FINAL REPORT

ON
STUDY OF VENTURE CAPITAL
IN INDIA

1
 Acknowledgement

I am deeply indebted to my Project Coordinator Prof for her valuable

suggestion, able guidance and constant encouragement throughout the
Project.

I would also like to thank all others who helped me directly and
indirectly during this project.

.-

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 DECLARATION
I, hereby declare that the project work titled “To Study the
venture capital in India” is original work done by me and submitted
to the Punjab Technical University for the fulfillment of
requirements for the award of Master of Business Administration
(finance) is a record of original work done under the supervision of
prof

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 Certificate by the Guide

This is to certify that the project work titled “To Studyof venture
capital in india ” is a bonafide work of . is carried out in a partial
fulfillment for the award of Master of Business Administration
Management of Punjab Technical University under my guidance. This
project has not been submitted earlier for the award of any degree/
diploma of any other Institute/ University.

Place:
Date:

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 CONTENTS:
PARTICULARS PAGE NO

 Introduction 6-26

 Venture capital India 27-33

 Literature Survey 35-36

 Research methodology 38

 Objectives 39-46

 Findings 48

 Limitations 50

 Suggestions 52

 Conclusion 54

 Bibliography 55

Annexure

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Introduction

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 INTRODUCTION

VENTURE:

A business project or activity specially one that involves risk.

CAPITAL:

Fund employed in any business activity.

Most important factor of production.
No economic entity can function without capital.

VENTURE CAPITAL:

Venture capital is a type of private equity capital typically provided by

professional, outside investors to new, growth businesses

VENTURE CAPITALISTS:

A venture capitalist (VC) is a person who makes such investments,

these include wealthy investors, investment banks, other financial
institutions other partnerships.

Venture capital is a means of financing fast-growing private companies.

Finance may be required for:

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 The start up,
Development/ expansion, &
Modernization
Of a company. Growing businesses always require capital. There are a
number of different ways to fund growth.

These include the owner's own capital, arranging debt finance or

seeking an equity partner, as is the case with venture capital.
With venture capital, the venture capitalist acquires an agreed proportion of
the equity of the company in return for the requisite funding. Equity finance
offers the significant advantage of having no interest charges. It is patient
capital that seeks a return through long-term capital gain rather than
immediate and regular interest payments.

Venture capital investors are exposed, therefore, to the risk of the

company failing. As a result the venture capitalist have to invest in
companies that have the ability to grow very successfully and give higher-
than-average returns to compensate for the risk.

Venture Capital may be a viable source of financing for a business.

While they generally invest in businesses that are more established and
ongoing, some do fund start-ups. In general they tend to invest in high-
technology businesses such as research and development, electronics and
computers. Venture Capitalists deal more in large sums of money, numbering
into the millions of dollars, so they are generally well suited to businesses
that are going grand from the start or have grown and require gigantic
expansion

TASKS OF VENTURE CAPITALISTS:

When venture capitalists invest in a business they :

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

 They tend to take a minority share in the company and

usually do not take day-to-day control.

 Professional venture capitalists act as mentors and aim to

provide support and advice on a range of management
and technical issues.

 Assist the company to develop its full potential.

The management support is the most important
contribution of a venture capitalist. There are many
sources of capital, but only a venture capitalist can
provide experienced management input gained by
helping many other companies successfully conquer the
inevitable problems and growing pains.

HISTORY

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Beginnings of modern venture capital:
The earliest origins of venture capital can be traced back to the medieval
Islamic mudaraba partnership. In terms of protecting the entrepreneur,
sharing the risks, losses and profits the two systems of finance are
remarkably similar.

General Georges Doriot is considered to be the father of the modern

venture capital industry.

 In 1946, Doriot co-founded American Research and

Development Corporation (AR&DC) with Ralph
Flanders, Karl Compton and others, the biggest success
of which was Digital Equipment Corporation.

 When Digital Equipment went public in 1968 it provided

AR&DC with 101% annualized Return on Investment
(ROI). AR&DC’s $70,000 USD investment in Digital
Corporation in 1957 grew in value to $355 million USD.
 It is commonly accepted that the first venture-backed
startup is Fairchild Semiconductor, funded in 1959 by
Venrock Associates. Venture capital investments, before
World War II, were primarily the sphere of influence of
wealthy individuals and families.
 Small Business Administration 1958. One of the first
steps toward a professionally-managed venture capital
industry was the passage of the Small Business
Investment Act of 1958. The 1958 Act officially allowed
the U.S. Small Business Administration (SBA) to license
private "Small Business Investment Companies" (SBICs)
to help the financing and management of the small
entrepreneurial businesses in the United States. Passage
of the Act addressed concerns raised in a Federal Reserve
Board report to Congress that concluded that a major gap
existed in the capital markets for long-term funding for
growth-oriented small businesses. Facilitating the flow of

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 capital through the economy up to the pioneering small
concerns in order to stimulate the U.S. economy was and
still is the main goal of the SBIC program today.

Generally, venture capital is closely associated with technologically

innovative ventures and mostly in the United States. Due to structural
restrictions imposed on American banks in the 1930s there was no private
merchant banking industry in the United States, a situation that was quite
exceptional in developed nations.

As late as the 1980s Lester Thurow, a noted economist, decried the

inability of the USA's financial regulation framework to support any
merchant bank other than one that is run by the United States Congress in
the form of federally funded projects. These, he argued, were massive in
scale, but also politically motivated, too focused on defense, housing and
such specialized technologies as space exploration, agriculture, and
aerospace.

US investment banks were confined to handling large M&A

transactions, the issue of equity and debt securities, and, often, the breakup
of industrial concerns to access their pension fund surplus or sell off
infrastructural capital for big gains.

Not only was the lax regulation of this situation very heavily criticized at
the time, this industrial policy differed from that of other industrialized
rivals—notably Germany and Japan—which at that time were gaining
ground in automotive and consumer electronics markets globally. However,
those nations were also becoming somewhat more dependent on central
bank and elite academic judgment, rather than the more diffuse way that
priorities were set by government and private investors in the United States.

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 ROLES WITHIN A VENTURE CAPITAL
FIRM

1. Venture capital general partners: (Also known in this case as "venture

capitalists" or "VCs") are the executives in the firm. In other words the
investment professionals. Typical career backgrounds vary, but VCs come
from either an operational or a finance background.

VCs with an operational background tend to be former chief

executives at firms similar to those which the partnership finances and other
senior executives in technology companies.VCs with finance backgrounds
come from investment banks, M&A firms, and other firms in the corporate
investment and finance space.

2. Limited partners: Investors in venture capital funds are known as limited

partners. This constituency comprises both high net worth individuals and
institutions with large amounts of available capital, such as state and private
pension funds, insurance companies, and pooled investment vehicles,
called fund of funds or mutual funds.

3. Venture partners and entrepreneur-in-residence (EIR): Other positions

at venture capital firms include venture partners and entrepreneur-in-
residence (EIR).Venture partners "bring in deals" and receive income only
on deals they work on (as opposed to general partners who receive income
on all deals).

EIRs are experts in a particular domain and perform due diligence on

potential deals. EIRs are engaged by VC firms temporarily (six to 18
months) and are expected to develop and pitch startup ideas to their host
firm (although neither party is bound to work with each other). Some EIR's
move on to roles such as Chief Technology Officer (CTO) at a portfolio
company.

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 4. Associate: The "associate" is the typical apprentice
within a venture capital firm. After a few successful
years, an associate may move up to the "senior
associate" position. The next step from senior
associate is "principal," typically a partner track
position. Alternatively, there are many pre-MBA
associate roles that are used solely for the purpose of
deal sourcing, and the associate is usually expected to
move on after two years.

STRATEGIC ROLES
Serving Board
Business Consultant
Financier

SOCIAL/ SUPPORTIVE
 Coach/ Mentor
 Conflict resolver

NETWORKING ROLES
 Management recruiter
 Professional contact
 Industrial contact

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 FEATURES OF VENTURE CAPITAL
The main features of venture capital are:

Long-time horizon: In general, venture capital undertakings take a longer

time — say, 5-10 years at a minimum — to come out commercially
successful; one should, thus, be able to wait patiently for the outcome of the
venture.

Lack of liquidity: Since the project is expected to run at start-up stage for
several years, liquidity may be a greater problem.

High risk: The risk of the project is associated with management, product
and operations.

Unlike other projects, the ones that run under the venture finance may be
subject to a higher degree of risk, as their result is uncertain or, at best,
probable in nature.

High-tech: Venture capital finance caters largely to the needs of first-

generation entrepreneurs who are technocrats, with innovative technological
business ideas that have not so far been tapped in the industrial field.

However, a venture capitalist looks not only for high-technology but the
innovativeness through which the project can succeed.

Equity participation and capital gains: A venture capitalist invests his

money in terms of equity or quasi-equity. He does not look for any dividend
or other benefits, but when the project commercially succeeds, then he can
enjoy the capital gain which is his main benefit. Otherwise, he will be losing
his entire investment.

Participation in management: Unlike the traditional financier or banker,

the venture capitalist can provide managerial expertise to entrepreneurs
besides money. Since many innovations and inventions cannot be
commercialized due to lack of finance, venture capital finance acts as a

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strong impetus for entrepreneurs to develop products involving newer
technologies and to commercialize them.

Factor to be consider by venture

capitalist selection of Investment
proposal
.
There are basically fourelements in financing ofventures which are
studied indepth by the venture capitalists. These are:
1. Management
: The strength, expertise & unity of the key people on the
board bringSignificant credibility to the company. The
members are to be mature, Experienced possessing working
knowledge of business and capable of taking potentially
high risks.

2. Potential of capital gain

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

3. Realistic Financial Requirement and Projections:The venture

capitalist requiresa realistic view about the present health of the
organization as well as future projections regarding scope, nature
and performance the company in terms of scaleof operations, op
erating profit and further costs related to product development
through Research & Development.

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4. Owner's Financial Stake:

The financial resources owned & committed by the

Entrepreneur/ owner in the business including the funds invested
by family, friendsand relatives play a very important role in
increasing the viability of the Business. It isan important avenue
where the venture Capitalist keeps an open eye.

ACCESSING THE VENTURE CAPITAL

Venture capital has been in India for quite some time. The rejection ratio is very
high, out of a 100 proposals received only 1 gets funded. The standard parameters
used by venture capitalists are very similar to any investment decision. The only
difference being exit. If one buys a listed security, one can exit at a price but with
an unlisted security, exit becomes difficult. The key factors which they look for in

1. The Management
2. The Idea
3. Valuation
4. Exit

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 KEY FACTORS FOR THE
SUCCESS:
The key factors for the success of any project under the consideration of a
venture capitalist are:

 Clear and objective thinking;

 Operational experience, especially in a start-up;
 Firm grasp of numbers of numbers;
 People management skills;
 Ability to spot technology and market trends;
 Wide network of contacts;
 Knowledge of all facets of business — marketing,
Finance and HR;
 Judgment to evaluate them on the basis of integrity and
ability;
 Patience to pursue the final goal;
 Drive to guide budding entrepreneurs; and
 Empathy with entrepreneurs.

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 ADVANTAGES OF VENTURE CAPITAL
Venture capital has made significant contribution to technological
innovations and promotion of entrepreneurism. Many of the companies like
Apple, Lotus, Intel, Micro etc. have emerged from small business set up by
people with ideas but no financial resources and supported by venture
capital. There are abundant benefits to economy, investors and entrepreneurs
provided by venture capital.

Economy Oriented-
 Helps in industrialization of the country
 Helps in the technological development of the country
 Generates employment
 Helps in developing entrepreneurial skills

Investor oriented-
 Benefit to the investor is that they are invited to invest
only after company starts earning profit, so the risk is less
and healthy growth of capital market is entrusted.
 Profit to venture capital companies.
 Helps them to employ their idle funds into productive
avenues.

Entrepreneur oriented:
 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

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 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.

ADVANTAGES

ENTREPRENEUR ECONOMY INVESTOR

ORIENTED

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WHAT DO VENTURE CAPITALISTS
LOOK FOR WHILE INVESTING?
1. A GROWING MARKET: The venture capitalists see whether the
company is targeting a substantial and rapidly growing market. Does the
company have a reasonable chance to successfully enter the market and
obtain a strong market position?

2. A UNIQUE PRODUCT: Is the company having a proprietary or

differentiated product? Does the product offer benefits over existing
products? Does it have patent or other proprietary protection to forestall
competitors?

3. IPO CANDIDATE OR ACQUISITION TARGET: Whether the company

has the possibility of growing quickly and becoming an attractive acquisition
target or IPO candidate? Venture capitalists are concerned about how they
will realize liquidity and receive value for their investment.

4. SOUND BUSINESS PLAN: Is the company's strategy and business plan

sound? Venture capitalists expect to see a well-thought-out, coherent
business plan.

5. SIGNIFICANT GROSS PROFIT MARGINS: Can the product or service

generate significant gross profit margins (40 percent or more)? Large profit
margins give a company room for error and enhance its attractiveness for a
possible IPO or acquisition.

6. HOME RUN POTENTIAL: Finally, the venture capitalist wants to see

the possibility of hitting a "home run" by investing in the company. Most
venture capitalists won't be interested unless the company can grow to at
least $25 million in sales within five years.

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

Venture capital financing in India took four forms:-

 Equity
 Conditional Loan
 Convertible Debentures
 Cumulative Convertible Preference Share

Equity:-

All VCFs in India provides equity. When a venture capitalist contributes

equity capital, he acquires the status of an owner, and becomes entitled to a
share in the firm’s profits as much as he is liable for losses.
The advantage of the equity financing for the company seeking venture
finance is that it does not have the burden of serving the capital, as dividends
will not be paid if the company has no cash flows.
The advantage to the VCFs is that it can share in the high value of the
venture and make capital gains if the venture succeeds.

Conditional Loans:-

A conditional loan 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
charged royalty ranging between 2-15%.

Convertible Debentures & Cumulative Convertible Preference Shares:-

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 Convertible Debentures and Convertible Preference Shares require an
active secondary market to be attractive securities from the investors’ point
of view.
In the Indian context, both VCFs and entrepreneurs earlier favored a
financial package which has a higher component of loan. This was because
of the promoter’s fear of loss of ownership and control to the financier and
because of the traditional reluctance and conservation of financier to share in
the risk inherent in the use of equity.
Cumulative Convertible Preference Shares are particularly attractive in the
Indian context since CPP shareholders do not have a right to vote. They are,
however, entitled to voting if they do not receive dividend consequently for
two years.

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 PROCESS OF VENTURE CAPITAL

Venture capital investment activity is a sequential process involving five

steps:

1. Deal origination
2. Screening
3. Evaluation or due diligence
4. Deal structuring
5. Post-investment activities and exit

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 POST INVESTMENT
ACTIVIES/ EXIT

DEAL STRUCTURING

DUE DILIGENCE

SCREENING

DEAL ORIGINATION

1. Deal origination A continuous flow of deals is essential for the venture

capital business. Deals may originate in various ways. Referral system is an
important source of deals. Deals may be referred to the VCs through their
parent organizations, trade partners, industry associations, friends etc.

The venture capital industry in India has become quite proactive in its
approach to generating the deal flow by encouraging individuals to come up
with their business plans. Consultancy firms like Mckinsey and Arthur
Anderson have come up with business plan competitions on an all India
basis through the popular press as well as direct interaction with premier
educational and research institutions to source new and innovative ideas.
The short listed plans are provided with necessary expertise through people
who have experience in the industry.

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2. Screening VCFs carry out initial screening of all projects on the basis of
some broad criteria. For example the screening process may limit projects to
areas in which the venture capitalist is familiar in terms of technology, or
product, or market scope. The size of investment, geographical location and
stage of financing could also be used as the broad screening criteria.

3. Evaluation or due diligence Once a proposal has passed through initial

screening, it is subjected to a detailed evaluation or due diligence process.
Most ventures are new and the entrepreneurs may lack operating experience.
Hence a sophisticated, formal evaluation is neither possible nor desirable.

The VCs thus rely on a subjective but comprehensive, evaluation. VCFs

evaluate the quality of the 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 expected return
on the venture. Following points are taken into consideration while
performing due diligence. These include-

 BACKROUND
 MARKET AND COMPETITORS

 TECHNOLOGY AND MANUFACTURING

 MARKETING AND SALES STRATEGY

 ORGANIZATION AND MANAGEMENT

 FINANCE AND LEGAL ASPECT

Investment Valuation The investment valuation process is aimed at

ascertaiing an acceptable price for the deal. The valuation process goes
through the following steps:

 Projections on future revenue and profitability

 Expected market capitalization
 Deciding on the ownership stake based on the return
expected on the proposed investment

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 The pricing thus calculated is rationalized after taking in to
consideration various economic scenarios, demand and supply of
capital, founder's/management team's track record, innovation/
unique selling propositions (USPs), the product/service size of
the potential market, etc.

4. Deal Structuring Once the venture has been evaluated as viable, the
venture capitalist and the investment company negotiate the terms of the
deal, i.e. the amount, form and price of the investment. This process is
termed as deal structuring.

The agreement also includes the protective covenants and earn-out

arrangements. Covenants include the venture capitalists right to control the
investee company and to change its management if needed, buy back
arrangements, acquisition, making initial public offerings (IPOs) etc, Earn-
out arrangements specify the entrepreneur's equity share and the objectives
to be achieved.

Venture capitalists generally negotiate deals to ensure protection of their

interests. They would like a deal to provide for:

 A return commensurate with the risk

 Influence over the firm through board membership
 Minimizing taxes
 Assuring investment liquidity
 The right to replace management in case of consistent
poor managerial performance.

The investee companies would like the deal to be structured in such a

way that their interests are protected. They would like to earn reasonable
return, minimize taxes, have enough liquidity to operate their business and
remain in commanding position of their business.

There are a number of common concerns shared by both the venture

capitalists and the investee companies. They should be flexible, and have a
structure, which protects their mutual interests and provides enough
incentives to both to cooperate with each other.

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 The instruments to be used in structuring deals are many and varied. The
objective in selecting the instrument would be to maximize (or optimize)
venture capital's returns/protection and yet satisfy the entrepreneur's
requirements. The different instruments through which a Venture Capitalist
could invest a company include: Equity shares, preference shares, loans,
warrants and options.

5. Post-investment Activities and Exit Once the deal has been structured
and agreement finalized, the venture capitalist generally assumes the role of
a partner and collaborator. He also gets involved in shaping of the direction
of the venture. This may be done via a formal representation of the board of
directors, or informal influence in improving the quality of marketing,
finance and other managerial functions.

The degree of the venture capitalists involvement depends on his policy.

It may not, however, be desirable for a venture capitalist to get involved in
the day-to-day operation of the venture. If a financial or managerial crisis
occurs, the venture capitalist may intervene, and even install a new
management team.

Venture capitalists typically aim at making medium-to long-term capital

gains. They 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. A venture capitalist can exit in four ways:

 Initial Public Offerings (IPOs)

 Acquisition by another company
 Repurchase of the venture capitalist ? share by the
investee company

VENTURE CAPITAL SCENARIO IN INDIA

1972: The Committee on Development of Small and Medium
Entrepreneurs, under the chairmanship of Mr. R. S. Bhatt, first highlighted
venture capital financing in India.

1975: venture capital financing was introduced in India by the

financial institutions with the inauguration of Risk Capital Foundation

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(RCF), sponsored by IFCI with a view to encouraging technologists and
professionals to promote new industries.

1976: The seed capital scheme was introduced by IDBI.

1983: The Technology Policy statement of the Government set the

guidelines for technological self-reliance by encouraging the
commercialization and exploitation of technologies developed in the
country. Till 1984 venture capital took the form of risk capital and seed
capital.

1986: ICICI launched a venture capital scheme to encourage new

technocrats in the private sector in emerging fields of high-risk technology.

1986-87: the Government levied a 5 per cent cess on all know-how

payments to create a venture capital fund by IDBI. ICICI also became a
partner of the venture capital industry in the same year.

1988-89:

 The first attempt to frame comprehensive guidelines

governing venture capital funds was. Even under these
guidelines, only all India financial institutions, all
scheduled banks including foreign banks operating in
India, and the subsidiaries of the above were eligible to
set up venture capital funds/companies.
 IFCI sponsored RCF was converted into the Risk Capital
and Technology Finance Corporation of India Ltd.

 Unit Trust of India sponsored venture capital unit

schemes. State Bank of India has a venture capital
scheme operated through its subsidiary SBI Caps.

 ICICI flagged off a new venture capital company called

Technology Development and Information Company of
India with the objective of encouraging new technocrats
in the private sector in high-risk areas.

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  The first scheme floated by Canara Bank had
participation by World Bank. About the same time, two
State level corporations, viz., Andhra Pradesh and
Gujarat also took initiatives to promote venture capital
funds and could obtain World Bank assistance. A foreign
bank set up a Venture Capital Fund in 1987. In addition,
other public sector banks have participated in the equity
share capital of venture capital companies or invested in
schemes of venture capital funds.

Several venture capital firms are incorporated in India and they are
promoted either by financial institutions, such as IDBI, ICICI, IFCI, State-
level financial institutions and public sector banks, or promoted by foreign
banks/private sector financial institutions such as Indus Venture Capital
Fund, Credit Capital Venture Fund, and so on. Hence, the total pool of
Indian venture capital today stands over Rs 5,000 crore.

VENTURE capital, the new-age finance, is gaining importance in the

Indian economy as traditional financial institutions and commercial banks
are hamstrung by inadequacy of equity capital, focus on low-risk ventures,
conservative approach, and delays in project evaluation.

Venture capital is also often described as "the early stage financing of

new and young enterprises seeking to grow rapidly".

The Indian government sets up a venture

capital fund

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The Indian government has reiterated its commitment to the Indian software-driven IT
industry by creating a National Venture Capital Fund for the Software and IT Industry
(NFSIT). NFSIT, set up in association with various financial institutions and the industry,
operates under the umbrella of the Small Industries Development Bank of India (SIDBI).
The objective of the fund is to encourage entrepreneurship in the areas of software,
services, dot.com and other IT related sectors in which India has inherent as well as
acquired competency. The fund was launched by prime minister Atal Behari Vajpayee,
who has emerged as a strong proponent of India's software-driven IT industry. The fund
is expected to be a key component in addressing the rapidly growing demand for venture
capital in India. The fund will be looking at supporting entrepreneurship in high growth
sectors.Many state governments have already set up venture capital funds for the IT
sector in partnership with local state financial institutions and SIDBI. These include
Andhra Pradesh, Karnataka, Delhi, Kerala and Tamil Nadu.

STRUCTURE OF VENTURE CAPITAL

INDUSTRY

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

 All India Developmental Financial Institutions sponsored Venture

Capital Funds promoted by the all-India development financial institutions such as
Technology Development and Information Company of India Limited(TDICI) by
ICICI, Risk Capital Technology Financial Corporation Limited (RCTCF) by IFCI and
Risk Capital Fund by IDBI.
 State Finance Corporations sponsored Venture Capital Funds
promoted by the state-level developmental financial institutions such as Gujarat Venture
Capital Limited (GVCL) and Andhra Pradesh Industrial Development Corporation’s,
Venture Capital Limited (APIDC-VCL).
 Bank-sponsored Venture Capital Funds promoted by public sector
banks such as Can finance and SBI Caps.
 Private Venture Capital Funds promoted by the foreign
banks/private sector companies and financial institutions such as Indus Venture Capital
Funds, Credit Capital Venture Funds and Grindlay’s India Development Fund.

 Objectives of VCFs in India

The objective of Indian venture Capital Funds are:

 financing and development of high technology businesses,

 to provide financial assistance for attaining commercial application of

indigenous technology or adapting imported technology for wider
domestic application,

to provide risk capital to first generation entrepreneurs for setting up industrial

projects and to accelerate the pace and quality of technological innovations for
products having application in industry, agriculture, health, energy and other areas
beneficial to the development process in India.

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Major player of venture capital India
 IDBI Venture Capital Fund

This was established in1986 with the objective to finance projects whose
requirements range between Rs. 5 lakhs to 2.5 crores. The promoters’
stake should be at least 10percent for the ventures below Rs. 50 lakhs and
15percent for those above 50 lakhs. Financial assistance is extended in the
form of unsecured loans involving minimum legal formalities. Interest at
concessional rate of 9percent is charged during technology development
and trial run of production stage and it will be 17percent once the product
is commercially traded in the market by the financially assisted firm. IDBI
venture capital funds extends its financial assistance to the ventures likely
to be engaged in the fields of chemicals, computer software, electronics,
bio-technology, non-conventional energy, food products, refractories and
medical equipments.

 Technology Development and Information Company of India

Limited (TDICI)

This venture Capital fund was jointly floated by Industrial Credit &
Investment Corporation of India (ICICI) and Unit Trust of India (UTI) to
finance the projects of professional technocrats who take initiative in
designing and developing indigenous technology in the country.
Technology Development and Information Company of India Limited
(TDICI) was launched with an authorized capital base of Rs. 20 crores and
the same was targeted to be increased to Rs. 40 to 50 crores. TDICI
favours the firms seeking financial assistance for developing information
technology, management consultancy, pharmaceutical, veterinary
biological, environmental, engineering, non-conventional sources of
energy and other innovative services in the country.

 Unit Trust of India (UTI)

In 1988-99 UTI set-up a venture capital fund of Rs. 20 crores in

collaboration with ICICI for fostering industrial development. TDICI
established by UTI jointly with ICICI acts as an advisor and manager of
the fund. UTI launched venture capital unit scheme (VECAUS-I) to raise
resources for this fund. It has set up a second venture capital fund in
March 1990 with a capital of Rs. 100 crores with the objective of
financing green field ventures and steering industrial development.

32
 Risk Capital and Technology Finance Corporation Ltd. (RCTFC)

IFCI had sponsored in 1985, Risk Capital Foundation (RCF) to give

positive encouragement to the new entrepreneurs. RCF was converted into
RCTFC on 12th January, 1988. It provides both risk capital and
technology finance and roof to innovative entrepreneurs and technocrats
for their technology oriented ventures.
Small Industrial Development Bank of India (SIDBI)

Small Industrial Development Bank of India (SIDBI)has decided to set-up

a venture capital fund in July 1993, exclusively for support to
entrepreneurs in the small sector. Initially a corpus has been created by
setting apart Rs. 10 crores. The fund would be augmented in future,
depending upon requirements.

 Andhra Pradesh Industrial Development Corporation (APIDC)

APIDC Venture Capital Ltd. (APIDC-VCL) was promoted by APIDC with

an authorized capital of Rs.2 million on 29th August 1989. Its main
objective is to encourage technology-based ventures particularly those
started by first generation technocrat entrepreneurs and ventures involving
high risk in the state of Andhra Pradesh.

 Gujarat Venture Finance Limited(GVFL)

GVFL has been promoted by the Gujarat Industrial Investment

Corporation Limited (GIIC) in 1990, to provide financial support to the
ventures whose requirements range between 25 lakhs and 2 crores. Total
corpus of Rs. 24 crores of the referred venture capital fund was co-
financed by GIIC, state financial corporation, some private corporates and
World Bank. The firms engaged in biotechnology, surgical instruments,
conservation of energy and food processing industries are financed by
GVFL.

33
  Commercial Banks Sponsored Venture Capital Funds

State Bank of India, Canara Bank, Grindlays Bank and many other banks have
participated in the venture capital fund building Industry in order to provide financial
assistance to the projects associated with high risks. SBI venture capital is monitored
through SBI capital markets. Canbanks venture capital functions through Canbank.
Financial services and India Investment Fund represents the venture capital launched by
Grindlays Bank

34
Literature Review

35
 Literature Review

According to Chary, (September 2005)

There has been a plethora of literature on venture capital finance, which is helpin
g the practitioners’ viz., venture capital finance companies and fund manage for
better understanding the role of venture capital in economic development. There ar
e number of studies on the venture capital and activities of venture capitalists in d
evelopedcountries.

According to Vijayalakshman & Dalvi,((Jan., 2006)

Whenever Indian policy makers have to encourage any industry. The usual pra
ctice isto grant that the industry tax breaks for a limited period. This definitely acts
as a positive incentive for that industry. However, what is required is a throughunder
standing of the industry requirement framing and implementation of aggregativestr
ategy for its development. VC funds are not even registered with SEBI in
spite of all the benefit available. VC industry is one, which will today prepare a
base for astrong tomorrow. What is need for the development of VC industry is not
only tax breaks but simpler procedures legislation for simplified exit form investm
ent, moretransparency and legal backing to participate in business amongst
other
things.

According to Kumar, (July, 2005)

One of the integral aspects of venture funding is venture capitalist's involve
ment withthe entrepreneurial team. The relationship through broad interaction was e
xplored byRosenstein (1988). A comparison was drawn between small and large fir
ms withregard to board interaction. While it is important in large firms the relative
power of small conventional firms, board interaction generally is undermined. Rose
nstein et. a.(1993) studied the finer aspects of boards in the venture funded compan
ies in theUSA. From 98 candidates in the sample, the study attempted to bring out t
he changesin the board size, board composition and control and their relation to va
lue added tothe funded unit. The empirical analysis yielded results wherein the size

36
of the boardincreased after venture funding, indicating more transparency in board
operations. Through a case based approach Lloyd et. al. (1995) explored the aspect
of deal structuring and post investment staging of venture capitalists through
venture

According to Mishra, (July 2004)

There is abundant empirical research conducted in developed countries which addre

ssthe relative investment evaluation criteria taken into account in the screening pr
ocessfor new venture investment proposals. Zopunidis (1994) provides a useful su
mmaryof the previous research in this field. The identification of selection criteria
has beenresearched using different methodologies such as simple rating of criteria
(perpetualand deal specific responses) Knight, 1986; Dixon, 1991; Hall and Hofer,
1993; Rah,Jung and Lee, 1994), construct analysis (Fried and Hisrich, 1994), verb
al protocols(Zhacharakis and Meyer, 1998), and quantitative compensatory models
(Muzyka,Birley and Leleux, 1996; Shepherd, 1999). Multi methods (case analysis,
study of administrative records, published interviews, questionnaire and personal i
nterviews)approach has also been used (Riquelme, 1994) to enhance understandin
g of investment criteria and also extend it to other aspects of investment process l
ike dealstructuring and divestment.

37
RESEARCH
METHODOLOGY

38
 Research Methodology

Acc. to Kerlinger,

“Research design is the plan structure &

s t r a t e g y o f investigation conceived so as to obtain answers to
research questions and to control varianc

Research design:- Exploratory research

Data collection: - secondary data

Secondary data is the data which is already collected bysomeone and complied
For different purposes which are used in research for this study. It includes:-
 Internet

 Magazine

 Journal

 Newspaper

39
 Objective of the Study

 To find out the venture capital investment volume in India.

 To study the problem faced by venture capitalist in India.

 To study the future prospects of venture capital financing

OBJECTIVE NO 1
To find out the venture capital investment vol in india Method of financing

40
Instrument Rs million %
equity share 6318.12 63.8
Redeemable preference share 2154.46 21.54
Nonconvertible debt 873.01 8.73
Convertible instrument 580.02 5.8
Convertible instrument 75.85 0.75
Total 10,000.46 100

Interpretation:

This diagram shows the venture capital financing in equity shareand sec
ondly they invest in redeemable preference shares to get higher returns

41
 Contributor of funds

Contributor Rs mm %
Foreign institution investor 13426.47 52.46
All India financial institution 6252.90 24.43
Multilateral Development agencies 2133.64 8.34
Other banks 1541 .00 6.02
Private sector 412.53 1.61
Foreign investor 570 2.23
Public sector 324.44 1.27
Nationalized bank 278.67 1.09
Non resident 235.5 0.92
Sate financial institution 215 0.84
Other public 115.52 0.45
Insurance co 85 0.33
Mutual funds 4.5 0.02
Total 25595.17 100.00

Interpretation
This table shows the highest contribution of fund FII and secondlyAIFI to develop the Indust
ry. Financing by investment stage

42
 Contributors Rs. Million %

Industrial Products and 2,956.67 23.54

Machinery
Computer Software Service 2,508,87 19.98
Consumer Related 1,381.49 10.20
Medical 817.48 6.50
Computer Hardware System 735.41 5.86
Food and Food Processing 718.56 5.72
Tel. and Data 417.89 3.33
Communication
Biotechnology 448.77 3.56
Other Electronics 426.06 3.39
Energy Related 229.56 1.82
Others 1,865.09 18.85
Total 12,559.85 100
Investment in industry

Investment by Industry

43
 As in the previous year, the maximum investment has been made in industrial products
and machinery followed by investment in computer software and service. There is an
interesting change here compared to the previous year. In 1998 the total of the
investments in computer software and hardware put together exceeds investments in
industrial products and machinery. In the previous year, the total investment in
industrial products and machinery exceeded that in the computer industry. This is a
clear indication that investment in the IT industry, as a whole is attracting greater
attention, compared to other industries. This is in keeping with global trends.

Investment by Stages of Financing

A sum of Rs.5, 146.40 million, which is almost 41 percent of the total

venture capital investment of Rs. 12,559.85 million, has been invested in
start-up projects, followed by Rs. 4,478.60 million in later stage projects,
Rs. 2,208.39 million in other early stage projects, Rs. 643.51 million in
seed stage projects and only Rs. 82.95 million in turnaround projects.

Industry wise Investment

Investment Stages
Rs. Million
Start-up Stage
5,146.40
Later Stage 4,478.60
Other Early Stage 2,203.39
Seed Stage 643.51
Turnaround Financing 82.95
Total 12,559.85

44
 The average amount of investments per project makes an interesting study.
It is Rs. 8.04 million per project in the seed stage, Rs. 9.21 million per
project in the turnaround stage Rs. 14.50 million per project in the start-
up stage, Rs. 18.72 million per project in the other early stage and Rs.
26.98 million per project in the later stage. This shows that the average
investment per project is the maximum in the later stage. This is as
expected, since later stage projects generally require larger amounts of
finance. Seed stage investments generally require smaller investments per
projects. These averages also show that not only are the number of
investments in turnaround projects minimal, the amounts of investments in
such projects are also very little, further supporting the theory that venture
capitalists are generally not keen to fund turnaround projects.

OBJECTIVE NO 2
The problem faced by venture capitalist

License Raj and The IPO Boom

Till early 90s, under the license raj regime, only commodity centric
Businessesthrived in a deficit situation. To fund a cement plant, venture
capital is not needed.What was needed was ability to get a license and then
get the project funded by the banks and DFIs. In most cases, the
promoters were wellestablished industrial houses,with no apparent need
for funds. Most of these entities were capable of raising fundsfrom
conventional sources, including term loans from institutions and equity
markets.

Scalabilit

The Indian software segment has recorded an impressive growth over the
last fewyears and earns large revenues from its export earnings, yet our
share in the globalmarket is less than 1 per cent. Within the software
industry, the value chain rangesfrom body shopping at the bottom to
strategic consulting at the top. Higher valueaddition and profitability as
well as significant market presence take place at thehigher end of the

45
 value chain. If the industry has to grow further and survive the fluxit
would only be through innovation. For any venture idea to succeed there
should bea product that has a growing market with a scalable business
model. The IT industry(which is most suited for venture funding because
of its "ideas" nature) in India tillrecently had a service centric business m
odel. Products developed for Indian marketslack scale.
Mindsets
Venture capital as an activity was virtually nonexistent in India. Most venture
capitalcompanies want to provide capital on a secured debt basis, to establish
ed businesseswith profitable operating histories. Most of the venture capital
units were offshoots of financial institutions and banks and the lending mindse
t continued. True venturecapital is capital that is used to help launch products
and ideas of tomorrow. Abroad,this problem is solved by the presence of `
angel investors’. They are typically wealthyindividuals who not only provide
venture finance but also help entrepreneurs to shapetheir business and make
their venture successful.

Returns, Taxes and Regulations

There is a multiplicity of regulators like SEBI and RBI. Domestic venture fun
ds areset up under the Indian Trusts Act of 1882 as per SEBI guidelines, w
hile offshorefunds routed through Mauritius follow RBI guidelines. Abroad, s
uch funds are madeunder the Limited Partnership Act, which brings advant
ages in terms of taxation. Thegovernment must allow pension funds and insu
rance companies to invest in venturecapitals as in USA where corporate contri
butions to venture funds are large.

Exit
The exit routes available to the venture capitalists were restricted to the IPO
route.Before deregulation, pricing was dependent on the erstwhile CCI
regulations. Ingeneral, all issues were under priced. Even now SEBI guideli
nes make it difficult for pricing issues for an easy exit. Given the failure of t
he OTCEI and the revisedguidelines, small companies could not hope for a
BSE/ NSE listing. Given the dullmarket for mergers and acquisitions, strategic
sale was also not available.
Valuation
The recent phenomenon is valuation mismatches. Thanks to the software
boom, most promoters have sky high valuation expectations. Given this, it is
difficult for deals toreach financial closure as promoters do not agree to a

46
 valuation. This coupled withthe fancy for software stocks in the bourses
means that most companies are preponingtheir IPO’s. Consequently, the
number and quality of deals available to the venturefunds getsreduced

OBJECIVE NO 3
To study the future prospect of venture capital
financing

With the advent of liberalization, India has been showing remarkable growth
in theeconomy in the past 10 12 years. The government is promoting growth
capacityutilization of available and acquired resources and hence entrepreneur
development, by liberalizing norms regarding venture capital. While only eigh
domestic venture capital funds were registered with SEBI during 19961998,
14 fundshave already been registered in 1999 -2000.
Institutional interest is growing andforeign venture investments are also on the
rise. Many state governments have alsoset up venture capital funds for the IT
sector in partnership with the local statefinancial institutions and SIDBI.
These include Andhra Paradesh, Karnataka, Delhi,Kerala and Tamil Nadu.
The other states are to follow soon.In the year 2000, the finance ministry
announced the liberalization of tax treatmentfor venture capital funds to
promote them & to increase job creation. This is expectedto give a strong
boost to the non resident Indians located in the Silicon Valley andelsewhere
to invest some of their capital, knowledge and enterprise in these ventures.
A Bangalore based media company, G r a y c e l l Ltd., has recently obtained
VCinvestment totaling about $ 1.7 mn. The company would be creating and
marketing branded web based consumer products in the near future.

47
 The following points can be considered as the harbingers of VC financing in
India:-
a.Existence of a globally competitive high technology.

b.Globally competitive human resource capital.

c.Second Largest English speaking, scientific & technical manpower in theworld.

d.Vast pool of existing and ongoing scientific and technical research carried byl
arge number of research laboratories.
e. Initiatives taken by the Government in formulating policies to encourageinve
stors and entrepreneurs.

Findings

48
 Findings

During the preparation of my report I have analyzed many things which are
following:-

• A number of people in India feel that financial institution are not only
conservatives but they also have a bias for foreign technology & they do not Trust
on the abilities of entrepreneurs.
 Venture Capital Financing is still not regarded as commercial activity.
 Restricted scope of Venture Capital in India to hi-tech project
 Ambiguous government policy towards inter-corporate investment and
issue of shares to the entrepreneurs at below per value or in the form of a “ guest equity”.
 . Focus on specific industry

49
Limitations

50
 Limitations of Study

1. The biggest limitation was time

2.The data required was secondary & that was not easily available.

3. Study by its nature is suggestive & not conclusive.

4. Expenses were high in collecting & searching the data

5. Major limitation of the project has been the

unavailability of current data

51
Suggestions

52
 Suggestions
The investment should be made in the later stage
 The government allow or encourage pension fund and
insurance company to make investment in the venture capital
 The entry of private sector should be encourage
 Tax concession and exemption given to the investor
 The government offer attractive opportunity to foreign investor
to invest in Indian venture capital firms

53
54
 Conclusion

Conclusion
Venture capital can play a more innovation and development role in a
developingcountry like India. It could help the rehabilitation of sick
unit through people withideas and turnaround management skill. A la
rge number of small enterprises in India because sick unit even bef
ore the commencement of production of production.Venture capital
ist could also be in line with the developments taking place in their
parent compay
.Yet another area where can play a significant role indeveloping co
untries is theservice sector including tourism, publishing, healthcare
etc. they could also providefinancial assistance to people coming out
of the universities, technical institutes etc.who wish to start their ow
n venture with or without hightech content,but involvinghigh risk.

55
T his would encourage the entrepreneurial spirit. It is not only initialf
unding which is need from the venture capitalists, but the should also
simultaneously provide management and marketing expertisea real cri
tical aspect of venturecapitalists, but they also simultaneously provi
de management and marketingexpertisea real critical aspect of ventur
e capital in developing countries. Which canimprove their effective
ness by setting up venture capital cell in R&D and other scientific ge
neration, providing syndicated or consortium financing and acing as
business incubators

Bibliography
1.
JOURNALS
•
APPLIED FINANCE VENTURE STAGE INVESTMENTPRE
FERENCE IN INDIA, VINAY KUMAR, MAY, 2004.
•
ICFAI JOURNAL OF APPLIED FINANCE MAY- JUNE
•
VIKALPA VOLULMLE 28, APRI L- JUNE 2003
•
ICFAI JOURNAL OF APPLIED FINANCE, JULY- AUG.

2.BOOKS
•

56
I.M. Panday- venture capital development process in India
•
I. M. Panday- venture capital the Indian experience,

3.VARIOUS NEWS PAPERS4 . I N T E R N E T

•
www.indiainfoline.com
•
www.vcapital.com
•
www.investopedia.com
www.vcinstitute.com

APPENDIX-
List of Venture Capital Companies in India
20th Century Finance Corporation Limited
1. Centre Point
Dr.Ambedkar Road
Parel
Mumbai - 400012

2. AIG Investment Corporation (Asia) Limited

India - Representative Office
2634 Oberoi Towers
Nariman Point
Mumbai - 400021

3. Acuity Strategic Financials Private Limited

14 Santosh, 2nd floor

57
 242 Lady Jamshedji Road
Mumbai - 400028

4. AIA Capital India Private Limited

9B Hansalaya
Barakhamba Road
New Delhi - 110001
Alliance DLJ Private Equity Fund
5. 404 / 405 Prestige Centre Point
7 Edward Road
Bangalore - 560052

6. Alliance Venture Capital Advisors Limited

607 Raheja Chambers
Free Press Journal Road, Nariman Point
Mumbai - 400021

7. APIDC Venture Capital Limited

1102 Block A, 11th floor
Babukhan Estate, Basheerbagh
Hyderabad - 500001

8. Canbank Venture Capital Fund Limited

2/F Kareem Towers, 11th floor
19/5 -19/6 Cunningham Road
Bangalore - 560052

9. Draper International (India) Private Limited

V203 Prestige Meridian -1
M.G. Road
Bangalore - 560001

10. eVentures India

(Consultair Investments Private Limited)
Khetan Bhavan
8 Jameshedji Tata Road
Churchgate
Mumbai - 400020

58
11. GE Capital Services India Limited
AIFACS Building
1 Rafi Marg
New Delhi - 110001

12. Gujarat Venture Finance Limited

Premchand House Annexe, 1st floor
Behind Popular House
Ashram Road
Ahmedabad - 380009

13. HSBC Private Equity Management Mauritius Limited

Ashoka Estate, 3rd floor
24 Barakhamba Road
New Delhi - 110001

14. ICICI Securities and Finance Company Limited

41/44 Strand Palace
M.Desai Marg
Colaba
Mumbai - 400005

15. ICICI Venture Funds Management

Company Limited (formerly TDICI)
Raheja Plaza, 4th floor
17 Commissariat Road
D'Souza Circle
Bangalore - 560025

16. IFB Venture Capital Finance Limited

8/1 Middletown Row
Calcutta - 700071

17. Industrial Development Bank of India

IDBI Tower Cuffe Parade
Mumbai - 400005

18. Small Industries Development Bank of India (SIDBI)

SIDBI Venture Capital Limited
Nariman Bhavan

59
 227 Vinay K. Shah Marg
Nariman Point
Mumbai - 400021

19. Tata Investment Corporation Limited

Ewart House, 3rd floor
Homi Modi Street Fort
Mumbai - 400001

20. Templeton India Private Equity Fund

125 Free Press House
Nariman Point
Mumbai - 400021

21. Vista Ventures

DBS Corporate Club
26 Cunningham Road
Bangalore - 560052

22. Walden-Nikko India Management Company Limited

One Silverstone
294 Linking Road
Khar (West)
Mumbai - 400052

60