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 MBA program and to do this project in a short period
was a heavy task.

Intention, dedication, concentration and hard work are very much essential to complete
any task. But still it needs a lot of support, guidance, assistance, co-operation of people to
make it successful.

I 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. I want to thanks them for their
continuous support in my research and writing efforts.

I wish to record my thanks and indebtedness to my best faculty, whose inspiration,

dedication and helping nature provided me the kind of guidance necessary to complete
this project.

I am extremely grateful to INTENATIONAL INSTITUTION OF MANAGEMENT

DELHI for granting me permission to be part of this college.

I would also like to acknowledge my parents and my batch mates for their guidance
and blessings
 Table of Content

♦ Introduction
♦ What is venture capital?
♦ The concept of venture capital?
♦ The venture capital process
♦ Stages of venture capital funding
♦ Methods of venture financing
♦ Venture capital | INDIAN CONTEXT
[early beginning, Regulatory guide lines & frame work]
♦ Meaning of venture
♦ History of venture capital
♦ What is venture capitalist?
♦ Venture capital in INDIA-political support.
[Industry size, Activity And Participant, Policy support]
♦ Venture capital in India –Objective and Vision
♦ Advantage of Venture capital
♦ What does the investment process?
♦ Areas of Indian venture capital Investment
♦ Indian venture capital Industry issues and challenges.

Introduction
A number of technocrats are seeking to set up shop on their own and capitalize on
opportunities. In the highly dynamic economic climate that surrounds us today, few
‘traditional’ business models may survive. Countries across the globe are realizing 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. For
example, in the US, 50% of the exports are created by companies with less than 20
employees and only 7% are created by companies with 500 or more employees. This
growing trend can be attributed to rapid advances in technology in the last decade.
Knowledge driven industries like InfoTech, health-care, entertainment and services have
become the cynosure of bourses worldwide. In these sectors, it is innovation and
technical capability that are big business-drivers. This is a paradigm shift from the earlier
physical production and ‘economies of scale’ model. However, 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 qualities of a promoter. However, there are other factors, which lie beyond
the control of the entrepreneur. Prominent among these is the timely infusion of funds.
This is where the venture capitalist comes in, with money, business sense and a lot more.

What is Venture Capital???

The venture capital investment helps for the growth of innovative entrepreneurships in
India. Venture capital has developed as a result of the need to provide non-conventional,
risky finance to new ventures based on innovative entrepreneurship. Venture capital is an
investment in the form of equity, quasi-equity and sometimes debt - straight or
conditional, made in new or untried concepts, promoted by a technically or professionally
qualified entrepreneur. Venture capital means risk capital. It refers to capital investment,
both equity and debt, which carries substantial risk and uncertainties. The risk envisaged
may be very high may be so high as to result in total loss or very less so as to result in
high gains

The concept of Venture Capital

Venture capital means many things to many people. It is in fact nearly impossible to
come across one single definition of the concept.

Jane Koloski Morris, editor of the well known industry publication, Venture
Economics, defines venture capital as 'providing seed, start-up and first stage
financing' and also 'funding the expansion of companies that have already
demonstrated their business potential but do not yet have access to the public
securities market or to credit oriented institutional funding sources.

The European Venture Capital Association describes it as risk finance for

entrepreneurial growth oriented companies. It is investment for the medium or long term
return seeking to maximize medium or long term for both parties. It is a partnership with
the entrepreneur in which the investor can add value to the company because of his
knowledge, experience and contact base.

The Venture Capital Process

The Venture Capital Investment Process:
The venture capital activity is a sequential process involving the following six steps.

1. Deal origination
2. Screening
3. Due diligence Evaluation
4. Deal structuring
5. Post-investment activity
6. Exit
 Stages of Venture Capital Funding
The Venture Capital funding varies across the different stages of growth of a firm. The
various stages are:

:
1. Pre seed Stage: Here, 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.
2. Seed Stage: Financing is provided to complete product development and commence
initial marketing formalities.

3. Early Stage / First Stage: Finance is provided to companies to initiate

commercial manufacturing and sales.

4. Second Stage: In the Second Stage of Financing working capital is provided for the
expansion of the company in terms of growing accounts receivable and inventory.

5. Third Stage: Funds provided for major expansion of a company having increasing
sales volume. This stage is met when the firm crosses the break even point.

6. Bridge / Mezzanine Financing or Later Stage Financing: Bridge /

Mezzanine Financing or Later Stage Financing is financing a company just before its IPO
(Initial Public Offer). Often, bridge finance is structured so that it can be repaid, from the
proceeds of a public offering.

Methods of Venture Financing

Venture capital is typically available in three forms in India, they are:

Equity: All VCFs in India provide equity but generally their contribution does not
exceed 49 percent of the total equity 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.

Conditional Loan: It is repayable in the form of a royalty after the venture is able to
generate sales. No interest is paid on such loans. In India, VCFs charge royalty ranging
between 2 to 15 percent; actual rate depends on other factors of the venture such as
gestation period, cost-flow patterns, riskiness and other factors of the enterprise.

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

Other Financing Methods: A few venture capitalists, particularly in the private

sector, have started introducing innovative financial securities like participating
debentures, introduced by TCFC is an example.

VENTURE CAPITAL: INDIAN

CONTEXT
Early Beginnings
In the absence of an organized Venture Capital industry till almost 1998,
individual investors and development financial institutions played the role of venture
capitalists in India. Entrepreneurs have largely depended upon private placements, public
offerings and lending by the financial institutions.

In 1973 a committee on Development of Small and Medium Enterprises

highlighted the need to foster venture capital as a source of funding new entrepreneurs
and technology. Thereafter some public sector funds were set up but the activity of
venture capital did not gather momentum as the thrust was on high-technology projects
funded on a purely financial rather than a holistic basis.

Regulatory Guidelines & Framework

Later, a study was undertaken by the World Bank to examine the possibility of
developing Venture Capital in the private sector, based on which the Government of
India took a policy initiative and announced guidelines for Venture Capital Funds (VCFs)
in India in 1988.

However, these guidelines restricted setting up of VCFs by the banks or the

financial institutions only. Thereafter, the Government of India issued guidelines in
September 1995 for overseas investment in Venture Capital in India. For tax-exemption
purposes, 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 have been governed by
the Reserve Bank of India's (RBI) requirements. Further, as a part of its mandate to
regulate and to develop the Indian capital markets, the Securities and Exchange Board of
India (SEBI) framed the SEBI (Venture Capital Funds) Regulations, 1996. These
guidelines were further amended in Apr 2000 with the objective of fuelling the growth of
Venture Capital activities in India.

Meaning of venture capital:

Venture 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. Venture capital is an important source of equity for start-up
companies.

Professionally 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.

Venture capitalists generally:

• Finance new and rapidly growing companies

• Purchase equity securities

• Assist in the development of new products or services

• Add value to the company through active participation

• Take higher risks with the expectation of higher rewards

• Have a long-term orientation

When considering an investment, venture capitalists carefully screen the technical and
business merits of the proposed company. Venture 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.

Venture 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. In addition, many venture partnerships manage multiple funds
simultaneously. For decades, venture capitalists have nurtured the growth of America's
high technology and entrepreneurial communities resulting in significant job creation,
economic growth and international competitiveness. Companies such as Digital
Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel,
Microsoft and Genetech are famous examples of companies that received venture capital
early in their development.
 HISTORY OF VC
USA is the birth place of Venture Capital Industry as we know it today. During most its
historical evolution, the market for arranging such financing was fairly informal, relying
primarily on the resources of wealthy families.
In 1946, American Research and Development Corporation (ARD), a publicly traded,
closed-end investment company was formed. ARD's best known investment was the
start-up financing it provided in 1958 for computer maker Digital Equipment Corp. ARD
was eventually profitable, providing its original investors with a 15.8 percent annual rate
of return over its twenty-five years as an independent firm.

The number of such specialized investment firms, eventually to be called venture capital
firms, began to boom in the late 1950s.The growth was aided in large part by the creation
in 1958 of the federal Small Business Investment Company program. Hundreds of SBICs
were formed in the 1960s, and many remain in operation today.

What is a Venture Capitalist?

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 capital; thus, if they can’t get
capital from a bank or from their own pockets, they enlist the help of a venture capitalist.
In truth, venture capital and private equity firms are pools of capital, typically organized
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. Far 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. In the early days of venture capital
investment, in the 1950s and 1960s, individual investors were the archetypal venture
investor. While this type of individual investment did not totally disappear, the modern
venture firm emerged as the dominant venture investment vehicle. However, 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 "angel investors" will mentor a company and
provide needed capital and expertise to help develop companies. Angel investors may
either be wealthy people with management expertise or retired business men and women
who seek the opportunity for first-hand business development.

VC IN INDIA – POLICY SUPPORT

Industry Size, Activity and Participants

Pursuant to the regulatory framework mentioned above, some domestic VCFs
were registered with SEBI. Some overseas investment has also come through the
Mauritius route. However, the venture capital industry, understood globally as
"independently managed, dedicated pools of capital that focus on equity or equity-linked
investments in privately held, high-growth companies", is relatively in a nascent stage in
India. Figures from the Indian Venture Capital Association (IVCA) show that, till 1998,
around Rs. 30 billion had been committed by domestic VCFs and offshore funds which
are members of IVC]. Figures available from private sources indicate that overall funds
committed are around US$ 1.3 billion. Investible funds are less than 50% of the
committed funds and actual investments are lower still .

Policy Support
Given the proper environment and policy support, there is undoubtedly tremendous
potential for venture capital activity in India. The Finance Minister of India, in his 1999
budget speech, announced that "for boosting high-tech sectors and supporting first
generation entrepreneurs, there is an acute need for higher investment in venture capital
activities." The SEBI committee on Venture Capital was set up in July, 1999 to identify
the impediments and suggest suitable measures to facilitate the growth of venture capital
activity in India. Also keeping in view the need for a global perspective it was decided to
associate Indian entrepreneurs from Silicon Valley in the committee

VC- IN INDIA – OBJECTIVES AND

VISION
Venture capital is valuable not just because it makes risk capital available at the early
stages of a project but also because of the expertise of venture capitalist that leads to
superior product development.

- Venture capitalists finance innovation and ideas which have potential for high growth
but with inherent uncertainties.

♦ This makes it a high-risk, high return investment.

♦ Venture capitalists provide networking, management and marketing support

as well. In the broadest sense, therefore, venture capital connotes financial as
well as human capital.

♦ In the global venture capital industry, investors and investee firms work
together closely in an enabling environment that allows entrepreneurs to
focus on value creating ideas and allows venture capitalists to drive the
industry through ownership of the levers of control, in return for the provision
of capital, skills, information and complementary resources.

♦ This very blend of risk financing and hand holding of entrepreneurs by

venture capitalists creates an environment particularly suitable for knowledge
and technology based enterprises.

ADVANTAGES OF VENTURE
CAPITAL
Venture capital has a number of advantages over other forms of finance, such as :
♦ Finance - The venture capitalist injects long-term equity finance, which
provides a solid capital base for future growth. The venture capitalist may
also be capable of providing additional rounds of funding should it be
required to finance growth.
♦ Business Partner - The venture capitalist is a business partner, sharing the
risks and rewards. Venture capitalists are rewarded by business success and
the capital gain.
♦ Mentoring - The venture capitalist is able to provide strategic, operational
and financial advice to the company based on past experience with other
companies in similar situations.
♦ Alliances - The venture capitalist also has a network of contacts in many
areas that can add value to the company, such as in recruiting key personnel,
providing contacts in international markets, introductions to strategic partners
and, if needed, co-investments with other venture capital firms when
additional rounds of financing are required.
♦ Facilitation of Exit - The venture capitalist is experienced in the process of
preparing a company for an initial public offering (IPO) and facilitating in
trade sales.

WHAT DO VC’S LOOK IN AN

ENTREPRENEUR ?
'(Venture capital) certainly isn't about quick trading profits in the stock market. At its
best, it is about helping entrepreneurs grow really great companies.‘
Bill Ferris, Executive Chairman, Castle Harlan Australian Mezzanine Partners
Here's what member funds are likely to look for when they talk to entrepreneurs with
fresh idea :
– strong, motivated management teams
– clear strategies
– large but carefully defined target markets
– proven abilities to outperform the competition
– innovation
–

What does a VC look for?

Venture capital is not suitable for all businesses, as a venture capitalist typically seeks :
– Superior Businesses
– Quality and Depth of Management
– Corporate Governance and Structure
– Venture capitalists are put off by complex corporate structures without a
clear ownership and where personal and business assets are merged.
– Appropriate Investment Structure
– An Exit Plan
–

What does the Investment Process

entail ?
The investment process begins with the venture capitalist conducting an initial review of
the proposal to determine if it fits with the firm's investment criteria. If so, a meeting will
be arranged with the entrepreneur/management team to discuss the business plan.
1. Preliminary Screening,
2. Negotiating Investment, and
3. Approvals and Investment Completed.
The investment process can take up to three months, and sometimes longer. It is
important, therefore, not to expect a speedy response. It is advisable to plan the business
financial needs early on to allow appropriate time to secure the required funding.

What are the various Legal Terms used while drafting an

Agreement ?

It is likely that a shareholders' agreement would be prepared containing the rights and
obligations of each party. This could include :
– Amount and terms of investment.
– Dividend policy.
– Composition of the board of directors.
– Reporting - management reports, monthly accounts, annual budgets.
– Liquidity (exit) plans.
– Rights of CO-sale
– Warranties.
– Matters requiring venture capitalist approval (such as auditors,
employment contracts, major asset purchases, major debt obligations and
significant variations of plans).

AREAS OF INDIAN VC
INVESTMENT
♦ IT and IT-enabled services

♦ Software Products (Mainly Enterprise-focused)

♦ Wireless/Telecom/Semiconductor

♦ Banking

♦ PSU Disinvestments

♦ Media/Entertainment

♦ Bio Technology/Bio Informatics

♦ Pharmaceuticals

♦ Electronic Manufacturing

♦ Retail

INDIAN VC INDUSTRY ISSUES

AND CHALLENGES
Indian VC yet to be established as a sustainable asset class among institutional investors.
Moreover a limited amount of true “risk-capital” impacts entrepreneurial activity.
Exit challenges exist mainly due to shallow capital markets and dull M&A environment
for small companies.
Most importantly, India is yet to create a brand-name for IP-led companies, like Israel has
successfully done