Major Research Project

[For the partial fulfillment of requirement towards degree in Master of Business Administration (MBA), 2009-11 of Devi Ahilya Vishva Vidhalay (DAVV), Indore]

On

venture Capital Analysis:An Empirical Study

Guided By: Mr.M.L .Patidar Submitted By:Hemant Jain MBA IV Semester

Project Summary
The report of the present study has been divided into 7 chapters. Chapter 1: contains Introduction which includes Conceptual Framework,

Introduction of topic, Review of Literature, & Rationale of study. Chapter 2: contains Research Methodology which includes Objectives of study, Method of Research, Nature of the study, both for Data collection and Data Analysis. Chapter 3: contains Data Analysis which contains Method of data analysis (type of statistical tool).It includes various graphs, charts and tables. Chapter 4- contains Findings and Conclusions which includes Conclusion , Policy implications (advices), Limitations of the study. Chapter 5: contains References 1- Bibliography-preferred books, journals, other papers (in alphabetical order) 2- -Webliography (website references (in alphabetical order)

Certificate of Faculty Guide

This is to certify that HEMANT JAIN student of Master of Business Administration (Full Time) program has completed Major Research Project on Venture Capital Analysis: An Empirical Study under my guidance and supervision.

The research done by him is original and genuine and all the data collected is found to be authentic and submitted to me.

Date: __________ Place: Indore

Mr. M.L.PATIDAR Faculty Guide LKCT,

Declaration

For the partial fulfillment of requirement towards degree in Master of Business Administration, 2009-11 of Devi Ahilya Vishva Vidhalaya, Indore, I present this project entitled Venture Capital Analysis: An Empirical Study this project completed under the supervision of Mr. M.L.PATIDAR, faculty guide in LKCT, Indore. I declare that the work presented in the major research project is my genuine work, except as acknowledge in the text and foot notes. According to my knowledge this material has not submitted either in whole or in part for a degree at this institute or at any such institute earlier.

Student Name HEMANT JAIN MBA (FT) IV Roll.No-09170320

Acknowledgement

The feeling of gratitude when expressed in words is only a fraction of acknowledgement. I cannot express my gratitude fully in words to all those who have extended their consistent support to enable to complete the project.

I would like to express my thanks & gratitude to my Major Research Project mentor Mr. M.L.Patidar, Faculty LKCT, for the valuable guidance he/she has given me on the Major Research Project. She/he has given me all the freedom to work and helping & advising me throughout project. Every step in my project had a demand of deep understanding of the concepts which was only possible with the help of our professor, students. A part from this, I would like to thank all the respected professors who trim the silver lamp of knowledge kept the scared of flame bright towards me. I would also like to thank all the respondents who helped me whole heartedly by providing me valuable information.

Chapter-1
Conceptual Frame Work
Concept of Venture Capital Stage of Venture Capital Method of Venture Financing Venture Capital Process

Introduction
Introduction of Venture Capital Venture Capitalist Venture Capital In India

Review of Literature Rationale of Study

CONCEPT
The term venture capital comprises of two words that is, Venture and Capital. Venture is a course of processing, the outcome of which is uncertain but to which is attended the risk or danger of loss. Capital means recourses to start an enterprise. To connote the risk and adventure of such a fund, the generic name Venture Capital was coined. Venture capital has also been described as unsecured risk financing. The relatively high risk of venture capital is compensated by the possibility of high returns usually through substantial capital gains in the medium term. Venture capital in broader sense is not solely an injection of funds into a new firm, it is also an input of skills needed to set up the firm, design its marketing strategy, organize and manage it. Thus it is a long term association with successive stages of companys development under highly risky investment conditions, with distinctive type of financing appropriate to each stage of development. Investors join the entrepreneurs as co-partners and support the project with finance and business skills to exploit the market opportunities.

Feature of venture capital High Risk

By definition the Venture capital financing is highly risky and chances of failure are high as it provides long term startup capital to high risk-high reward ventures. Venture capital assumes four types of risks, these are: Management risk - Inability of management teams to work together. Market risk - Product may fail in the market. Product risk - Product may not be commercially viable.

Operation risk - Operations may not be cost effective resulting in increased cost decreased gross margins.

High Tech
As opportunities in the low technology area tend to be few of lower order, and hi-tech projects generally offer higher returns than projects in more traditional areas, venture capital investments are made in high tech. areas using new technologies or producing innovative goods by using new technology. Not just high technology, any high risk ventures where the entrepreneur has conviction but little capital gets venture finance. Venture capital is available for expansion of existing business or diversification to a high risk area. Thus technology financing had never been the primary objective but incidental to venture capital.

Equity Participation & Capital Gains

Investments are generally in equity and quasi equity participation through direct purchase of shares, options, convertible debentures where the debt holder has the option to convert the loan instruments into stock of the borrower or a debt with warrants to equity investment. The funds in the form of equity help to raise term loans that are cheaper source of funds. In the early stage of business, because dividends can be delayed, equity investment implies that investors bear the risk of venture and would earn a return commensurate with success in the form of capital gains.

Participation In Management
Venture capital provides value addition by managerial support, monitoring and follow up assistance. It monitors physical and financial progress as well as market development initiative. It helps by identifying key resource person. They want one seat on the companys board of directors and involvement, for better or worse, in the major decision affecting the direction of company. This is a unique philosophy of hands on management where Venture capitalist acts as complementary to the entrepreneurs. Based upon the experience other companies, a venture capitalist advise the promoters

on project planning, monitoring, financial management, including working capital and public issue. Venture capital investor cannot interfere in day today management of the enterprise but keeps a close contact with the promoters or entrepreneurs to protect his investment.

Length of Investment
Venture capitalist help companies grow, but they eventually seek to exit the investment in three to seven years. An early stage investment may take seven to ten years to mature, while most of the later stage investment takes only a few years. The process of having significant returns takes several years and calls on the capacity and talent of venture capitalist and entrepreneurs to reach fruition.

Illiquid Investment
Venture capital investments are illiquid, that is, not subject to repayment on demand or following a repayment schedule. Investors seek return ultimately by means of capital gains when the investment is sold at market place. The investment is realized only on enlistment of security or it is lost if enterprise is liquidated for unsuccessful working. It may take several years before the first investment starts to locked for seven to ten years. Venture capitalist understands this illiquidity and factors this in his investment decisions.

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 commence initial marketing formalities.

development and

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 breakeven 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.

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

Indianmba.com (Fig 1.1)

 Venture Capital Investment Process

Deal origination:
In generating a deal flow, the VC investor creates a pipeline of deals or investment opportunities that he would consider for investing in. Deal may originate in various ways. referral system, active search system, and intermediaries. Referral system is an important source of deals. Deals may be referred to VCFs by their parent organizations, trade partners, industry associations, friends etc. Another deal flow is active search through networks, trade fairs, conferences, seminars, foreign visits etc. Intermediaries is used by venture capitalists in developed countries like USA, is certain intermediaries who match VCFs and the potential entrepreneurs.

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

 Due Diligence:
Due diligence is the industry jargon for all the activities that are associated with evaluating an investment proposal. The venture capitalists evaluate the quality of entrepreneur before appraising the characteristics of the product, market or technology. Most venture capitalists ask for a business plan to make an assessment of the possible risk and return on the venture. Business plan contains detailed information about the proposed venture. The evaluation of ventures by VCFs in India includes; Preliminary evaluation: The applicant required to provide a brief profile of the proposed venture to establish prima facie eligibility. Detailed evaluation: Once the preliminary evaluation is over, the proposal is evaluated in greater detail. VCFs in India expect the entrepreneur to have:Integrity, long-term vision, urge to grow, managerial skills, commercial orientation. VCFs in India also make the risk analysis of the proposed projects which includes:

Product 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 Figure. Deal Structuring: Structuring refers to putting together the financial aspects of the deal and negotiating with the entrepreneurs to accept a venture capitals 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. Also the structure should take into consideration the various commercial issues (ie what the entrepreneur wants and what the venture capital would require protecting the investment). Documentation 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 maximize (or optimize) venture capitals returns/protection and yet satisfies the entrepreneurs requirements. The instruments could be as follows:

Instrument

Issues

Loan

Clean vs secured

Interest bearing vs non interest bearing

convertible vs one with features (warrants)

1st Charge, 2nd Charge,

loan vs loan stock

Maturity

Preference shares

redeemable (conditions under Company Act)

participating

par value

nominal shares

Warrants

exercise price

expiry period

Common shares

new or vendor shares

par value partially-paid shares

(Fig 1.2)
,In India, straight equity and convertibles are popular and commonly used. Nowadays, warrants are issued as a tool to bring down pricing. A variation that was first used by PACT and TDICI was "royalty on sales". Under this, the company was given a conditional loan. If the project was successful, the company had to pay a % age of sales as royalty and if it failed then the amount was written off. In 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 requested, is appropriate and consistent with the risk level of the investment. The risks should be analyzed, taking into consideration the stage at which the company is in and other factors relating to the project. (eg exit problems, etc)

Post Investment Activities :

Once the deal has been structured and agreement finalized, the venture capitalist generally assumes the role of a partner and collaborator. He also gets involved in shaping of the direction of the venture. The degree of the venture capitalists involvement depends on his policy. It may not, however, be desirable for a venture capitalist to get involved in the day-today operation of the venture. If a financial or managerial crisis occurs, the venture capitalist may intervene, and even install a new management team.

Exit:
Venture capitalists generally want to cash-out their gains in five to ten years after the initial investment. They play a positive role in directing the company towards particular exit routes. A venture may exit in one of the following ways: 1. Initial Public Offerings (IPOs) 2. Acquisition by another company 3. Purchase of the venture capitalists shares by the promoter, 4. Purchase of the venture capitalists share by an outsider.

BRIEF PROFILE OF MAJOR PLAYERS

IDBI Venture Capital Fund
This was established in1986 with the objective to finance projects whose requirements range between Rs. 5lakhs to 2.5crores. The promoters stake should be at least 10percent for the ventures below Rs. 50lakhs 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 produ ct 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, refractoriness and medical equipments.

Technology Development and Information Company of India Limited (TDICI)

This venture Capital fund was jointly floated by Industrial Credit & Investment Corporation o f I n d i a ( I C I C I ) a n d U n i t T r u s t o f I n d i a ( U T I ) t o f i n a n c e t h e p r o j e c t s o f p r o f e s s i o n a l 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 50crores. TDICI favors the firms seeking financial assistance for developing information technology, management consultancy, and pharmaceutical.

Unit Trust of India (UTI)

In 1988-99 UTI set-ups 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 capital of Rs. 100 crores with the objective of financing green field ventures and steering industrial development.

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.36

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 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 adventures 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 25lakhs 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 corporate and World Bank. Thef i r m s e n g a g e d i n b i o t e c h n o l o g y , s u r g i c a l i n s t r u m e n t s , c o n s e r v a t i o n o f e n e r g y a n d f o o d processing industries are financed by GVFL.

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. Can banks venture capital functions through Canbank. Financial services and India Investment Fund represents the venture capital launched by Grindlays Bank.

Introduction

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. Venture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop In to 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.

 Definition: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 organization for economic co-operation and development :Capital provided by firms who invest alongside management in young companies that
are not quoted on the stock market. The objective is high return from the investment. value is created by the young company in partnership with venture capitalists money and professional expertise

Internatoinal finance corporation : equity or equity featured capital seeking

investment in new ideas, new companies ,new products, new process or new services that offer the potential of high returns on investment. it also include investment in turnaround situation.

Bank of England quarterly bulletin: venture capital investment is defined as

an activity by which investors support entrepreneurial talent with finance and business skill to exploit market opportunities and thus obtain long term capital gain

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.

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 cant get capital from a bank or from their own pockets, they enlist the help of a venture capitalist. The venture capitalist may look at several hundred investment opportunities before investing in only a few selected companies with favorable investment opportunities. 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.

Factor to be considered by venture capitalist in selection of investment proposal

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

1. Management:- :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.

2. Potential for 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 the stage, higher is the risk and hence the return.

3. Realistic Financial Requirement and Projections:- The venture capitalist requires a realistic view about the present health of the organization 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 Research & Development.

4. Owner's Financial Stake:- The financial resources owned & committed by the entrepreneur/ 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. It is an important avenue where the venture capitalist keeps an open eye.

Venture Capital in INDIA

Venture capital was introduced in India in mid eighties by All India Financial Institutions with the inauguration of Risk Capital Foundation (RCF) sponsored by IFCI with a view to encourage the technologists and the professional to promote new industries.

 Consequently the government of India promoted the venture capital during 198687 by creating a venture capital fund in the context of structural development and growth of small-scale business enterprises. The Indian Venture Capital Industry (IVCI) is just about a decade old industry as compared to that in Europe and US. In this short span it has nurtured close to one thousand ventures, mostly in SME segment and has supported building technocrat/professionals all through. The Venture Capital companies operating at present can be divided into four groups: Promoted by All India Development Financial Institutions Promoted by State Level Financial Institutions Promoted by Commercial banks Private venture Capitalists.

Promoted by all India development financial institutions

The IDBI started a VC fund in 19876 as per the long term fiscal policy of government of India, with an initial capital of Rs. 10 cr which raised by imposing acess of 5% on all payments made for the import of technology know- how projects requiring funds fromrs.5 lacs to rs 2.5cr were considered for financing. Promoters contribution ranged from this fund was available at a concessional interest rate of 9% ( during gestation period)which could be increased at later stages.

The ICICI provided the required impetus to VC activities in India, 1986, it started providing VC finance in 1998 it promoted, along with the Unit Trust of India (UTI) Technology Development and Information Company of India (TDICI) as the first VC company registered under the companies act, 1956. The TDICI may provide financial assistance to venture capital undertakings which are set up by technocrat entrepreneurs, or technology information and guidance services.

The risk capital foundation established by the industrial finance corporation of India(IFCI) in 1975, was converted in 1988 into the Risk Capital and Technology Finance company (RCTC) as a subsidiary company of the ifci the rctc provides assistance in the form of conventional loans, interest free conditional loans on profit and risk sharing basis or equity participation in extends financial support to high

technology projects for technological up gradations. The RCTC has been renamed as IFCI Venture Capital Funds Ltd.(IVCF)

Promoted by State Level Financial Institutions

In India, the State Level financial institutions in some states such as Madhya Pradesh, Gujarat, Uttar Pradesh, etc., have done an excellent job and have provided VC to a small scale enterprises. Several successful entrepreneurs have been the beneficiaries of the liberal funding environment. In 1990,the Gujarat Industrial Investment Corporation, promoted the Gujarat Venture Financial Ltd.(GVFL) along with other promoters such as the IDBI, the World Bank, etc. The GVFL provides financial assistance to businesses in the form of equity, conditional loans or income notes for technologies development and innovative products. It also provides finance assistance to entrepreneurs. The government of Andhra Pradesh has also promoted the Andhra Pradesh Industrial Development Corporation (APIDC) venture capital ltd. To Andhra Pradesh. provide VC financing in

Promoted by commercial banks

Canbank Venture Capital Fund, State Bank Venture Capital Fund and Grind lays bank Venture Capital Fund have been set up by the respective commercial banks to undertake vc activities.

The State Bank Venture Capital Funds provides financial assistance for bought out deals well as new companies in the form of equity which it disinvests after the commercialization of the project. Canbank Venture Capital Fund provides financial assistance for proven but yet to b commercially exploited technologies. It provides assistance both in the form of equity and conditional loans.

Private Venture Capital Funds

Several private sector venture capital funds have been established in India such as the 20thCenture Venture Capital Company, Indus Venture Capital Fund, Infrastructure Leasing and Financial Services Ltd.

Some of the companies that have received funding through this route include: Mastek, on of the oldest softwear house in India Ruskan software, Pune based software consultancy SQL Star, Hyderabad-based training and software development consultancy Satyam infoway, the first private ISP in India Hinditron, makers of embedded software Selectia, provider of interactive software selectior Yantra, ITLInfosys US subsidiary, solution for supply chain management.

Some important Venture Capital Funds in India: 1. APIDC Venture Capital Limited, , Babukhan Estate, Hyderabad 500 001 2. Canbank Venture Capital Fund Limited, IInd Floor, Kareem Towers, Bangalore. 3. Gujarat Venture Capital Fund 1997, Ashram Road, Ahmedabad 380 009 4. Industrial Venture Capital Limited, Thyagaraya Road, Chennai 600 017 5. Gujarat Venture Capital Fund 1995 Ashram Road Ahmedabad 380 009 6. Karnataka Information Technology Venture Capital Fund Cunningham Rd Bangalore 7. India Auto Ancillary Fund Nariman Point, Mumbai 400 021 8. Information Technology Fund, Nariman Point, Mumbai 400021 9. Tamil nad InfoTech Fund Nariman Point, Mumbai 400021 10. Orissa Venture Capital Fund Nariman Point Mumbai 400021 11. Uttar Pradesh Venture Capital Fund Nariman Point, Mumbai 400021 12. SICOM Venture Capital Fund Nariman Point Mumbai 400 021

REVIEW OF LITERATURE
According to Vijayalakshman & Dalvi,
Whenever Indian 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. However, what is required is a thorough understanding of the industry requirement framing and implementation of aggregative strategy 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 a strong tomorrow. What is need for the development of VC 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 Kumar and Kaura,

The present study reports four factors which are used by the venture capitalist to screen new venture proposals. Using Kendalls tau-c analysis, the study brings out strong association between several variable pair. Broadly, 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. Indian venture capitalists do not seem to be much enamored of technology venturing; 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 unique to successful venture in India. They are: Ability to evaluate and react to risk Attention to details

Market share Profits. 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 Robbie, (1997)

Robbies, et. al. (1997) highlights the monitoring policies of funded units by venture capitalists and studies the performance targets, monitoring information, and monitoring actions through a questionnaire-based survey. The survey was administered to 108 British Venture Capital Association 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 Fried et.al. (1998) emphasize 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 Kumar, (June 2003)

This study focus on the industry should concentrate more on early stage business opportunities instead of later stage. It is the experience world over and especially in the United States of America that the early stage opportunities have generated exceptional returns for the industry. He also suggests that individual capitalists should follow a focused investment strategy. The specialization should be in a board technology segment.

According to Kumar, (March, 2004)

The industry should concentrate more an early stage business opportunities instead of later stage. It is the experience world over and especially in the United states of America that the early stage opportunities have generated exceptional for the industry. It 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 Kumar, (May 2004)

The Indian Venture Capital Industry 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. Whenever 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 commercialization.

According to Mishra, (July 2004)

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. Zopunidis (1994) 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 (perpetual

and deal specific responses) Knight, 1986; Dixon, 1991; Hall and Hofer, 1993; Rah, Jung and Lee, 1994), construct analysis (Fried and Hisrich,1994), verbal 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 interviews) approach has also been used (Riquelme, 1994) to enhance understanding of investment criteria and also extend it to other aspects of investment process like deal structuring and divestment.

According to Subash and Nair, (May 2005)

According to theses persons though the modern concept of venture capital stated during 1946 and now practiced by almost all economies around the world, there seems to be a slowdown of venture capital activities after 2000.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. Hardly 5% of the total venture capital investment globally is given to really stage ventures. In 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 Chary, (September 2005)

There has been a plethora of literature on venture capital finance, which is helping the practitioners viz., venture capital finance companies and fund manager 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 Vijayalakshman & Dalvi, ((Jan., 2006)

Whenever Indian 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. However, what is required is a thorough understanding of the industry requirement framing and implementation of aggregative strategy 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 a strong tomorrow. What is need for the development of VC 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.

I.M.Panday (2009) In his scholarly work Venture Capital: The Indian Experience focuses his attention on the strategic role of venture capital in the development of technology, innovative entrepreneurship and small enterprises in India; the development process of venture capital by a systematic analysis of venture capital practices and policies in India; and the policy initiatives necessary for the success of venture capital in developing countries based on the Indian experience.

RATIONALE OF STUDY

To confine that Venture Capital is related to such divers topic as corporate finance, leverage buyouts, merchant banking financing of start-ups, small business management, entrepreneurship development, business incubators, technology transfers, and economic development. The present study is confined to a specific aspect of venture capital i.e. appraisal of working of venture capital in developing country like India for proper perspective; the scope of the study has been widened to include the practices and experiences of the developed and some developing countries. To show that Capital is relatively small and emerging activity. The number of players in the industry is limited.

To determine that It also indicates the geographical coverage is at all India bases
adventure capital funds are spread in different parts of the country. As far as the time period covered under the study is concerned, all possible efforts are made to find out data from different authentic sources.

Chapter-2
Research Methodology
Objective Method of Research Tools Of Data Collection

OBJECTIVE OF STUDY

When we are going to study something there is specific purpose for our study. It 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 India.

To study the problem faced by venture capitalist in India.

To study the future prospects of venture capital financing.

METHOD OF RESEARCH
REDMEN & MORY defines, Research as a systematized effort to gain now
knowledge. It 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. It includes research design, sample size, data collection and procedure of analysis of research instrument.

Research always starts with a question or a problem. Its purpose is to find answers to questions through the application of the scientific method. It is a systematic and intensive study directed towards a more complete knowledge of the subject studied.

RESEARCH DESIGN : Acc. to Ker linger, Research design is the plan structure & strategy of investigation
conceived so as to obtain answers to research questions and to control variance.

Acc. to Green and Tull, A research design is the specification of methods and
procedures for acquiring the information needed. It is the overall operational pattern or framework of the project that stipulates what information is to be collected from which sources by what procedures. Its found that research design is purely and simply the framework for a study that guides the collection and analysis of required data.

Research design is broadly classified into:

Exploratory research design

This research is an exploratory research. The major purpose of this research is description of state of affairs as it exists at present.

Exploratory research is a type of research conducted for a problem that has not been clearly defined.

The results of exploratory research are not usually useful for decision-making by themselves, but they can provide significant insight into a given situation. Although the results of qualitative research can give some indication as to the "why", "how" and "when" something occurs, it cannot tell us "how often" or "how many".

Tools of Data Collection

Data
Type Of Data Secondary Data
Secondary data is the work or findings which are already present. Secondary data is in the form of published and unpublished documents, reports, magazines, letters etc. e.g. if the data published by RBI on currency, National Income, Exports or Imports, is used in some other statistical enquiry, it will be termed as Secondary data. It refers to the statistical material which is not originated by the investigator himself but obtained from someone else's records, or when Primary data is utilized for any other purpose at some subsequent enquiry it is termed as Secondary data. This type of data is generally taken from newspapers, magazines, bulletins, reports, journals etc.

According to M.M. Blair, "Secondary data are those already in existence for some
other purpose than the answering of the question in hand."

Source Of Data Collection

Internet Magazine Journal Newspaper

Chapter-3
Data Analysis And Interpretation

Data Analysis
Analysis of data is a process of inspecting, cleaning, transforming, and modeling data with the goal of highlighting useful information, suggesting conclusions, and supporting decision making. Data analysis has multiple facets and approaches, encompassing diverse techniques under a variety of names, in different business. The process of evaluating data using analytical and logical reasoning to examine each component of the data provided. This form of analysis is just one of the many steps that must be completed when conducting a research experiment. Data from various sources is gathered, reviewed, and then analyzed to form some sort of finding or conclusion. There are a variety of specific data analysis method, some of which include data mining, text analytics, business intelligence, and data visualizations.

Data Interpretation:
Interpretation of data is done by using statistical tools like pie diagrams, bar graphs, and also using quantitative techniques accurate information is obtained.

A number of tables, graphs are

the data.

prepare to bring out the main characteristics of

Classification:-

Data classification is sorting of data according to class, segment or category. Once data is classified it is easier to analyze it and draw conclusions.

Tabulation:-

For the numerical identification and distinction of the available data, tabulation is
used. Tabulation helps to compare and contrast the data.

OBJECTIVE 1:-

To Find out the venture capital investment volume in India

Financing By Industry

Industry Information technology

RS. Crore VCF: Rs. 564 crore

Telecommunications

VCF: Rs. 1092 croer

Pharmaceuticals

VCF: Rs. 457 croer

Biotechnology

VCF: Rs. 186 crore

Media/ Entertainment

VCF: Rs. 903crore

Services Sector

VCF: Rs. 1168 crore

Industrial Products

VCF: Rs. 947 crore

Real Estate

VCF: Rs. 8700 crore

Others

VCF: Rs. 11559 crore

TOTAL

VCF: Rs. 25576 crores

www.sebi.gov.in (Fig: 3.1)

Financing By Industry
564 1092 457 186 903 1168 947 11559 Information technology Telecommunications Pharmaceuticals Biotechnology Media/ Entertainment Services Sector 8700 Industrial Products Real Estate Other

(Fig: 3.2)

Interpretation: In this diagram highest finance received by others 11559 crore and
secondly finance received by Real Estate 8700 crore

Venture Capital Investment by Stage

Investment Stages
Seed/start-up Other early stages Later stages

$ million
36 51 228

Investment by stage
36 51 start-up early stages 228 later stages

(Fig: 3.3)

 Decrease in seed/start-up investment, but increase in large later-stage investments Q1 2011 investments were increasingly concentrated in later-stage deals (73 percent of all value) both in terms of deals (63 percent) and value (73 percent) compared to Q1 2010. The combined value of financing in all early stages in Q1 2011 was $87 million, an 18 percent decline relative toQ1 2010 . This decline is attributable to fewer investments in other early-stage investments as seed and start-up financings remained relatively unchanged year-over-year

Interpretation: This diagram shows the highest finance is received by the

venture in later stage 228$million of any venture.

Venture Capital by Type Investors

Investors Foreign Fund Private industry Institutions Government Other

$ million 100 68 10 61 29

Venture Capital By Type Investors

29 Foreign Fund Private industry Institution Government other 10 68

100 61

(Fig: 3.4)

Interpretation:-This Graph shows the highest contribution of fund FII

100$million and secondly Private industry 68$ million to develop the Industry.

VC EXIT
EXIT VOLUME Buyback IPO M&A Open market Secondary sales 15 15 40 76 18 EXIT VALUE($ mn) 1695.32 502.22 1238.13 1448.54 160.85

Exit Value $ mn
160.85

1448.54

1695.32 Buy back IPO M&A 502.22 1238.13 Open market Secondary Market

(Fig: 3.5)

Interpretation: - This Graph shows the highest EXIT VALUE of BUY BACK
1695.32$ million and secondly OPEN MARKET 1448.54$ million.

 OBJECTIVE:- 2
To study the problems faced by venture capitalist in India
Problems of Venture Capital in Indian Context

One can ask why venture funding is so successful in USA and faced a number of
problems in India.

The biggest problem was a mindset change from "collateral funding" 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 zero. Moreover VCF is in its nascent stages in India. The emerging scenario of global competitiveness has put an immense pressure on the industrial sector to improve the quality level with minimization of cost of products by making use of latest technological skills.

The implication is to obtain adequate financing along with the necessary hi-tech
equipments to produce an innovative product which can succeed and grow in the present market condition.

 Unfortunately, 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 (5 7 years). The other issues that led to such a situation include:-

License Raj and The IPO Boom

Till early 90s, under the license raj regime, only commodity centric businesses thrived 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 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 equity markets.

Scalability
The Indian 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 1 per cent. Within the software industry, the value chain ranges from body shopping at the bottom to strategic consulting at the top.

 Higher value addition and profitability as well as significant market presence take place at the higher end of the value chain.

If the industry has to grow further and survive the flux it would only be through innovation. For any venture idea to succeed there should be a 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 till recently had a service centric business model. Products developed for Indian markets lack scale.

Mindsets
Venture capital as an activity was virtually non-existent in India. Most venture capital companies want to provide capital on a secured debt basis, to established businesses with profitable operating histories. 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. Abroad, this problem is solved by the presence of `angel investors. 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, Taxes and Regulations

 There is a multiplicity of regulators like SEBI and RBI. Domestic venture funds are set up under the Indian Trusts Act of 1882 as per SEBI guidelines, while offshore funds routed through Mauritius follow RBI guidelines. Abroad, such funds are made under the Limited Partnership Act, which brings advantages in terms of taxation. The government must allow pension funds and insurance companies to invest in venture capitals as in USA where corporate contributions 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. In general, all issues were under priced. Even now SEBI guidelines make it difficult for pricing issues for an easy exit. Given the failure of the OTCEI and the revised guidelines, small companies could not hope for a BSE/ NSE listing. Given the dull market 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 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 preopening their IPOs. Consequently, the number and quality of deals available to the venture funds gets reduced Some other major problems facing by venture capitalist in India are:

Requirement of an experienced management team.

b. Requirement of an above average rate of return on investment. Longer payback period.

c. Uncertainty regarding the success of the product in the market.

d. Questions 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 size of the market.

g. Major competitors and their market share.

h. Skills and Training required and the cost of training.

i.

Financial considerations like return on capital employed (ROCE), cost of the project, the Internal Rate of Return (IRR) of the project, total amount of funds required, ratio of owners investment (personnel funds of the

entrepreneur), borrowed capital, mortgage loans etc. in the capital employed.

OBJECTIVE :-3
To study the future prospect of Venture Capital Financing .

Prospects of Venture Capital Financing

With the advent of liberalization, India has been showing remarkable growth in the economy in the past 10 - 12 years. The government is promoting growth in capacity utilization of available and acquired resources and hence entrepreneurship development, by liberalizing norms regarding venture capital. While only eight domestic venture capital funds were registered with SEBI during 1996-1998, 14 funds have already been registered in 1999-2000. Institutional interest is growing and foreign venture investments are also on the rise. Many state governments have also set up venture capital funds for the IT sector in partnership with the local state financial institutions and SIDBI. These include Andhra Parades, 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 treatment for venture capital funds to promote them & to increase job creation. This is expected to give a strong boost to the non resident Indians located in the Silicon Valley and elsewhere to invest some of their capital, knowledge and enterprise in these ventures. 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 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 the world

d. Vast pool of existing and ongoing scientific and technical research carried by large number of research laboratories.

e. Initiatives of the SEBI to develop a strong and vibrant capital market giving the adequate liquidity and flexibility for investors for entry and In a recent survey it has been shown that the VC investments in India's I.T. Software and services sector (including dot com companies)- have grown 564 crore in 2011. The credit can be given to setting up of a National Venture Capital Fund for the Software and I.T. Industry (NFSIT) in association with various financial institutions of Small Industries and Development Bank of India (SIDBI).

 Chapter-4
Conclusion Policy Implication Limitation of Study

Conclusion of the study

A number of people in India feel that financial institution is 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. The team usually a two or three man team. It does not possess the required depth In top management. The team is often found to have technical skills but does not possess the overall organization building skills team is often short sited. Venture capitalists in India consider the entrepreneurs integrity &urge to grow as the most critical aspect or venture evaluation. Venture Capitalists in Indian have notice of newer avenues and regions to expand. VCs have moved beyond IT service but are cautious in exploring the right business model, for finding opportunities that generate better returns for their investors. In terms of impediments to expansion, few concerning factors to VCs include; unfavorable political and regulatory environment compared to other countries, difficulty in achieving successful exists and administrative delays in

documentation and approval.

Policy Implication

In the light of the conclusions reached related to the theoretical analysis of present status and working of venture capital in India, endeavor is made to offer some suggestions and recommendations to make the venture capital more useful in the country: 1. The investment should be in turnaround stage. Since there are many sick industries in India and the number is growing each year, the venture capitalists that have specialized knowledge in management can help sick industries. It would also be highly profitable if the venture capitalist replace management either good ones in the sick industries.

2. It 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. 3. There should be a greater role for the venture capitalists in the promotion of entrepreneurship. The Venture capitalists should promote entrepreneur forums, clubs and institutions of learning to enhance the quality of entrepreneurship.

Limitations 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 required was secondary & that was not easily available. Study by its nature is suggestive & not conclusive Expenses were high in collecting & searching the data

Chapter-5
References
Bibliography Webliography

A) Bibliography
I.M. Panday, Financial Management, Vikas Publication Pvt. Ltd. 2009,Ninth Edition. I.M. Panday- venture capital development process in India. I. M. Panday- venture capital the Indian experience, Publisher Prentice Hall of India 2010. Satyanarayana Chary, Venture Capital Concept and Application, Macmillan Publisher India 2005. Dr.Vasan Desai, The Indian Financial System and Development, Second Edition 2009. Gavin c. Reid ,Venture Capital Investment,2002. David Glade Stone, Laura glade Stone, Venture Capital Investing,2004. Joseph W. Bartlett, Fundamentals Of Venture Capital, Publisher-Madison Books, Edition (Nov17,1999). Paul. Gompers, Josh Lerner, The Venture Capital Cycle, Second Edition (Aug11,2006). G. Ramesh Babu, Financial Service In India, Publisher-Concept publishing Company,2005. Berkery, Dermot Raising VC for Entrepreneur, McGraw Hill 2008. Pankaj Sahai, Smooth Ride of VC-How to get VC funding for Business. Dilek Cetindamer , The Growth Of VC: A Cross Cultural 2007.

B) Various News Paper

The Economic Times. The Times Of India.

C) Webliography
www.indiainfoline.com www.vcapital.com www.investopedia.com www.vcinstitute.com www.sebi.gov.in www.ivca.org Economictimes.indiatimes.com Timeofindia.indiatimes.com www.indiamba.com www.wekipedia.com