FINAL REPORT ON Study of Venture Capital in India and its Aspects

Submitted in partial fulfilment of the requirement of MBA Degree of Maharshi Dayanand University, Rohtak

Under the supervision o ! Mr Vivek Bhatia Faculty International Business, I M !urgaon "u#$itted #y! sandeep arora "#$MB%$&'# Session '""#$'""( Institute o Te%hno&o'y and Mana'e$ent (ur'aon
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Acknowledgement
+No Learnin' is proper and e e%tive ,ithout Proper (uidan%e)very study is incomplete *ithout having a *ell plan and concrete e+posure to the student, Management studies are not e+ception, Scope of the pro-ect at this level is very *ide ranging, .n the other hand it provide sound basis to adopt the theoretical kno*ledge and on the other hand it gives an opportunities for e+posure to real time situation,

his study is an internal part of our MB% program and to do this pro-ect in a short period *as a heavy task,

Intention, dedication, concentration and hard *ork are very much essential to complete any task, But still it needs a lot of support, guidance, assistance, co$ operation of people to make it successful, I bear to imprint of my people *ho have given me, their precious ideas and times to enable me to complete the research and the pro-ect report, I *ant to thanks them for their continuous support in my research and *riting efforts,

I *ish to record my thanks and indebtedness to Mr .ivek Bhatia / Fa%u&ty Internationa& Business, ITM (ur'aon, *hose inspiration, dedication and helping nature provided me the kind of guidance necessary to complete this pro-ect, I am e+tremely grateful to $ana'e$ent of Institute o Te%hno&o'y 0

Mana'e$ent, (ur'aon for granting me permission to be part of this college, I *ould also like to ackno*ledge $y parents and $y #at%h $ates for their guidance and blessings

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Table of Content
1. 2.

Introduction Significance o "tudy .b-ective of Study /esearch Methodology

3.

4.

0iterature /evie*

1on%eptua& Fra$e,ork

.perational De inition

5.

%nalysis 1 Interpretation Findings Suggestions 2onclusion 0imitation Bibliographies %nne+ure

6.

7.

8.

9.

10.

11.

ANNEXU E I * NAME OF .ENTURE 1APITAL FIRM" OUT "IDE OF INDIA ANNEXU E II * NAME OF .ENTURE 1APITAL FIRM" IN INDIA2

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Introduction
% number of technocrats are seeking to set up shop on their o*n and capitali3e on opportunities, In the highly dynamic economic climate that surrounds us today, fe* 4traditional5 business models may survive, 2ountries across the globe are reali3ing that it is not the conglomerates and the gigantic corporations that fuel economic gro*th any more, he essence of any economy today is the small and medium enterprises, For e+ample, in the 6S, 7"8 of the e+ports are created by companies *ith less than '" employees and only #8 are created by companies *ith 7"" or more employees, his gro*ing trend can be attributed to rapid advances in technology in the last decade, 9no*ledge driven industries like Info ech, health$care, entertainment and services have become the cynosure of bourses *orld*ide, In these sectors, it is innovation and technical capability that are big business$drivers, his is a paradigm shift from the earlier physical production and 4economies of scale5 model, :o*ever, starting an enterprise is never easy, here are a number of parameters that contribute to its success or do*nfall, )+perience, integrity, prudence and a clear understanding of the market are among the sought after qualities of a promoter, :o*ever, there are other factors, *hich lie beyond the control of the entrepreneur, ;rominent among these is the timely infusion of funds, his is *here the venture capitalist comes in, *ith money, business sense and a lot more,

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!"at is Venture Capital###

he venture capital investment helps for the gro*th of innovative entrepreneurships in India, Venture capital has developed as a result of the need to provide non$ conventional, risky finance to ne* 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 ne* or untried concepts, promoted by a technically or professionally qualified entrepreneur, Venture capital means risk capital, It refers to capital investment, both equity and debt, *hich carries substantial risk and uncertainties, he risk envisaged may be very high may be so high as to result in total loss or very less so as to result in high gains

The %on%ept o .enture 1apita&

Venture capital means many things to many people, It is in fact nearly impossible to come across one single definition of the concept, 3ane 4o&oski Morris, editor of the *ell kno*n industry publication, Venture )conomics, de ines venture capital as 5providin' seed, start/up and irst sta'e inan%in'5 and also 5 undin' the e6pansion o %o$panies that have a&ready de$onstrated their #usiness potentia& #ut do not yet have a%%ess to the pu#&i% se%urities $arket or to %redit oriented institutiona& undin' sour%es, he European .enture 1apita& Asso%iation describes it as risk finance for entrepreneurial gro*th oriented companies, It is investment for the medium or long term return seeking to ma+imi3e medium or long term for both parties, It is a partnership *ith the entrepreneur in *hich the investor can add value to the company because of his kno*ledge, e+perience and contact base, Meanin' o venture %apita&! Venture capital is money provided by professionals *ho invest alongside management in young, rapidly gro*ing companies that have the potential to develop into significant economic contributors, Venture capital is an important source of equity for start$up companies, Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

;rofessionally managed venture capital firms generally are private partnerships or closely$held corporations funded by private and public pension funds, endo*ment funds, foundations, corporations, *ealthy individuals, foreign investors, and the venture capitalists themselves, Venture capitalists generally<

Finance ne* and rapidly gro*ing companies ;urchase equity securities %ssist in the development of ne* products or services %dd value to the company through active participation ake higher risks *ith the e+pectation of higher re*ards :ave a long$term orientation

=hen 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 revie* and have a long$term perspective, hey also actively *ork *ith the company>s management, especially *ith contacts and strategy formulation, Venture capitalists mitigate the risk of investing by developing a portfolio of young companies in a single venture fund, Many times they co$invest *ith other professional venture capital firms, In addition, many venture partnerships manage multiple funds simultaneously, For decades, venture capitalists have nurtured the gro*th of %merica>s high technology and entrepreneurial communities resulting in significant -ob creation, economic gro*th and international competitiveness, 2ompanies such as Digital )quipment 2orporation, %pple, Federal )+press, 2ompaq, Sun Microsystems, Intel, Microsoft and !enetech are famous e+amples of companies that received venture capital early in their development, 7"our%e! National Venture Capital Association $%%% &ear 'ook(

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Private E8uity Investin'

Venture capital investing has gro*n from a small investment pool in the &(?"s and early &(#"s to a mainstream asset class that is a viable and significant part of the institutional and corporate investment portfolio, /ecently, some investors have been referring to venture investing and buyout investing as @private equity investing,@ his term can be confusing because some in the investment industry use the term @private equity@ to refer only to buyout fund investing, In any case, an institutional investor *ill allocate '8 to A8 of their institutional portfolio for investment in alternative assets such as private equity or venture capital as part of their overall asset allocation, 2urrently, over 7"8 of investments in venture capitalBprivate equity comes from institutional public and private pension funds, *ith the balance coming from endo*ments, foundations, insurance companies, banks, individuals and other entities *ho seek to diversify their portfolio *ith this investment class,

9hat is a .enture 1apita&ist:

he typical person$on$the$street depiction of a venture capitalist is that of a *ealthy financier *ho *ants to fund start$up companies, he perception is that a person *ho develops a brand ne* change$the$*orld invention needs capitalC thus, if they can5t get capital from a bank or from their o*n pockets, they enlist the help of a venture capitalist, In truth, venture capital and private equity firms are pools of capital, typically organi3ed as a limited partnership that invests in companies that represent the opportunity for a high rate of return *ithin five to seven years, he venture capitalist may look at several hundred investment opportunities before investing in only a fe* selected companies *ith favorable investment opportunities, Far from being simply passive financiers, venture capitalists foster gro*th in companies through their involvement in the management, strategic marketing and planning of their investee companies, hey are entrepreneurs first and financiers second, )ven individuals may be venture capitalists, In the early days of venture capital investment, in the &(7"s and &(?"s, individual investors *ere the archetypal venture Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

investor, =hile this type of individual investment did not totally disappear, the modern venture firm emerged as the dominant venture investment vehicle, :o*ever, in the last fe* years, individuals have again become a potent and increasingly larger part of the early stage start$up venture life cycle, hese @angel investors@ *ill mentor a company and provide needed capital and e+pertise to help develop companies, %ngel investors may either be *ealthy people *ith management e+pertise or retired business men and *omen *ho seek the opportunity for first$hand business development,

)actor to 'e considered 'y *enture capitalist in selection of in*estment proposal

here are basically four key elements in financing of ventures *hich are studied in depth by the venture capitalists, hese are< ;2 Mana'e$ent< he strength, e+pertise 1 unity of the key people on the board he members are to be mature,

bring significant credibility to the company, potentially high risks,

e+perienced possessing *orking kno*ledge of business and capable of taking

<2 Potentia& or 1apita& (ain! %n above average rate of return of about A" $ D"8 is required by venture capitalists, he rate of return also depends upon the stage of the business cycle *here funds are being deployed, )arlier the stage, higher is the risk and hence the return, =2 Rea&isti% Finan%ia& Re8uire$ent and Pro)e%tions! he venture capitalist

requires a realistic vie* about the present health of the organi3ation as *ell as future pro-ections regarding scope, nature and performance of the company in terms of scale of operations, operating profit and further costs related to product development through /esearch 1 Development, >2 O,ner5s Finan%ia& "take! he financial resources o*ned 1 committed by the

entrepreneurB o*ner 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 *here the venture capitalist keeps an open eye,

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A +rief ,istory
he concept of venture capital is not ne*, Venture capitalists often relate the story of 2hristopher 2olumbus, In the fifteenth century, he sought to travel *est*ards instead of east*ards from )urope and so planned to reach India, :is far$fetched idea did not find favor *ith the 9ing of ;ortugal, *ho refused to finance him, Finally, Eueen Isabella of Spain decided to fund him and the voyages of 2hristopher 2olumbus are no* empanelled in history, he modern venture capital industry began taking shape in the post F =orld =ar II years, It is often said that people decide to become entrepreneurs because they see role models in other people *ho have become successful entrepreneurs, Much the same thing can be said about venture capitalists, he earliest members of the organi3ed venture capital industry had several role models, including these three< A$eri%an Resear%h and Deve&op$ent 1orporation, formed in &(D?, *hose biggest success *as Digital )quipment, he founder of %/D *as !eneral !eorges Doroit, a French$born military man *ho is considered ?the ather o venture %apita&2? In the &(7"s, he taught at the :arvard Business School, :is lectures on the importance of risk capital *ere considered quirky by the rest of the faculty, *ho concentrated on conventional corporate management, 32@2 9hitney 0 1o also formed in &(D?, one of *hose early hits *as Minute Maid -uice, Gock =hitney is considered one of the industry5s founders, The Ro%ke e&&er Fa$i&y, and in particular, 0 S /ockefeller, one of *hose earliest investments *as in )astern %irlines, *hich is no* defunct but *as one of the earliest commercial airlines, he Second =orld =ar produced an abundance of technological innovation, primarily *ith military applications, hey include, for e+ample, some of the earliest *ork on micro circuitry, Indeed, G,:, =hitney5s investment in Minute Maid *as Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

intended to commerciali3e an orange -uice concentrate that had been developed to provide nourishment for troops in the field, In the mid$&(7"s, the 6,S, federal government *anted to speed the development of advanced technologies, In &(7#, the Federal /eserve System conducted a study that concluded that a shortage of entrepreneurial financing *as a chief obstacle to the development of *hat it called ?entrepreneuria& #usinesses2? %s a response this a number of Small Business Investment 2ompanies HSBI2I *ere established to @leverage@ their private capital by borro*ing from the federal government at belo*$ market interest rates, Soon commercial banks *ere allo*ed to form SBI2s and *ithin four years, nearly ?"" SBI2s *ere in operation, %t the same time a number of venture capital firms *ere forming private partnerships outside the SBI2 format, hese partnerships added to the venture capitalist5s toolkit, by offering a degree of fle+ibility that SBI2s lack, =ithin a decade, private venture capital partnerships passed SBI2s in total capital under management, he &(?"s sa* a tremendous bull I;. market that allo*ed venture capital firms to demonstrate their ability to create companies and produce huge investment returns, For e+ample, *hen Digital )quipment *ent public in &(?J it provided %/D *ith &"&8 annuali3ed /eturn on Investment H/.II, he 6SK#",""" Digital invested to start the company in &(7( had a market value of 6SKA#mn, %s a result, venture capital became a hot market, particularly for *ealthy individuals and families, :o*ever, it *as still considered too risky for institutional investors, In the &(#"s, though, venture capital suffered a double$*hammy, First, a red$hot I;. market brought over &,""" venture$backed companies to market in &(?J, the public markets *ent into a seven$year slump, here *ere a lot of disappointed stock market investors and a lot of disappointed venture capital investors too, hen in &(#D, after 2ongress legislation against the abuse of pension fund money, all high$risk investment of these funds *as halted, %s a result of poor public market and the pension fund legislation, venture capital fund raising hit rock bottom in &(#7, =ell, things could only get better from there, Beginning in &(#J, a series of legislative and regulatory changes gradually improved the climate for venture Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

investing, First 2ongress slashed the capital gains ta+ rate to 'J8 from D(,78, hen the 0abor Department issued a clarification that eliminated the pension funds act as an obstacle to venture investing, %t around the same time, there *as a number of high$profile I;.s by venture$backed companies, hese included Federal )+press in &(#J, and %pple 2omputer and !enetech Inc in &(J&, his rekindled interest in venture capital on the part of *ealthy families and institutional investors, Indeed, in the &(J"s, the venture capital industry began its greatest period of gro*th, In &(J", venture firms raised and invested less than 6SK?"" million, hat number soared to nearly 6SKDbn by &(J#, business, he late &(J"s marked the transition of the primary source of venture capital funds from *ealthy individuals and families to endo*ment, pension and other institutional funds, he surge in capital in the &(J"s had predictable results, /eturns on venture capital investments plunged, Many investors *ent into the funds anticipating returns of A"8 or higher, hat *as probably an unrealistic e+pectation to begin *ith, he consensus today is that private equity investments generally should give the investor an internal rate of return something to the order of &78 to '78, depending upon the degree of risk the firm is taking, :o*ever, by &((", the average long$term return on venture capital funds fell belo* J8, leading to yet another do*nturn in venture funding, Disappointed families and institutions *ithdre* from venture investing in droves in the &(J($(& periods, he economic recovery and the I;. boom of &((&$(D have gone a long *ay to*ards reversing the trend in both private equity investment performance and partnership commitments, In &((J, the venture capital industry in the 6nited States continued its seventh straight year of gro*th, It raised 6SK'7bn in committed capital for investments by venture firms, *ho invested over 6SK&?bn into domestic gro*th companies 6S firms have traditionally been the biggest participants in venture deals, but non$6S venture investment is gro*ing, In India, venture funding more than doubled from KD'" million in '""' to almost K& billion in '""A, For the first half of '""D, venture capital investment rose A'8 from '""A, Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon he decade also marked the e+plosion in the buy$out

Venture Capital in IN-IA

Venture capital *as introduced in India in mid eighties by %ll India Financial Institutions *ith the inauguration of /isk 2apital Foundation H/2FI sponsored by IF2I *ith a vie* to encourage the technologists and the professional to promote ne* industries, 2onsequently the government of India promoted the venture capital during &(J?$J# by creating a venture capital fund in the conte+t of structural development and gro*th of small$scale business enterprises, Since then several venture capital firmsBfunds HV2FsI are incorporated by Financial Institutions HFIsI, ;ublic Sector Banks H;SBsI, and ;rivate Banks and ;rivate Financial companies, he Indian Venture 2apital Industry HIV2II is -ust about a decade old industry as compared to that in )urope and 6S, In this short span it has nurtured close to one thousand ventures, mostly in SM) segment and has supported building technocratBprofessionals all through, he V2 industry, through its investment in high gro*th companies as *ell as companies adopting ne*er technologies backed by first generation entrepreneurs, has made a substantial contribution to economy, In India, ho*ever, the potential of venture capital investments is yet to be fully reali3ed, here are around thirty venture capital funds, *hich have garnered over /s, 7""" 2rores, he venture capital investments in India at /s, &""","7 crore as in &((#, representing ",& percent of !D;, as compared to 7,7 per cent in countries such as :ong 9ong,

In*estment ."ilosop"y
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Venture capitalists can be generalists, investing in various industry sectors, or various geographic locations, or various stages of a company5s life, %lternatively, they may be specialists in one or t*o industry sectors, or may seek to invest in only a locali3ed geographic area, Lot all venture capitalists invest in @start$ups,@ =hile venture firms *ill invest in companies that are in their initial start$up modes, venture capitalists *ill also invest in companies at various stages of the business life cycle, % venture capitalist may invest before there is a real product or company organi3ed Hso called @seed investing@I, or may provide capital to start up a company in its first or second stages of development kno*n as @early stage investing,@ %lso, the venture capitalist may provide needed financing to help a company gro* beyond a critical mass to become more successful H@e+pansion stage financing@I, he venture capitalist may invest in a company throughout the company5s life cycle and therefore some funds focus on later stage investing by providing financing to help the company gro* to a critical mass to attract public financing through a stock offering, %lternatively, the venture capitalist may help the company attract a merger or acquisition *ith another company by providing liquidity and e+it for the company5s founders, %t the other end of the spectrum, some venture funds speciali3e in the acquisition, turnaround or recapitali3ation of public and private companies that represent favorable investment opportunities, here are venture funds that *ill be broadly diversified and *ill invest in companies in various industry sectors as diverse as semiconductors, soft*are, retailing and restaurants and others that may be specialists in only one technology, =hile high technology investment makes up most of the venture investing in the 6,S,, and the venture industry gets a lot of attention for its high technology investments, venture capitalists also invest in companies such as construction, industrial products, business services, etc, only in @socially responsible@ start$up endeavors, Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon here are several firms that have speciali3ed in retail company investment and others that have a focus in investing

he basic principal underlying venture capital F invest in high$risk pro-ects *ith the anticipation of high returns, hese funds are then invested in several fledging ypically first enterprises, *hich require funding, but are unable to access it through the conventional sources such as banks and financial institutions, generation entrepreneurs start such enterprises, Such enterprises generally do not have any ma-or collateral to offer as security, hence banks and financial institutions are averse to funding them, Venture capital funding may be by *ay of investment in the equity of the ne* enterprise or a combination of debt and equity, though equity is the most preferred route, Since most of the ventures financed through this route are in ne* areas H*orld*ide venture capital follo*s @hot industries@ like Info ech, electronics and he biotechnologyI, the probability of success is very lo*, %ll pro-ects financed do not give a high return, Some pro-ects fail and some give moderate returns, investment, ho*ever, is a long$term risk capital as such pro-ects normally take A to # years to generate substantial returns, Venture capitalists offer @more than money@ to the venture and seek to add value to the investee unit by active participation in its management, hey monitor and evaluate the pro-ect on a continuous basis, he venture capitalist is ho*ever not *orried about failure of an investee company, because the deal *hich succeeds, nets a very high return on his investments F high enough to make up for the losses sustained in unsuccessful pro-ects, he returns generally come in the form of selling the stocks *hen they get listed on the stock e+change or by a timely sale of his stake in the company to a strategic buyer, he idea is to cash in on an increased appreciation of the share value of the company at the time of disinvestment in the investee company, If the venture fails Hmore often than notI, the entire amount gets *ritten off, ;robably, that is one reason *hy venture capitalists assess several pro-ects and invest only in a handful after careful scrutiny of the management and marketability of the pro-ect, o conclude, a venture financier is one *ho funds a start up company, in most cases promoted by a first generation technocrat promoter *ith equity, % venture capitalist is not a lender, but an equity partner, :e cannot survive on minimalism, :e is driven by ma+imi3ation< *ealth ma+imi3ation, Venture capitalists are sources of e+pertise Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

for the companies they finance, )+it is preferably through listing on stock e+changes, his method has been e+tremely successful in 6S%, and venture funds have been credited *ith the success of technology companies in Silicon Valley, technology industry thrives on it he entire

Len'th o invest$ent<
Venture capitalists *ill help companies gro*, but they eventually seek to e+it the investment in three to seven years, %n early stage investment make take seven to ten years to mature, *hile a later stage investment many only take a fe* years, so the appetite for the investment life cycle must be congruent *ith the limited partnerships5 appetite for liquidity, he venture investment is neither a short term nor a liquid investment, but an investment that must be made *ith careful diligence and e+pertise,

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Stages of Venture Capital )unding

he Venture 2apital funding varies across the different stages of gro*th of a firm, he various stages are<

< &2 Pre seed "ta'e< :ere, a relatively small amount of capital is provided to an
entrepreneur to conceive and market a potential idea having good future prospects, he funded *ork also involves product development to some e+tent,

'2 "eed "ta'e< Financing is provided to complete product development and

commence initial marketing formalities,

A, Ear&y "ta'e A First "ta'e< Finance is provided to companies to initiate

commercial manufacturing and sales,

D, "e%ond "ta'e! In the Second Stage of Financing *orking capital is provided for
the e+pansion of the company in terms of gro*ing accounts receivable and inventory,

72 Third "ta'e< Funds provided for ma-or e+pansion of a company having

increasing sales volume, point, his stage is met *hen the firm crosses the break even

?2 Brid'e A MeBBanine Finan%in' or Later "ta'e Finan%in'< Bridge B

Me33anine Financing or 0ater Stage Financing is financing a company -ust before its I;. HInitial ;ublic .fferI, .ften, bridge finance is structured so that it can be repaid, from the proceeds of a public offering,

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Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

/et"ods of Venture )inancing

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

E8uity< %ll V2Fs in India provide equity but generally their contribution does not
e+ceed D( percent of the total equity capital, hus, the effective control and ma-ority o*nership of the firm remains *ith the entrepreneur, hey buy shares of an enterprise *ith an intention to ultimately sell them off to make capital gains,

1onditiona& Loan< It is repayable in the form of a royalty after the venture is able
to generate sales, Lo interest is paid on such loans, In India, V2Fs charge royalty ranging bet*een ' to &7 percentC actual rate depends on other factors of the venture such as gestation period, cost$flo* patterns, riskiness and other factors of the enterprise,

In%o$e Note! It is a hybrid security *hich combines the features of both

conventional loan and conditional loan, he entrepreneur has to pay both interest and royalty on sales, but at substantially lo* rates,

Other Finan%in' Methods<

% fe* venture capitalists, particularly in the

private sector, have started introducing innovative financial securities like participating debentures, introduced by 2F2 is an e+ample,

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Venture Capital )und 0peration

Venture capitalists are very selective in deciding *hat to invest in, % common figure is that they invest only in about one in four hundred ventures presented to them, hey are only interested in ventures *ith high gro*th potential, .nly ventures *ith high gro*th potential are capable of providing the return that venture capitalists e+pect, and structure their businesses to e+pect, Because many businesses cannot create the gro*th required having an e+it event *ithin the required timeframe, venture capital is not suitable for everyone, Venture capitalists usually e+pect to be able to assign personnel to key management positions and also to obtain one or more seats on the company>s board of directors, his is to put peop&e in p&a%e, a phrase that has sometimes quite unfortunate implications as it *as used in many accounting scandals to refer to a strategy of placing incompetent or easily bypassed individuals in positions of due diligence and formal legal responsibility, enabling others to rob stockholders blind, .nly a tiny portion of venture capitalists, ho*ever, have been found liable in the large scale frauds that rocked %merican HmostlyI finance in '""" and '""&, Venture capitalists e+pect to be able to sell their stock, *arrants, options, convertibles, or other forms of equity in three to ten years< this is referred to as harvestin', Venture capitalists kno* that not all their investments *ill pay$off, he failure rate of investments can be highC any*here from '"8 to ("8 of the enterprises funded fail to return the invested capital, Many venture capitalists try to mitigate this problem through diversification, hey

invest in companies in different industries and different countries so that the systematic risk of their total portfolio is reduced, .thers concentrate their investments in the industry that they are familiar *ith, In either case, they *ork on the assumption that for every ten investments they make, t*o *ill be failures, t*o *ill be successful, and si+ *ill be marginally successful, hey e+pect that the t*o successes *ill pay for the time given to, and risk e+posure of the other eight, In good times, the funds that do succeed may offer returns of A"" to &"""8 to investors, Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Venture capital partners Halso kno*n as @venture capitalists@ or @V2s@I may be former chief e+ecutives at firms similar to those *hich the partnership funds, Investors in venture capital funds are typically large institutions *ith large amounts of available capital, such as state and private pension funds, university endo*ments, insurance companies and pooled investment vehicles, Most venture capital funds have a fi+ed life of ten yearsMthis model *as pioneered by some of the most successful funds in Silicon Valley through the &(J"s to invest in technological trends broadly but only during their period of ascendance, to cut e+posure to management and marketing risks of any individual firm or its product, In such a fund, the investors have a fi+ed commitment to the fund that is @called do*n@ by the V2s over time as the fund makes its investments, In a typical venture capital fund, the V2s receive an annual @management fee@ equal to '8 of the committed capital to the fund and '"8 of the net profits of the fund, Because a fund may run out of capital prior to the end of its life, larger V2s usually have several overlapping funds at the same timeMthis lets the larger firm keep specialists in all stage of the development of firms almost constantly engaged, Smaller firms tend to thrive or fail *ith their initial industry contactsMby the time the fund cashes out, an entirely ne* generation of technologies and people is ascending, *hom they do not kno* *ell, and so it is prudent to re$assess and shift industries or personnel rather than attempt to simply invest more in the industry or people it already kno*s

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Significance of Study
Venture capitalists not only support high technology pro-ects they also fiancN any risky idea, they provide funds HaI if one needs additional capital to e+pand his e+isting business or one has a ne* 1 promising pro-ect to e+ploit HbI if one cannot obtain a conventional loan the requirement terms *ould create a burden during the period the firm is struggling to gro*n, It is the ambition of many talented people in India to set up their o*n venture if they could get adequate 1 reliable support, Financial investment provides loans 1 equity, But they do not provide management support, *hich is often needed by entrepreneurs, But the venture capital industries provide such support along *ith capital also, Venture capitalist acts a partner not a financier,

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

O#)e%tive o the "tudy

=hen *e 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 dra* out certain inferences out of the available data, he ob-ectives of my study are< o find out the venture capital investment volume in India, o study the problem faced by venture capitalist in India, o study the future prospects of venture capital financing

0'1ecti*e No2 $

3o )ind out t"e *enture capital in*estment *olume in India

Methods o Finan%in'

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Instru$ents )quity Shares /edeemable ;reference Shares Lon 2onvertible Debt 2onvertible Instruments .ther Instruments otal
Rs million 7,000.00 6,000.00 5,000.00 4,000.00 3,000.00 2,000.00 1,000.00 0.00 Redeemable re!eren"e Shares Equity Shares 6,318.12

Rs $i&&ion ?,A&J,&' ',&7D,D? J#A,"& 7J","' #7,J7 &",""",D?

Per %ent ?A,&J '&,7D J,#A 7,J ",#7 &""

2,154.46 873.01 580.02 $on%ertible 'nstruments 75.85 (ther 'nstruments

Interpretation! his diagram sho*s the venture capital financing in equity share
and secondly they invest in redeemable preference shares to get higher returns,

1ontri#utors o Funds

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

#on $on%ertible &ebt

1ontri#utors Foreign Institutional Investors %ll India Financial Institutions Multilateral Development %gencies .ther Banks Foreign Investors ;rivate Sector ;ublic Sector Lationali3ed Banks Lon /esident Indians State Financial Institutions .ther ;ublic Insurance 2ompanies Mutual Funds otal

Rs2 $n &A,D'?,D# ?,'7',(" ',&AA,?D &,7D&,"" 7#" D&',7A A'D,DD '#J,?# 'A7,7 '&7 &&7,7' J7 D,7 '7,7(7,&#

Per %ent 7',D?8 'D,DA8 J,AD8 ?,"'8 ','A8 &,?&8 &,'#8 &,"(8 ",('8 ",JD8 ",D78 ",AA8 ","'8 &"",""8

Interpretation! his table sho*s the highest contribution of fund FII and
secondly %IFI to develop the Industry,

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Finan%in' By Invest$ent "ta'e

Invest$ent "ta'es Start$up 0ater stage .ther early stage Seed stage urnaround financing otal

Rs $i&&ion A,J&A,"" A,AAJ,(( &,J'7,## (?A,' 7(,7 &",""",D? Rs million '(# &7D &'D &"# ( ?(&

Nu$#er

4,500.00 4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0.00

3,813.00

3,338.)) 1,825.77 )63.2 5).5

Start*u+

,ater sta-e

(ther early sta-e

Seed sta-e

.urnaround !inan"in-

Interpretation! his diagram sho*s the highest finance is received by the venture
in startup stage of any venture,

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Finan%in' By Industry

Industry Industrial products, machinery 2omputer Soft*are 2onsumer /elated Medical Food, food processing .ther electronics el 1 Data 2ommunications Biotechnology )nergy related 2omputer :ard*are Miscellaneous otal

Rs $i&&ion ',7((,A' &,JA' &,D&',#D ?'A,J 7"","? DA?,7D AJ7,"( A#?,D? 'D(,7? '"A,A? &,AJ",J7 &",""",D?

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Rs million 3,000.00 2,5)).32 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0.00 $om+uter So!t/ are 0edi"al 1ood, !ood +ro"essinEner-y related .el 2 &ata $ommuni"ations $om+uter 4ard/ are 'ndustrial +rodu"ts, $onsumer Related 0is"ellaneous (ther ele"troni"s 3iote"hnolo-y 1,832 1,412.74 623.8 500.06 436.54 385.0) 376.46 1,380.85

24).56 203.36

Interpretation! In this diagram highest finance received by industrial products

and machinery and secondly finance received by computer soft*are,

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Finan%in' By "tates
Invest$ent Maharashtra amil Ladu %ndhra ;radesh !u-arat 9arnataka =est Bengal :aryana Delhi 6ttar ;radesh Madhya ;radesh 9erala !oa /a-asthan ;un-ab .rissa Dadra 1 Lagar :aveli :imachal ;radesh ;ondicherry Rs $i&&ion ',7?? &7A& &A#' &&"' &"D? A&' A"" '(D 'JA 'A& &A7 &"7 J# JD A7 A' 'J ''

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Bihar .verseas otal

&? D&A (((D Source IVCA 45667869(

Rs million
3,000 2,500 2,000 1,500 1,000 500 0
.a m il # ad u ra de sh t na ta 9a 3e nal 6 u7 ar a as h 4a r ya na &e lh i tra

2,566

1531

1372

1102

1046 312 300 2)4

0 ah ar

8a r

Interpretation! In this diagram highest finance given by the Maharashtra to the

ventures to promote the state economy gro*th,

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nd hr

: es t

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Assessing Venture Capital

Venture funds, both domestic and offshore, have been around in India for some years no*, :o*ever it is only in the past &' to &J months, they have come into the limelight, he re-ection ratio is very high, about &" in &"" get beyond pre evaluation stage, and & gets funded, Venture capital funds are broadly of t*o kinds $ generalists or specialists, It is critical for the company to access the right type of fund, ie *ho can add value, his backing is invaluable as focusedBspeciali3ed funds open doors, assist in future rounds and help in strategy, :ence, it is important to choose the right venture capitalist, he standard parameters used by venture capitalists are very similar to any investment decision, he only difference being e+it, If one buys a listed security, one can e+it at a price but *ith an unlisted security, e+it becomes difficult, factors *hich they look for in he key

The Mana'e$ent
Most businesses are people driven, *ith success or failure depending on the performance of the team, It is important to distinguish the entrepreneur from the professional management team, he value of the idea, the vision, putting the team together, getting the funding in place is amongst others, some key aspects of the role of the entrepreneur, Venture capitalists *ill insist on a professional team coming in, including a 2). to e+ecute the idea, .ne$man armies are passe, Integrity and commitment are attributes sought for, he venture capitalist can provide the strategic vision, but the team e+ecutes it, %s a famous Silicon Valley saying goes @Success is e+ecution, strategy is a dream@,

The Idea
he idea and its potential for commerciali3ation are critical, Venture funds look for a scalable model, at a country or a regional level, .ther*ise the entire game *ould be reduced to a manpo*er or machine multiplication e+ercise, For e+ample, it is very easy for :industan 0ever to double sales of 0iril $ a soap *ithout incremental cape+, Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

*hile !u-arat %mbu-a needs to spend at least /sDbn before it can increase sales by &mn ton, Distinctive competitive advantages must e+ist in the form of scale, technology, brands, distribution, etc *hich *ill make it difficult for competition to enter,

.a&uation
%ll investment decisions are sensitive to this, %n old stock market saying @)very stock is a buy at a price and vice versa@, Most deals fail because of valuation e+pectation mismatch, In India, *hile calculating returns, venture capital funds *ill take into account issues like rupee depreciation, political instability, *hich adds to the risk premia, thus suppressing valuations, 0inked to valuation is the stake, *hich the fund takes, In India, entrepreneurs are still uncomfortable *ith the venture capital @taking control@ in a seed stage pro-ect,

E6it
=ithout e+it, gains cannot be booked, )+it may be in the form of a strategic sale orBand I;., a+ation issues come up at the time, %ny fund *ould discuss all e+it options before closing a deal, Sometimes, the fund insists on a buy back clause to ensure an e+it,

Port o&io Ba&an%in'

Most venture funds try and achieve portfolio balancing as they invest in different stages of the company life cycle, For e+ample, a venture capital has invested in a portfolio of companies predominantly at seed stageC they *ill focus on e+pansion stage pro-ects for future investments to balance the investment portfolio, his *ould enable them to have a phased e+it, In summary, venture capital funds go through a certain due diligence to finali3e the deal, his includes evaluation of the management team, strategy, e+ecution and commerciali3ation plans, his is supplemented by legal and accounting due diligence, typically carried out by an e+ternal agency, In India, the entire process takes about ? months, )ntrepreneurs are advised to keep that in mind before looking to raise funds, he actual cash inflo* might get delayed because of regulatory issues, It is interesting to note that in 6S%, at times angels *rite checks across the table, Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

)inancing 0ptions in :eneral

he possibility of raising a substantial part of pro-ect finances in India through both equity and debt instruments are among the key advantages of investing in India,

he Indian banking system has sho*n remarkable gro*th over the last t*o decades, he rapid gro*th and increasing comple+ity of the financial markets, especially the capital market have brought about measures for further development and improvement in the *orking of these markets, Banks and development financial institutions led by I2I2I, IDBI and IF2I *ere providers of term loans for funding pro-ects, he options *ere limited to conventional businesses, i,e, manufacturing centric, Services sector *as ignored because of the @collateral@ issue,

)quity *as raised from the capital markets using the I;. route, he bull markets of the ("s, fuelled by :arshad Mehta and the FIIs, ensured that HadI venture capital *as easily available, Manufacturing companies e+ploited this to the full,

he services sector *as ignored, like soft*are, media, etc, 0ack of understanding of these sectors *as also responsible for the same, If *e look back to &((& or even &((', the situation as regards financial outlay available to Indian soft*are companies *as poor, Most soft*are companies found it e+tremely difficult to source seed capital, *orking capital or even venture capital, Most soft*are companies started off undercapitali3ed, and had to rely on loans or overdraft facilities to provide *orking capital, his approach forced them to generate revenue in the short term, rather than investing in product development, he situation fortunately has changed,

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

esearc" /et"odology
REDMEN 0 MORC defines,O/esearch as a systemati3ed effort to gain no* kno*ledge,O It is a careful investigation for search of ne* facts in any branch of kno*ledge, he purpose of research methodology section is to describe the procedure for conduction the study, It includes research design, sample si3e, data collection and procedure of analysis of research instrument, /esearch al*ays starts *ith a question or a problem, Its purpose is to find ans*ers to questions through the application of the scientific method, It is a systematic and intensive study directed to*ards a more complete kno*ledge of the sub-ect studied, RE"EAR1@ DE"I(N< Acc2 to ;erlinger< P/esearch design is the plan structure 1 strategy of investigation conceived so as to obtain ans*ers to research questions and to control variance, Acc2 to :reen and 3ull< P% research design is the specification of methods and procedures for acquiring the information needed, It is the overall operational pattern or frame*ork of the pro-ect that stipulates *hat information is to be collected from *hich sources by *hat procedures, Its found that research design is purely and simply the frame*ork for a study that guides the collection and analysis of required data, /esearch design is broadly classified into )+ploratory research design Descriptive research design 2asual research design he ma-or purpose of this research is

his research is a E6p&oratory resear%h,

description of state of affairs as it e+ists at present,

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

DATA 1OLLE1TION "e%ondary data Secondary data is the data *hich is already collected by someone and complied for different purposes *hich are used in research for this study, It includes<$ Internet Maga3ine Gournal Le*spaper

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=iterature e*iew
A%%ordin' to "u#ash and Nair, 7May <DDEF
%ccording to theses persons though the modern concept of venture capital stated during &(D? and no* practiced by almost all economies around the *orld, there seems to be a slo*do*n of venture capital activities after '""", here may be a long list of reasons for this situation, *here people feel more risky to put their money in ne* and emerging ventures, :ardly 78 of the total venture capital investment globally is given to really stage ventures, In all the years people around the *orld has seen the potentiality of venture capital in promoting different economies of the *orld by improving the standard of living of the people by e+panding business activities, increasing employment and also generating more revenue to the government

A%%ordin' To 4u$ar, 73une <DD=F

his study focus on the industry should concentrate more on early stage business opportunities instead of later stage, It is the e+perience *orld over and especially in the 6nited States of %merica that the early stage opportunities have generated e+ceptional returns for the industry, :e also suggests that individual capitalists should follo* a focused investment strategy, he speciali3ation should be in a board technology segment,

A%%ordin' to 4u$ar and 4aura, 7Mar%h <DDGF

he present study reports four factors *hich are used by the venture capitalist to screen ne* venture proposals, 6sing 9endall5s tau$c analysis, the study brings out strong association bet*een several variable pair, Broadly, the analysis finds that< Successful venture teams put in sustained efforts o identified target markets, hey are highly meticulous *hile attending to the details, hese teams are adept at dealing *ith risk because of their impeccable past e+perience, Indian venture capitalists do not seem to be much enamored of technology venturingC at least some of the successful funded by them do not seem to sho* signs of being hi$ tech, Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

he study brings out four important variables *hich are highly unique to successful venture in India, hey are< %bility to evaluate and react to risk %ttention to details Market share ;rofits,

)valuating risk seems to be an area *here unsuccessful venture fail, Since successful teams focus on established markets and meticulously pursue these markets to gain market share, they achieve desired profits,

A%%ordin' to 4u$ar, 7May <DD>F

he Indian Venture 2apital Industry has follo*ed the classical model of venture capital finance, he early stage financing *hich includes seeds, startup 1 early stage investment *as al*ays the ma-or part of the total investment, =henever venture capitalists invest in venture certain basic preference play a crucial role in investment decision, *o such considerations are location preferences and o*nership preferences, Seed stage finance is provided to ne* companies for the use in product development 1 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 commerciali3ation,

A%%ordin' to 4u$ar, 7Mar%h, <DD>F

he industry should concentrate more an early stage business opportunities instead of later stage, It is the e+perience *orld over and especially in the 6nited states of %merica that the early stage opportunities have generated e+ceptional 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, he present situation may compel venture capitalists to opt for less risky opportunities but it is against the sprit of venture capitalism, he established fact is big gains are possible in high risk pro-ects,

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

A%%ordin' to 1hary, 7"epte$#er <DDEF here has been a plethora of literature on venture capital finance, *hich is helping the practitioners5 vi3,, venture capital finance companies and fund manage for better understanding the role of venture capital in economic development, developed countries, here are number of studies on the venture capital and activities of venture capitalists in

A%%ordin' to .i)aya&aksh$an 0 Da&vi, 773an2, <DDGF

=henever Indian policy makers have to encourage any industry, he usual practice is to grant that the industry ta+ breaks for a limited period, his definitely acts as a positive incentive for that industry, :o*ever, *hat is required is a through understanding of the industry requirement framing and implementation of aggregative strategy for its development, V2 funds are not even registered *ith S)BI in spite of all the benefit available, V2 industry is one, *hich *ill today prepare a base for a strong tomorro*, =hat is need for the development of V2 industry is not only ta+ breaks but simpler procedures legislation for simplified e+it form investment, more transparency and legal backing to participate in business amongst other things,

A%%ordin' to 4u$ar, 73u&y, <DDEF

.ne of the integral aspects of venture funding is venture capitalist>s involvement *ith the entrepreneurial team, he relationship through broad interaction *as e+plored by /osenstein H&(JJI, % comparison *as dra*n bet*een small and large firms *ith regard to board interaction, =hile it is important in large firms the relative po*er of small conventional firms, board interaction generally is undermined, /osenstein et, a, H&((AI studied the finer aspects of boards in the venture funded companies in the 6S%, From (J candidates in the sample, the study attempted to bring out the changes in the board si3e, board composition and control and their relation to value added to the funded unit, he empirical analysis yielded results *herein the si3e of the board increased after venture funding, indicating more transparency in board operations, Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

hrough a case based approach 0loyd et, al, H&((7I e+plored the aspect of deal structuring and post investment staging of venture capitalists through venture capitalists> co$investing strategy, he study finds that even through venture capitalists fi+ tight milestones and time lines they themselves contribute to many of the delays that are e+perienced by a typical start up firm, his is because of the hierarchical co$ investing partners and the lack of understanding *ithin the venture capitalist co$ investors as to *hat role they individually play in the development of their portfolio company,

A%%ordin' to Ro##ie, 7;HHIF

/obbies, et, al, H&((#I highlights the monitoring policies of funded units by venture capitalists and studies the performance targets, monitoring information, and monitoring actions through a questionnaire$based survey, he survey *as administered to &"J British Venture 2apital %ssociation members and total of ## responses *ere gathered in the study, he findings related to performance targets and other monitoring issues *ere considerable addition to the literature in the sub-ect, he issues concerning board of directors> role in venture backed companies are *idely debated topics in academic research, he findings of the study by Fried et, al, H&((JI emphasi3e that the board of directors are a more involved in the venture$ backed firms than boards *here members do not have large o*nership at stake, he study provides an empirical evidence of variation in the boards> involvement and sho*s its relevance in performance management of funded units,

A%%ordin' to Mishra, 73u&y <DD>F

here is abundant empirical research conducted in developed countries *hich address the relative investment evaluation criteria taken into account in the screening process for ne* venture investment proposals, Qopunidis H&((DI provides a useful summary of the previous research in this field, he identification of selection criteria has been researched using different methodologies such as simple rating of criteria Hperpetual and deal specific responsesI 9night, &(J?C Di+on, &((&C :all and :ofer, &((AC /ah, Gung and 0ee, &((DI, construct analysis HFried and :isrich, &((DI, verbal protocols HQhacharakis and Meyer, &((JI, and quantitative compensatory models Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

HMu3yka, Birley and 0eleu+, &((?C Shepherd, &(((I, Multi methods Hcase analysis, study of administrative records, published intervie*s, questionnaire and personal intervie*sI approach has also been used H/iquelme, &((DI to enhance understanding of investment criteria and also e+tend it to other aspects of investment process like deal structuring and divestment,

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Conceptual )rame !ork >

3"e Venture Capital .rocess
he Venture 2apital Investment ;rocess< he venture capital activity is a sequential process involving the follo*ing si+ steps, &, Deal origination ', Screening A, Due diligence )valuation D, Deal structuring 7, ;ost$investment activity ?, )+it

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

.enture 1apita& Invest$ent Pro%ess

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Dea& ori'ination! In generating a deal flo*, the V2 investor creates a pipeline of deals or investment opportunities that he *ould consider for investing in, Deal may originate in various *ays, referral system, active search system, and intermediaries, /eferral system is an important source of deals, Deals may be referred to V2Fs by their parent organi3ations, trade partners, industry associations, friends etc, %nother deal flo* is active search through net*orks, trade fairs, conferences, seminars, foreign visits etc, Intermediaries is used by venture capitalists in developed countries like 6S%, is certain intermediaries *ho match V2Fs and the potential entrepreneurs, "%reenin'! V2Fs, before going for an in$depth analysis, carry out initial screening of all pro-ects on the basis of some broad criteria, For e+ample, the screening process may limit pro-ects to areas in *hich the venture capitalist is familiar in terms of technology, or product, or market scope, he si3e of investment, geographical location and stage of financing could also be used as the broad screening criteria, Due Di&i'en%e! Due diligence is the industry -argon for all the activities that are associated *ith evaluating an investment proposal, he 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, he evaluation of ventures by V2Fs in India includesC ;reliminary evaluation< he applicant required to provide a brief profile of the

proposed venture to establish prima facie eligibility, Detailed evaluation< .nce the preliminary evaluation is over, the proposal is evaluated in greater detail, V2Fs in India e+pect the entrepreneur to have<$ Integrity, long$term vision, urge to gro*, managerial skills, commercial orientation, V2Fs in India also make the risk analysis of the proposed pro-ects *hich includes< ;roduct risk, Market risk, echnological risk and )ntrepreneurial risk, he final decision is taken in terms of the e+pected risk$return trade$off as sho*n in Figure,

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Deal Structuring< Structuring refers to putting together the financial aspects of the deal and negotiating *ith the entrepreneurs to accept a venture capital5s proposal and finally closing the deal, o do a good -ob in structuring, one needs to be kno*ledgeable in areas of accounting, cash flo*, finance, legal and ta+ation, %lso the structure should take into consideration the various commercial issues Hie *hat the entrepreneur *ants and *hat the venture capital *ould require protecting the investmentI, Documentation refers to the legal aspects of the paper*ork in putting the deal together, he instruments to be used in structuring deals are many and varied, he ob-ective in selecting the instrument *ould be to ma+imi3e Hor optimi3eI venture capital5s returnsBprotection and yet satisfies the entrepreneur5s requirements, he instruments could be as follo*s< Instru$ent 0oan Issues 2lean vs secured Interest bearing vs non interest bearing convertible vs one *ith features H*arrantsI &st 2harge, 'nd 2harge, loan vs loan stock Maturity ;reference shares redeemable Hconditions under 2ompany %ctI participating par value nominal shares =arrants 2ommon shares e+ercise price, e+piry period ne* or vendor shares par value

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

partially$paid shares In India, straight equity and convertibles are popular and commonly used, Lo*adays, *arrants are issued as a tool to bring do*n pricing, % variation that *as first used by ;%2 and DI2I *as @royalty on sales@, 6nder this, the company *as given a conditional loan, If the pro-ect *as successful, the company had to pay a 8 age of sales as royalty and if it failed then the amount *as *ritten off, In structuring a deal, it is important to listen to *hat the entrepreneur *ants, but the venture capital comes up *ith his o*n solution, )ven for the proposed investment amount, the venture capital decides *hether or not the amount requested, is appropriate and consistent *ith the risk level of the investment, he risks should be analy3ed, taking into consideration the stage at *hich the company is in and other factors relating to the pro-ect, Heg e+it problems, etcI, Post Invest$ent A%tivities< .nce the deal has been structured and agreement finali3ed, the venture capitalist generally assumes the role of a partner and collaborator, :e also gets involved in shaping of the direction of the venture, he degree of the venture capitalist>s involvement depends on his policy, It may not, ho*ever, 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 ne* management team, E6it! Venture capitalists generally *ant to cash$out their gains in five to ten years after the initial investment, hey play a positive role in directing the company to*ards particular e+it routes, % venture may e+it in one of the follo*ing *ays< &, Initial ;ublic .fferings HI;.5sI ', %cquisition by another company A, ;urchase of the venture capitalist>s shares by the promoter, D, ;urchase of the venture capitalist>s share by an outsider

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

0'1ecti*e No25

3o study t"e pro'lems faced 'y *enture capitalist in India2

Pro#&e$s o .enture 1apita& in Indian 1onte6t
.ne can ask *hy venture funding is so successful in 6S% and faced a number of problems in India, he biggest problem *as a mindset change from @collateral funding@ to high risk high return funding, Most of the pioneers in the industry *ere people *ith credit background and e+posure to manufacturing industries, )+posure to fast gro*ing intellectual property business and services sector *as almost 3ero, Moreover V2F is in its nascent stages in India, he emerging scenario of global competitiveness has put an immense pressure on the industrial sector to improve the quality level *ith minimi3ation of cost of products by making use of latest technological skills, he implication is to obtain adequate financing along *ith the necessary hi$tech equipments to produce an innovative product *hich can succeed and gro* in the present market condition, 6nfortunately, our country lacks on both fronts, he necessary capital can be obtained from the venture capital firms *ho e+pect an above average rate of return on the investment, he financing firms e+pect a sound, e+perienced, mature and capable management team of the company being financed, Since the innovative pro-ect involves a higher risk, there is an e+pectation of higher returns from the pro-ect, he payback period is also generally high H7 $ # yearsI, he other issues that led to such a situation include<

Li%ense Ra) and The IPO Boo$

ill early ("s, under the license ra- regime, only commodity centric businesses thrived in a deficit situation, o fund a cement plant, venture capital is not needed, =hat *as needed *as ability to get a license and then get the pro-ect funded by the banks and DFIs, In most cases, the promoters *ere *ell$established industrial houses, *ith no apparent need for funds, Most of these entities *ere capable of

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

raising funds from conventional sources, including term loans from institutions and equity markets,

"%a&a#i&ity
he Indian soft*are segment has recorded an impressive gro*th over the last fe* years and earns large revenues from its e+port earnings, yet our share in the global market is less than & per cent, =ithin the soft*are industry, the value chain ranges from body shopping at the bottom to strategic consulting at the top, :igher value addition and profitability as *ell as significant market presence take place at the higher end of the value chain, If the industry has to gro* further and survive the flu+ it *ould only be through innovation, For any venture idea to succeed there should be a product that has a gro*ing market *ith a scalable business model, he I industry H*hich is most suited for venture funding because of its @ideas@ natureI in India till recently had a service centric business model, ;roducts developed for Indian markets lack scale,

Mindsets
Venture capital as an activity *as virtually non$e+istent in India, Most venture capital companies *ant to provide capital on a secured debt basis, to established businesses *ith profitable operating histories, Most of the venture capital units *ere offshoots of financial institutions and banks and the lending mindset continued, rue venture capital is capital that is used to help launch products and ideas of tomorro*, %broad, this problem is solved by the presence of Rangel investors5, entrepreneurs to shape their business and make their venture successful, hey are typically *ealthy individuals *ho not only provide venture finance but also help

Returns, Ta6es and Re'u&ations

here is a multiplicity of regulators like S)BI and /BI, Domestic venture funds are set up under the Indian rusts %ct of &JJ' as per S)BI guidelines, *hile offshore funds routed through Mauritius follo* /BI guidelines, %broad, such funds are made under the 0imited ;artnership %ct, *hich brings advantages in terms of ta+ation, he

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

government must allo* pension funds and insurance companies to invest in venture capitals as in 6S% *here corporate contributions to venture funds are large,

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

E6it
he e+it routes available to the venture capitalists *ere restricted to the I;. route, Before deregulation, pricing *as dependent on the erst*hile 22I regulations, In general, all issues *ere under priced, )ven no* S)BI guidelines make it difficult for pricing issues for an easy e+it, !iven the failure of the . 2)I and the revised guidelines, small companies could not hope for a BS)B LS) listing, !iven the dull

market for mergers and acquisitions, strategic sale *as also not available, .a&uation
he recent phenomenon is valuation mismatches, hanks to the soft*are boom, most promoters have sky high valuation e+pectations, !iven this, it is difficult for deals to reach financial closure as promoters do not agree to a valuation, his coupled *ith the fancy for soft*are stocks in the bourses means that most companies are preponing their I;.5s, 2onsequently, the number and quality of deals available to the venture funds gets reduced Some other ma-or problems facing by venture capitalist in India are< a, /equirement of an e+perienced management team, b, /equirement of an above average rate of return on investment, 0onger payback period, c, 6ncertainty regarding the success of the product in the market, d, Euestions regarding the infrastructure details of production like plant location, accessibility, relationship *ith the suppliers and creditors, transportation facilities, labour availability etc, e, he category of potential customers and hence the packaging and pricing details of the product, f, he si3e of the market,

g, Ma-or competitors and their market share, Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

h, Skills and raining required and the cost of training, i, Financial considerations like return on capital employed H/.2)I, cost of the pro-ect, the Internal /ate of /eturn HI//I of the pro-ect, total amount of funds required, ratio of o*ners investment Hpersonnel funds of the entrepreneurI, borro*ed capital, mortgage loans etc, in the capital employed,

?Source .andey< I2 /2< Venture Capital > 3"e Indian E@press VIt" Edition 45669(AA

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

O#)e%tive No2 =

3o study t"e future prospect of Venture Capital )inancing2

Prospe%ts o .enture 1apita& Finan%in'
=ith the advent of liberali3ation, India has been sho*ing remarkable gro*th in the economy in the past &" $ &' years, he government is promoting gro*th in capacity utili3ation of available and acquired resources and hence entrepreneurship development, by liberali3ing norms regarding venture capital, =hile only eight domestic venture capital funds *ere registered *ith S)BI during &((?$&((J, &D funds have already been registered in &((($'""", Institutional interest is gro*ing and foreign venture investments are also on the rise, Many state governments have also set up venture capital funds for the I 9erala and amil Ladu, he sector in partnership *ith the local state other states are to follo* soon, financial institutions and SIDBI, hese include %ndhra ;aradesh, 9arnataka, Delhi, In the year '""", the finance ministry announced the liberali3ation of ta+ treatment for venture capital funds to promote them 1 to increase -ob creation, his is e+pected to give a strong boost to the non resident Indians located in the Silicon Valley and else*here to invest some of their capital, kno*ledge and enterprise in these ventures, % Bangalore based media company, !ray cell 0td,, has recently obtained V2 investment totaling about K &,# mn, he company *ould be creating and marketing branded *eb based consumer products in the near future, he follo*ing points can be considered as the harbingers of V2 financing in India<$ a, )+istence of a globally competitive high technology, b, !lobally competitive human resource capital, c, Second 0argest )nglish speaking, scientific 1 technical manpo*er in the *orld,

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

d, Vast pool of e+isting and ongoing scientific and technical research carried by large number of research laboratories, e, Initiatives taken by the !overnment in formulating policies to encourage investors and entrepreneurs, f, Initiatives of the S)BI to develop a strong and vibrant capital market giving the adequate liquidity and fle+ibility for investors for entry and e+it, In a recent survey it has been sho*n that the V2 investments in India>s I, , $ Soft*are and services sector Hincluding dot com companiesI$ have gro*n from 6S K &7" million in &((J to over 6SK &'"" million in '""J, he credit can be given to setting up of a Lational Venture 2apital Fund for the Soft*are and I, , Industry HLFSI I in association *ith various financial institutions of Small Industries and Development Bank of India HSIDBII, he facts reveal that V2 disbursements as on September A", '""' made by LFSI totaled /s '7D,A? mn, Source www.evaluesevrve.com

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

)indings
During the preparation of my report I have analy3ed many things *hich are follo*ing<$ % number of people in India feel that financial institution are not only conservatives but they also have a bias for foreign technology 1 they do not trust on the abilities of entrepreneurs,

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Some venture fails due to fe* e+it options, eams are ignorant of international standards, he team usually a t*o or three man team, It does not possess the he team is often found to have technical required depth In top management, short sited,

skills but does not possess the overall organi3ation building skills team is often

Venture capitalists in India consider the entrepreneur5s integrity 1urge to gro* as the most critical aspect or venture evaluation,

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

=imitations of Study
&, ', he biggest limitation *as time because the time *as not sufficient as there *as lot of information to be got 1 to have it interpretation he data required *as secondary 1 that *as not easily available,

A, Study by its nature is suggestive 1 not conclusive D, )+penses *ere high in collecting 1 searching the data,

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Suggestions
&, he investment should be in turnaround stage, Since there are many sick industries in India and the number is gro*ing each year, the venture capitalists that have speciali3ed kno*ledge in management can help sick industries, It *ould also be highly profitable if the venture capitalist replace management either good ones in the sick industries, ', It is recommended that the venture capitalists should retain their basic feature that is tasking high risk, spirit of venture capitalism, possible in high risk pro-ects, A, here should be a greater role for the venture capitalists in the promotion of entrepreneurship, he Venture capitalists should promote entrepreneur forums, clubs and institutions of learning to enhance the quality of entrepreneurship, he present situation may compel venture capitalists to opt for less risky opportunities but is against the he established fact is big gains are

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

+i'liograp"y
1.

3OURNAL"
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<2 BOO4"
I,M, ;anday$ venture capital development process in India I, M, ;anday$ venture capital the Indian e+perience,

=2 .ARIOU" NE9" PAPER" >2 INTERNET

***,indiainfoline,com

***,vcapital,com

***,investopedia,com

***,vcinstitute,com

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

ANNEXU E I
.enture %apita& ir$s
)+amples of venture capital firms include<

%ccede ;artners %ustin Ventures %tlas Venture Battery Ventures Benchmark 2apital 2harles /iver Ventures Doughty :anson echnology Ventures Fidelity Ventures :ealth 2ap :ummer =imbled Insight Venture ;artners Mobius Venture 2apital Mohr Davido* Ventures Sevin /osen Funds

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Sequoia 2apital relys

ANNEJURE II
Some important Venture 2apital Funds in India &, %;ID2 Venture 2apital 0imited, , Babukhan )state, :yderabad 7"" ""& ', 2anbank Venture 2apital Fund 0imited, IInd Floor, 9areem o*ers, Bangalore, A, !u-arat Venture 2apital Fund &((#, %shram /oad, %hmedabad AJ" ""( D, Industrial Venture 2apital 0imited, hyagaraya /oad, 2hennai ?"" "&# 7, !u-arat Venture 2apital Fund &((7 %shram /oad %hmedabad AJ" ""( ?, 9arnataka Information echnology Venture 2apital Fund 2unningham /d Bangalore #, India %uto %ncillary Fund Lariman ;oint, Mumbai D"" "'& J, Information echnology Fund, Lariman ;oint, Mumbai D"""'& (, amilnadu Info ech Fund Lariman ;oint, Mumbai D"""'& &", .rissa Venture 2apital Fund Lariman ;oint Mumbai D"""'& &&, 6ttar ;radesh Venture 2apital Fund Lariman ;oint, Mumbai D"""'& &', SI2.M Venture 2apital Fund Lariman ;oint Mumbai D"" "'&

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon

Conclusion
Venture capital can play a more innovation and development role in a developing country like India, It could help the rehabilitation of sick unit through people *ith ideas and turnaround management skill, % large number of small enterprises in India because sick unit even before the commencement of production of production, Venture capitalist could also be in line *ith the developments taking place in their parent companies, Set another area *here can play a significant role in developing countries is the service sector including tourism, publishing, healthcare etc, they could also provide financial assistance to people coming out of the universities, technical institutes etc, *ho *ish to start their o*n venture *ith or *ithout high$tech content, but involving high risk, his *ould encourage the entrepreneurial spirit, It is not only initial funding *hich is need from the venture capitalists, but the should also simultaneously provide management and marketing e+pertise$a real critical aspect of venture capitalists, but they also simultaneously provide management and marketing e+pertise$a real critical aspect of venture capital in developing countries, =hich can improve their effectiveness by setting up venture capital cell in /1D and other scientific generation, providing syndicated or consortium financing and acing as business incubators,

Pro)e%t Report * Institute o Te%hno&o'y and Mana'e$ent, (ur'aon