A PROJECT

ON
STUDY OF PROBLEM & PROSPECTS VENTURE CAPITAL IN INDIA

SUBMITTED FOR THE COMPLETION OF THE REQUIREMENT FOR THE

DEGREE OF
MASTER OF BUSINESS ADMINISTRATION
(Session 2012-2014)

Submitted By
Name: Ravinder Kumar
Uni Roll No: 1685
MBA 2012-14

BABA FARID COLLEGE OF MANAGEMENT AND TECHNOLOGY

MUKTSAR ROAD, DEON, BATHINDA
PUNJAB
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CERTIFICATE
This is to certify that Name Ravinder Kumar U.I.D.122562029 has preceded under my
supervision his / her project report on "STUDY OF PROBLEM & PROSPECTS VENTURE
CAPITAL IN INDIA in specialization area FINANCE.
The work embodied in this report is original and is of the standard expected -of an MBA
student and has not been submitted in part or full to this or any other University for the award
of any degree or diploma. He has completed all requirements of guidelines for research
project report and the work is fit for evaluation.
Name:
Signature of Supervisor/Guide

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CANDIDATE'S DECLARATION
This is certified that I Ravinder Kumar, the student of Department of Management Studies,
studying in MBA (4th Sem.), has undergone research project on title STUDY OF
PROBLEM & PROSPECTS VENTURE CAPITAL IN INDIA for the completion of
degree of Master of Business Administration to BABA FARID COLEEGE OF
MANAGEMENT AND TECHNOLOGY, BATHINDA , PUNJAB.
I solemnly declare that the work done by me is original and no copy of it has been submitted
to any other university for award of any other degree/fellowship or a similar title and topic.

Ravinder Kumar
Specialization: Finance

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ACKNOWLEDGEMENT
I am highly grateful to MR.SAURAV BANSAL (H.O.D) & all the faculty members of
Management of Business Administration department of BABA FARID COLLEGE OF
MANAGEMENT & TECHNOLOGY, DEON for providing this opportunity to make a
Major Project Report on Study of Problem & Prospects Venture Capital in India
Every study is incomplete without having a well plan and concrete exposure to the student.
Management studies are not exception. Scope of the project at this level is very wide ranging.
On the other hand it provide sound basis to adopt the theoretical knowledge and on the other
hand it gives an opportunities for exposure to real time situation.
I obliged to Mr. SANDEEP ARORA for his criticism & discussion that have constantly
inspired me throughout the tuner of my world. I am also very thankful to for making
available the guidance and encouragement since the day of my joining throughout my work.
My increased spectrum of knowledge in this field is the result of there constant supervision
and direction that has helped me to absorb relevant and high quality information.
I am extremely grateful to BABA FARID COLLEGE OF MANAGEMENT &
TECHNOLOGY, BATHINDA (DEON) for granting me permission to be part of this
college.
Thanking you
RAVINDER KUMAR
M.B.A 4th Sem

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TABLE OF CONTENT

CHAPTERS

TITLE

PAGE NO.

CHAPTER 1:

Introduction

01-21

CHAPTER 2:

Reliance Venture Capital

22-25

CHAPTER3:

Review of Literature

26-30

CHAPTER 4:

Significance of Study

31-32

CHAPTER 5:

Objective of Study

33-34

CHAPTER 6:

Research Methodology

35-37

Research Design
Data Collection
Limitations of Study
CHAPTER 7:

Analysis & Interpretation

38-53

CHAPTER 8:

Suggestions

54-55

CHAPTER 9:

Findings

56-57

CHAPTER10:

Conclusion

58-59

CHAPTER11:

Bibliography

60

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CHAPTER:- 1
INTRODUCTION

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INTRODUCTION
Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk,
growth startup companies.

The venture capital fund makes money by owning equity in the

companies it invests in, which usually have a novel technology or business model in high
technology industries, such as biotechnology, IT, software, etc. The typical venture capital
investment occurs after the seed funding round as growth funding round (also referred to as
Series A round)

in the interest of generating a return through an eventual realization event, such

as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore, all
venture capital is private equity, but not all private equity is venture capital.
In addition to angel investing and other seed funding options, venture capital is attractive for new
companies with limited operating history that are too small to raise capital in the public
markets and have not reached the point where they are able to secure a bank loan or complete a
debt offering.

In exchange for the high risk that venture capitalists assume by investing in

smaller and less mature companies, venture capitalists usually get significant control over
company decisions, in addition to a significant portion of the company's ownership (and
consequently value).
Venture capital is also associated with job creation (accounting for 2% of US GDP), the
knowledge economy,

and used as a proxy measure of innovation within an economic sector or

geography. Every year, there are nearly 2 million businesses created in the USA, and 600
800 get venture capital funding. According to the National Venture Capital Association, 11% of
private sector jobs come from venture backed companies and venture backed revenue
accounts for 21% of US GDP.
It is also a way in which public and private sectors can construct an institution that
systematically creates networks for the new firms and industries, so that they can progress.
This institution helps in identifying and combining pieces of companies, like finance,
technical expertise, know-hows of marketing and business models. Once integrated, these
enterprises succeed by becoming nodes in the search networks for designing and building
products in their domain.
A number of technocrats are seeking to set up shop on their own and capitalize on
opportunities. In the highly dynamic economic climate that surrounds us today, few
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traditional business models may survive. Countries across the globe are realizing that it is
not the conglomerates and the gigantic corporations that fuel economic growth any more.
The essence of any economy today is the small and medium enterprises. This growing trend
can be attributed to rapid advances in technology in the last decade. Knowledge driven
industries like InfoTech, health-care, entertainment and services have become the cynosure of
bourses worldwide. In these sectors, it is innovation and technical capability that are big
business-drivers. This is a paradigm shift from the earlier physical production and economies
of scale model. However, starting an enterprise is never easy.
There are a number of parameters that contribute to its success or downfall. Experience,
integrity, prudence and a clear understanding of the market are among the sought after
qualities of a promoter. However, there are other factors, which lie beyond the control of the
entrepreneur. Prominent among these is the timely infusion of funds. This is where the
venture capitalist comes in, with money, business sense and a lot more.

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WHAT IS VENTURE CAPITAL???

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

The Concept of Venture Capital

Venture capital means many things to many people. It is in fact nearly impossible to come
across one single definition of the concept.
Jane Koloski Morris, editor of the well known industry publication, Venture Economics,
defines venture capital as 'providing seed, start-up and first stage financing' and also
'funding the expansion of companies that have already demonstrated their business
potential but do not yet have access to the public securities market or to credit oriented
institutional funding sources.
The European Venture Capital Association describes it as risk finance for entrepreneurial
growth oriented companies. It is investment for the medium or long term return seeking to
maximize medium or long term for both parties. It is a partnership with the entrepreneur in
which the investor can add value to the company because of his knowledge, experience and
contact base.

Meaning of Venture Capital:

Venture capital is money provided by professionals who invest alongside management in
young, rapidly growing companies that have the potential to develop into significant
economic contributors. Venture capital is an important source of equity for start-up
companies.
Professionally managed venture capital firms generally are private partnerships or closelyheld corporations funded by private and public pension funds, endowment funds,

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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.

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Private Equity Investing

Venture capital investing has grown from a small investment pool in the 1960s and early
1970s to a mainstream asset class that is a viable and significant part of the institutional and
corporate investment portfolio. Recently, some investors have been referring to venture
investing and buyout investing as "private equity investing." This 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 will allocate 2% to 3% of their
institutional portfolio for investment in alternative assets such as private equity or venture
capital as part of their overall asset allocation. Currently, over 50% of investments in venture
capital/private equity comes from institutional public and private pension funds, with the
balance coming from endowments, foundations, insurance companies, banks, individuals and
other entities who seek to diversify their portfolio with this investment class.

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.
In truth, venture capital and private equity firms are pools of capital, typically organized as a
limited partnership that invests in companies that represent the opportunity for a high rate of
return within five to seven years. The venture capitalist may look at several hundred
investment opportunities before investing in only a few selected companies with favorable
investment opportunities. Far from being simply passive financiers, venture capitalists foster
growth in companies through their involvement in the management, strategic marketing and
planning of their investee companies. They are entrepreneurs first and financiers second.
Even individuals may be venture capitalists. In the early days of venture capital investment,
in the 1950s and 1960s, individual investors were the archetypal venture investor. While this
type of individual investment did not totally disappear, the modern venture firm emerged as
the dominant venture investment vehicle. However, in the last few years, individuals have
again become a potent and increasingly larger part of the early stage start-up venture life
cycle. These "angel investors" will mentor a company and provide needed capital and
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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 firsthand 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. Owners 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.

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A BRIEF HISTORY
The concept of venture capital is not new. Venture capitalists often relate the story of
Christopher Columbus. In the fifteenth century, he sought to travel westwards instead of
eastwards from Europe and so planned to reach India. His far-fetched idea did not find favor
with the King of Portugal, who refused to finance him. Finally, Queen Isabella of Spain
decided to fund him and the voyages of Christopher Columbus are now empanelled in
history.
The modern venture capital industry began taking shape in the post World War II years. It is
often said that people decide to become entrepreneurs because they see role models in other
people who have become successful entrepreneurs. Much the same thing can be said about
venture capitalists. The earliest members of the organized venture capital industry had several
role models, including these three:
A venture may be defined as a project prospective of converted into a process with an
adequate assumed risk and investment. With few exceptions, private equity in the first half of
the 20th century was the domain of wealthy individuals and families.
The Vanderbilts, Whitneys, Rockefellers, and Warburgs were notable investors in private
companies in the first half of the century. In 1938, Laurence S. Rockefeller helped finance the
creation of both Eastern Air Lines and Douglas Aircraft, and the Rockefeller family had vast
holdings in a variety of companies. Eric M. Warburg founded E.M. Warburg & Co. in 1938, which
would ultimately become Warburg Pincus, with investments in both leveraged buyouts and venture
capital.

Origins of Modern Private Equity

Before World War II, money orders (originally known as "development capital") were primarily
the domain of wealthy individuals and families. It was not until after World War II that what
is considered today to be true private equity investments began to emerge marked by the
founding of the first two venture capital firms in 1946: American Research and Development
Corporation

(ARDC) and J.H. Whitney & Company.

ARDC was founded by Georges Doriot, the "father of venture capitalism" (former dean of
Harvard Business School

and founder of INSEAD), with Ralph Flanders and Karl Compton (former
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president of MIT), to encourage private sector investments in businesses run by soldiers who
were returning from World War II.
ARDC's significance was primarily that it was the first institutional private equity investment
firm that raised capital from sources other than wealthy families although it had several
notable investment successes as well. ARDC is credited with the first trick when its 1957
investment of $70,000 in Digital Equipment Corporation (DEC) would be valued at over $355
million after the company's initial public offering in 1968 (representing a return of over 1200
times on its investment and an annualized rate of return of 101%).
Former employees of ARDC went on and established several prominent venture capital firms
including Greylock Partners (founded in 1965 by Charlie Waite and Bill Elfers) and Morgan,
Holland Ventures, the predecessor of Flagship Ventures (founded in 1982 by James Morgan).
ARDC continued investing until 1971 with the retirement of Doriot. In 1972, Doriot merged
ARDC with Textron after having invested in over 150 companies.
J.H. Whitney & Company

was founded by John Hay Whitney and his partner Benno Schmidt. Whitney

had been investing since the 1930s, founding Pioneer Pictures in 1933 and acquiring a 15%
interest in Technicolor Corporation with his cousin Cornelius Vanderbilt Whitney. By far Whitney's
most famous investment was in Florida Foods Corporation.
The company developed an innovative method for delivering nutrition to American soldiers,
which later came to be known as Minute Maid orange juice and was sold to The Coca-Cola
Company

in 1960. J.H. Whitney & Company continues to make investments in leveraged buyout

transactions and raised $750 million for its sixth institutional private equity fund in 2005.

Early Venture Capital and The Growth of Silicon Valley

A highway exit for Sand Hill Road in Menlo Park, California, where many Bay Area venture capital
firms are based
One of the first steps toward a professionally-managed venture capital industry was the
passage of the Small Business Investment Act of 1958. The 1958 Act officially allowed the U.S.
Small Business Administration

(SBA) to license private "Small Business Investment Companies"

(SBICs) to help the financing and management of the small entrepreneurial businesses in the
United States.

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During the 1960s and 1970s, venture capital firms focused their investment activity primarily
on starting and expanding companies. More often than not, these companies were exploiting
breakthroughs in electronic, medical, or data-processing technology. As a result, venture
capital came to be almost synonymous with technology finance.
An early West Coast venture capital company was Draper and Johnson Investment Company,
formed in 1962 by William Henry Draper III and Franklin P. Johnson, Jr. In 1965, Sutter Hill
Ventures acquired the portfolio of Draper and Johnson as a founding action. Bill Draper and
Paul Wythes were the founders, and Pitch Johnson formed Asset Management Company at
that time.
It is commonly noted that the first venture-backed startup is Fairchild Semiconductor (which
produced the first commercially practical integrated circuit), funded in 1959 by what would
later become Venrock Associates.[13] Venrock was founded in 1969 by Laurance S. Rockefeller, the
fourth of John D. Rockefeller's six children as a way to allow other Rockefeller children to
develop exposure to venture capital investments.
It was also in the 1960s that the common form of private equity fund, still in use today, emerged.
Private equity firms

organized limited partnerships to hold investments in which the investment

professionals served as general partner and the investors, who were passive limited partners, put
up the capital.
The compensation structure, still in use today, also emerged with limited partners paying an
annual management fee of 1.02.5% and a carried interest typically representing up to 20% of
the profits of the partnership.
The growth of the venture capital industry was fueled by the emergence of the independent
investment firms on Sand Hill Road, beginning with Kleiner, Perkins, Caufield & Byers and Sequoia
Capital

in 1972. Located in Menlo Park, CA, Kleiner Perkins, Sequoia and later venture capital

firms would have access to the many semiconductor companies based in the Santa Clara Valley as
well as early computer firms using their devices and programming and service companies.
Throughout the 1970s, a group of private equity firms, focused primarily on venture capital
investments, would be founded that would become the model for later leveraged buyout and
venture capital investment firms. In 1973, with the number of new venture capital firms
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increasing, leading venture capitalists formed the National Venture Capital Association (NVCA).
The NVCA was to serve as the industry trade group for the venture capital industry. Venture
capital firms suffered a temporary downturn in 1974, when the stock market crashed and
investors were naturally wary of this new kind of investment fund.
It was not until 1978 that venture capital experienced its first major fundraising year, as the
industry raised approximately $750 million. With the passage of the Employee Retirement Income
Security Act

(ERISA) in 1974, corporate pension funds were prohibited from holding certain

risky investments including many investments in privately held companies.

In 1978, the US Labor Department relaxed certain of the ERISA restrictions, under the
"prudent man rule," thus allowing corporate pension funds to invest in the asset class and
providing a major source of capital available to venture capitalists.
1980s
The public successes of the venture capital industry in the 1970s and early 1980s (e.g., Digital
Equipment Corporation, Apple Inc., Genentech)

gave rise to a major proliferation of venture capital

investment firms. From just a few dozen firms at the start of the decade, there were over 650
firms by the end of the 1980s, each searching for the next major "home run". The number of
firms multiplied, and the capital managed by these firms increased from $3 billion to $31
billion over the course of the decade.
The growth of the industry was hampered by sharply declining returns, and certain venture
firms began posting losses for the first time. In addition to the increased competition among
firms, several other factors impacted returns. The market for initial public offerings cooled in
the mid-1980s before collapsing after the stock market crash in 1987 and foreign
corporations, particularly from Japan and Korea, flooded early stage companies with capital.
In response to the changing conditions, corporations that had sponsored in-house venture
investment arms, including General Electric and Paine Webber either sold off or closed these
venture capital units. Additionally, venture capital units within Chemical Bank and Continental
Illinois National Bank,

among others, began shifting their focus from funding early stage

companies toward investments in more mature companies. Even industry founders J.H.
Whitney & Company
capital

and Warburg Pincus began to transition toward leveraged buyouts and growth

investments.
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The Venture Capital Boom and The Internet Bubble (1995 To 2000)
By the end of the 1980s, venture capital returns were relatively low, particularly in
comparison with their emerging leveraged buyout cousins, due in part to the competition for hot
startups, excess supply of IPOs and the inexperience of many venture capital fund managers.
Growth in the venture capital industry remained limited throughout the 1980s and the first
half of the 1990s, increasing from $3 billion in 1983 to just over $4 billion more than a
decade later in 1994.
After a shakeout of venture capital managers, the more successful firms retrenched, focusing
increasingly on improving operations at their portfolio companies rather than continuously
making new investments.
Results would begin to turn very attractive, successful and would ultimately generate the
venture capital boom of the 1990s. Yale School of Management Professor Andrew Metrick
refers to these first 15 years of the modern venture capital industry beginning in 1980 as the
"pre-boom period" in anticipation of the boom that would begin in 1995 and last through the
bursting of the Internet bubble in 2000.
The late 1990s were a boom time for venture capital, as firms on Sand Hill Road in Menlo Park
and Silicon Valley benefited from a huge surge of interest in the nascent Internet and other
computer technologies. Initial public offerings of stock for technology and other growth
companies were in abundance, and venture firms were reaping large returns.

The Private Equity Crash (2000 To 2003)

The technology-heavy NASDAQ Composite index peaked at 5,048 in March 2000, reflecting the
high point of the dot-com bubble. The Nasdaq crash and technology slump that started in
March 2000 shook virtually the entire venture capital industry as valuations for startup
technology companies collapsed. Over the next two years, many venture firms had been
forced to write-off large proportions of their investments, and many funds were significantly
"under water" (the values of the fund's investments were below the amount of capital invested).
Venture capital investors sought to reduce size of commitments they had made to venture
capital funds, and, in numerous instances, investors sought to unload existing commitments
for cents on the dollar in the secondary market. By mid-2003, the venture capital industry had
shriveled to about half its 2001 capacity. Nevertheless, PricewaterhouseCoopers's Money
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Tree Survey shows that total venture capital investments held steady at 2003 levels through
the second quarter of 2005.
Although the post-boom years represent just a small fraction of the peak levels of venture
investment reached in 2000, they still represent an increase over the levels of investment
from 1980 through 1995.
As a percentage of GDP, venture investment was 0.058% in 1994, peaked at 1.087% (nearly
19 times the 1994 level) in 2000 and ranged from 0.164% to 0.182% in 2003 and 2004. The
revival of an Internet-driven environment in 2004 through 2007 helped to revive the venture
capital environment. However, as a percentage of the overall private equity market, venture
capital has still not reached its mid-1990s level, let alone its peak in 2000.
Venture capital funds, which were responsible for much of the fundraising volume in 2000
(the height of the dot-com bubble), raised only $25.1 billion in 2006, a 2%-decline from 2005
and a significant decline from its peak.

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
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government of India promoted the venture capital during 1986-87 by creating a venture
capital fund in the context of structural development and growth of small-scale business
enterprises.
Since then several venture capital firms/funds (VCFs) are incorporated by Financial
Institutions (FIs), Public Sector Banks (PSBs), and Private Banks and Private Financial
companies.
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
VC industry, through its investment in high growth companies as well as companies adopting
newer technologies backed by first generation entrepreneurs, has made a substantial
contribution to economy.
In India, however, the potential of venture capital investments is yet to be fully
realized. There are around thirty venture capital funds, which have garnered over Rs. 5000
Crores. The venture capital investments in India at Rs. 1000.05 crore as in 1997, representing
0.1 percent of GDP, as compared to 5.5 per cent in countries such as Hong Kong.

INVESTMENT PHILOSOPHY
Venture capitalists can be generalists, investing in various industry sectors, or various
geographic locations, or various stages of a companys life. Alternatively, they may be

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specialists in one or two industry sectors, or may seek to invest in only a localized geographic
area.
Not all venture capitalists invest in "start-ups." While venture firms will invest in companies
that are in their initial start-up modes, venture capitalists will also invest in companies at
various stages of the business life cycle. A venture capitalist may invest before there is a real
product or company organized (so called "seed investing"), or may provide capital to start up
a company in its first or second stages of development known as "early stage investing."
Also, the venture capitalist may provide needed financing to help a company grow beyond a
critical mass to become more successful ("expansion stage financing").
The venture capitalist may invest in a company throughout the companys life cycle and
therefore some funds focus on later stage investing by providing financing to help the
company grow to a critical mass to attract public financing through a stock offering.
Alternatively, the venture capitalist may help the company attract a merger or acquisition
with another company by providing liquidity and exit for the companys founders.
At the other end of the spectrum, some venture funds specialize in the acquisition, turnaround
or recapitalization of public and private companies that represent favorable investment
opportunities.
There are venture funds that will be broadly diversified and will invest in companies in
various industry sectors as diverse as semiconductors, software, retailing and restaurants and
others that may be specialists in only one technology.
While high technology investment makes up most of the venture investing in the U.S., and
the venture industry gets a lot of attention for its high technology investments, venture
capitalists also invest in companies such as construction, industrial products, business
services, etc. There are several firms that have specialized in retail company investment and
others that have a focus in investing only in "socially responsible" start-up endeavors.
The basic principal underlying venture capital invest in high-risk projects with the
anticipation of high returns. These funds are then invested in several fledging enterprises,
which require funding, but are unable to access it through the conventional sources such as
banks and financial institutions. Typically first generation entrepreneurs start such
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enterprises. Such enterprises generally do not have any major collateral to offer as security,
hence banks and financial institutions are averse to funding them. Venture capital funding
may be by way of investment in the equity of the new 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 new areas (worldwide venture
capital follows "hot industries" like InfoTech, electronics and biotechnology), the probability
of success is very low. All projects financed do not give a high return. Some projects fail and
some give moderate returns. The investment, however, is a long-term risk capital as such
projects normally take 3 to 7 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. They monitor and evaluate the project on a continuous basis.
The venture capitalist is however not worried about failure of an investee company, because
the deal which succeeds, nets a very high return on his investments high enough to make up
for the losses sustained in unsuccessful projects. The returns generally come in the form of
selling the stocks when they get listed on the stock exchange or by a timely sale of his stake
in the company to a strategic buyer.
The idea is to cash in on an increased appreciation of the share value of the company at the
time of disinvestment in the investee company. If the venture fails (more often than not), the
entire amount gets written off. Probably, that is one reason why venture capitalists assess
several projects and invest only in a handful after careful scrutiny of the management and
marketability of the project.
To conclude, a venture financier is one who funds a start up company, in most cases
promoted by a first generation technocrat promoter with equity. A venture capitalist is not a
lender, but an equity partner. He cannot survive on minimalism. He is driven by
maximization: wealth maximization. Venture capitalists are sources of expertise for the
companies they finance. Exit is preferably through listing on stock exchanges. This method
has been extremely successful in USA, and venture funds have been credited with the success
of technology companies in Silicon Valley. The entire technology industry thrives on it

Length of Investment:
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Venture capitalists will help companies grow, but they eventually seek to exit the investment
in three to seven years. An early stage investment make take seven to ten years to mature,
while a later stage investment many only take a few years, so the appetite for the investment
life cycle must be congruent with the limited partnerships appetite for liquidity. The venture
investment is neither a short term nor a liquid investment, but an investment that must be
made with careful diligence and expertise.

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STAGES OF VENTURE CAPITAL FUNDING

The Venture Capital funding varies across the different stages of growth of a firm. The
various stages are::
1. Pre seed Stage: Here, a relatively small amount of capital is provided to an
entrepreneur to conceive and market a potential idea having good future prospects.
The funded work also involves product development to some extent.
2. Seed Stage: Financing is provided to complete product development and commence
initial marketing formalities.
3. Early Stage / First Stage : Finance is provided to companies to initiate
commercial manufacturing and sales.
4. Second Stage: In the Second Stage of Financing working capital is provided for the
expansion of the company in terms of growing accounts receivable and inventory.
5. Third Stage: Funds provided for major expansion of a company having increasing
sales volume. This stage is met when the firm crosses the break even point.
6. Bridge / Mezzanine Financing or Later Stage Financing: Bridge /
Mezzanine Financing or Later Stage Financing is financing a company just before its
IPO (Initial Public Offer). Often, bridge finance is structured so that it can be repaid,
from the proceeds of a public offering.

Page | 23

METHODS OF VENTURE FINANCING

Venture capital is typically available in three forms in India, they are:
1. 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.
2. 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.
3. 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.
4. 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.

Page | 24

VENTURE CAPITAL FUND OPERATION

Venture capitalists are very selective in deciding what to invest in. A common figure is that
they invest only in about one in four hundred ventures presented to them.
They are only interested in ventures with high growth potential. Only ventures with high
growth potential are capable of providing the return that venture capitalists expect, and
structure their businesses to expect. Because many businesses cannot create the growth
required having an exit event within the required timeframe, venture capital is not suitable for
everyone.
Venture capitalists usually expect to be able to assign personnel to key management positions
and also to obtain one or more seats on the company's board of directors. This is to put
people in place, a phrase that has sometimes quite unfortunate implications as it was used in
many accounting scandals to refer to a strategy of placing incompetent or easily bypassed
individuals in positions of due diligence and formal legal responsibility, enabling others to rob
stockholders blind. Only a tiny portion of venture capitalists, however, have been found liable
in the large scale frauds that rocked American (mostly) finance in 2000 and 2001.
Venture capitalists expect to be able to sell their stock, warrants, options, convertibles, or
other forms of equity in three to ten years: this is referred to as harvesting. Venture
capitalists know that not all their investments will pay-off. The failure rate of investments can
be high; anywhere from 20% to 90% of the enterprises funded fail to return the invested
capital.
Many venture capitalists try to mitigate this problem through diversification. They invest in
companies in different industries and different countries so that the systematic risk of their
total portfolio is reduced. Others concentrate their investments in the industry that they are
familiar with. In either case, they work on the assumption that for every ten investments they
make, two will be failures, two will be successful, and six will be marginally successful. They
expect that the two successes will pay for the time given to, and risk exposure of the other

Page | 25

eight. In good times, the funds that do succeed may offer returns of 300 to 1000% to
investors.
Venture capital partners (also known as "venture capitalists" or "VCs") may be former chief
executives

at firms similar to those which the partnership funds. Investors in venture capital

funds are typically large institutions with large amounts of available capital, such as state and
private pension funds, university endowments, insurance companies and pooled investment vehicles.
Most venture capital funds have a fixed life of ten yearsthis model was pioneered by some
of the most successful funds in Silicon Valley through the 1980s to invest in technological trends
broadly but only during their period of ascendance, to cut exposure to management and
marketing risks of any individual firm or its product.
In such a fund, the investors have a fixed commitment to the fund that is "called down" by
the VCs over time as the fund makes its investments. In a typical venture capital fund, the
VCs receive an annual "management fee" equal to 2% of the committed capital to the fund
and 20% of the net profits of the fund. Because a fund may run out of capital prior to the end
of its life, larger VCs usually have several overlapping funds at the same timethis lets the
larger firm keep specialists in all stage of the development of firms almost constantly
engaged. Smaller firms tend to thrive or fail with their initial industry contactsby the time
the fund cashes out, an entirely new generation of technologies and people is ascending,
whom they do not know well, and so it is prudent to re-assess and shift industries or
personnel rather than attempt to simply invest more in the industry or people it already knows

Page | 26

CHAPTER:- 2
RELIANCE VENTURE
CAPITAL

Page | 27

INTRODUCTION TO RELIANCE VENTURE CAPITAL

As the worlds of finance, technology, markets and people expand and converge, Reliance
Group's horizons are constantly expanding. Reliance Venture Asset Management Limited
(RVAM) has been promoted by the Reliance Group to leverage emerging and high growth
potential technologies, business models, world class management teams and markets to look
ahead at future opportunities that can be enriched and enhanced by taking advantage of the
group and its ecosystem.
The company was ranked 30th in the Red Herring Top 100 Global Venture Capital Firms in
2009-2010 and was the only India based corporate venture capital company to feature in the
ranking.
Our critical differentiators

Amongst the few Indian VC funds going global, contrary to the popular trend that is
reverse in nature

Investments in leading edge technologies, disruptive business models and technology

enabled companies around the world

Reliance Venture Asset Management, wholly owned subsidiary of Reliance Capital, is the
venture capital arm of the Reliance Group with an investment mandate to incubate or invest
into high-growth, new business ideas and is stage, sector and geography agnostic
RVAM currently manages assets of approx. Rs. 2 billion (US$ 35 million)

Page | 28

PORTFOLIO
Reliance Venture Asset Management has partnered in the establishment, growth and
success of numerous innovative business ideas worldwide. Till date, we have invested and
advised in deals to the tune of over $1 billion:

Page | 29

INVESTMENT APPROACH
With an overall strategy to enable innovation, Reliance Venture Asset Management Ltd. seeks
and invests in promising technology, media and entertainment, telecom, infrastructure
(logistics and defense), clean technology and mass consumption driven sectors. Our focus is
both - on established as well as emerging or disruptive technologies and business model. We
invest across the globe in various stages of the companys lifecycle.
We believe that in a rapidly-changing knowledge economy, organizations can prosper only by
mobilizing diverse competencies, skill sets and expertise, by driving synergies across
attractive opportunities. To further this belief, we seek to create an ecosystem whereby it not
only maximizes investor returns but also provides a fertile environment for the growth of our
investee companies.
We believe in relationship capital and empowerment of companies to access our worldwide
customer base, technical knowledge, access to capital, and leverage the power of the Reliance
Group ecosystem. We strongly believe in the spirit of entrepreneurship and our mission is to
help build businesses that not only deliver outstanding financial value but also emerge as
category leaders.

Page | 30

CHAPTER:- 3
REVIEW OF
LITERATURE

Page | 31

LITERATURE REVIEW
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 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 and Kaura, (March 2006)

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 hitech.

Page | 32

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 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 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 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 manage for better

Page | 33

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 through 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, (July, 2005)

One of the integral aspects of venture funding is venture capitalist's involvement with the
entrepreneurial team. The relationship through broad interaction was explored by Rosenstein
(1988). A comparison was drawn between small and large firms with regard to board
interaction. While it is important in large firms the relative power of small conventional
firms, board interaction generally is undermined. Rosenstein et. a. (1993) studied the finer
aspects of boards in the venture funded companies in the USA. From 98 candidates in the
sample, the study attempted to bring out the changes in the board size, board composition and
control and their relation to value added to the funded unit. The empirical analysis yielded
results wherein the size of the board increased after venture funding, indicating more
transparency in board operations.
Through a case based approach Lloyd et. al. (1995) explored the aspect of deal
structuring and post investment staging of venture capitalists through venture capitalists' coinvesting strategy. The study finds that even through venture capitalists fix tight milestones
and time lines they themselves contribute to many of the delays that are experienced by a
typical start up firm. This is because of the hierarchical co-investing partners and the lack of
understanding within the venture capitalist co-investors as to what role they individually play
in the development of their portfolio company.
Page | 34

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 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.

Page | 35

CHAPTER:- 4
SIGNIFICANCE OF
STUDY

SIGNIFICANCE OF STUDY
Page | 36

Venture capitalists not only support high technology projects they also fianc any risky idea,
they provide funds (a) if one needs additional capital to expand his existing business or one
has a new & promising project to exploit (b) if one cannot obtain a conventional loan the
requirement terms would create a burden during the period the firm is struggling to grown.
It is the ambition of many talented people in India to set up their own venture if they could
get adequate & reliable support. Financial investment provides loans & equity. But they do
not provide management support, which is often needed by entrepreneurs. But the venture
capital industries provide such support along with capital also. Venture capitalist acts a
partner not a financier.

Page | 37

CHAPTER:- 5
OBJECTIVE OF
STUDY

OBJECTIVE OF THE STUDY

Page | 38

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

Page | 39

CHAPTER:- 6
RESEARCH
METHODOLOGY

RESEARCH METHODOLOGY

Page | 40

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 Kerlinger, 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

Descriptive research design
Casual research design

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

DATA COLLECTION
Page | 41

SECONDARY DATA
Secondary data is the data which is already collected by someone and complied for different
purposes which are used in research for this study. It includes:

Internet
Magazine
Journal
Newspaper

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.

Page | 42

CHAPTER:- 7
ANALYSIS &
INTERPRETATION

Page | 43

OBJECTIVE NO. 1
To Find out the venture capital investment volume in India
Methods of Financing
Instruments

Rs million

Per cent

Equity Shares

6,318.12

63.18

Redeemable Preference Shares

2,154.46

21.54

Non Convertible Debt

873.01

8.73

Convertible Instruments

580.02

5.8

Other Instruments

75.85

0.75

Total

10,000.46

100

Interpretation:-: This diagram shows the venture capital financing in equity share and
secondly they invest in redeemable preference shares to get higher returns.

Page | 44

CONTRIBUTORS OF FUNDS
Contributors

Rs. million

Per cent

Foreign Institutional Investors

13,426.47

52.46%

All India Financial Institutions

6,252.90

24.43%

Multilateral Development Agencies

2,133.64

8.34%

Other Banks

1,541.00

6.02%

Foreign Investors

570

2.23%

Private Sector

412.53

1.61%

Public Sector

324.44

1.27%

Nationalized Banks

278.67

1.09%

Non Resident Indians

235.5

0.92%

State Financial Institutions

215

0.84%

Other Public

115.52

0.45%

Insurance Companies

85

0.33%

Mutual Funds

4.5

0.02%

Total

25,595.17

100.00%

Interpretation:-: This table shows the highest contribution of fund FII and secondly AIFI
to develop the Industry.

Page | 45

FINANCING BY INVESTMENT STAGE

Investment Stages

Rs million

Number

Start-up

3,813.00

297

Later stage

3,338.99

154

Other early stage

1,825.77

124

Seed stage

963.2

107

Turnaround financing

59.5

Total

10,000.46

691

Interpretation:-: This diagram shows the highest finance is received by the venture in
startup stage of any venture.

Page | 46

FINANCING BY INDUSTRY
Industry

Rs million

Industrial products, machinery

2,599.32

Computer Software

1,832

Consumer Related

1,412.74

Medical

623.8

Food, food processing

500.06

Other electronics

436.54

Tel & Data Communications

385.09

Biotechnology

376.46

Energy related

249.56

Computer Hardware

203.36

Miscellaneous

1,380.85

Total

10,000.46

Page | 47

Interpretation:-: In this diagram highest finance received by industrial products and

machinery and secondly finance received by computer software.

Page | 48

FINANCING BY STATES
Investment

Rs million

Maharashtra

2,566

Tamil Nadu

1531

Andhra Pradesh

1372

Gujarat

1102

Karnataka

1046

West Bengal

312

Haryana

300

Delhi

294

Uttar Pradesh

283

Madhya Pradesh

231

Kerala

135

Goa

105

Rajasthan

87

Punjab

84

Orissa

35

Dadra & Nagar Haveli

32

Himachal Pradesh

28

Pondicherry

22

Bihar

16
Page | 49

Overseas

413

Total

9994

Interpretation:-: In this diagram highest finance given by the Maharashtra to the ventures
to promote the state economy growth.

Page | 50

OBJECTIVE NO.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
Page | 51

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

Page | 52

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 preponing 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:
a. 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.

Page | 53

Page | 54

Assessing Venture Capital

Venture funds, both domestic and offshore, have been around in India for some years now.
However it is only in the past 12 to 18 months, they have come into the limelight. The
rejection ratio is very high, about 10 in 100 get beyond pre evaluation stage, and 1 gets
funded.
Venture capital funds are broadly of two kinds - generalists or specialists. It is critical for the
company to access the right type of fund, ie who can add value. This backing is invaluable as
focused/specialized funds open doors, assist in future rounds and help in strategy. Hence, it is
important to choose the right venture capitalist.
The standard parameters used by venture capitalists are very similar to any investment
decision. The only difference being exit. If one buys a listed security, one can exit at a price
but with an unlisted security, exit becomes difficult.

The Management
Most businesses are people driven, with success or failure depending on the performance of
the team. It is important to distinguish the entrepreneur from the professional management
team. The value of the idea, the vision, putting the team together, getting the funding in place
is amongst others, some key aspects of the role of the entrepreneur. Venture capitalists will
insist on a professional team coming in, including a CEO to execute the idea. One-man
armies are passe. Integrity and commitment are attributes sought for. The venture capitalist
can provide the strategic vision, but the team executes it. As a famous Silicon Valley saying
goes "Success is execution, strategy is a dream".

The Idea
The idea and its potential for commercialization are critical. Venture funds look for a scalable
model, at a country or a regional level. Otherwise the entire game would be reduced to a
manpower or machine multiplication exercise. For example, it is very easy for Hindustan
Lever to double sales of Liril - a soap without incremental capex, while Gujarat Ambuja
needs to spend at least Rs4bn before it can increase sales by 1mn ton. Distinctive competitive
advantages must exist in the form of scale, technology, brands, distribution, etc which will
make it difficult for competition to enter.
Page | 55

Valuation
All investment decisions are sensitive to this. An old stock market saying "Every stock is a
buy at a price and vice versa". Most deals fail because of valuation expectation mismatch. In
India, while calculating returns, venture capital funds will take into account issues like rupee
depreciation, political instability, which adds to the risk premia, thus suppressing valuations.
Linked to valuation is the stake, which the fund takes. In India, entrepreneurs are still
uncomfortable with the venture capital "taking control" in a seed stage project.

Exit
Without exit, gains cannot be booked. Exit may be in the form of a strategic sale or/and IPO.
Taxation issues come up at the time. Any fund would discuss all exit options before closing a
deal. Sometimes, the fund insists on a buy back clause to ensure an exit.

Portfolio Balancing
Most venture funds try and achieve portfolio balancing as they invest in different stages of
the company life cycle. For example, a venture capital has invested in a portfolio of
companies predominantly at seed stage; they will focus on expansion stage projects for future
investments to balance the investment portfolio. This would enable them to have a phased
exit. In summary, venture capital funds go through a certain due diligence to finalize the deal.
This includes evaluation of the management team, strategy, execution and commercialization
plans. This is supplemented by legal and accounting due diligence, typically carried out by an
external agency. In India, the entire process takes about 6 months. Entrepreneurs are advised
to keep that in mind before looking to raise funds. The actual cash inflow might get delayed
because of regulatory issues. It is interesting to note that in USA, at times angels write checks
across the table.

Page | 56

Financing Options in General

The possibility of raising a substantial part of project finances in India through both equity
and debt instruments are among the key advantages of investing in India.
The Indian banking system has shown remarkable growth over the last two decades. The
rapid growth and increasing complexity of the financial markets, especially the capital market
have brought about measures for further development and improvement in the working of
these markets. Banks and development financial institutions led by ICICI, IDBI and IFCI
were providers of term loans for funding projects. The options were limited to conventional
businesses, i.e. manufacturing centric. Services sector was ignored because of the "collateral"
issue.
Equity was raised from the capital markets using the IPO route. The bull markets of the 90s,
fuelled by Harshad Mehta and the FIIs, ensured that (ad) venture capital was easily available.
Manufacturing companies exploited this to the full.
The services sector was ignored, like software, media, etc. Lack of understanding of these
sectors was also responsible for the same. If we look back to 1991 or even 1992, the situation
as regards financial outlay available to Indian software companies was poor. Most software
companies found it extremely difficult to source seed capital, working capital or even venture
capital.
Most software companies started off undercapitalized, and had to rely on loans or overdraft
facilities to provide working capital. This approach forced them to generate revenue in the
short term, rather than investing in product development. The situation fortunately has
changed.

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OBJECTIVE NO. 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 Paradesh, Karnataka,
Delhi,

Kerala

and

Tamil

Nadu.

The

other

states

are

to

follow

soon.

In the year 2000, the finance ministry announced the liberalization of tax 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. A Bangalore based media
company, Gray cell Ltd., has recently obtained VC investment totaling about $ 1.7 mn. The
company would be creating and marketing branded web based consumer products in the near
future.
The following points can be considered as the harbingers of VC financing in India:

Existence of a globally competitive high technology.

Globally competitive human resource capital.

Second Largest English speaking, scientific & technical manpower in the world.

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

Initiatives taken by the Government in formulating policies to encourage investors

and entrepreneurs.

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Initiatives of the SEBI to develop a strong and vibrant capital market giving the
adequate liquidity and flexibility for investors for entry and exit.

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 from US $ 150 million in 1998 to
over US$ 1200 million in 2008. 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). The facts reveal that
VC disbursements as on September 30, 2002 made by NFSIT totaled Rs 254.36 mn.

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CHAPTER:- 8
SUGGESTIONS

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SUGGESTIONS
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.
It is recommended that the venture capitalists should retain their basic feature that is taking
high risk. The present situation may compel venture capitalists to opt for less risky
opportunities but is against the spirit of venture capitalism. The established fact is big gains
are possible in high risk projects.
There should be a greater role for the venture capitalists in the promotion of entrepreneurship.
The Venture capitalists should promote entrepreneur forums, clubs and institutions of
learning to enhance the quality of entrepreneurship.

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CHAPTER:- 9
FINDINGS

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

A number of people in India feel that financial institution are not only conservatives but
they also have a bias for foreign technology & they do not trust on the abilities of
entrepreneurs.

Some venture fails due to few exit options. Team ignorant of international standards. 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.

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CHAPTER:- 10
CONCLUSION

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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 with ideas and turnaround
management skill. A 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 with
the developments taking place in their parent companies.
Yet another area where can play a significant role in developing countries is the service sector
including tourism, publishing, healthcare etc. they could also provide financial assistance to
people coming out of the universities, technical institutes etc. who wish to start their own
venture with or without high-tech content, but involving high risk. This would encourage the
entrepreneurial spirit. It is not only initial funding which is need from the venture capitalists,
but the should also simultaneously provide management and marketing expertise-a real
critical aspect of venture capitalists, but they also simultaneously provide management and
marketing expertise-a real critical aspect of venture capital in developing countries. Which
can improve their effectiveness by setting up venture capital cell in R&D and other scientific
generation, providing syndicated or consortium financing and acing as business incubators.

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CHAPTER:-11
BIBLIOGRAPHY

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BIBLIOGRAPHY
http://en.wikipedia.org/wiki/Venture_capital
http://www.relianceventure.com
www.vcapital.com
www.investopedia.com

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