A

PRESENTION
ON
VENTURE CAPITAL
SUBMITTED BY :-
PATEL NILESH – 128
PATEL SWAPNIL – 145
PATEL RAVI – 42
PATEL BHAVESH - 99

SUBMITTED TO :- PROF. K M PATEL

 INTRODUCTION ABOUT VENTURE CAPITAL

Venture capital is a fund was born with a fundamental objective

initial capital & support in building capital base to the entrepreneurs, having a sound
background of professional education, expertise & initiative to lunch the business based
on fast changing technology.

DEFINITION

Definitions of venture capital are all very similar. The definition of venture capital “as
capital provided by firms who invest alongside management in young companies that are not
quoted on the stock market. The objective is high return from the investment. Value is created by
the young company in partnership with the venture capitalist’s money and professional
expertise.”

Problems and confusion emerge when the terms “venture capital” and “private equity” are
being used. In the USA “venture capital” refers to early stage investment, in Europe it also
includes later stage investment
 HISTORY

Venture capital was an American phenomenon before it emerged in

other countries. The first modern venture capital firm, American Research and Development
(ARD), was created in 1946 in a partnership of MIT, the Harvard Business School and local
business leaders. A small group of venture capitalists made high-risk investments into emerging
companies that were based on technology developed for World War II. The results were mixed.
The most profitable one was an investment of $ 70,000 in Digital Equipment Company (DEC) in
1957 which grew in value to $ 355 million. Other venture capital firms followed this example
but never developed into an economically significant force. The annual flow of money into
venture capital during the first three post-war decades never exceeded a few hundred million
dollars. In the mid-1970s venture capital almost ceased to exist.

In the US, the breakthrough for venture capital occured in 1979 when the
US Department of Labor clarified the “prudent man rule” of the Employment Retirement Income
Security Act (ERISA). Previously, the rule prevented pension fund managers from investing in
risky businesses. In 1979, the Department of Labor decided that portfolio diversification was a
good thing and that allocating a small fraction of a portfolio (about 5%) in venture capital funds
would not be seen as imprudent. Thus was removed a major obstacle for huge amount of money
flowing into the venture capital industry. But even then the maximum amounts of venture capital
in any year of the 1980s was a mere $5 billion in 1988 (Mandel 2000:18).

Another reason why venture capital started to surge again in the late
1980s/early 1990s was the decline in military spending in the US (since 1985). Many engineers
who had developed high-tech weapons for the Pentagon were suddenly looking for a civilian use
of their knowledge and talents. People with ideas and skills were looking for money.
 Venture capital in INDIA

The venture capital industry in India is still at a nascent stage. With a

view to promote innovation, enterprise and conversion of scientific technology and knowledge
based ideas into commercial production, it is very important to promote venture capital activity
in India. India’s recent success story in the area of information technology has shown that there
is a tremendous potential for growth of knowledge based industries. This potential is not only
confined to information technology but is equally relevant in several areas such as bio-
technology, pharmaceuticals and drugs, agriculture, food processing, telecommunications,
services, etc. Given the inherent strength by way of its skilled and cost competitive manpower,
technology, research and entrepreneurship, with proper environment and policy support, India
can achieve rapid economic growth and competitive global strength in a sustainable manner.

A flourishing venture capital industry in India will fill the gap between
the capital requirements of technology and knowledge based startup enterprises and funding
available from traditional institutional lenders such as banks. The gap exists because such
startups are necessarily based on intangible assets such as human capital and on a technology-
enabled mission, often with the hope of changing the world. Very often, they use technology
developed in university and government research laboratories that would otherwise not be
converted to commercial use. However, from the viewpoint of a traditional banker, they have
neither physical assets nor a low-risk business plan.
 Features of venture capital

 Investments in equity.

 Participation in management.

 Investments in new technology/new product.

 Investments are illiquid.

 High-risk & high growth potential.

 Make money by selling shareholding.

 Commercialization of new technologies.

 Investment in small & medium sized organization.

 No venture financing to trading, financial services sector.

Investments in equity: - Investments are generally in equity instruments where investors

return is taxed as capital gain rather than ordinary income.

Participation in management: - Investors are directly involved in the management of the

enterprise.

Investment in new technology or new products: - Investments is done in new

enterprise using new technology to produce new products in expectation of higher gain of
spectacular return.

Investments are illiquid:- Venture capital investment is illiquid, e.g. not subject
to repayment on demand as is the case with an overdraft or following a loan
repayment schedule. The investment is realized only on enlistment of security or it
is lost, if organization is liquidated for unsuccessful working.
High-risk & high growth potential:- Investment is made only in high risk but high-
growth potential project, All kinds of risks viz technological, managerial, financial are studided.
Sensitivity analysis is also used to study the impact on return under different scenarios only if the
high risk factors are offset by an even higher probability of success/growth than the project
would be taken up.

Make money by selling shareholding: - The basis objective of venture capital

financing is to money by selling the shareholding either to promoters or in the
market after the unit has realized its full potential.

Commercialization of new technologies: - Venture capital assistance is available

only for commercialization of new technologies and not financing R&D in
isolation. The objective of a venture capital company is to make profit from
activities. Pure R&D would not help it to achieve this objective.

Investment in small & medium sized organization: - Investments are usually

made in small and medium level firms. This helps a venture capital company to
pick up the equity at par. Besides, large units do note generally need venture
capital assistance, since they already have access to fund and can provide sufficient
security for a financial institution loan.

No venture financing to trading, financial services sector: - Venture Capital

Company does not finance enterprise which are engaged in trading, investment,
brokerage, financial services, agency or liasion work.
 Profile of major Indian venture capital funds

 IDBI venture capital fund

 Technology development & information company of Indian limited (TDICI)

 Unit trust of India (UTI)

 Risk capital & technology finance corporation ltd (RCTFC)

 Small industrial development bank of India (SIDBI)

 Andhra Pradesh industrial development corporation (APIDC)

 Gujarat venture finance limited (GVFL)

 Commercial banks sponsored capital funds

 Private sector venture capital funds

 THE PROCESS OF VENTURE CAPITAL FINANCING

The venture capital activity is a sequential process involving the following six steps

 Deal origination
 Screening
 Evaluation (due diligence)
 Deal structuring
 Post-investment activity
 Exist plan

Deal origination

A continuous flow of deal is essential for venture capital business. Deals may originate
in various ways :( 1) referral system, (2) active search and (3) intermediaries. Referral system is
an important source of deals. Deals may be referred to VCFs by their parent organizations, trade
parent industry associations, friends etc. yet another important source of deal flow is the active
search through networks, trade fairs, conferences, seminars, foreign visits etc. a third sources,
used by venture capitalists in developed countries like USA, is certain intermediaries who match
VCFs and the potential entrepreneurs.

Screening

Venture capital is a service industry, and VCFs generally operate with a small staff. In
order to save on time and to select the best ventures, before going for an in-dept analysis, VCFs
carry out initial screening of all projects on the basis of broad criteria. For example, the screening
process may limit projects to areas in which the venture capitalist is familiar in terms of
technology, or product, or market scope. The size of investment, geographical location and stage
of financing could also be used as the broad screening criteria.
Due diligence

Once a proposal has passed through initial screening, it is subjected to detailed

evaluation or due diligence process. Most ventures are new and the entrepreneurs may lack
operating experience. Hence, a sophi, formal evaluation is neither possible nor desirable. The
venture capitalists, thus, may rely on a subjective, but comprehensive, evaluation sticated. They
evaluate the equity of entrepreneur before appraising the characteristics of the product, market or
technology. Most venture capitalist asks for business plan to make and assessment of the
possible risk and return on the venture. Business plan contain detailed information about the
proposed venture.

The evaluation of ventures by VCFs in India includes the following steps:

 Preliminary evaluation The applicant is required to provide a brief profile of the

proposed venture to establish prima facie eligibility. Promoters are also encouraged to
have a face-to-face discussion to clarify issues.
 Detailed evaluation Once the project has crossed the qualifying hurdle through initial
evaluation, the proposal is evaluated in greater detail. A lot of stress is placed on techno-
economic evaluation. Most of the VCFs involve experts for the technical appraisal,
whenever necessary.
Deal structuring

Once the venture has been evaluated as viable, the venture capitalist and the venture
company negotiate the terms of the deal, viz., the amount, form and the price of the investment.
This process is termed as deal structuring. The agreement also includes the protective

covenants and earn-out arrangements. Covenants include the venture capitalist’s right to
control the venture company and to change its management if needed, buyback arrangements,
acquisition, making initial public offerings (IPOs) etc. earned-out arrangement specify the
entrepreneur’s equity share and the objectives to be achieved.

The venture companies like deal to be structured in such a way that their interest is
protected. They would like to earn reasonable return, minimize taxes, have enough liquidity to
operate their businesses and remain in commanding position of their business.

Post-investment activities

Once the deal has been structured and agreement finalized, the venture capitalist
generally assumes the role of partner and collaborator. He also gets involved in shaping the
direction of the venture. This may be done via a formal representation on the board of director,
or informal influence in improving the quality of marketing, finance and other managerial
functions. The degree of venture capitalist’s involvement depends on his policy. It may not,
however, be desirable for a venture capitalist to get involve in the day-to-day operation of the
venture.
Exit plan

Venture capitalists typically aim at making medium to long term capital gain. They
generally want to cash-out their gains in five to ten years after the initial investment. They play a
positive role in directing the company towards particular exit routes. A venture may exit in one
of the following ways:

1. Initial public offerings (IPOs)

2. Acquisition by another company
3. Purchase of the venture capitalist’s share by promoter
4. Purchase of the venture capitalist’s share by outsider.

The secondary, over-the-counter (OTC), market which specializes in the trading of small
companies plays a critical role in exit through IPOs and acquisitions.
 Venture capital in India 1996 - 2008

Year (Rs. million) (U.S. $ million)

1996 700 20

1997 3200 80

1998 6100 150

1999 14000 320

2000 32000 750

2001 50000 120

2008 450000 10000

Geographical Differences
Venture capital, as an industry, originated in the United States and American firms
have traditionally been the largest participants in venture deals and the bulk of
venture capital has been deployed in American companies. However, increasingly,
non-US venture investment is growing and the number and size of non-US venture
capitalists have been expanding.

Venture capital has been used as a tool for economic development in a variety of
developing regions. In many of these regions, with less developed financial
sectors, venture capital plays a role in facilitating access to finance for small and
medium enterprises (SMEs), which in most cases would not qualify for receiving
bank loans.

United States

Venture capitalists invested some $6.6 billion in 797 deals in U.S. during the third
quarter of 2006, according to the MoneyTree Report by PricewaterhouseCoopers
and the National Venture Capital Association based on data by Thomson Financial.

A recent National Venture Capital Association survey found that majority (69%) of
venture capitalists predict that venture investments in U.S. will level between $20-
29 billion in 2007.

India

The investment of capitalists in Indian industries in the first half of 2006 is $3

billion and is expected to reach $6.5 billion at the end of the year. Most VC
firms in India are either divisions or subsidiaries of Silicon Valley funds.
They are primarily centered in Bangalore and Mumbai. Some VCs also
operate from Delhi and other parts of the National Capital Region.

China
In China, venture funding more than doubled from $420,000 in 2002 to almost $1
million in 2003. For the first half of 2004, venture capital investment rose 32%
from 2003. By 2005, led by a wave of successful IPOs on the NASDAQ and
revised government regulations, China-dedicated funds raised US$4 million in
committed capital.