial institutions such as Gujarat Venture Capital Limited (GVCL) and Andhra
Pradesh Industrial Development Corporations, Venture Capital Limited (APIDC-VCL).

 Bank-sponsored Venture Capital Funds promoted by public sector banks such as Can finance
and SBI Caps.

 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
India Development Fund.

1.8 VENTURE CAPITAL FINANCING

Venture capital is growing business of recent origin. It refers to investment in new & tried
enterprises that are lacking a stable record of growth. Venture capital is long-term risk capital to finance
high technology projects which involve risk but at the same time has strong potential for growth. There is
a significant scope for venture capital companies in our country because of increasing emergence of
technocrat entrepreneurs who lack capital to be risked. Investors of venture capital firms are called
limited partners. Venture capital firms are usually organized as limited partnerships. The investment
Scope of Venture Capital firms usually the

 EARLY-STAGE FINANCING:

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  Seed Capital & Research & Development Projects: This is the finance provided at the
project development stage. A small amount of capital is provided to the entrepreneurs for concept
testing or translating an idea into business.

 Start Ups: This is the stage of initiating commercial production and marketing. At this stage, the
venture capitalist provides capital to manufacture a product.
 Second Round Finance: This is the stage where product has already been launched in the market
but has not earned enough profits to attract new investors. Additional funds are needed at this stage to
meet the growing needs of business. Venture capital firms provide larger funds at this stage.

 LATER STAGE FINANCING:

 Development Capital: This refers to the financing of an enterprise which has overcome the highly
risky stage and has recorded profits but cannot go for public issue. Hence it requires financial support.
Funds are required for further expansion.

 Expansion Finance

 Replacement Capital

 Turnarounds: This refers to finance to enable a company to resolve its financial difficulties. Venture
capital is provided to a company at a time of 63 severe financial problem for the purpose of turning the
company around.

 Buy Outs: This refers to the purchase of a company or the controlling interest of a company's share.
Buy-out financing involves investments that might assist management or an outside party to acquire
control of a company. This results in the creation of a separate business by separating it from their
existing owners.
 Procedure of Venture Capital Financing:

The procedure of VC financing includes:

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1) Study of VC`s Details: Often venture capitalists have preferences for stages of investment, amount
of investment, industry sectors, and geographical location.

2) Submission of Business Plan: The business plan is a document that outlines the management team,
product, marketing plan, capital costs and means of financing and profitability statements.

3) Scrunity of Business Plan: Thus, the entrepreneur should present clarity of thinking about the
business in the plan as the "Surprises can be great for parties, but potentially could be fatal for
businesses."

4) Preliminary Meeting: The initial meeting provides an opportunity for the venture capitalist to meet
with the entrepreneur and key members of the management team to review the business plan and conduct
initial due diligence on the project.

5) Negotiating Investments: This involves an agreement between the venture capitalist and
management of the terms of the term sheet, often called memorandum of understanding (MoU).

6) Approvals: The process involves due diligence and disclosure of all relevant business information.
Final terms can then be negotiated and an investment proposal is typically submitted to the venture
capital fund's board of directors. If approved, legal documents are prepared.

7) Legal & Other Procedures: The process involves due diligence and disclosure 64 of all relevant
business information. Final terms can then be negotiated and an investment proposal is typically
submitted to the venture capital fund's board of directors. If approved, legal documents are prepared.

A] VENTURE CAPITAL INVESTMENT PROCESS

The venture capital activity is a sequential process involving the following six steps.

1. Deal origination

2. Screening

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3. Due diligence

4. Deal structuring

5. Cost-investment activity

6. Exit

Deal Origination:

In generating a deal flow, the VC investor creates a pipeline of deals or investment opportunities that he
would consider for investing in. Deal may originate in various ways like referral system, active search
system, and intermediaries. Referral system is an important source of deals. Deals may be referred to VCFs
by their parent organizations, trade partners, industry associations, friends etc.

Another deal flow is active search through networks, trade fairs, conferences, seminars, foreign visits etc.
Intermediaries is used by venture capitalists in developed countries like USA, is certain intermediaries who
match VCFs and the potential entrepreneurs.

Screening:

VCFs, before going for an in-depth analysis, 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.

Due Diligence:

Due diligence is the industry jargon for all the activities that are associated with evaluating an investment
proposal. The venture capitalists evaluate the quality of entrepreneur before appraising the characteristics of
the product, market or technology. 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. The evaluation of ventures by VCFs in India includes; Preliminary evaluation: The applicant
required to provide a brief profile of the proposed venture to establish prima facie eligibility. Detailed
evaluation: Once the preliminary evaluation is over, the proposal is evaluated in greater detail. VCFs in India
expect the entrepreneur to have: Integrity, long-term vision, urge to grow, managerial skills, commercial
orientation.

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Deal Structuring:

In this process, the venture capitalist and the venture company negotiate the terms of the deals, that is, the
amount, form and price of the investment. This process is termed as deal structuring. The agreement also
include the venture capitalists right to control the venture company and to change its management if needed,
buyback arrangements, acquisition, making initial public offerings (IPOs), etc. Earned out arrangements
specify the entrepreneur's equity share and the objectives to be achieved.

Post Investment Activities:

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. The
degree of the venture capitalist’s involvement depends on his policy. It may not, however, be desirable for a
venture capitalist to get involved in the day-to-day operation of the venture. If a financial or managerial
crisis occurs, the venture capitalist may intervene, and even install a new management team.

Exit:

Venture capitalists generally want to cash-out their gains in three to seven years after the initial
investment. They play a positive role in directing the company towards particular exit routes. A venture
Capitalist may exit in one of the following way:

 Initial Public Offerings (IPOs):

An IPO or initial public offering is a company’s first public stock offering, which takes place when a
company goes public by registering its securities with the Securities and Exchange Commission. This is
where Venture Capitalists feel the firm is worth going public. The Venture Capitalists look on making an
oversubscribed profit from the offering.

 Mergers and Acquisitions:

In an era of large companies dominating industry landscapes, acquisition is often the targeted and most
common exit strategy. Smaller companies have, in essence, become the research and development arm of
larger companies who often look to buy them once their innovations can contribute to their own profitability.

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  Redemption:

Another alternative is that the company may be required to buy back a venture capital firms stock at cost
plus a certain premium. Often a venture capital firm will put a redemption clause also referred to as a “buy-
back clause” in the investment terms which allows them to exit their investment in your company in the
event that an IPO or acquisition does not happen within a designated time period.

B] STAGES OF FINANCING

The various stages in financing of venture capital are described below:

 Seed Stage – Development of an Idea:

In the initial stage venture capitalists provide seed capital for translating an idea into business proposition. At
this stage investigation is made in-depth which normally takes a year or more.

 Implementation Stage – Start up Finance:

When the firm is set up to manufacture a product or provide a service, startup finance is provided by the
venture capitalists. The first and second stage capital is used 67 for full scale manufacturing and further
business growth.

 Fledging Stage – Additional Finance:

In the third stage, the firm has made some headway and entered the stage of manufacturing a product but
faces teething problems. It may not be able to generate adequate funds and so additional round of financing
is provided to develop the marketing infrastructure.

 Establishment Stage – Establishment Finance:

At this stage the firm is established in the market and expected to expand at a rapid pace. It needs further
financing for expansion and diversification so that it can reap economies of scale and attain stability.

 Bridge/Pre IPO-Stage:

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At the end of the establishment stage, the firm is listed on the stock exchange and at this point the venture
capitalist disinvests their shareholding through available exit routes. Before investing in small, new or young
hi-tech enterprises, the venture capitalist look for percentage of key success factors of a venture capital
project. They prefer project that address these problems.

C] METHODS

A pre-requisite for the development of an active venture capital industry is the availability of a variety of
financial instruments which cater to the different risk-return needs of investors. They should be acceptable to
entrepreneurs as well.

1. Equity Participation: Venture Capital firms participate in equity through direct purchase of shares
but their stake does not exceed 49%. These shares are retained by them till the assisted projects making
profit. These shares are sole either to the promoter at negotiated price under by back agreement or the
public in the secondary market at a profit.

2. Conventional Loan: Under this form of assistance, a lower fixed rate of interest is charged till the
assisted units become commercially operational, after which the loan carries normal or higher rate of
interest. The loan has to be repaid according to a predetermined schedule of repayment as per terms of
loan agreement.

3. Conditional Loan: Under this form of finance, an interest free loan is provided during the
implementation period but it has to pay royalty on sales. The loan has to be repaid according to a pre-
determined schedule as soon as the company is able to generate sales and income'. It is repayable in the
form of a royalty after the venture is able to generate sales. In India, VCFs charge royalty ranging
between 2 to 15 percent; actual rate depends on other factors of the venture such as gestation period,
cost-flow patterns, riskiness and other factors of the enterprise.

4. Income Note: It is a hybrid security which combines the features of both conventional loan and
conditional loan. The entrepreneur has to pay both interest and royalty on sales, but at substantially low
rates.

5. Other Financing Methods: A few venture capitalists, particularly in the private sector, have started
introducing innovative financial securities.

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1.9 EXIST ROUTES

After the unit has settled down to a profitable working and the enterprise is in a position to raise funds
through conventional resources like capital market, financial institution or commercial banks, the venture
capitalist liquidates their investment and make an exit from the investee company.

The ultimate objective of a Venture Capitalist is to realize from his investment by selling off the same at a
substantial capital gain. Infect at the time of making their investment, the venture capitalist plan their
potential exit.

The investee company must prepare and make suitable adjustments in its capital structure at the time of
realization by the venture capitalist. The convertible preference shares and convertible loans must be
converted to ordinary equity before the exit by the venture capitalist. In case of non- convertible preference
shares and loans by the venture capitalist these are to be redeemed. At exit the special rights granted to the
venture capitalist cease to operate and venture capital firms normally withdraw their nominees from the
board of the investee company.

The venture capitalist firms have a motto ‘exit at the maximum possible profit or at a minimum
possible loss’ – in case of a failed investment. The exit can be voluntary or involuntary. Liquidation or
receivership of a failed venture is a case of involuntary exit.

The voluntary exit can have four alternative routes for disinvestment:

 Buy back of shares by promoters or company

 Sale of stock(shares)

 Selling to a new investor

 Strategic/Trade sale

BUY BACK/SHARES REPURCHASE

Buy back or shares repurchase has the following forms:

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 The investee company has to buy back its own shares for cash from its venture capitalist using its
internal accruals.

 The promoters and their group buy back the equity stake of venture capitalist.

 The employees’ stock trusts are formed which, in turn, buy the shareholding of the venture capitalist in
the company.

The route is suited to the Indian conditions because it keeps the ownership and control of the promoters
intact. Indian entrepreneurs are often very touchy about ownership and control of their business. Hence in
India, first a buy back option is normally given to the promoters or to the company and only on their refusal
the other disinvestments routes are looked into. The exact price is mutually negotiated between the
entrepreneur and the venture capitalist. The price is determined considering the book value of shares, future
earning potential of the venture, P/ E ratio of similar listed companies.

The companies were not allowed to buy back their shares in India; however, with effect from the
amendment in the companies act (1999) the companies can do so now.

SALE OF SHARES ON THE STOCK EXCHANGE

The venture capitalist can exit by getting the company listed on the stock exchange and selling his equity in
the primary or secondary market using any of the following three methods:

 Sale of Shares on Stock Exchange after Listing Shares:

Venture capitalists generally invest at the start up stage and propose to disinvest their holding after the
company brings out an IPO for raising funds for expansion. This listing on stock exchange provides an
exit route from investment.

 Initial Public Offer (IPO)/Offer for Sale:

When the existing entrepreneurs opt out of buy back, the venture capitalists opt for disinvesting their stocks
through public offering.

 Disinvestments on OTC

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An active capital market supports the venture capital activities. It enables the venture capitalists to get a
suitable valuation for their investment. Besides the regular stock exchange, a well-developed OTC market
where dealers can trade in shares. The OTC market enables the new and smaller companies not eligible for
71 listing on a regular stock exchange to be listed at an OTC exchange and thus provide liquidity to the
investors.

As per the recommendations of several committees, an OTC exchange was required in India. As a result,
‘Over the Counter Exchange of India (OTCEI)’ was setup.

SELLING TO AN INVESTOR

Many a times for their exit venture capitalist and /or the promoters locate a new investor, a corporate
body or another venture capital firm. The new investors are normally those who find some sort of synergy
between the investee company and their existing operations such that the relationship is useful to both the
companies. This route is also used when the promoters want to get rid of the venture capitalist. Some venture
capitalists, as a policy concentrate their activities to start ups and early-stage investments. Such venture
capital funds exit paving way for the venture capital fund specializing in the later stage investment or buy
out deals. Often a growing venture needs second stage financing, if the existing venture capitalist as a policy
does not commit funds for the second stage it normally locates another venture capitalist that finds the
investment attractive enough to enter.

CORPORATE/TRADE SALE

The venture capital firm and the entrepreneur together sell the enterprise to a third party mostly a
corporate entity. Herein the promoters also exit from the venture along with the venture capitalist. This is
called a corporate, strategic or trade sale. The reasons for this sale can be varied, difficulty in running the
business profitability or a perceived competition from more established big business houses having huge
resources and business synergy. On the other hand, where operations of an existing venture are modest, a
higher exit valuation may be achieved in the market rather than by a trade sale, as the market investors are
usually swayed by the appeal of the sector in which the venture operates rather than the quality of its specific
business operations.

MODALITIES

The modalities of the trade sale differ from case to case depending upon the nature of operations, its
size, the requirements of the buyer, etc. The sale can be in cash, 72 against shares of the acquiring company
64
or the combination of the two. The equity owners get the shares of the buyer company in lieu of the shares
being sold by them. Such sales have the advantage that the seller does not have to pay any tax as the
transaction involves only exchange of shares. At times, it is through a management buy- out or buy-in, which
in turn may be financed partially by another venture capital fund. It is important to note that in India if the
investee company is a listed company at the time of trade sale, then the provisions of listing agreement are
attracted besides the provisions of the SEBI regulations of merger and acquisitions are also applicable.

MANAGEMENT BUY-OUTS

Venture capital buy-outs are both a successful investment strategy for venture capital investment as
well as an efficient exit route. Buy-out financed by another venture capitalist primarily by providing debt is
known a leveraged buy-out. Buy-out without participation by another investor is called management buy-
out. Here in the current management group purchases the stake of the venture capitalist. The stock options
and sweat equity have made management buy-out possible in India.

Management buy-outs are important in venture capital market for various reasons:

 MBO’s provide an opportunity to managers to become entrepreneurs.

 Venture capital investment in buy-out has a lower investment risk than early-stage investment.

 MBO’s help smaller enterprises to adapt to technological changes

Buy-in is like buy-out but involves new management from outside and improvement in the operations of the
venture. Incoming new management is often unfamiliar with the operations of the venture hence the
acquiring company may feel that the continuity of the existing entrepreneur will be beneficial for the
business; the services of the original entrepreneur are retained. This helps in implementing the remaining
parts of the original ideas and also provides continuity to the venture.

1.10 FUTURE OF VENTURE CAPITAL

Rapidly changing economic environment accelerated by the high technology explosion, emerging needs of
new generation of entrepreneurs in the process and inadequacy of the existing venture capital funds/schemes
are indicative of the tremendous scope for venture capital in India and pointers to the need for the creation of
a sound and broad-based venture capital movement India.
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 There are many entrepreneurs in India with a good project idea but no previous entrepreneurial track
record to leverage their firms, handle customers and bankers. Venture capital can open a new window for
such entrepreneurs and help them to launch their projects successfully.

With rapid international march of technology, demand for newer technology and products in India has
gone up tremendously. The pace of development of new and indigenous technology in the country has been
slack in view of the fact that several processes developed in laboratories are not commercialized because of
unwillingness of people to take entrepreneurial risks, i.e. risk their funds as also undergo the ordeal of
marketing the products and process. In such a situation, venture financing assumes more significance. It can
act not only act as a financial catalyst but also provide strong impetus for entrepreneurs to develop products
involving newer technologies and commercialize them. This will give a fillip to the development of new
technology and would go a long way in broadening the industrial base, creation of jobs, provide a thrust to
exports and help in the overall enrichment of the economy.

In addition, venture capital will be needed urgently to solve the serious problems of sickness which
has plagued many Indian Industries. There are large numbers of sick companies which offer
opportunities for turn-around, either through a change in the product line or use of existing facilities in a
different way or in any other manner. What is needed is the supply of equity to persons who have fertile
ideas, necessary expertise and competence and who can bring about improvements in some units.

Another type of situation commonly found in our country is where the local group and a multi-
national company may be ready to enter into a joint venture but the former does not have sufficient funds
to put up its share of the equity and the latter is restricted to a certain percentage. For the personal
reasons or because of competition, the local group may not be keen to invite anyone in its industry or any
major private 74

investor to contribute equity and may prefer a venture capital company, as a less intimately involved and
temporary shareholder. Venture capitalists can also lend their expertise and standing to the entrepreneurs.

A large number of smaller units serving as ancillaries to major industrial groups need capital,
expertise and contacts of venture capitalist for up gradation of their technology in tune with the demands
from the major industrial units. It is generally found that small suppliers are faced with a choice of going
out of business, losing their major client, being acquired by the client or obtaining at an exorbitant rate
from a source outside the industry. Venture capitalist can help these units and save them from the crisis.

In service sector, which has Immense growth prospects in India, venture capitalists can play
significant role in tapping its potentiality to the full. For instance, venture capitalists can provide capital
and expertise to organizations selling antique, remodel jewelry, builders of resort hotels, baby and health
care market, retirement homes and small houses.

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 The financial investment process evolved a lot with time in India. Earlier there were only some
commercial banks and some financial Institutes but now with venture capital investment institutes, India
is going to grow a lot. Business firms now focus on expansion because they can get financial support
with venture capital. The scale and quality of business enterprises are increasing in India now. With
international competition, there is several growth-oriented business that are investing in venture capital.

In view of the above, it will be desirable to establish a separate national venture capital fund to which the
financial institutions and banks can contribute. In scope and content such a national venture capital fund
should cover:

1] All the aspects of venture capital financing in all the three stages of conceptual, developmental an
exploitation phases in the process of commercialization of the technological innovation and

2] As of the risk stages-development, manufacturing, marketing, management, and growth as possible under
Indian Conditions. The fund should offer a comprehensive package of technical, commercial, managerial
and financial assistance and services to building entrepreneurs and be a position to offer innovative solutions
to the varied 75 problems faced by them in business promotion, transfer and innovation. To this end, the
proposed national venture capital fund should have at its command multidisciplinary technical expertise. The
major thrust of this fund should be on the promotion of viable new business in India to take advantage of the
on high technology revolution and setting up of high growth industries so as to take the Indian economy to
commanding heights.

`1.11 LEGAL FRAMEWORK OF VENTURE CAPITAL

Regulatory framework of Venture Capital in India: -

Venture Capital in India governs by the SEBI [8] Act, 1992 and SEBI (Venture Capital Fund)
Regulations, 1996. According to which, any company or trust proposing to carry on activity of a Venture
Capital Fund [9] shall get a grant of certificate from SEBI [10]. However, registration of Foreign Venture
Capital Investors (FVCI) is not obligatory under the FVCI regulations [11]. Venture Capital funds and

67
Foreign Venture Capital Investors are also covered by Securities Contract (Regulation) Act, 1956, SEBI
(Substantial Acquisition of Shares & Takeover) Regulations, 1997, SEBI (Disclosure of Investor Protection)
Guidelines, 2000.

Eligibility and Investment Criteria for Venture Capital Funds for Venture Capital
Funds:

It is required that Memorandum of Association or Trust Deed must have main objective to carry on action
of Venture Capital Fund including prohibition by Memorandum of Association & Article of Association for
making an invitation to the public to subscribe to its securities. Further, it is required that Director or
Principal Officer or Employee or Trustee is not caught up in any litigation connected with the securities
market and has not at any time been convicted of any offence involving moral turpitude or any economic
offence. Also, in case of, body corporate, it must have been set up under Central or State legislations and
applicant has not been refused certificate by SEBI [13].

Tax Matters related to Venture Capital Funds:

Indian Venture Capital Funds are allowed to tax payback under Section 10(23FB) of the Income Tax Act,
1961. Any income earned by an SEBI registered Venture Capital Fund (established either in the form of a
trust or a company) set up to raise funds for investment in a Venture Capital Undertaking is exempt from tax
[16]. It will also be extensive to domestic VCFs and VCCs which draw overseas venture capital investments
provided these VCFs/VCCs be conventional to the guidelines pertinent for domestic VCFs/VCCs. On the
other hand, if the Venture Capital Fund is prepared to forego the tax exemptions available under Section
10(23F) of the Income Tax Act, it would be within its rights to invest in any sector [17].

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 CHAPTER 2 – RESEARCH METHODOLOGY

2.1 PURPOSE OF RESEARCH

The purpose of this research is to find out hoe Venture Capital companies select/chose the companies they
provide funds to and find out industry segment do they generally target. Venture Capitalist do not only inject
funds into an organization but also play an important role in strategizing and managing. Therefore, there is
an urge to learn about what are the various roles played in order to hedge against losses and strategies used
in order to accelerate profits.

2.2 RESEARCH DESIGN

Every research requires an action plan and method for conducting a study. This project is more prone to
the questionnaire method as the answer are based on google forms.

2.3 DATA COLLECTION

After listing down the methods to study and the activities to be conducted in order to complete the
research, next was the implementation of the activities. This project is based on primary as well as secondary
data.

69
A] PRIMARY DATA

 Interview – The interview was utilized to a great extend to proceed with the primary data.

B] SECONDARY DATA

 Reading Books and Newspaper

This was an important aspect to the project as it was necessary to get an insight and economic knowledge
about what Venture Capital is, how did it come into existence, their background and how big a role it plays
in equity markets today.

 Websites

After knowing about what Venture capital is and their major role is funding various start-ups and venture a
good amount of knowledge and information based on their methods, various functions, etc. was received
from various websites.

2.4 RESEARCH INSTRUMENT

Online questions [ Google forms] were used for this purpose. Total 63 responses were collected from the
resources.

2.5 RESEARCH LIMITATIONS

 Certain information was held confidential.
 Due to lack of time, sufficient primary data could not be collected.

2.6 OBJECTIVES
 To understand the Venture Capitalism in India.

 To understand the funding and functioning of Venture Capital companies in India, their various
financing stages, and basis of exit.

 To find out basis of acceptance of proposal.

 To analyse the role pf Venture Capital companies in success of venture.

70
  To study the future of Venture Capital companies in India

CHAPTER 3 – LITERATURE REVIEW

This article engaged a systematic literature review by exploring the leading internationally published
articles in Business Venturing, European journal of Business and Management, journal of corporate finance
and so on, which underpin VC performance on different sectors and their growth. Several authors
investigated the impact of VC focused on performance and total factor productivity of the VC backed firms.
This literature review concludes that VC backed-firms outperform the non-VC backed companies in terms of
sales revenue growth, increase in profitability, return on asset, and return on investment but again, other
scholars suggest that VC financing has inconsequential or negative implication on the growth of funded
companies. The disparity in the theoretical domain and fragmented conclusions in the empirical literature,
leave the researches with question surrounding how VC financing spurs performance of funded firms. This
paper presents a critical analysis of extant literature highlighting research gaps and an agenda for future
research.

[Macmillan, 1985], Stares about various factors a Venture Capitalist evaluates before accepting a proposal.
He states factors like product, market, financial assistance, the growth possible and the competition. Nut of
all these, the most crucial factor is the Entrepreneur. The business plan does not merely describe the potential

71
of the entrepreneur, therefore there is a must for Venture Capitalist to see to it that the venture functions the
same as provided in the business plan and can lead the entire team. This possesses maximum risk of failure.

[Skyes 1990] study, he mentioned 4 primary strategic objectives which are choice of primary strategic
objective, type, and frequency of communication with the ventures or VCLPs, return on portfolio investment
and mode of investment. Objectives that produce a mutually supportive environment, such as formation of
corporate/venture business relationships, are more likely to lead to success. Objectives that induce a
potential conflict of interest between the corporation and the venture acquisition, may lead to a
nonproductive environment and failure of the relationship.

Similarly, [Jain and Kini.1995] analysed 13 companies listed on the US stock market that received VC
funding prior to IPO equated to non-VC funded IPO of comparable sue. The findings uncovered positive
increase in sales growth from the year before and after the IPO. Secondly, VC backed companies
significantly surpasses the non-VC funded.

Gompers, [1996] encapsulated that VCs have resilient motivations to attract attention, by compelling VC
backed firms to prematurely go public, to allow them exit and acquire returns on investment timely. Virtually
most elucidations underscored by the authors suggest that VC are literally interested in commercialization of
funded companies in order to maximize returns on investments.

[Kortum and Lerner 1998] tested the link between VC and innovations across 20 industries in the US foe
over three decades. They recognized that VC considerably amplified patenting and added about 15% of
industrial innovation.

[Gompers and Lerner, 2001] alluded that VC funded firms grow faster, have sound financial performance,
decent governance structures and are very innovative with high opportunities of going public compared with
the non-VC funded industries.

The research of Croce et al. [2013] surveyed a large sample of 700 high tech companies below 20 years
involve six countries from Europe, the outcomes disclosed an additional productivity growth of VC backed

72
firms as compared to non-VC backed firms. On the other side, Colombo et al. [2016] presented that VC had
a positive effect on EU- funded R and D partnership for new technology-based firms.

Troy D. Smith [2015] analysed the impact of private equity investments in Indian firms. The findings
suggested that large share pf private equity investments were attracted by which has established its success
in market. The firms backed by the private equity were witnessing the raise in the employment, profitability,
revenue generation and asset accrual and were more likely to survive. Private equity helps in increasing the
sophistication and productive over the period the macro level with its financial support. This helps the firm
to remove various constraints faced by the business at its development life cycle.

M.B. Raghupaty and A. Thillairajan [2016] studied the performance of venture capital backed IPO and Non
venture capital backed IPO in India. The result infer that the average performance of venture capital IPO
stood higher in terms of profitability, size, and growth rates. The result show that the private investment
option has a positive impact.

Vaishali Pagaria [2018] brings in the conceptual insights venture capital financing. Venture capital
considered as alternative source of financing for potential new generation venture in India. The study states
that Venture capital as risk financing which provides financial assistance to high growth potential and
innovative business with risk. This characteristic differentiates venture capital from traditional sources of
finances.

J.K Sharma and Smite Tripathi [2019] assessed the stages of venture capital investment in infrastructure
sector. The result indicated that 64% of the total venture capital investment in the second round attributed
only 23.1%. the drastic decrease in the venture capital investment in subsequent rounds is evident, the
rationale could be failure of venture backed firms to reach the milestone to earn the subsequent finding from
venture capital investors. The venture capital investment in infrastructure sector are made mostly in
established firms rather than start-ups.

Kisan Kumar Shetty [2020] made a comparative study of impact of venture capital financing in fostering
start-ups across India, USA and China. The impact found to be comparatively lesser in India than in USA
and China due to the corona virus outbreak. However, the momentous growth in investment is evident
consumer technology sector. Larger network, positive cash flows from promising ventures and raising
innovations in health care and management forms the forte for venture capital financing in India.

73
Irena Dalic et al. [2021] analysed the role oof venture capital in development of Small, Medium Enterprise.
Venture Capital investments have been source of finance for the early-stage venture and industries with rapid
growth opportunities. Venture capital investors provide support for business activities. SMEs are the prime
contributor for the employment creation and economic development. Venture capital is supporting the
developing the growth of SME and jointly contributing to the national development.

Yuk-She Chan [2022] assesses the role of venture capital as a financial intermediary. According to the
developed theory of financial intermediation, venture capitalist acts as informed agents with imperfect
information in a market. Entrepreneur are the well informed about the qualitative prospects about the project.
Entrepreneurs try to push the ventures with lesser prospects of survival and profitability. This forms a
hindrance for the venture capital investment as it leads undesirable allocation of funds in low return projects.

CHAPTER 4: DATA ANALYSIS

In this section, the study presents and analyse the demographic characteristic of the Venture capitalism in
India. The analysis focuses on key demographic factors such as age, gender, occupation, awareness,
investment. Through the descriptive statistic and visual representation, the study provides insights into the
composition and distribution into venture capital in India. By understanding the demographic profile of the
venture capital, the study lays the foundation for further analysis of capitalism.

GENDER DISTRIBUTION OF THE RESPONDENT.

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 Data gathered for the Venture capitalism in India project offers valuable insights into the financial
behaviour of the respondent. Among 64 respondents surveyed, there was a notable gender imbalance with 35
male and 29 females participating. This gender distribution highlights potential disparities in capital
engagement and decision-making between genders, warranting further investigation into factors influencing
investment patterns among young men and women.

AGE DISTRIBUTION OF THE RESPONDENTS.

Additionally, age-wise distribution of the respondents across 18-35 age range reveals diverse representation
among different age group. Where 63[ 98.4%] of the respondents are grom the age group of 18-35.

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AWARENESS OF THE VENTURE CAPITALSIM

Among 64 respondents, 14[21.9%] No, 10[15.6%] Maybe and 40[62.5%] Yes are aware about the concept of
Venture Capitalism.

SECTORS MAINLY INVESTED IN?

2[37.5%] Mutual fund, 16[25%] Education, 20[31.3%] Stock, 4[6.3%] Real estate, Mutual fund is the sector
mainly invested in.

SPECIFIC KEY PERFORMANCE INDICATOR

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TIME FRAME FOR THE START-UPS

BEST SOURCE OF FUNDING?

77
This study indicates that 35.9% of the participants have taken interest in venture capital as the best source of
funding. Venture capital is a form of equity and type of financing that investors provide to startups
companies and small businesses that are believed to have lonh term growth potential.

SPECIAL TYPES OF STARTUPS TO INVEST IN.

Life style startups are the special types of startups many respondents 32.8% will invest in

HOW INVOLVED ARE YOU IN THE COMPANIES YOU INVEST IN

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 CHAPTER 5- CONCLUSION AND SUGGESTIONS

Rapidly changing economic and political factors are few that are influential to growth of venture capital
as well as their downturn. This is because these factors may or may not give confidence to start-up
entrepreneurs or ventures. Acceleration in the rise of Technology plays an impact in the market. This allows
Venture Capitalist to increase their profits as they are prone to sectors that show emergence and evergreen
growth. Few of the various other sector that show repetitive rise are Pharmaceutical, Energy, Biotech.
Venture capital help in injecting funds and providing help to entrepreneurs with a vision and idea and lack
sources of funds.

They provide funds in the seed stage and acquire few seats in the management. They stay with the venture
from 3-5 years and then publicly list them in the market. Or they stay for a period of 5-7 years with those
ventures that need support and could exit by way of M&A. Venture Capital play a major role in accelerating

79
profits by funding the venture, providing assistance and guidance, attending board meetings, access to talent.
Another major role played by Venture Capital is their way of exit. As this is the last major decision taken by
a Venture Capitalist beige being a part of the venture, this decision plays an impact to the venture henceforth
and would have to be confident on pursing towards their goal.

In order to gain acceptance from a venture capital company, the proposal needs to state the goals, the
finance required, how strong is customer traction, competition, etc.

Additionally, the firms need to show the ability to grow and be greedy to attain a position in the market.
Firms should also have a reliable team that would help in leadership that will stay firm throughout.

This country is going to see a rise in the venture capital business in the years to come. The Make in India
schemes provides for start-ups to initiate their ideas and make profit earning possible. All that venture
capitalist need are a potential entrepreneur who is determined to reap profits and show signs of innovation
regularly. The growing development and funding provided by Venture Capital in India is of great importance
to start-ups and help in serving a rise in India.

CHAPTER 6 – BIBLIOGRAPGHY

The following newspaper and Websites were used for the collection of secondary data

Newspapers

 Economic Times

 Times of India

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Websites

 www.ecomomictimes.com
 www.indianmba.com

 www.paxcap.com
 www.investopedia.com

 www.blogexpertsmind.com
 www.ifciltd.com

 www.sidbiventure.co.in
 www.iciciventure.com

 www.gvfl.com
 www.bloomberg.com

 www.sbicaps.com
 www.toi.com

 www.economictimes.com
 www.carlyle.co.in

 www.gvfl.com
 www.kotak.com

 www.indiajuris.com
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  www.forbes.com

 www.legalservicesindia.com
 www.quora.com

 www.hartford.com
 www.pdfcoffee.com

 www.abacademies.org
 www.researchgate.net

 www.ventureintelligence.com
 www.ijemr.net

 www.investopedia.com

CHAPTER 7 – APPENDIX

List of questions:

 How long have you been in the Venture Capital business for?

 Do you think venture capitalism is good for startups?

 Which sectors have you mainly invested in? Why?

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 What is the most common reason for rejecting proposals?

 What according to you is the best source of funding? Why?

 On what basis/ factor you look into consideration while selecting a company you invest in?

 While investing in a company what role does technological advancement play?

 How long would you wait before exiting and what is this decision based on?

 In this dynamic start-up environment what do you feel is the importance of seed capita

 How do you deal with loss making companies that show minimal signs of improvement?

 Where will you invest in?

 How involved are you in the companies are you invest in?

 Are there any specific KPIs that are particularly important to you?

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