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Financial Support

Macro Analysis of Venture Capital Funding

A Macro Analysis of the Venture Capital Funding: An Indian Perspective

Ruchi Mehrotra Faculty – Finance, School of Business, Alliance University, Bangalore uniqueruchi@rediffmail.com

CA Pankaj Mehrotra Manager – Accounts – Aditya Birla Group, Bangalore pankajdreams@gmail.com

©ICER-BRIC International Conference

Indian Institute of Management Bangalore, 8-10th Dec 2011

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Financial Support

Macro Analysis of Venture Capital Funding

A Macro Analysis of the Venture Capital Funding: An Indian Perspective
Abstract

For the Indian prospective, a book by I M Pandey (1998) studying the development of the Indian venture capital market, which identifies various steps in the developmental process. Satyanarayana Chary & T. Prasad (2006) conducted a research to study the importance of financial performance analysis of venture capital undertakings through ratio analysis. Financial performance of an organization depends on its operational activities that generates the revenue and incurs some cost (Satyanarayana Chary & T. Prasad, 2006). Need for the study Taking the study of S. Chary & T. Prasad forward where research was done to study the performance of venture capital undertakings through a case study of Semiconductor Company, in this Research paper an attempt has been made to study the financial performance analysis of two India based Information technology companies, (Listed on Indian Stock Exchanges) funded by Venture capital investors, for the duration of period for which the funds of the venture capital investors were locked in the company. An attempt has been made to study the performance and impact on financials of VC accepting firms at the point of entry and at exit point of time. Two live case studies – Sasken & R Systems have been studied to see the impact of VC Funding.

1.1. Statement of Problem
The study focuses on a broad industry wise analysis of the Venture Capital as a source of funding for the budding companies in India. It also aims to analyze financial performance of specific companies funded by VC through financial statement analysis.

1.2. Objective of the Study
1. To study the industry and sector wise distribution of the venture capital funding in Indian markets. 2. To analyze financial performance of specific companies funded by VC through key ratios. Specifically looking at the pre & post impact of VC funding on the financial health of the companies under study. 3. To examine the risk factors associated and legal framework formulated by the SEBI to encourage venture capital in India. 4. To study various strategies and instruments of entry and exit used by the venture capitalists in India for two case study’s – Sasken and R Systems Ltd who received VC funding
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Financial Support

Macro Analysis of Venture Capital Funding

5. Financial Analysis – Performance analysis of the mentioned cases to understand the advantage of VC funding

1.3. Scope of the Study
The scope of the study includes all types of venture capital firms whether setup as a companies, trusts or foundations, corporate sponsored organizations or HNIs to nurture the budding entrepreneurs. Venture capital companies or firms irrespective of whether they are registered with SEBI are studied to gain an insight in the venture capital in India. Two specific companies as Case studies is chosen to understand the pre-post impact of VC funding – Sasken & R Systems Ltd. The financial performance analysis covers all key ratios.

1.4. Research Methodology
1.4.1. Sources of Data For the purpose of the study, secondary data is utilized and it is collected from Internet, books, newspapers and magazines, company websites, etc. For financial data of the companies, annual reports are used to collect data from publicly available sources. And analysis is done using the financial tools. 1.4.2. Research Design The research type used in the study is Descriptive & Analytical in nature. But financial numbers are studied through the Ratio Analysis.
Keywords: Exit Strategy, Financial Performance Analysis, Venture Capitalist, Ratio Analysis.

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Indian Institute of Management Bangalore, 8-10th Dec 2011

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infrastructure. To connote the risk and adventure of such a fund.com) ©ICER-BRIC International Conference Indian Institute of Management Bangalore.Financial Support Macro Analysis of Venture Capital Funding A Macro Analysis of the Venture Capital Funding: An Indian Perspective VENTURE CAPITAL – An Overview The term venture capital comprises of two words that is. health/life sciences. development/expansion or purchase of a company. the outcome of which is uncertain but to which is attended the risk or danger of “loss”. the generic name Venture Capital was coined. Venture capital in broader sense is not solely an injection of funds into a new firm. design its marketing strategy. Thus it is a long term association with successive stages of company‟s development under highly risky investment conditions. clean technology.g. Venture Capital firms invest funds on a professional basis. etc. Venture is a course of processing. “Venture” and “Capital”. “Capital” means recourses to start an enterprise. Venture capital is a means of equity financing for rapidly-growing private companies. 8-10th Dec 2011 Page 4 of 39 . start-up. The relatively high risk of venture capital is compensated by the possibility of high returns usually through substantial capital gains in the medium term. WHAT IS VENTURE CAPITAL According to Indian Venture Capital Association (IVCA). but it has the potential for above-average returns. IT. It typically entails high risk for the investor. it is also an input of skills needed to set up the firm. (from investopedia. that is. Venture capital has also been described as „unsecured risk financing‟. It may be at any stage of business/production cycle.). often focusing on a limited sector of specialization (e. organize and manage it. expansion or to improve a product or process. which are associated with both risk and reward. Venture capital is not a passive finance. Finance may be required for the start-up.

Most venture capital funds have a fixed life of 10 years. It is "patient" capital that seeks a return through long-term capital gain rather than immediate and regular interest payments. As a result the venture capitalist must look to invest in companies which have the ability to grow very successfully and provide higher than average returns to compensate for the risk. after which the focus is managing and making follow-on investments in an existing portfolio. With venture capital financing. the venture capitalist acquires an agreed proportion of the equity of the company in return for the funding. Venture capital firms typically comprise small teams with technology backgrounds (scientists. researchers) or those with business training or deep industry experience. Given the nature of equity financing. Venture capital firms are typically structured as partnerships. Equity finance offers the significant advantage of having no interest charges. venture capital investors are therefore exposed to the risk of the company failing. 8-10th Dec 2011 Page 5 of 39 . as in the case of debt financing. the general partners of which serve as the managers of the firm and will serve as investment advisors to the venture capital funds raised. and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments.Financial Support Macro Analysis of Venture Capital Funding The goal of venture capital is to build companies so that the shares become liquid (through IPO or acquisition) and provide a rate of return to the investors (in the form of cash or shares) that is consistent with the level of risk taken. VENTURE CAPITAL FIRMS AND FUNDS A venture capitalist (also known as a VC) is a person or investment firm that makes venture investments. with the possibility of a few years of extensions to allow for private companies still seeking liquidity. A venture capital fund refers to a pooled investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. The investing cycle for most funds is generally three to five years. This model was pioneered by successful funds in Silicon Valley through the 1980s to invest in technological trends broadly but only during their period of ©ICER-BRIC International Conference Indian Institute of Management Bangalore.

• Market risk . and to cut exposure to management and marketing risks of any individual firm or its product.       HIGHLY TECHNOLOGICAL BASED EQUITY PARTICIPATION PARTICIPATION IN MANAGEMENT LONG TIME HORIZON ILLIQUID INVESTMENT ACHIEVE SOCIAL OBJECTIVES ©ICER-BRIC International Conference Indian Institute of Management Bangalore. FDI/FIIs rules) for VCs change • Political risk – Regime of the government may change & so may laws • Operation risk .Product may not be commercially viable. 8-10th Dec 2011 Page 6 of 39 . • Legal risk – Law of land(Tax.Financial Support Macro Analysis of Venture Capital Funding ascendance.Inability of management teams to work together. CHARACTERISTICS OF VENTURE CAPITAL  HIGH RISK By definition the Venture capital financing is highly risky and chances of failure are high as it provides long term startup capital to high risk-high reward ventures. Venture capital assumes four types of risks. • Product risk .Operations may not be cost effective resulting in increased cost decreased gross margins. these are: • Management risk .Product may fail in the market.

In 2007. (which is 33% of total investment) PIPE deals worth $12. PE/ VC penetration was 1. against $9. During 2004 – 2009 A capital of $40 billion was invested by PE/VC funds in 1800 companies during the 2004-2009 in India. India witnessed 268 deals worth $4 billion in 2009 against $6 billion raised by India focused funds.3 billion of venture capital were invested in 625 deals. By a stage-wise breakup. 473 deals worth $13. where 73% (by value) and 67% (by volume). in technology companies. In the US.2% when GDP grew 8%. The VC investments in India were 7% of the total PE investments which grew to 7. it was 0.57 took place in India.6 billion. At its peak in 2007.5% in 2008 and to 12. The PE/VC investments in India for 2009 was just 0.3% of the total GDP growth. 8-10th Dec 2011 Page 7 of 39 .6 billion raised by India focused funds.Financial Support Macro Analysis of Venture Capital Funding VENTURE CAPITAL / PRIVATE EQUITY INVESTMENT IN INDIA Indian PE/ VC penetration as percentage of GDP in 2005 was 0.5 billion (17%) Buyout deals worth $4.5% of the GDP growth in the US. it was 3. $3. it grew to 18.32 billion (28%).3% in 2007. PE investments that took place during 2004-2009 were:      Late stage PE deals $14.6% in 2009 from 9. In the same year. During the same period.3%. The VC investment in India as percentage of total PE investments is growing in a steady pace.11 (9%) Early stage deals worth $3. As far as the PE investments during 2004-2009 are concerned. while. Growth stage deals worth $7.3% in 2009. in the US.94 billion (9%) ©ICER-BRIC International Conference Indian Institute of Management Bangalore.7% of the total GDP growth.

958 Table 1: PE/ VC Investments 2007 .068 7.564 4. 8-10th Dec 2011 Page 8 of 39 .2010 Year 2007 2008 2009 2010 Number of investments 500 478 289 324 Amount($M) 14.Financial Support Macro Analysis of Venture Capital Funding PE/ VC Investments 2007 .076 10.2010 (Source: Venture intelligence database) During 2010 Size(US$M) 0-5 5-10 10-15 15+ No. of Deals 16 13 8 1 Value($M) 30 78 87 15 Table 2: Distribution of VC investment by deal size in 2010 (Source: Venture intelligence database) Figure 1: Distribution of VC investment by deal size in 2010 ©ICER-BRIC International Conference Indian Institute of Management Bangalore.

8-10th Dec 2011 Page 9 of 39 . of Deals 27 23 21 17 17 8 5 5 Value($M) 55 144 228 328 580 497 657 1359 Table 3: Distribution of PE investment by deal size in 2010 (Source: Venture intelligence database) Figure 2: Distribution of PE investment by deal size in 2010 ©ICER-BRIC International Conference Indian Institute of Management Bangalore.Financial Support Macro Analysis of Venture Capital Funding Size(US$M) 0-5 5-10 10-15 15-25 25-50 50-100 100-200 200+ No.

Even before a business plan is prepared the entrepreneur invests his time and resources in surveying the market. finding and understanding the target customers and their needs. 8-10th Dec 2011 Page 10 of 39 . acquisition Later stage finance 1-3 Medium & product development for profit making company Buy out-in 1-3 Medium Medium to high Low Acquisition financing Turning around a sick company Turnaround 3-5 Mezzanine 1-3 Facilitating public issue Table 4: Risk perception and time orientation for different stages of venture capital financing ©ICER-BRIC International Conference Indian Institute of Management Bangalore.Financial Support Macro Analysis of Venture Capital Funding VENTURE CAPITAL FINANCING SPECTRUM The requirements of funds vary with the life cycle stage of the enterprise. The table below shows risk perception and time orientation for different stages of venture capital financing: Financing Stage Period (funds Risk perception For supporting a concept or 7-10 Extreme idea or R & D for product development 5-9 Very high Initializing operations or developing prototypes Start commercial production and marketing Activity to be financed locked in yrs) Early stage finance Seed Start up First stage 3-7 High Second stage 3-5 Sufficiently Expand market & growing high working capital need Market expansion.

and 53% foreign countries. 36%. INDIAN VENTURE CAPITAL INDUSTRY The pioneers of the Indian venture capital industry were largely government-owned banks and financial institutions. India. The survey of investors found bullish expectations for VC activity over the next five years in emerging economies in China.$499 million in assets under management. mid-sized and small firms. with the largest concentration. create a favorable climate for venture capital in India. measured the opinions of more than 500 venture capitalists worldwide. and also examined the factors which are contributing to each country‟s outlook. Brazil and India. Respondents felt that improving entrepreneurial environment and growing market in India. but a much grimmer outlook for the US and parts of Europe. China. Germany.Financial Support Macro Analysis of Venture Capital Funding 2010 GLOBAL VENTURE CAPITAL SURVEY The 2010 Global Venture Capital survey. Israel. with $100 .S. Responses and Demographics In the survey. with some contribution from the financial services companies in the private sector. 8-10th Dec 2011 Page 11 of 39 . UK and the United States. 516 responses were taken from nine countries which included Brazil. The following VC funds were the pioneers which laid the foundations of India‟s VC industry: ©ICER-BRIC International Conference Indian Institute of Management Bangalore. Canada. Responses were taken mainly from large. conducted by Deloitte and the National Venture Capital Association. France. 47% responses were from U.

210 20 Century Fund 20th Century Venture Capital Corp.6 US$ 7. 300 Rs. 8-10th Dec 2011 Page 12 of 39 . guidelines were also issued by the Central Board of Direct Taxes (CBDT) and the investments and flow of foreign currency into and out of India was governed by the Reserve Bank of India‟s (RBI) requirements. 543.Financial Support Macro Analysis of Venture Capital Funding VC Funds Set Up By Year Size (Million) Venture Capital Fund Scheme India Investment Unit Scheme IDBI Grindlays 3i Invest. the Securities and Exchange Board of India (SEBI) framed the SEBI (Venture Capital Funds) Regulations. as a part of its mandate to regulate and to develop the Indian capital markets. Services Ltd 1987 1987 Rs.5 Venture Capital Unit Scheme I CanBank Venture Capital fund TDICI CanBank Financial Services Ltd 1989 1989 Rs. ©ICER-BRIC International Conference Indian Institute of Management Bangalore. 500 Indus Venture Capital Fund th Indus Venture Management Ltd 1991 Rs. 100 Table 5: Venture Capital Funds Set Up during 1987-1994 Entry of Foreign Venture Capital Funds: 1995-1998 Thereafter. 100 Rs. These guidelines were further amended in April 2000 with the objective of fuelling the growth of venture capital activities in India. 300 Rs. 287 Venture Capital Unit Scheme III IFB Venture Capital Information Technology Fund RC&TF Corporation IFB Venture Finance Credit Capital Venture Fund Ltd 1991 1992 1993 Rs. the Government of India issued guidelines in September 1995 for overseas investment in venture capital in India. 1991 Rs. Further. 240 Rs. 135 Rs. 1000 Rs. 156 Venture Capital Unit Scheme II APIDC Venture Capital Fund Gujarat Venture Capital Fund IL&FS Venture Fund TDICI APIDC Venture Capital Ltd Gujarat Venture Finance Ltd IL&FS Venture Corporation Ltd 1990 1990 1990 1991 Rs. 1996. For tax-exemption purposes. Ltd.

Industrial products. ©ICER-BRIC International Conference Indian Institute of Management Bangalore. subsequent to the investment. if they are registered with SEBI and in compliance with Indian government and SEBI Regulations. if the undertaking. However. in which its funds are invested. tax will be payable by the shareholders of or withdrawers from the company or fund. DATA ANALYSIS SECTOR WISE ANALYSIS OF INVESTMENT IN INDIA As per SEBI. The table showing the detailed figures is available in annexure. Services Sector. Real Estate and others. the venture capital market is categorized into 9 following sectors which are Information Technology. The provisions of the IT Act regarding taxation on distributed profits (dividend). The income of such companies and/or funds will continue to be exempt. Pharmaceuticals. 1961 (the “IT Act”) The income of venture capital companies or funds set up to raise funds for investment in venture capital undertakings is tax exempt. Venture capital companies or funds are exempt from withholding tax in respect of income distributed to their investors. Telecommunications. This analysis presents the sector wise distribution of Venture Capital funds and Foreign Venture Capital funds in different sectors of venture capital market over the period of 2007 to 2010. 8-10th Dec 2011 Page 13 of 39 . Biotechnology. distributed income and deduction of tax at source do not apply to venture capital companies or funds. Media/Entertainment.Financial Support Macro Analysis of Venture Capital Funding Income-Tax Act. gets listed on a stock exchange.

The maximum Foreign Venture capital Funds were obtained by again Real Estate sector followed by Information technology and lowest was in Biotechnology sector.Financial Support Macro Analysis of Venture Capital Funding Figure 3: Sector Wise distribution of VCF and FVCI during the year 2007(in crores) Interpretation During the year 2007. it can be observed that that maximum Venture Capital Funds (VCF) were obtained by Real Estate sector which accounted to 9805 crores whereas lowest Venture capital funding was in Telecommunications sector of 415 crores. ©ICER-BRIC International Conference Indian Institute of Management Bangalore. 8-10th Dec 2011 Page 14 of 39 .

8-10th Dec 2011 Page 15 of 39 . ©ICER-BRIC International Conference Indian Institute of Management Bangalore.11%. The total amount of funds in this sector by FVCI increased from 4709 crores in 2007 to 6174 crores in 2008. which is an increase of 31. it can be observed that there was an increasing trend in Foreign Venture Capital Funds investing in Information technology.Financial Support Macro Analysis of Venture Capital Funding Figure 4: Sector Wise distribution of VCF and FVCI during the year 2008 (in crores) Interpretation During the year 2008. Increase of 98% in pharmaceutical sector and 146% in Media/ Entertainment was found in Foreign Venture Capital investments in 2008.

although there was a decrease in Foreign Venture Capital in 2009.Financial Support Macro Analysis of Venture Capital Funding Figure 5: Sector Wise distribution of VCF and FVCI during the year 2009 (in crores) Interpretation In 2009. real estate sector maintained its top position of Venture Capital Fund recipient. An overall decrease in Venture Capital investment was observed in Biotechnology sector. ©ICER-BRIC International Conference Indian Institute of Management Bangalore. A tremendous increase was observed in Information Technology and Telecommunication sector in terms of Foreign Venture Capital funds. 8-10th Dec 2011 Page 16 of 39 .2% from 6503 crores in 2008 to 5727 crores in 2009. which dropped 11.

©ICER-BRIC International Conference Indian Institute of Management Bangalore.2% from 6503 crores in 2008 to 5727 crores in 2009. which dropped 11. An overall decrease in Venture Capital investment was observed in Biotechnology sector. although there was a decrease in Foreign Venture Capital in 2009. A tremendous increase was observed in Information Technology and Telecommunication sector in terms of Foreign Venture Capital funds. real estate sector maintained its top position of Venture Capital Fund recipient. 8-10th Dec 2011 Page 17 of 39 .Financial Support Macro Analysis of Venture Capital Funding Figure 6: Sector Wise distribution of VCF and FVCI during the year 2010 (in crores) Interpretation In 2009.

©ICER-BRIC International Conference Indian Institute of Management Bangalore. In the end of 2009 Foreign Venture Capital Investors (FVCI) also exited from the company. Venture Capital Investors (VCI) and Foreign Venture Capital Investors (FVCI) held 814. In September 2005. This attention and investment from the leading brand in semiconductors validated that silicon automation systems was a legitimate market segment and gave Sasken the credibility and funding it needed to expand globally. Intel Capital also participated in a second round of funding in 2003 to help the company continue its dramatic growth. Intel Capital was an investor in a critical round of funding for Sasken. Till 2006.Financial Support Macro Analysis of Venture Capital Funding ANALYSIS OF PERFORMANCE OF SASKEN In 1999. Sasken underwent a very successful Initial Public Offering (IPO). Venture Capital Investors (VCI) exited from the company and from 2007 to 2009 only Foreign Venture Capital Investors (FVCI ) were active which held 490. In 2006.78% of total number of shares of the company.172 numbers of shares which accounted for 2. Following is the analysis of the performance of the company for the duration for which the venture capitalists were active in the company.500 shares accounting for 1. 8-10th Dec 2011 Page 18 of 39 .89% of total number of shares of the company.

this led to second round of funding from Intel Capital. the sales increased from 759.16 million to 1428. like in this case it‟s almost a decade.27 million and then to 1092. Long term growth is sustainable when the VC investor stays for a longer duration. ©ICER-BRIC International Conference Indian Institute of Management Bangalore.16 million to 6978.33 million. the sales increased 88.55 million in 2002-03. after which it went for an upward trend. Overall for the period of 10 years for which the VC funding was there in the company.83%.Financial Support Macro Analysis of Venture Capital Funding SALES Figure 7: Sales performance of Sasken Ltd from 1999-00 to 2008-09 Interpretation After the first round of funding in 1999.14% from 759.9% to 1086. But in the subsequent year the sales decreased 23. 8-10th Dec 2011 Page 19 of 39 .19 million with a compounded annual growth rate of 24.

2.66 lakhs.15 lakhs. PBIT Figure 8: PBIT (in Rs. the Profit before Interest and Tax (PBIT).1.3 lakhs to 12523. 8-10th Dec 2011 Page 20 of 39 . ©ICER-BRIC International Conference Indian Institute of Management Bangalore. Lakhs) from 1999-00 to 2008-09 Interpretation Overall for the duration from 1999-00 to 2008-09. increased from 2162. although a decrease in the PBIT was observed during 2001-02 where the company witnessed a loss of 878.Financial Support Macro Analysis of Venture Capital Funding 1.

Financial Support Macro Analysis of Venture Capital Funding PAT Figure 9: PAT (in Rs. increased from 1486.12 lakhs to 4230. the Profit after Tax (PAT). the company witnessed a loss of 1563.41 lakhs. although a fluctuation in the PAT was observed for the whole duration. ©ICER-BRIC International Conference Indian Institute of Management Bangalore. Lakhs) from 1999-00 to 2008-09 Interpretation Overall for the duration from 1999-00 to 2008-09. During 2001-02.86 lakhs but after second round of funding the PAT starts increasing again. Overall the company has maintained an increasing profit trend. 8-10th Dec 2011 Page 21 of 39 .

Except in the year 2002-03 where current ratio increased to 3.Financial Support Macro Analysis of Venture Capital Funding CURRENT RATIO Figure 10: Current ratio of Sasken Ltd from 1999-00 to 2008-09 Interpretation From 1999-00 to 2008-09. 8-10th Dec 2011 Page 22 of 39 .5 to 3. ©ICER-BRIC International Conference Indian Institute of Management Bangalore.9. the Current Ratio has varied in the range of 2. which is very much significant. Over the funding period the company had enough current assets to meet the current liabilities. the company has maintained its current ratio more or less same figure.9.

4 0.6 2.9.Financial Support Macro Analysis of Venture Capital Funding 3.2. the current ratio was 3.2 3. where it decreased to 0.4 0.6.3 0.8 2. RATIO ANALYSIS LIQUIDITY AND EFFICIENCY RATIOS Year Current Ratio Average Collection period( Days) Net Working Capital ratio 0. During the funding period the Net Working Capital ratio lie only in the range of 0.9 3. with an only exception in 2005-06. It can be seen that company maintained adequate liquidity to cover its obligations during the funding period.3 to 0.5 2.1. 8-10th Dec 2011 Page 23 of 39 .2 2.33 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Average 3. In the year 2002-03.4 Table 6: Liquidity and efficiency ratios of Sasken Ltd. It is evident from the table that from 1999-00 to 2008-09.3 0.9 which can be attributed to the fact that there was a significant change in the total volume of current assets as well as current liabilities in the year 2002-03.9 2.3 0.4.5 to 3.2 0.4 0.8 2. On the whole the net working capital turnover of the company was at an average of 33% over the ©ICER-BRIC International Conference Indian Institute of Management Bangalore.4 0.3 0.5 3 126 127 98 104 74 82 77 67 78 71 90. the Current Ratio has varied in the range of 2.6 3.3 0.

4 2.3 3. the trend is similar to PBT/Total Turnover. an increasing trend was seen in the company. which suggests that accounts receivables are being converted to cash quickly. This is due to increased Depreciation and Amortization during the year 2001-02. 8-10th Dec 2011 Page 24 of 39 .0 4.6% Return on average capital employed 27% 28% -9% 4% 16% 18% 9% 11% 10% 10% 12. After the second round of funding.4% Sales to average net working capital 3. The company‟s average collection period changed from 126 days to 71 days.2 3.1% PAT/Total turnover 20% 20% -14% 1% 11% 9% 7% 9% 7% 6% 7. As far as PAT/ total Turnover is concerned. PROFITABILITY RATIOS Table 7: Profitability ratios of Sasken Ltd. ©ICER-BRIC International Conference Indian Institute of Management Bangalore. After remaining constant on 20% in 1999-00 and 2000-01 it decreased to -14% in 2001-02.5 3.4 3.77 Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Average From the table it can be seen that the PBT/Total Turnover decreased from 33% in 1999-00.Financial Support Macro Analysis of Venture Capital Funding funding period.5 4.4 3. to 23% in 2000-01 and to -11% in 2001-02.6 5. PBT/Total turnover 33% 23% -11% 4% 10% 10% 10% 11% 10% 11% 11.4 4.

3 1. Overall the Return on average capital employed was positive for the funding period.1 Total assets/Net worth 1.0 0.0 49.1 161.0 9.2 1.2 0.4 0.0 1. Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Debt – Equity ratio 0.6 1.1 Interest Cover 17.9 21.2 0.3 1.4 1.3 0.3 32.4 24.3 11.Financial Support Macro Analysis of Venture Capital Funding As far as Return on average capital employed is concerned a fluctuating trend was observed as it first adopted a decreasing trend and then increased after 2001-02.0 1.0 0. ANALYSIS OF PERFORMANCE OF R SYSTEMS LTD R Systems strategic focus and commitment to developing expertise in key verticals was rewarded by strategic investments by Intel Capital in 2001.6 -2. In the end of 2006 the venture capital firms exited from the company through Initial Public offering (IPO) route of exit. ©ICER-BRIC International Conference Indian Institute of Management Bangalore.3 0.0 1.0 1.8 Debt Equity ratio was found to be below 1 showing the major source of finance to be equity for the company.2 1. 8-10th Dec 2011 Page 25 of 39 .0 0.0 0. LEVERAGE RATIOS Table 8: Leverage ratios of Sasken Ltd.

the sales increased from INR 13.247 lakhs but after that it took an upward trend. 8-10th Dec 2011 Page 26 of 39 . fluctuating a great deal from year to year.957 lakhs.Financial Support Macro Analysis of Venture Capital Funding SALES Figure 11: Sales of R System Ltd from 2001-02 to 2006-07 After the company received funding in 2001.957 lakhs to INR 24.10%. The investment has produced a stable return throughout its life.706 lakhs with a compounded annual growth rate of 12. But in the subsequent year the sales decreased to INR 12. From the entry of VCs in 2001 till their exit in 2007. even if the investment was extremely volatile. the company recorded sales of INR 13. ©ICER-BRIC International Conference Indian Institute of Management Bangalore.

Financial Support Macro Analysis of Venture Capital Funding PBIT Figure 12: PBIT (in Rs Lakhs) from 2001-02 to 2006-07 Interpretation Overall for the duration from 2001-02 to 2006-07. the Profit before Interest and Tax (PBIT). 8-10th Dec 2011 Page 27 of 39 . ©ICER-BRIC International Conference Indian Institute of Management Bangalore. increased from 809 lakhs to 2895 lakhs. although a decrease in the PBIT was observed during 2002-03 where the company witnessed a decrease in PBIT.

8-10th Dec 2011 Page 28 of 39 . increased from 365 lakhs to 1897 lakhs.Financial Support Macro Analysis of Venture Capital Funding PAT Figure 13: PAT (in Rs Lakhs) from 2001-02 to 2006-07 Interpretation Overall for the duration from 2001-02 to 2006-07. ©ICER-BRIC International Conference Indian Institute of Management Bangalore. the Profit After Tax (PAT). although a decrease in the PBIT was observed during 2002-03 where the company witnessed a loss of 367 lakhs. Overall the trend of PAT was pretty much fluctuating but for entire lock in period of VC funds the profit increased tremendously.

It increased from 2.29 to 2. from 2001-02 to 2006-07 Interpretation From 2001-02 to 2006-07. to 2. The company has increased its current assets position significantly during the lock in period. Over the funding period the company had enough current assets to meet the current liabilities. an increasing trend can be observed in the Current Ratio.72. 8-10th Dec 2011 Page 29 of 39 .93. except in the year 2005-06 where current ratio decreased in comparison to last year.Financial Support Macro Analysis of Venture Capital Funding CURRENT RATIO Figure 14: Current Ratio of R Systems Ltd. ©ICER-BRIC International Conference Indian Institute of Management Bangalore.

68 69 83 82 88 82 78 80. During the whole duration of lock in of funds.79 2.69 2.93 2. it means company has not maintained level of account receivable being converted to liquid cash.93. ©ICER-BRIC International Conference Indian Institute of Management Bangalore.71 2. Overall the company had an average collection period of 80.3 days which is a significant figure determining the average number of days required to convert receivables into cash.Financial Support Macro Analysis of Venture Capital Funding RATIO ANALYSIS – R SYSTEMS LTD LIQUIDITY AND EFFICIENCY RATIOS Year Current Ratio Average Collection period( Days) 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Average 2.29 to 2.3 TaTable 9: Liquidity and efficiency ratios for R System Ltd.29 2. It is evident from the table that from 2001-02 to 2006-07. it can be seen that company maintained adequate liquidity to cover its obligations.72 2. 8-10th Dec 2011 Page 30 of 39 . the Current Ratio has varied in the range of 2. Since here it has increased.

09% in 2006-07.3% -6.67% 21.16% 4.1% 0. As far as PAT/ total Turnover is concerned.1% 6.46% 3.5% in 2001-02.5% -2.1% 2.36% 2.8% 7.98% 14. It decreased to -3% in 2002-03 and then increased to 7.19% From the table it can be seen that the PBT/Total Turnover increased from 3.7% 0. As far as Return on average capital employed is concerned a fluctuating trend was observed as it first adopted a decreasing trend.7% in 2002-03 and then increased to 9. ©ICER-BRIC International Conference Indian Institute of Management Bangalore.22% 8.405% Year PBT/Total turnover PAT/Total turnover Return on Average Equity 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Average 3.26% 14.95% 9.2% 7. the trend is similar to PBT/Total Turnover.45% 22. 8-10th Dec 2011 Page 31 of 39 . Overall the Return on average capital employed was positive for the funding period. Return on average capital employed 5.64% at the exit point of VCs.0% 0.5% 9.09% 4.6% -3. except in 2002-03.9% 3.01% 7.03% 16. This is due to increased Depreciation and Amortization during the year 2002-03. to -2.7% 9.Financial Support Macro Analysis of Venture Capital Funding PROFITABILITY RATIOS Table 10: Profitability ratios for R System Ltd.9% -5.

1.17 0.  According to 2010 Global Venture Capital Survey conducted by Deloitte.11 0. FINDINGS Findings on „Venture Capital‟ market in India  It can be deduced that Venture Capital market in India is growing at a very fast pace and India is one of the preferred destinations. problem-free regulatory framework for quick and efficient flow of money into VC funds in India.29 0.0 0. showing the source of funds to be majorly equity FINDINGS. single window. RECOMMENDATIONS AND CONCLUSION 2. The Debt-Equity ratio was found to be below 1 for the whole funding period. it was found that 85% of respondents which included large. 8-10th Dec 2011 Page 32 of 39 . Venture capitalists in India expect their ecosystem to expand  SEBI is the nodal regulator for VC funds in India providing a smooth. mid-sized and small firms feel that Venture capital firms will grow in India.04 0.01 Table 11: Leverage ratio for R Systems Ltd.Financial Support Macro Analysis of Venture Capital Funding LEVERAGE RATIOS Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Debt – Equity ratio 0. ©ICER-BRIC International Conference Indian Institute of Management Bangalore.

the expected figures would be $478 million in late stage and $274 million in buyout. account for a majority of the VCPE firms operating in India (63%).2%. It was followed by Biotechnology and Services sector. healthcare and engineering & construction sectors are anticipated to witness $30-billion plus investment in 2011-2015. VCPE firms that were promoted by Financial Corporations.958 million. 8-10th Dec 2011 Page 33 of 39 . Real estate sector received the maximum venture capital funding both from Indian venture capital firms as well as foreign venture capital firms.Financial Support Macro Analysis of Venture Capital Funding  In 2010. The reason behind this could be the high return on investments in this sector. a total of 324 VC investments took place in India with a total investment value of $7.  In 2011.  It was observed that there was an increasing trend in investments from 2007 to 2010 majorly in Information technology and telecommunications sector. apart from others sector. manufacturing. growth stage will get $295 million follow-on funding. ©ICER-BRIC International Conference Indian Institute of Management Bangalore.39 billion funding. late stage to get $986 million funding and buyout will get $1. in India Real estate sector has been the major recipient of Venture Capital funds from both Indian Venture capitalists and foreign venture capitalists. and Government accounted for 11.3% respectively.  Private Firms.  As per the sector-wise forecast.  During 2010. 8%. Corporate Venture group constitute the second highest proportion of VCPE investors (14. IT & ITES. and 3.2%). In 2015. expecting a robust growth again. Investment Banks.  It was found that since 2007 to 2010. followed by services sector.

1% and 7. 8-10th Dec 2011 Page 34 of 39 .5 at the exit point but. recording a compounded annual growth rate of 24.  It was found that when the Venture capital entered the firm with its investment in 1999-00. an increase of 1.83%.66 lakhs.  The average Return on Capital Employed for the lock in period was found to be 12. which tells that company is earned sufficient revenues and profits in order to make the best use of its capital assets during the duration for which VC funds were locked in. was found to increase from INR 2162. the company had enough current assets to meet the current liabilities. over the funding period. the sales were INR 759. which suggests that account receivables are converted to cash quickly.Financial Support Macro Analysis of Venture Capital Funding Findings on performance of Sasken Ltd.41 lakhs. from revenues.4%.  The average Gross Profit Margin ratio and average Net profit Margin Ratio for the lock in period was found to be 11.19 million. an increase of 4. This tells us the better position of business efficiency of the company.9 at entry point of VC fund to 2. ©ICER-BRIC International Conference Indian Institute of Management Bangalore.79 times. required to pay fixed costs and profits.16 million and at the time of exit in 2008-09 it was INR 6978.  During the lock in period of funds from 1999-00 to 2008-09.  Profit after Tax from the time of entry to point of exit was found to increase from INR 1486.3 lakhs to INR 12523.  The company‟s current ratio was found to have decreased from 3. which suggests that company generated adequate amount of earnings.6% respectively.12 lakhs to INR 4230.  During the lock in period the average collection period decreased from 126 days in 1990-00 to 71 days in 2008-09. Profit before Interest and Tax.84 times.

Financial Support Macro Analysis of Venture Capital Funding  The Debt to Equity ratio was found to be below 1 for all 10 years. The investment has produced a stable return throughout its life.  The impact of Venture Capital fund after the entry in the firm was found to be positive. Profit before Interest and Tax. PBIT and PAT were found to have increased tremendously after the company received VC funds.57 times.10%. The VC firms also were able to make huge returns by capitalizing on investments for long period of time. was found to increase from INR 809 lakhs to INR 2.  Profit after Tax from the time of entry to point of exit was found to increase from INR 365 lakhs to INR 1. 8-10th Dec 2011 Page 35 of 39 .957 lakhs and at the time of exit in 2006-07 it was INR 24. an increase of 4. The Sales. the sales were INR 13. Findings on performance of R Systems Ltd.706 lakhs.  It was found that when the Venture capital entered the firm with its investment in 2001-02. an increase of 2.  The company‟s current ratio was found to have increased from 2. which implies that the company was able to utilize funds properly and was able to have sufficient liquidity.93 at the exit point.895 lakhs.897 lakhs. which indicates that equity was the major source of raising capital by the company. ©ICER-BRIC International Conference Indian Institute of Management Bangalore.19 times.  During the lock in period of funds from 2001-02 to 2006-07. recording a compounded annual growth rate of 12.  The company maintained a substantial growth rate during the lock in period of funds.29 at entry point of VC fund to 2.

required to pay fixed costs and profits. increase was found in both from the point of entry till the point of exit.36% and 3. an atmosphere of structural flexibility. fiscal neutrality and operational adaptability can make the Venture capital industry flourish much better. which suggests that company generated adequate amount of earnings. 8-10th Dec 2011 Page 36 of 39 .  The average Gross Profit Margin ratio average and Net profit Margin Ratio for the lock in period was found to be 4.  The average Return on Capital Employed for the lock in period was found to be 9. This tells us that efficiency of the company has reduced. the Indian legal and regulatory environment continue to inhibit venture capital investors from maximizing their returns.405%. An RECOMMENDATIONS 1. The regulatory. tax and legal environment should play an enabling role. which tells that account receivables are not converted to cash quickly.16% respectively. The bureaucratic obstacles to the free operation ©ICER-BRIC International Conference Indian Institute of Management Bangalore. PBIT and PAT were found to have increased tremendously after the company received VC funds.  The Debt to Equity ratio was found to be below 1 for all 10 years. which tells that company is earned sufficient revenues and profits in order to make the best use of its capital assets during the duration for which VC funds were locked in.Financial Support Macro Analysis of Venture Capital Funding  From point of entry till exit. 2. There is a need for revamping of the system as. from revenues. In India. average collection period increased from 69 days to 78 days.  The impact of Venture Capital fund after the entry in the firm was found to be positive. which tells that equity was the major source of raising capital by the company. The Sales.

©ICER-BRIC International Conference Indian Institute of Management Bangalore. the Venture Capital plays a vital role in the development and growth of innovative entrepreneurships. operating in an environment suitable for raising the large amounts of risk capital needed and for spurring innovation. 8-10th Dec 2011 Page 37 of 39 . India remains a difficult environment for venture capital. Insurance companies and pension funds should be allowed as source of funds for VCs in India. Another significant issue that must be addressed to develop a vibrant venture capital industry is India‟s foreign currency regulations. Existence of „Full capital account convertibility‟ can help to overcome the factors that hamper venture capital inflows from offshore because specific. that protects investors and investee firms. Efforts should be taken to make Venture capital institutionalized & organized sector in India. 6. Financial innovations can be brought through new & better sources like ADRs/GDRs/IDRs a mode of entry in the Indian venture capital industry.Financial Support Macro Analysis of Venture Capital Funding of venture capital remain significant. and it is likely that the government will continue and even accelerate its efforts to encourage venture capital investing. In India. time-consuming governmental approvals from multiple agencies are required for each investment and disinvestment. 5. 4. Even in 2011 the Indian government remains bureaucratic and highly regulated. venture capital industry is still in nascent stage in India. Today. 3. To encourage the growth of venture capital will require further action. apart from other countries also. CONCLUSION Venture Capital has emerged as a new method of financing during the 20th century. There continues to be a confusing array of newly created statutes. allowing insurance companies and pension funds would enlarge the possibilities of setting up of domestic funds. Although corporate bodies have been allowed to invest their funds. Still.

8-10th Dec 2011 Page 38 of 39 . India being an emerging market. provides lucrative returns on investment and is no doubt promising which is evident by large number of new entrants in past days. ©ICER-BRIC International Conference Indian Institute of Management Bangalore. The analysis of companies as case study helped to gain an insight on the performance of the company from the time of entry. Venture capitalists are upbeat about the attractiveness of India as a place to do business. Nonetheless market is challenging for successful investment. In spite of some non attracting factors. The impact can help to make judgments on the efficiency of VC funds.Financial Support Macro Analysis of Venture Capital Funding The study provided an insight in the investment made by Venture Capitalists in recent years. till the point of exit or in other words the lock in period.

Chary Satyanarayana T. Satyanarayana Chary and Mr. www. CMIE Industry Reports 7. ISBN: 978-1-56-833126-3 ARTICLES/ INDUSTRY REPORTS: 1. 8-10th Dec 2011 Page 39 of 39 . T. ISBN: 978-1-40-392679-1 2.gov. 1st edition.in 5. 4.Madras. http://en.blogspot.sebi. IVCA IIT-Madras PEVC Report 2010 by IVCA and IIT. Performance of Venture Capital Undertakings – A case Study by Dr.com ©ICER-BRIC International Conference Indian Institute of Management Bangalore.wikipedia. SEBI Industry Reports WEBSITES: 1. IVCA Bain PEVC Report 2010 by IVCA and IIT 3. 5.indiavca. Prasad. Madison Books.ventureintelligence. (1999) .Financial Support Macro Analysis of Venture Capital Funding BIBLIOGRAPHY BOOKS: 1. www. Fundamentals of Venture Capital.in 2. Paper titled “Creating an environment: Developing Venture Capital in India” by Rafiq Dossani and Martin Kenney. 2.org 4. www. www. MacMillan. Bartlett Joseph W.ventureintelligence. (2005) Venture Capital – Concepts and Applications.org/wiki/Venture_capital 3. VC_insights-and-trends-report_2010 published by Earnst & Young 6.