FINAL REPORT

ON
Study of Venture Capital
in India and its Aspects
Acknowledgement
No Learning is proper and effective without
Proper Guidance
Every study is incomplete without having a well plan and concrete exposure to the
student. Management studies are not exception. Scope of the project at this level is
very wide ranging. On the other hand it provide sound basis to adopt the theoretical
knowledge and on the other hand it gives an opportunities for exposure to real time
situation.
This study is an internal part of our M! program and to do this project in a short
period was a heavy task.
"ntention# dedication# concentration and hard work are very much essential to
complete any task. ut still it needs a lot of support# guidance# assistance# co$
operation of people to make it successful.
" bear to imprint of my people who have given me# their precious ideas and times to
enable me to complete the research and the project report. " want to thanks them for
their continuous support in my research and writing efforts.
" wish to record my thanks and indebtedness to r !ive" #hatia $ Facu%t&
Internationa% #usiness' IT Gurgaon' whose inspiration# dedication and helping
nature provided me the kind of guidance necessary to complete this project.
" am extremely grateful to (anage(ent of Institute of Techno%og& ) anage(ent'
Gurgaon for granting me permission to be part of this college.
" would also like to acknowledge (& parents and (& *atch (ates for their guidance
and blessings
Table of Content
+, "ntroduction
-, Significance of Study
., Objective of Study
/, %esearch Methodology
&iterature %eview
'onceptual (ramework
Operational )efinition
0, !nalysis * "nterpretation
1, (indings
2, Suggestions
3, 'onclusion
4, &imitation
+5,ibliographies
++, !nnexure
ANNEXUE I + ,!ME O( -E,T.%E '!/"T!& ("%MS O.T
S")E O( ",)"!
ANNEXUE II + ,!ME O( -E,T.%E '!/"T!& ("%MS ",
",)"!.
Introduction
! number of technocrats are seeking to set up shop on their own and capitali0e on
opportunities. "n the highly dynamic economic climate that surrounds us today# few
1traditional2 business models may survive. 'ountries across the globe are reali0ing
that it is not the conglomerates and the gigantic corporations that fuel economic
growth any more. The essence of any economy today is the small and medium
enterprises. (or example# in the .S# 345 of the exports are created by companies
with less than 64 employees and only 75 are created by companies with 344 or more
employees. This growing trend can be attributed to rapid advances in technology in
the last decade. 8nowledge driven industries like "nfoTech# health$care# entertainment
and services have become the cynosure of bourses worldwide. "n these sectors# it is
innovation and technical capability that are big business$drivers. This is a paradigm
shift from the earlier physical production and 1economies of scale2 model. 9owever#
starting an enterprise is never easy. There are a number of parameters that contribute
to its success or downfall. Experience# integrity# prudence and a clear understanding
of the market are among the sought after :ualities of a promoter. 9owever# there are
other factors# which lie beyond the control of the entrepreneur. /rominent among
these is the timely infusion of funds. This is where the venture capitalist comes in#
with money# business sense and a lot more.
!"at is Venture Capital###
The venture capital investment helps for the growth of innovative entrepreneurships
in "ndia. -enture capital has developed as a result of the need to provide non$
conventional# risky finance to new ventures based on innovative entrepreneurship.
-enture capital is an investment in the form of e:uity# :uasi$e:uity and sometimes
debt $ straight or conditional# made in new or untried concepts# promoted by a
technically or professionally :ualified entrepreneur. -enture capital means risk
capital. "t refers to capital investment# both e:uity and debt# which carries substantial
risk and uncertainties. The risk envisaged may be very high may be so high as to
result in total loss or very less so as to result in high gains
The concept of !enture 6apita%
-enture capital means many things to many people. "t is in fact nearly impossible to
come across one single definition of the concept.
7ane 8o%os"i orris# editor of the well known industry publication# -enture
Economics# defines venture capital as 9providing seed' start$up and first stage
financing9 and also 9funding the e:pansion of co(panies that have a%read&
de(onstrated their *usiness potentia% *ut do not &et have access to the pu*%ic
securities (ar"et or to credit oriented institutiona% funding sources.
The European !enture 6apita% Association describes it as risk finance for
entrepreneurial growth oriented companies. "t is investment for the medium or long
term return seeking to maximi0e medium or long term for both parties. "t is a
partnership with the entrepreneur in which the investor can add value to the company
because of his knowledge# experience and contact base.
eaning of venture capita%;
-enture capital is money provided by professionals who invest alongside management
in young# rapidly growing companies that have the potential to develop into
significant economic contributors. -enture capital is an important source of e:uity for
start$up companies.
/rofessionally managed venture capital firms generally are private partnerships or
closely$held corporations funded by private and public pension funds# endowment
funds# foundations# corporations# wealthy individuals# foreign investors# and the
venture capitalists themselves.
-enture capitalists generally;
(inance new and rapidly growing companies
/urchase e:uity securities
!ssist in the development of new products or services
!dd value to the company through active participation
Take higher risks with the expectation of higher rewards
9ave a long$term orientation
<hen considering an investment# venture capitalists carefully screen the technical and
business merits of the proposed company. -enture capitalists only invest in a small
percentage of the businesses they review and have a long$term perspective. They also
actively work with the company=s management# especially with contacts and strategy
formulation.
-enture capitalists mitigate the risk of investing by developing a portfolio of young
companies in a single venture fund. Many times they co$invest with other professional
venture capital firms. "n addition# many venture partnerships manage multiple funds
simultaneously. (or decades# venture capitalists have nurtured the growth of
!merica=s high technology and entrepreneurial communities resulting in significant
job creation# economic growth and international competitiveness. 'ompanies such as
)igital E:uipment 'orporation# !pple# (ederal Express# 'ompa:# Sun Microsystems#
"ntel# Microsoft and >enetech are famous examples of companies that received
venture capital early in their development.
<=ource; National Venture Capital Association $%%% &ear 'ook(
Private E>uit& Investing
-enture capital investing has grown from a small investment pool in the ?@A4s and
early ?@74s to a mainstream asset class that is a viable and significant part of the
institutional and corporate investment portfolio. %ecently# some investors have been
referring to venture investing and buyout investing as Bprivate e:uity investing.B This
term can be confusing because some in the investment industry use the term Bprivate
e:uityB to refer only to buyout fund investing. "n any case# an institutional investor
will allocate 65 to C5 of their institutional portfolio for investment in alternative
assets such as private e:uity or venture capital as part of their overall asset allocation.
'urrently# over 345 of investments in venture capitalDprivate e:uity comes from
institutional public and private pension funds# with the balance coming from
endowments# foundations# insurance companies# banks# individuals and other entities
who seek to diversify their portfolio with this investment class.
?hat is a !enture 6apita%ist@
The typical person$on$the$street depiction of a venture capitalist is that of a wealthy
financier who wants to fund start$up companies. The perception is that a person who
develops a brand new change$the$world invention needs capitalE thus# if they can2t get
capital from a bank or from their own pockets# they enlist the help of a venture
capitalist.
"n truth# venture capital and private e:uity firms are pools of capital# typically
organi0ed as a limited partnership that invests in companies that represent the
opportunity for a high rate of return within five to seven years. The venture capitalist
may look at several hundred investment opportunities before investing in only a few
selected companies with favorable investment opportunities. (ar from being simply
passive financiers# venture capitalists foster growth in companies through their
involvement in the management# strategic marketing and planning of their investee
companies. They are entrepreneurs first and financiers second.
Even individuals may be venture capitalists. "n the early days of venture capital
investment# in the ?@34s and ?@A4s# individual investors were the archetypal venture
investor. <hile this type of individual investment did not totally disappear# the
modern venture firm emerged as the dominant venture investment vehicle. 9owever#
in the last few years# individuals have again become a potent and increasingly larger
part of the early stage start$up venture life cycle. These Bangel investorsB will mentor
a company and provide needed capital and expertise to help develop companies.
!ngel investors may either be wealthy people with management expertise or retired
business men and women who seek the opportunity for first$hand business
development.
)actor to 'e considered 'y *enture capitalist in
selection of in*estment proposal
There are basically four key elements in financing of ventures which are studied in
depth by the venture capitalists. These are;
+, anage(ent; The strength# expertise * unity of the key people on the board bring
significant credibility to the company. The members are to be mature# experienced
possessing working knowledge of business and capable of taking potentially high
risks.
-, Potentia% for 6apita% Gain ; !n above average rate of return of about C4 $ F45 is
re:uired by venture capitalists. The rate of return also depends upon the stage of the
business cycle where funds are being deployed. Earlier the stage# higher is the risk
and hence the return.
., Rea%istic Financia% Re>uire(ent and ProAections ; The venture capitalist re:uires
a realistic view about the present health of the organi0ation as well as 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 %esearch * )evelopment.
/, Owner9s Financia% =ta"e ; The financial resources owned * committed by the
entrepreneurD owner in the business including the funds invested by family# friends
and relatives play a very important role in increasing the viability of the business. "t is
an important avenue where the venture capitalist keeps an open eye.
A +rief ,istory
The concept of venture capital is not new. -enture capitalists often relate the story of
'hristopher 'olumbus. "n the fifteenth century# he sought to travel westwards instead
of eastwards from Europe and so planned to reach "ndia. 9is far$fetched idea did not
find favor with the 8ing of /ortugal# who refused to finance him. (inally# Gueen
"sabella of Spain decided to fund him and the voyages of 'hristopher 'olumbus are
now empanelled in history.
The modern venture capital industry began taking shape in the post + <orld <ar ""
years. "t is often said that people decide to become entrepreneurs because they see
role models in other people who have become successful entrepreneurs. Much the
same thing can be said about venture capitalists. The earliest members of the
organi0ed venture capital industry had several role models# including these three;
A(erican Research and Beve%op(ent 6orporation# formed in ?@FA# whose biggest
success was )igital E:uipment. The founder of !%) was >eneral >eorges )oroit# a
(rench$born military man who is considered Cthe father of venture capita%,C "n the
?@34s# he taught at the 9arvard usiness School. 9is lectures on the importance of
risk capital were considered :uirky by the rest of the faculty# who concentrated on
conventional corporate management.
7,D, ?hitne& ) 6o also formed in ?@FA# one of whose early hits was Minute Maid
juice. Hock <hitney is considered one of the industry2s founders.
The Roc"efe%%er Fa(i%&# and in particular# & S %ockefeller# one of whose earliest
investments was in Eastern !irlines# which is now defunct but was one of the earliest
commercial airlines.
The Second <orld <ar produced an abundance of technological innovation# primarily
with military applications. They include# for example# some of the earliest work on
micro circuitry. "ndeed# H.9. <hitney2s investment in Minute Maid was intended to
commerciali0e an orange juice concentrate that had been developed to provide
nourishment for troops in the field.
"n the mid$?@34s# the ..S. federal government wanted to speed the development of
advanced technologies. "n ?@37# the (ederal %eserve System conducted a study that
concluded that a shortage of entrepreneurial financing was a chief obstacle to the
development of what it called Centrepreneuria% *usinesses,C !s a response this a
number of Small usiness "nvestment 'ompanies IS"'J were established to
BleverageB their private capital by borrowing from the federal government at below$
market interest rates. Soon commercial banks were allowed to form S"'s and within
four years# nearly A44 S"'s were in operation.
!t the same time a number of venture capital firms were forming private partnerships
outside the S"' format. These partnerships added to the venture capitalist2s toolkit#
by offering a degree of flexibility that S"'s lack. <ithin a decade# private venture
capital partnerships passed S"'s in total capital under management.
The ?@A4s saw a tremendous bull "/O market that allowed venture capital firms to
demonstrate their ability to create companies and produce huge investment returns.
(or example# when )igital E:uipment went public in ?@AK it provided !%) with
?4?5 annuali0ed %eturn on "nvestment I%O"J. The .SL74#444 )igital invested to
start the company in ?@3@ had a market value of .SLC7mn. !s a result# venture
capital became a hot market# particularly for wealthy individuals and families.
9owever# it was still considered too risky for institutional investors.
"n the ?@74s# though# venture capital suffered a double$whammy. (irst# a red$hot "/O
market brought over ?#444 venture$backed companies to market in ?@AK# the public
markets went into a seven$year slump. There were a lot of disappointed stock market
investors and a lot of disappointed venture capital investors too. Then in ?@7F# after
'ongress legislation against the abuse of pension fund money# all high$risk
investment of these funds was halted. !s a result of poor public market and the
pension fund legislation# venture capital fund raising hit rock bottom in ?@73.
<ell# things could only get better from there. eginning in ?@7K# a series of
legislative and regulatory changes gradually improved the climate for venture
investing. (irst 'ongress slashed the capital gains tax rate to 6K5 from F@.35. Then
the &abor )epartment issued a clarification that eliminated the pension funds act as an
obstacle to venture investing. !t around the same time# there was a number of high$
profile "/Os by venture$backed companies. These included (ederal Express in ?@7K#
and !pple 'omputer and >enetech "nc in ?@K?. This rekindled interest in venture
capital on the part of wealthy families and institutional investors. "ndeed# in the
?@K4s# the venture capital industry began its greatest period of growth. "n ?@K4#
venture firms raised and invested less than .SLA44 million. That number soared to
nearly .SLFbn by ?@K7. The decade also marked the explosion in the buy$out
business.
The late ?@K4s marked the transition of the primary source of venture capital funds
from wealthy individuals and families to endowment# pension and other institutional
funds. The surge in capital in the ?@K4s had predictable results. %eturns on venture
capital investments plunged. Many investors went into the funds anticipating returns
of C45 or higher. That was probably an unrealistic expectation to begin with. The
consensus today is that private e:uity investments generally should give the investor
an internal rate of return something to the order of ?35 to 635# depending upon the
degree of risk the firm is taking.
9owever# by ?@@4# the average long$term return on venture capital funds fell below
K5# leading to yet another downturn in venture funding. )isappointed families and
institutions withdrew from venture investing in droves in the ?@K@$@? periods. The
economic recovery and the "/O boom of ?@@?$@F have gone a long way towards
reversing the trend in both private e:uity investment performance and partnership
commitments.
"n ?@@K# the venture capital industry in the .nited States continued its seventh straight
year of growth. "t raised .SL63bn in committed capital for investments by venture
firms# who invested over .SL?Abn into domestic growth companies .S firms have
traditionally been the biggest participants in venture deals# but non$.S venture
investment is growing. "n "ndia# venture funding more than doubled from LF64
million in 6446 to almost L? billion in 644C. (or the first half of 644F# venture capital
investment rose C65 from 644C.
Venture Capital in IN-IA
-enture capital was introduced in "ndia in mid eighties by !ll "ndia (inancial
"nstitutions with the inauguration of %isk 'apital (oundation I%'(J sponsored by
"('" with a view to encourage the technologists and the professional to promote new
industries. 'onse:uently the government of "ndia promoted the venture capital during
?@KA$K7 by creating a venture capital fund in the context of structural development
and growth of small$scale business enterprises. Since then several venture capital
firmsDfunds I-'(sJ are incorporated by (inancial "nstitutions I("sJ# /ublic Sector
anks I/SsJ# and /rivate anks and /rivate (inancial companies.
The "ndian -enture 'apital "ndustry I"-'"J is just about a decade old industry
as compared to that in Europe and .S. "n this short span it has nurtured close to one
thousand ventures# mostly in SME segment and has supported building
technocratDprofessionals all through. The -' industry# through its investment in high
growth companies as well as companies adopting newer technologies backed by first
generation entrepreneurs# has made a substantial contribution to economy. "n "ndia#
however# the potential of venture capital investments is yet to be fully reali0ed. There
are around thirty venture capital funds# which have garnered over %s. 3444 'rores.
The venture capital investments in "ndia at %s. ?444.43 crore as in ?@@7# representing
4.? percent of >)/# as compared to 3.3 per cent in countries such as 9ong 8ong.
In*estment ."ilosop"y
-enture capitalists can be generalists# investing in various industry sectors# or various
geographic locations# or various stages of a company2s life. !lternatively# they may be
specialists in one or two industry sectors# or may seek to invest in only a locali0ed
geographic area.
,ot all venture capitalists invest in Bstart$ups.B <hile venture firms will invest in
companies that are in their initial start$up modes# venture capitalists will also invest in
companies at various stages of the business life cycle. ! venture capitalist may invest
before there is a real product or company organi0ed Iso called Bseed investingBJ# or
may provide capital to start up a company in its first or second stages of development
known as Bearly stage investing.B !lso# the venture capitalist may provide needed
financing to help a company grow beyond a critical mass to become more successful
IBexpansion stage financingBJ.
The venture capitalist may invest in a company throughout the company2s life cycle
and therefore some funds focus on later stage investing by providing financing to help
the company grow to a critical mass to attract public financing through a stock
offering. !lternatively# the venture capitalist may help the company attract a merger
or ac:uisition with another company by providing li:uidity and exit for the company2s
founders.
!t the other end of the spectrum# some venture funds speciali0e in the ac:uisition#
turnaround or recapitali0ation of public and private companies that represent
favorable investment opportunities.
There are venture funds that will be broadly diversified and will invest in companies
in various industry sectors as diverse as semiconductors# software# retailing and
restaurants and others that may be specialists in only one technology.
<hile high technology investment makes up most of the venture investing in the ..S.#
and the venture industry gets a lot of attention for its high technology investments#
venture capitalists also invest in companies such as construction# industrial products#
business services# etc. There are several firms that have speciali0ed in retail company
investment and others that have a focus in investing only in Bsocially responsibleB
start$up endeavors.
The basic principal underlying venture capital + invest in high$risk projects with the
anticipation of high returns. These funds are then invested in several fledging
enterprises# which re:uire funding# but are unable to access it through the
conventional sources such as banks and financial institutions. Typically first
generation entrepreneurs start such enterprises. Such enterprises generally do not have
any major collateral to offer as security# hence banks and financial institutions are
averse to funding them. -enture capital funding may be by way of investment in the
e:uity of the new enterprise or a combination of debt and e:uity# though e:uity is the
most preferred route.
Since most of the ventures financed through this route are in new areas Iworldwide
venture capital follows Bhot industriesB like "nfoTech# electronics and biotechnologyJ#
the probability of success is very low. !ll projects financed do not give a high return.
Some projects fail and some give moderate returns. The investment# however# is a
long$term risk capital as such projects normally take C to 7 years to generate
substantial returns. -enture capitalists offer Bmore than moneyB to the venture and
seek to add value to the investee unit by active participation in its management. They
monitor and evaluate the project on a continuous basis.
The venture capitalist is however not worried about failure of an investee company#
because the deal which succeeds# nets a very high return on his investments + high
enough to make up for the losses sustained in unsuccessful projects. The returns
generally come in the form of selling the stocks when they get listed on the stock
exchange or by a timely sale of his stake in the company to a strategic buyer. The idea
is to cash in on an increased appreciation of the share value of the company at the
time of disinvestment in the investee company. "f the venture fails Imore often than
notJ# the entire amount gets written off. /robably# that is one reason why venture
capitalists assess several projects and invest only in a handful after careful scrutiny of
the management and marketability of the project.
To conclude# a venture financier is one who funds a start up company# in most cases
promoted by a first generation technocrat promoter with e:uity. ! venture capitalist is
not a lender# but an e:uity partner. 9e cannot survive on minimalism. 9e is driven by
maximi0ation; wealth maximi0ation. -enture capitalists are sources of expertise for
the companies they finance. Exit is preferably through listing on stock exchanges.
This method has been extremely successful in .S!# and venture funds have been
credited with the success of technology companies in Silicon -alley. The entire
technology industry thrives on it
Length of invest(ent;
-enture capitalists will help companies grow# but they eventually seek to exit the
investment in three to seven years. !n early stage investment make take seven to ten
years to mature# while a later stage investment many only take a few years# so the
appetite for the investment life cycle must be congruent with the limited partnerships2
appetite for li:uidity. The venture investment is neither a short term nor a li:uid
investment# but an investment that must be made with careful diligence and expertise.
Stages of Venture Capital )unding
The -enture 'apital funding varies across the different stages of growth of a firm. The
various stages are;
;
?, Pre seed =tage; 9ere# a relatively small amount of capital is provided to an
entrepreneur to conceive and market a potential idea having good future prospects.
The funded work also involves product development to some extent.
6, =eed =tage; (inancing is provided to complete product development and
commence initial marketing formalities.
C. Ear%& =tage E First =tage; (inance is provided to companies to initiate
commercial manufacturing and sales.
F. =econd =tage ; "n the Second Stage of (inancing working capital is provided for
the expansion of the company in terms of growing accounts receivable and inventory.
3, Third =tage; (unds provided for major expansion of a company having
increasing sales volume. This stage is met when the firm crosses the break even point.
A, #ridge E eFFanine Financing or Later =tage Financing; ridge D
Me00anine (inancing or &ater Stage (inancing is financing a company just before its
"/O I"nitial /ublic OfferJ. Often# bridge finance is structured so that it can be repaid#
from the proceeds of a public offering.
/et"ods of Venture )inancing
-enture capital is typically available in three forms in "ndia# they are;
E>uit&; !ll -'(s in "ndia provide e:uity but generally their contribution does not
exceed F@ percent of the total e:uity capital. Thus# the effective control and majority
ownership of the firm remains with the entrepreneur. They buy shares of an enterprise
with an intention to ultimately sell them off to make capital gains.
6onditiona% Loan; "t is repayable in the form of a royalty after the venture is able
to generate sales. ,o interest is paid on such loans. "n "ndia# -'(s charge royalty
ranging between 6 to ?3 percentE actual rate depends on other factors of the venture
such as gestation period# cost$flow patterns# riskiness and other factors of the
enterprise.
Inco(e Note ; "t 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.
Other Financing ethods; ! few venture capitalists# particularly in the
private sector# have started introducing innovative financial securities like
participating debentures# introduced by T'(' is an example.
Venture Capital )und 0peration
-enture capitalists are very selective in deciding what to invest in. ! common figure
is that they invest only in about one in four hundred ventures presented to them.
They are only interested in ventures with high growth potential. Only ventures with
high growth potential are capable of providing the return that venture capitalists
expect# and structure their businesses to expect. ecause many businesses cannot
create the growth re:uired having an exit event within the re:uired timeframe# venture
capital is not suitable for everyone.
-enture capitalists usually expect to be able to assign personnel to key management
positions and also to obtain one or more seats on the company=s board of directors.
This is to put peop%e in p%ace# a phrase that has sometimes :uite unfortunate
implications as it was used in many accounting scandals to refer to a strategy of
placing incompetent or easily bypassed individuals in positions of due diligence and
formal legal responsibility# enabling others to rob stockholders blind. Only a tiny
portion of venture capitalists# however# have been found liable in the large scale
frauds that rocked !merican ImostlyJ finance in 6444 and 644?.
-enture capitalists expect to be able to sell their stock# warrants# options# convertibles#
or other forms of e:uity in three to ten years; this is referred to as harvesting. -enture
capitalists know that not all their investments will pay$off. The failure rate of
investments can be highE anywhere from 645 to @45 of the enterprises funded fail to
return the invested capital.
Many venture capitalists try to mitigate this problem through diversification. They
invest in companies in different industries and different countries so that the
systematic risk of their total portfolio is reduced. Others concentrate their investments
in the industry that they are familiar with. "n either case# they work on the assumption
that for every ten investments they make# two will be failures# two will be successful#
and six will be marginally successful. They expect that the two successes will pay for
the time given to# and risk exposure of the other eight. "n good times# the funds that do
succeed may offer returns of C44 to ?4445 to investors.
-enture capital partners Ialso known as Bventure capitalistsB or B-'sBJ may be former
chief executives at firms similar to those which the partnership funds. "nvestors in
venture capital funds are typically large institutions with large amounts of available
capital# such as state and private pension funds# university endowments# insurance
companies and pooled investment vehicles.
Most venture capital funds have a fixed life of ten yearsMthis model was pioneered
by some of the most successful funds in Silicon -alley through the ?@K4s to invest in
technological trends broadly but only during their period of ascendance# to cut
exposure to management and marketing risks of any individual firm or its product.
"n such a fund# the investors have a fixed commitment to the fund that is Bcalled
downB by the -'s over time as the fund makes its investments. "n a typical venture
capital fund# the -'s receive an annual Bmanagement feeB e:ual to 65 of the
committed capital to the fund and 645 of the net profits of the fund. ecause a fund
may run out of capital prior to the end of its life# larger -'s usually have several
overlapping funds at the same timeMthis lets the larger firm keep specialists in all
stage of the development of firms almost constantly engaged. Smaller firms tend to
thrive or fail with their initial industry contactsMby the time the fund cashes out# an
entirely new generation of technologies and people is ascending# whom they do not
know well# and so it is prudent to re$assess and shift industries or personnel rather
than attempt to simply invest more in the industry or people it already knows
Significance of Study
-enture capitalists not only support high technology projects they also fiancN any
risky idea# they provide funds IaJ if one needs additional capital to expand his existing
business or one has a new * promising project to exploit IbJ if one cannot obtain a
conventional loan the re:uirement terms would create a burden during the period the
firm is struggling to grown.
"t is the ambition of many talented people in "ndia to set up their own venture if they
could get ade:uate * reliable support. (inancial investment provides loans * e:uity.
ut they do not provide management support# which is often needed by entrepreneurs.
ut the venture capital industries provide such support along with capital also.
-enture capitalist acts a partner not a financier.
O*Aective of the =tud&
<hen we are going to study something there is specific purpose for our study. "t may
be for our course# as hobby# for passing our time# to find out genuine solution for any
problem or to draw out certain inferences out of the available data. The objectives of
my study are;
To find out the venture capital investment volume in "ndia.
To study the problem faced by venture capitalist in "ndia.
To study the future prospects of venture capital financing
0'1ecti*e No2 $
3o )ind out t"e *enture capital in*estment
*olume in India
ethods of Financing
Instru(ents Rs (i%%ion Per cent
E:uity Shares A#C?K.?6 AC.?K
%edeemable /reference Shares 6#?3F.FA 6?.3F
,on 'onvertible )ebt K7C.4? K.7C
'onvertible "nstruments 3K4.46 3.K
Other "nstruments 73.K3 4.73
Total ?4#444.FA ?44
Interpretation; This diagram shows the venture capital financing in e:uity share
and secondly they invest in redeemable preference shares to get higher returns.
6ontri*utors of Funds
6ontri*utors Rs, (n Per cent
(oreign "nstitutional "nvestors ?C#F6A.F7 36.FA5
!ll "ndia (inancial "nstitutions A#636.@4 6F.FC5
Multilateral )evelopment !gencies 6#?CC.AF K.CF5
Other anks ?#3F?.44 A.465
(oreign "nvestors 374 6.6C5
/rivate Sector F?6.3C ?.A?5
/ublic Sector C6F.FF ?.675
,ationali0ed anks 67K.A7 ?.4@5
,on %esident "ndians 6C3.3 4.@65
State (inancial "nstitutions 6?3 4.KF5
Other /ublic ??3.36 4.F35
"nsurance 'ompanies K3 4.CC5
Mutual (unds F.3 4.465
Total 63#3@3.?7 ?44.445
Interpretation; This table shows the highest contribution of fund ("" and secondly
!"(" to develop the "ndustry.
Financing #& Invest(ent =tage
Invest(ent =tages Rs (i%%ion Nu(*er
Start$up C#K?C.44 6@7
&ater stage C#CCK.@@ ?3F
Other early stage ?#K63.77 ?6F
Seed stage @AC.6 ?47
Turnaround financing 3@.3 @
Total ?4#444.FA A@?
Interpretation; This diagram shows the highest finance is received by the venture
in startup stage of any venture.
Financing #& Industr&
Industr& Rs (i%%ion
"ndustrial products# machinery 6#3@@.C6
'omputer Software ?#KC6
'onsumer %elated ?#F?6.7F
Medical A6C.K
(ood# food processing 344.4A
Other electronics FCA.3F
Tel * )ata 'ommunications CK3.4@
iotechnology C7A.FA
Energy related 6F@.3A
'omputer 9ardware 64C.CA
Miscellaneous ?#CK4.K3
Total ?4#444.FA
Interpretation; "n this diagram highest finance received by industrial products and
machinery and secondly finance received by computer software.
Financing #& =tates
Invest(ent Rs (i%%ion
Maharashtra
6#3AA
Tamil ,adu
?3C?
!ndhra /radesh
?C76
>ujarat
??46
8arnataka
?4FA
<est engal
C?6
9aryana
C44
)elhi
6@F
.ttar /radesh
6KC
Madhya /radesh
6C?
8erala
?C3
>oa
?43
%ajasthan
K7
/unjab
KF
Orissa
C3
)adra * ,agar 9aveli
C6
9imachal /radesh
6K
/ondicherry
66
ihar
?A
Overseas
F?C
Total
@@@F
Source IVCA 45667869(
Interpretation; "n this diagram highest finance given by the Maharashtra to the
ventures to promote the state economy growth.
Assessing Venture Capital
-enture funds# both domestic and offshore# have been around in "ndia for some years
now. 9owever it is only in the past ?6 to ?K months# they have come into the
limelight. The rejection ratio is very high# about ?4 in ?44 get beyond pre evaluation
stage# and ? gets funded.
-enture capital funds are broadly of two kinds $ generalists or specialists. "t is critical
for the company to access the right type of fund# ie who can add value. This backing
is invaluable as focusedDspeciali0ed funds open doors# assist in future rounds and help
in strategy. 9ence# it is important to choose the right venture capitalist.
The standard parameters used by venture capitalists are very similar to any investment
decision. The only difference being exit. "f one buys a listed security# one can exit at a
price but with an unlisted security# exit becomes difficult. The key factors which they
look for in
The anage(ent
Most businesses are people driven# with success or failure depending on the
performance of the team. "t is important to distinguish the entrepreneur from the
professional management team. The value of the idea# the vision# putting the team
together# getting the funding in place is amongst others# some key aspects of the role
of the entrepreneur. -enture capitalists will insist on a professional team coming in#
including a 'EO to execute the idea. One$man armies are passe. "ntegrity and
commitment are attributes sought for. The venture capitalist can provide the strategic
vision# but the team executes it. !s a famous Silicon -alley saying goes BSuccess is
execution# strategy is a dreamB.
The Idea
The idea and its potential for commerciali0ation are critical. -enture funds look for a
scalable model# at a country or a regional level. Otherwise the entire game would be
reduced to a manpower or machine multiplication exercise. (or example# it is very
easy for 9industan &ever to double sales of &iril $ a soap without incremental capex#
while >ujarat !mbuja needs to spend at least %sFbn before it can increase sales by
?mn ton. )istinctive competitive advantages must exist in the form of scale#
technology# brands# distribution# etc which will make it difficult for competition to
enter.
!a%uation
!ll investment decisions are sensitive to this. !n old stock market saying BEvery
stock is a buy at a price and vice versaB. Most deals fail because of valuation
expectation mismatch. "n "ndia# while calculating returns# venture capital funds will
take into account issues like rupee depreciation# political instability# which adds to the
risk premia# thus suppressing valuations. &inked to valuation is the stake# which the
fund takes. "n "ndia# entrepreneurs are still uncomfortable with the venture capital
Btaking controlB in a seed stage project.
E:it
<ithout exit# gains cannot be booked. Exit may be in the form of a strategic sale
orDand "/O. Taxation issues come up at the time. !ny fund would discuss all exit
options before closing a deal. Sometimes# the fund insists on a buy back clause to
ensure an exit.
Portfo%io #a%ancing
Most venture funds try and achieve portfolio balancing as they invest in different
stages of the company life cycle. (or example# a venture capital has invested in a
portfolio of companies predominantly at seed stageE they will focus on expansion
stage projects for future investments to balance the investment portfolio. This would
enable them to have a phased exit. "n summary# venture capital funds go through a
certain due diligence to finali0e the deal. This includes evaluation of the management
team# strategy# execution and commerciali0ation plans. This is supplemented by legal
and accounting due diligence# typically carried out by an external agency. "n "ndia# the
entire process takes about A months. Entrepreneurs are advised to keep that in mind
before looking to raise funds. The actual cash inflow might get delayed because of
regulatory issues. "t is interesting to note that in .S!# at times angels write checks
across the table.
)inancing 0ptions in :eneral
The possibility of raising a substantial part of project finances in "ndia through both
e:uity and debt instruments are among the key advantages of investing in "ndia.
The "ndian banking system has shown remarkable growth over the last two decades.
The rapid growth and increasing complexity of the financial markets# especially the
capital market have brought about measures for further development and
improvement in the working of these markets. anks and development financial
institutions led by "'"'"# ")" and "('" were providers of term loans for funding
projects. The options were limited to conventional businesses# i.e. manufacturing
centric. Services sector was ignored because of the BcollateralB issue.
E:uity was raised from the capital markets using the "/O route. The bull markets of
the @4s# fuelled by 9arshad Mehta and the (""s# ensured that IadJ venture capital was
easily available. Manufacturing companies exploited this to the full.
The services sector was ignored# like software# media# etc. &ack of understanding of
these sectors was also responsible for the same. "f we look back to ?@@? or even ?@@6#
the situation as regards financial outlay available to "ndian software companies was
poor. Most software companies found it extremely difficult to source seed capital#
working capital or even venture capital.
Most software companies started off undercapitali0ed# and had to rely on loans
or overdraft facilities to provide working capital. This approach forced them to
generate revenue in the short term# rather than investing in product development. The
situation fortunately has changed.
esearc" /et"odology
REBEN ) ORG defines#O%esearch as a systemati0ed effort to gain now
knowledge.O
"t is a careful investigation for search of new facts in any branch of knowledge. The
purpose of research methodology section is to describe the procedure for conduction
the study. "t includes research design# sample si0e# data collection and procedure of
analysis of research instrument.
%esearch always starts with a :uestion or a problem. "ts purpose is to find answers to
:uestions through the application of the scientific method. "t is a systematic and
intensive study directed towards a more complete knowledge of the subject studied.
RE=EAR6D BE=IGN;
Acc2 to ;erlinger< P%esearch design is the plan structure * strategy of
investigation conceived so as to obtain answers to research :uestions and to control
variance.
Acc2 to :reen and 3ull< P! research design is the specification of methods and
procedures for ac:uiring the information needed. "t is the overall operational pattern
or framework of the project that stipulates what information is to be collected from
which sources by what procedures.
"ts found that research design is purely and simply the framework for a study that
guides the collection and analysis of re:uired data.
%esearch design is broadly classified into
Exploratory research design
)escriptive research design
'asual research design
This research is a E:p%orator& research. The major purpose of this research is
description of state of affairs as it exists at present.
BATA 6OLLE6TION
=econdar& data
Secondary data is the data which is already collected by someone and complied for
different purposes which are used in research for this study. "t includes;$
"nternet
Maga0ine
Hournal
,ewspaper
=iterature e*iew
According to =u*ash and Nair' <a& -550H
!ccording to theses persons though the modern concept of venture capital stated
during ?@FA and now practiced by almost all economies around the world# there
seems to be a slowdown of venture capital activities after 6444.There may be a long
list of reasons for this situation# where people feel more risky to put their money in
new and emerging ventures. 9ardly 35 of the total venture capital investment
globally is given to really stage ventures. "n all the years people around the world has
seen the potentiality of venture capital in promoting different economies of the world
by improving the standard of living of the people by expanding business activities#
increasing employment and also generating more revenue to the government
According To 8u(ar' <7une -55.H
This study focus on the industry should concentrate more on early stage business
opportunities instead of later stage. "t is the experience world over and especially in
the .nited States of !merica that the early stage opportunities have generated
exceptional returns for the industry. 9e also suggests that individual capitalists should
follow a focused investment strategy. The speciali0ation should be in a board
technology segment.
According to 8u(ar and 8aura' <arch -551H
The present study reports four factors which are used by the venture capitalist to
screen new venture proposals. .sing 8endall2s tau$c analysis# the study brings out
strong association between several variable pair. roadly# the analysis finds that;
Successful venture teams put in sustained efforts o identified target markets.
They are highly meticulous while attending to the details.
These teams are adept at dealing with risk because of their impeccable past
experience.
"ndian venture capitalists do not seem to be much enamored of technology
venturingE at least some of the successful funded by them do not seem to
show signs of being hi$ tech.
The study brings out four important variables which are highly uni:ue to
successful venture in "ndia. They are;
!bility to evaluate and react to risk
!ttention to details
Market share
/rofits.
Evaluating risk seems to be an area where unsuccessful venture fail. Since
successful teams focus on established markets and meticulously pursue these
markets to gain market share# they achieve desired profits.
According to 8u(ar' <a& -55/H
The "ndian -enture 'apital "ndustry has followed the classical model of venture
capital finance. The early stage financing which includes seeds# startup * early stage
investment was always the major part of the total investment. <henever venture
capitalists invest in venture certain basic preference play a crucial role in investment
decision. Two such considerations are location preferences and ownership
preferences. Seed stage finance is provided to new companies for the use in product
development * initial marketing company may be in the process of setting up the
business or may be in the business for short period but have not reach the stage of
commerciali0ation.
According to 8u(ar' <arch' -55/H
The industry should concentrate more an early stage business opportunities instead of
later stage. "t is the experience world over and especially in the .nited states of
!merica that the early stage opportunities have generated exceptional for the industry.
"t is recommended that the venture capitalists should retain their basic feature that
taking retain their basic feature that is taking high risk. The present situation may
compel venture capitalists to opt for less risky opportunities but it is against the sprit
of venture capitalism. The established fact is big gains are possible in high risk
projects.
According to 6har&' <=epte(*er -550H
There has been a plethora of literature on venture capital finance# which is helping the
practitioners2 vi0.# venture capital finance companies and fund manage for better
understanding the role of venture capital in economic development. There are number
of studies on the venture capital and activities of venture capitalists in developed
countries.
According to !iAa&a%a"sh(an ) Ba%vi' <<7an,' -551H
<henever "ndian policy makers have to encourage any industry. The usual practice is
to grant that the industry tax breaks for a limited period. This definitely acts as a
positive incentive for that industry. 9owever# what is re:uired is a through
understanding of the industry re:uirement framing and implementation of aggregative
strategy for its development. -' funds are not even registered with SE" in spite of
all the benefit available. -' industry is one# which will today prepare a base for a
strong tomorrow. <hat is need for the development of -' industry is not only tax
breaks but simpler procedures legislation for simplified exit form investment# more
transparency and legal backing to participate in business amongst other things.
According to 8u(ar' <7u%&' -550H
One of the integral aspects of venture funding is venture capitalist=s involvement with
the entrepreneurial team. The relationship through broad interaction was explored by
%osenstein I?@KKJ. ! comparison was drawn between small and large firms with
regard to board interaction. <hile it is important in large firms the relative power of
small conventional firms# board interaction generally is undermined. %osenstein et. a.
I?@@CJ studied the finer aspects of boards in the venture funded companies in the
.S!. (rom @K candidates in the sample# the study attempted to bring out the changes
in the board si0e# board composition and control and their relation to value added to
the funded unit. The empirical analysis yielded results wherein the si0e of the board
increased after venture funding# indicating more transparency in board operations.
Through a case based approach &loyd et. al. I?@@3J explored the aspect of deal
structuring and post investment staging of venture capitalists through venture
capitalists= co$investing strategy. The study finds that even through venture capitalists
fix tight milestones and time lines they themselves contribute to many of the delays
that are experienced by a typical start up firm. This is because of the hierarchical co$
investing partners and the lack of understanding within the venture capitalist co$
investors as to what role they individually play in the development of their portfolio
company.

According to Ro**ie' <+442H
%obbies# et. al. I?@@7J highlights the monitoring policies of funded units by venture
capitalists and studies the performance targets# monitoring information# and
monitoring actions through a :uestionnaire$based survey. The survey was
administered to ?4K ritish -enture 'apital !ssociation members and total of 77
responses were gathered in the study. The findings related to performance targets and
other monitoring issues were considerable addition to the literature in the subject.
The issues concerning board of directors= role in venture backed companies are
widely debated topics in academic research. The findings of the study by (ried et. al.
I?@@KJ emphasi0e that the board of directors are a more involved in the venture$
backed firms than boards where members do not have large ownership at stake. The
study provides an empirical evidence of variation in the boards= involvement and
shows its relevance in performance management of funded units.
According to ishra' <7u%& -55/H
There is abundant empirical research conducted in developed countries which address
the relative investment evaluation criteria taken into account in the screening process
for new venture investment proposals. Qopunidis I?@@FJ provides a useful summary
of the previous research in this field. The identification of selection criteria has been
researched using different methodologies such as simple rating of criteria Iperpetual
and deal specific responsesJ 8night# ?@KAE )ixon# ?@@?E 9all and 9ofer# ?@@CE %ah#
Hung and &ee# ?@@FJ# construct analysis I(ried and 9isrich# ?@@FJ# verbal protocols
IQhacharakis and Meyer# ?@@KJ# and :uantitative compensatory models IMu0yka#
irley and &eleux# ?@@AE Shepherd# ?@@@J. Multi methods Icase analysis# study of
administrative records# published interviews# :uestionnaire and personal interviewsJ
approach has also been used I%i:uelme# ?@@FJ to enhance understanding of
investment criteria and also extend it to other aspects of investment process like deal
structuring and divestment.
Conceptual )rame !ork >
3"e Venture Capital .rocess
The -enture 'apital "nvestment /rocess;
The venture capital activity is a se:uential process involving the following six steps.
?. )eal origination
6. Screening
C. )ue diligence Evaluation
F. )eal structuring
3. /ost$investment activity
A. Exit
!enture 6apita% Invest(ent Process
Bea% origination;
"n generating a deal flow# the -' investor creates a pipeline of deals or investment
opportunities that he would consider for investing in. )eal may originate in various
ways. referral system# active search system# and intermediaries. %eferral system is an
important source of deals. )eals may be referred to -'(s by their parent
organi0ations# trade partners# industry associations# friends etc. !nother deal flow is
active search through networks# trade fairs# conferences# seminars# foreign visits etc.
"ntermediaries is used by venture capitalists in developed countries like .S!# is
certain intermediaries who match -'(s and the potential entrepreneurs.
=creening;
-'(s# before going for an in$depth analysis# carry out initial screening of all projects
on the basis of some broad criteria. (or 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 si0e of investment# geographical location and stage of
financing could also be used as the broad screening criteria.
Bue Bi%igence;
)ue diligence is the industry jargon for all the activities that are associated with
evaluating an investment proposal. The venture capitalists evaluate the :uality 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. usiness plan contains detailed
information about the proposed venture. The evaluation of ventures by -'(s in "ndia
includesE
/reliminary evaluation; The applicant re:uired to provide a brief profile of the
proposed venture to establish prima facie eligibility.
)etailed evaluation; Once the preliminary evaluation is over# the proposal is evaluated
in greater detail. -'(s in "ndia expect the entrepreneur to have;$ "ntegrity# long$term
vision# urge to grow# managerial skills# commercial orientation.
-'(s in "ndia also make the risk analysis of the proposed projects which includes;
/roduct risk# Market risk# Technological risk and Entrepreneurial risk. The final
decision is taken in terms of the expected risk$return trade$off as shown in (igure.
)eal Structuring; Structuring refers to putting together the financial aspects of the
deal and negotiating with the entrepreneurs to accept a venture capital2s proposal and
finally closing the deal. To do a good job in structuring# one needs to be
knowledgeable in areas of accounting# cash flow# finance# legal and taxation. !lso the
structure should take into consideration the various commercial issues Iie what the
entrepreneur wants and what the venture capital would re:uire protecting the
investmentJ. )ocumentation refers to the legal aspects of the paperwork in putting the
deal together. The instruments to be used in structuring deals are many and varied.
The objective in selecting the instrument would be to maximi0e Ior optimi0eJ venture
capital2s returnsDprotection and yet satisfies the entrepreneur2s re:uirements. The
instruments could be as follows;
Instru(ent Issues
&oan 'lean vs secured
"nterest bearing vs non interest bearing
convertible vs one with features IwarrantsJ
?st 'harge# 6nd 'harge#
loan vs loan stock
Maturity
/reference shares redeemable Iconditions under 'ompany !ctJ
participating
par value
nominal shares
<arrants exercise price# expiry period
'ommon shares new or vendor shares
par value
partially$paid shares
"n "ndia# straight e:uity and convertibles are popular and commonly used. ,owadays#
warrants are issued as a tool to bring down pricing.
! variation that was first used by /!'T and T)"'" was Broyalty on salesB. .nder
this# the company was given a conditional loan. "f the project was successful# the
company had to pay a 5 age of sales as royalty and if it failed then the amount was
written off. "n structuring a deal# it is important to listen to what the entrepreneur
wants# but the venture capital comes up with his own solution. Even for the proposed
investment amount# the venture capital decides whether or not the amount re:uested#
is appropriate and consistent with the risk level of the investment. The risks should be
analy0ed# taking into consideration the stage at which the company is in and other
factors relating to the project. Ieg exit problems# etcJ.
Post Invest(ent Activities;
Once the deal has been structured and agreement finali0ed# the venture capitalist
generally assumes the role of a partner and collaborator. 9e also gets involved in
shaping of the direction of the venture. The degree of the venture capitalist=s
involvement depends on his policy. "t may not# however# be desirable for a venture
capitalist to get involved in the day$to$day operation of the venture. "f a financial or
managerial crisis occurs# the venture capitalist may intervene# and even install a new
management team.
E:it;
-enture capitalists generally want to cash$out their gains in five to ten years after the
initial investment. They play a positive role in directing the company towards
particular exit routes. ! venture may exit in one of the following ways;
?. "nitial /ublic Offerings I"/O2sJ
6. !c:uisition by another company
C. /urchase of the venture capitalist=s shares by the promoter#
F. /urchase of the venture capitalist=s share by an outsider
0'1ecti*e No25
3o study t"e pro'lems faced 'y *enture
capitalist in India2
Pro*%e(s of !enture 6apita% in Indian 6onte:t
One can ask why venture funding is so successful in .S! and faced a number of
problems in "ndia. The biggest problem was a mindset change from Bcollateral
fundingB to high risk high return funding. Most of the pioneers in the industry were
people with credit background and exposure to manufacturing industries. Exposure to
fast growing intellectual property business and services sector was almost 0ero.
Moreover -'( is in its nascent stages in "ndia. The emerging scenario of global
competitiveness has put an immense pressure on the industrial sector to improve the
:uality level with minimi0ation of cost of products by making use of latest
technological skills. The implication is to obtain ade:uate financing along with the
necessary hi$tech e:uipments to produce an innovative product which can succeed
and grow in the present market condition. .nfortunately# our country lacks on both
fronts. The necessary capital can be obtained from the venture capital firms who
expect an above average rate of return on the investment. The financing firms expect
a sound# experienced# mature and capable management team of the company being
financed. Since the innovative project involves a higher risk# there is an expectation of
higher returns from the project. The payback period is also generally high I3 $ 7
yearsJ. The other issues that led to such a situation include;
License RaA and The IPO #oo(
Till early @4s# under the license raj regime# only commodity centric businesses thrived
in a deficit situation. To fund a cement plant# venture capital is not needed. <hat was
needed was ability to get a license and then get the project funded by the banks and
)("s. "n most cases# the promoters were well$established industrial houses# with no
apparent need for funds. Most of these entities were capable of raising funds from
conventional sources# including term loans from institutions and e:uity markets.
=ca%a*i%it&
The "ndian software segment has recorded an impressive growth over the last few
years and earns large revenues from its export earnings# yet our share in the global
market is less than ? per cent. <ithin the software industry# the value chain ranges
from body shopping at the bottom to strategic consulting at the top. 9igher value
addition and profitability as well as significant market presence take place at the
higher end of the value chain. "f the industry has to grow further and survive the flux
it would only be through innovation. (or any venture idea to succeed there should be
a product that has a growing market with a scalable business model. The "T industry
Iwhich is most suited for venture funding because of its BideasB natureJ in "ndia till
recently had a service centric business model. /roducts developed for "ndian markets
lack scale.
indsets
-enture capital as an activity was virtually non$existent in "ndia. Most venture capital
companies want to provide capital on a secured debt basis# to established businesses
with profitable operating histories. Most of the venture capital units were offshoots of
financial institutions and banks and the lending mindset continued. True venture
capital is capital that is used to help launch products and ideas of tomorrow. !broad#
this problem is solved by the presence of Rangel investors2. They are typically wealthy
individuals who not only provide venture finance but also help entrepreneurs to shape
their business and make their venture successful.
Returns' Ta:es and Regu%ations
There is a multiplicity of regulators like SE" and %". )omestic venture funds are
set up under the "ndian Trusts !ct of ?KK6 as per SE" guidelines# while offshore
funds routed through Mauritius follow %" guidelines. !broad# such funds are made
under the &imited /artnership !ct# which brings advantages in terms of taxation. The
government must allow pension funds and insurance companies to invest in venture
capitals as in .S! where corporate contributions to venture funds are large.
E:it
The exit routes available to the venture capitalists were restricted to the "/O route.
efore deregulation# pricing was dependent on the erstwhile ''" regulations. "n
general# all issues were under priced. Even now SE" guidelines make it difficult for
pricing issues for an easy exit. >iven the failure of the OT'E" and the revised
guidelines# small companies could not hope for a SED ,SE listing. >iven the dull
market for mergers and ac:uisitions# strategic sale was also not available.
!a%uation
The recent phenomenon is valuation mismatches. Thanks to the software boom# most
promoters have sky high valuation expectations. >iven this# it is difficult for deals to
reach financial closure as promoters do not agree to a valuation. This coupled with the
fancy for software stocks in the bourses means that most companies are preponing
their "/O2s. 'onse:uently# the number and :uality of deals available to the venture
funds gets reduced
Some other major problems facing by venture capitalist in "ndia are;
a. %e:uirement of an experienced management team.
b. %e:uirement of an above average rate of return on investment.
&onger payback period.
c. .ncertainty regarding the success of the product in the market.
d. Guestions regarding the infrastructure details of production like plant location#
accessibility# relationship with the suppliers and creditors# transportation
facilities# labour availability etc.
e. The category of potential customers and hence the packaging and pricing
details of the product.
f. The si0e of the market.
g. Major competitors and their market share.
h. Skills and Training re:uired and the cost of training.
i. (inancial considerations like return on capital employed I%O'EJ# cost of the
project# the "nternal %ate of %eturn I"%%J of the project# total amount of funds
re:uired# ratio of owners investment Ipersonnel funds of the entrepreneurJ#
borrowed capital# mortgage loans etc. in the capital employed.
?Source .andey< I2 /2< Venture Capital > 3"e Indian E@press VIt" Edition 45669(AA
O*Aective No, .
3o study t"e future prospect of Venture
Capital )inancing,
Prospects of !enture 6apita% Financing
<ith the advent of liberali0ation# "ndia has been showing remarkable growth in the
economy in the past ?4 $ ?6 years. The government is promoting growth in capacity
utili0ation of available and ac:uired resources and hence entrepreneurship
development# by liberali0ing norms regarding venture capital. <hile only eight
domestic venture capital funds were registered with SE" during ?@@A$?@@K# ?F funds
have already been registered in ?@@@$6444. "nstitutional interest is growing and
foreign venture investments are also on the rise. Many state governments have also set
up venture capital funds for the "T sector in partnership with the local state financial
institutions and S")". These include !ndhra /aradesh# 8arnataka# )elhi# 8erala and
Tamil ,adu. The other states are to follow soon.
"n the year 6444# the finance ministry announced the liberali0ation of tax treatment for
venture capital funds to promote them * to increase job creation. This is expected to
give a strong boost to the non resident "ndians located in the Silicon -alley and
elsewhere to invest some of their capital# knowledge and enterprise in these ventures.
! angalore based media company# >ray cell &td.# has recently obtained -'
investment totaling about L ?.7 mn. The company would be creating and marketing
branded web based consumer products in the near future.
The following points can be considered as the harbingers of -' financing in "ndia;$
a. Existence of a globally competitive high technology.
b. >lobally competitive human resource capital.
c. Second &argest English speaking# scientific * technical manpower in the
world.
d. -ast pool of existing and ongoing scientific and technical research carried by
large number of research laboratories.
e. "nitiatives taken by the >overnment in formulating policies to encourage
investors and entrepreneurs.
f. "nitiatives of the SE" to develop a strong and vibrant capital market giving
the ade:uate li:uidity and flexibility for investors for entry and exit.
"n a recent survey it has been shown that the -' investments in "ndia=s ".T. $ Software
and services sector Iincluding dot com companiesJ$ have grown from .S L ?34 million
in ?@@K to over .SL ?644 million in 644K. The credit can be given to setting up of a
,ational -enture 'apital (und for the Software and ".T. "ndustry I,(S"TJ in association
with various financial institutions of Small "ndustries and )evelopment ank of "ndia
IS")"J. The facts reveal that -' disbursements as on September C4# 6446 made by
,(S"T totaled %s 63F.CA mn.
Source www.evaluesevrve.com

)indings
)uring the preparation of my report " have analy0ed many things which are
following;$
! number of people in "ndia feel that financial institution are not only
conservatives but they also have a bias for foreign technology * they do not trust
on the abilities of entrepreneurs.
Some venture fails due to few exit options. Teams are ignorant of international
standards. The team usually a two or three man team. "t does not possess the
re:uired depth "n top management. The team is often found to have technical
skills but does not possess the overall organi0ation building skills team is often
short sited.
-enture capitalists in "ndia consider the entrepreneur2s integrity *urge to grow as
the most critical aspect or venture evaluation.
=imitations of Study
+, The biggest limitation was time because the time was not sufficient as there
was lot of information to be got * to have it interpretation
-, The data re:uired was secondary * that was not easily available.
., Study by its nature is suggestive * not conclusive
/, Expenses were high in collecting * searching the data.
Suggestions
+, The investment should be in turnaround stage. Since there are many
sick industries in "ndia and the number is growing each year# the
venture capitalists that have speciali0ed knowledge in management can
help sick industries. "t would also be highly profitable if the venture
capitalist replace management either good ones in the sick industries.
-, "t is recommended that the venture capitalists should retain their basic
feature that is tasking high risk. The present situation may compel
venture capitalists to opt for less risky opportunities but is against the
spirit of venture capitalism. The established fact is big gains are
possible in high risk projects.
., There should be a greater role for the venture capitalists in the
promotion of entrepreneurship. The -enture capitalists should promote
entrepreneur forums# clubs and institutions of learning to enhance the
:uality of entrepreneurship.
+i'liograp"y
?. 7OIRNAL=
!//&"E) (",!,'E -E,T.%E ST!>E ",-ESTME,T
/%E(E%E,'E ", ",)"!# -",!S 8.M!%# M!S# 644F.
"'(!" HO.%,!& O( !//&"E) (",!,'E M!S$ H.,E
-"8!&/! -O&.&M&E 6K# !/%" &$ H.,E 644C
"'(!" HO.%,!& O( !//&"E) (",!,'E# H.&S$ !.>.
6. #OO8=
".M. /anday$ venture capital development process in "ndia
". M. /anday$ venture capital the "ndian experience#
C. !ARIOI= NE?= PAPER=
F. INTERNET
www.indiainfoline.com
www.vcapital.com
www.investopedia.com
www.vcinstitute.com
ANNEXUE I
!enture capita% fir(s
Examples of venture capital firms include;
!ccede /artners
!ustin -entures
!tlas -enture
attery -entures
enchmark 'apital
'harles %iver -entures
)oughty 9anson Technology -entures
(idelity -entures
9ealth 'ap
9ummer <imbled
"nsight -enture /artners
Mobius -enture 'apital
Mohr )avidow -entures
Sevin %osen (unds
Se:uoia 'apital
Trelys
ANNEJIRE II
Some important -enture 'apital (unds in "ndia
?. !/")' -enture 'apital &imited# # abukhan Estate# 9yderabad 344 44?
6. 'anbank -enture 'apital (und &imited# ""nd (loor# 8areem Towers# angalore.
C. >ujarat -enture 'apital (und ?@@7# !shram %oad# !hmedabad CK4 44@
F. "ndustrial -enture 'apital &imited# Thyagaraya %oad# 'hennai A44 4?7
3. >ujarat -enture 'apital (und ?@@3 !shram %oad !hmedabad CK4 44@
A. 8arnataka "nformation Technology -enture 'apital (und 'unningham %d angalore
7. "ndia !uto !ncillary (und ,ariman /oint# Mumbai F44 46?
K. "nformation Technology (und# ,ariman /oint# Mumbai F4446?
@. Tamilnadu "nfoTech (und ,ariman /oint# Mumbai F4446?
?4. Orissa -enture 'apital (und ,ariman /oint Mumbai F4446?
??. .ttar /radesh -enture 'apital (und ,ariman /oint# Mumbai F4446?
?6. S"'OM -enture 'apital (und ,ariman /oint Mumbai F44 46?

Conclusion
-enture capital can play a more innovation and development role in a developing
country like "ndia. "t could help the rehabilitation of sick unit through people with
ideas and turnaround management skill. ! large number of small enterprises in "ndia
because sick unit even before the commencement of production of production.
-enture capitalist could also be in line with the developments taking place in their
parent companies.
Set another area where can play a significant role in developing countries is the
service sector including tourism# publishing# healthcare etc. they could also provide
financial assistance to people coming out of the universities# technical institutes etc.
who wish to start their own venture with or without high$tech content# but involving
high risk. This would encourage the entrepreneurial spirit. "t is not only initial funding
which is need from the venture capitalists# but the should also simultaneously provide
management and marketing expertise$a real critical aspect of venture capitalists# but
they also simultaneously provide management and marketing expertise$a real critical
aspect of venture capital in developing countries. <hich can improve their
effectiveness by setting up venture capital cell in %*) and other scientific generation#
providing syndicated or consortium financing and acing as business incubators.