“VENTURE CAPITAL”

A project report submitted to

University of Mumbai for partial completion of the degree of

Bachelor in Management Studies

Under The Faculty of Commerce

By

MISS. ANUKUMARI SINGH

Under the guidance of

PROF: SUNANDAR. DONGARE

SANPADACOLLEGEOFCOMMERCE&TECHNOLOGY
Plotno:3,4&5, sector-2, Sanpada (West)
Navi Mumbai–400703

FEBRUARY,2020

1
 DECLARATION

I undersigned Miss /Mr. ANUKUMARI SINGH here by, declared

that the work embodied in this project work titled
“VENTURE CAPITAL”, forms my own
Contribution to the research work carried out under the guidance of
__________________is the result of my own research work and has not
been previously submitted to any other university for any other
degree/ Diploma to this or any other university.

Whenever reference has been made to previous works of others, it

Has been clearly indicated as such and included in the bibliography.
I, hereby further declare that all information to this document has
Been obtained and presented in accordance with academic rules and
Ethical conduct.

SIGNATURE
ANUKUMARI SINGH

Certified by:

SIGNATURE
PROF. SUNANDAR. DONGARE

2
 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so

Numerous and depth is so enormous.

I would like to acknowledge the following as being idealistic

Channels and fresh dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving

Me chance to do this project.

I would like to thank my Principal, Prof. Raosaheb Shindegalvekar

for
Providing the necessary facilities required for completion of this
project.
I take this opportunity to thank our Coordinator
Prof. Mustak Deraiya,
For his moral support and guidance.

I would also like to express my sincere gratitude towards my project

Guide Prof Sunanda R. Dongare whose guidance and care made the
Project successful.

I would like to thank my College library, for having provided various

Reference books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or
Indirectly helped me in the completion of the project especially my
Parents and peers who supported me throughout my project.

3
 ORIENTAL EDUCATION SOCIETY’S
SANPADA COLLEGE OF COMMERCE & TECHNOLOGY
PLOT NO.3,4, 5, SECTOR 2, SANPADA, NAVI MUMBAI
4007053

CERTIFICATE
This is to certify that Ms./Mr. ANUKUMARI SINGH has worked an
duly Completed her/his Project work for the degree of bachelor of
management Studied under the faculty of commerce in the subject of
finance and her /his project is entitled,

“ VENTURE CAPITAL” under my

supervision.

I further certify that the entire work has been done by learner under my
guidance And that no part of it has been submitted previously for any
Degree or Diploma of Any University.

It is her / his own work and facts reported by her / his personal
findings and investigations.

PROF. SUNANDAR. DONGARE

4
Date of Submission:

INDEX

CONTENTS PG.NO

INTRODUCTION 07
1
OBJECTIVES 14
2
LITERATURE REVIEW 20
3
RESEARCH 25
4 METHODOLOGY
LIMITATION OF STUDY 38
5
DATA INTERPRETATION 44
6 (ANALYSIS)
FINDING 56
7
RECOMMODATION 65
8

CONCLUSION 75
9
REFERANCE 77
10

5
VENTURE
CAPITAL

6
 CHAPTER – 01

INTRODUCTI
ON

7
Venture capital is a type of financing that is provided by firms or funds to early stage that are deemed to
have high growth potential, or which have demonstrated high growth (in terms of number of employees,
annual revenue, or both). Venture capital firms or funds invest in these early-stage companies in exchange
for equity, or an ownership stake, in those companies. Venture capitalists take on the risk of financing risky
start-ups in the hopes that some of the firms they support will become successful.
Because startups face high uncertainty, VC investments have high rates of failure. The startups are usually
based on an innovative technology or business model and they are usually from the high technology
industries, such as information technology (IT), clean technology or biotechnology.
The typical venture capital investment occurs after an initial "seed funding" round. The first round of
institutional venture capital to fund growth is called the Series A round. Venture capitalists provide this
financing in the interest of generating a return through an eventual "exit" event, such as the company selling
shares to the public for the first time in an initial public offering (IPO) or doing a merger and acquisition
(also known as a "trade sale") of the company. Alternatively, an exit may come about via the private equity
secondary market.
In addition to angel investing, equity crowdfunding 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 early-stage
companies, venture capitalists usually get significant control over company decisions, in addition to a
significant portion of the companies' ownership (and consequently value). Start-ups like Uber, Airbnb,
Flipkart, Xiaomi & Didi Chuxing are highly valued startups, commonly known as unicorns, where venture
capitalists contribute more than financing to these early-stage firms; they also often provide strategic advice
to the firm's executives on its business model and marketing strategies.
Venture capital is also a way in which the private and public sectors can construct an institution that
systematically creates business networks for the new firms and industries, so that they can progress and
develop. This institution helps identify promising new firms and provide them with finance, technical
expertise, mentoring, marketing "know-how", and business models. Once integrated into the business
network, these firms are more likely to succeed, as they become "nodes" in the search networks for
designing and building products in their However, venture capitalists' decisions are often biased, exhibiting
for instance overconfidence and illusion of control, much like entrepreneurial decisions in general.

 HISTORY

A startup may be defined as a project prospective 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 Wallenbergs, Vanderbilts, Whitneys, Rockefellers, and Warburgs were notable investors in private
companies in the first half of the century. In 1938, Laurance 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. The Wallenberg family
started Investor AB in 1916 in Sweden and were early investors in several Swedish companies such as ABB,
Atlas Copco, Ericsson, etc. in the first half of the 20th century. (History of venture capital)

Origins of modern private equity

8
Before World War II (1939–1945), money orders (originally known as "development capital") remained
primarily the domain of wealthy individuals and families. Only after 1945 did "true" private equity
investments begin to emerge, notably with the founding of the first two venture capital firms in 1946:
American Research and Development Corporation (ARDC) and J.H.

Whitney & Company.

Georges Doriot, the "father of venture capitalism" (and former assistant dean of Harvard
Business School), founded the graduate business school INSEAD in 1957. Along with Ralph Flanders and
Karl Compton (former president of MIT), Doriot founded ARDC in 1946 to encourage private-sector
investment in businesses run by soldiers returning from World War II. ARDC became the first institutional
private-equity investment firm to raise capital from sources other than wealthy families, although it had
several notable investment successes as well.ARDC is credit] 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 to establish 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, when Doriot retired. In 1972 Doriot merged ARDC with Textron after having invested in over 150
companies.
John Hay Whitney (1904–1982) and his partner Benno Schmidt (1913–1999) founded J.H.
Whitney & Company in 1946. 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. Florida Foods Corporation proved Whitney's most famous investment. The company developed an
innovative method for delivering nutrition to American soldiers, later known as Minute Maid orange juice
and was sold to The Coca-Cola Company in 1960. J.H. Whitney & Company continued to make investments
in leveraged buyout transactions and raised $750 million for its sixth institutional private equity fund in
2005.

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
The Small Business Investment Act of 1958 provided tax breaks that helped contribute to the rise of private
equity firms.
During the 1950s, putting a venture capital deal together may have required the help of two or three other
organizations to complete the transaction. It was a business that was growing very rapidly, and as the
business grew, the transactions grew exponentially.
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, 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. 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.
9
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 1.0–
2.5% 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 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
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 restrictions of
the ERISA, 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
affected returns. The market for initial public offerings cooled in the mid1980s 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 and Warburg Pincus began to transition toward leveraged buyouts and growth
capital investments.

Venture capital boom and the Internet Bubble

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
10
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.
Private equity crash 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 the 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 mid2003, the venture capital industry had shriveled to about half
its 2001 capacity.
Nevertheless, PricewaterhouseCoopers' MoneyTree Survey[20] 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.

 Funding

Obtaining venture capital is substantially different from raising debt or a loan. Lenders have a legal right to
interest on a loan and repayment of the capital irrespective of the success or failure of a business. Venture
capital is invested in exchange for an equity stake in the business. The return of the venture capitalist as a
shareholder depends on the growth and profitability of the business. This return is generally earned when the
venture capitalist "exits" by selling its shareholdings when the business is sold to another owner.
Venture capitalists are typically very selective in deciding what to invest in, with a Stanford survey of
venture capitalists revealing that 100 companies were considered for every company receiving financing.
Ventures receiving financing must demonstrate an excellent management team, a large potential market, and
most importantly high growth potential, as only such opportunities are likely capable of providing financial
returns and a successful exit within the required time frame (typically 3–7 years) that venture capitalists
expect.
Because investments are illiquid and require the extended time frame to harvest, venture capitalists are
expected to carry out detailed due diligence prior to investment. Venture capitalists also are expected to
nurture the companies in which they invest, in order to increase the likelihood of reaching an IPO stage

11
when valuations are favourable. Venture capitalists typically assist at four stages in the company's
development:
Because there are no public exchanges listing their securities, private companies meet venture capital firms
and other private equity investors in several ways, including warm referrals from the investors' trusted
sources and other business contacts; investor conferences and symposia; and summits where companies

pitch directly to investor groups in face-to-face meetings, including a variant known as "Speed Venturing",
which is akin to speed-dating for capital, where the investor decides within 10 minutes whether he wants a
follow-up meeting. In addition, some new private online networks are emerging to provide additional
opportunities for meeting investors.
This need for high returns makes venture funding an expensive capital source for companies, and most
suitable for businesses having large up-front capital requirements, which cannot be financed by cheaper
alternatives such as debt. That is most commonly the case for intangible assets such as software, and other
intellectual property, whose value is unproven. In turn, this explains why venture capital is most prevalent in
the fast-growing technology and life sciences or biotechnology fields.
If a company does have the qualities venture capitalists seek including a solid business plan, a good
management team, investment and passion from the founders, a good potential to exit the investment before
the end of their funding cycle, and target minimum returns in excess of 40% per year, it will find it easier to
raise venture capital.

 Financing stages

There are typically six stages of venture round financing offered in Venture Capital, that roughly correspond
to these stages of a company's development.
Seed funding: The earliest round of financing needed to prove a
new idea, often provided by angel investors. Equity crowdfunding is also emerging as an option for seed
funding.
Start-up: Early stage firms that need funding for expenses associated with marketing and product
development
Growth (Series A round): Early sales and manufacturing funds. This is typically where VCs come in.
Series A can be thought of as the first institutional round. Subsequent investment rounds are called Series B,
Series C and so on. This is where most companies will have the most growth.
Second-Round: Working capital for early stage companies that are selling product, but not yet turning a
profit. This can also be called Series B round and so on.
Expansion: Also called Mezzanine financing, this is expansion money for a newly profitable company
Exit of venture capitalist: VCs can exit through secondary sale or an IPO or an acquisition. Early stage
VCs may exit in later rounds when new investors (VCs or Private Equity investors) buy the shares of
existing investors. Sometimes a company very close to a from the IPO.
Bridge Financing is when a startup seeks funding in between full VC rounds. The objective is to raise
smaller amount of money instead of a full round and usually the existing investors participate.
Between the first round and the fourth round, venture-backed companies may also seek to take venture debt.

 Firms and funds

12
A venture capitalist is a person who makes venture investments, and these venture capitalists are expected to
bring managerial and technical expertise as well as capital to their investments. A venture capital fund refers
to a pooled investment vehicle (in the United States, often an LP or LLC) that primarily invests the financial
capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans.
These funds are typically managed by a venture capital firm, which often employs individuals with
technology backgrounds (scientists, researchers), business training and/or deep industry experience.

A core skill within VC is the ability to identify novel or disruptive technologies that have the potential to
generate high commercial returns at an early stage. By definition, VCs also take a role in managing
entrepreneurial companies at an early stage, thus adding skills as well as capital, thereby differentiating VC
from buy-out private equity, which typically invest in companies with proven revenue, and thereby

potentially realizing much higher rates of returns. Inherent in realizing abnormally high rates of returns is the
risk of losing all of one's investment in a given startup company. As a consequence, most venture capital
investments are done in a pool format, where several investors combine their investments into one large fund
that invests in many different startup companies. By investing in the pool format, the investors are spreading
out their risk to many different investments instead of taking the chance of putting all of their money in one
start up firm.

13
 CHAPTER – 02

OBJECTIVE

14
It is a private or institutional investment made into early-stage / start-up companies (new ventures). As
defined, ventures involve risk (having uncertain outcome) in the expectation of a sizeable gain. Venture
Capital is money invested in businesses that are small; or exist only as an initiative, but have huge potential
to grow. The people who invest this money are called venture capitalists (VCs). The venture capital
investment is made when a venture capitalist buys shares of such a company and becomes a financial partner
in the business.
Venture Capital investment is also referred to risk capital or patient risk capital, as it includes the risk of
losing the money if the venture doesn’t succeed and takes medium to long term period for the investments to
fructify.
Venture Capital typically comes from institutional investors and high net worth individuals and is pooled
together by dedicated investment firms.
It is the money provided by an outside investor to finance a new, growing, or troubled business. The venture
capitalist provides the funding knowing that there’s a significant risk associated with the company’s future
profits and cash flow. Capital is invested in exchange for an equity stake in the business rather than given as
a loan.
Venture Capital is the most suitable option for funding a costly capital source for companies and most for
businesses having large up-front capital requirements which have no other cheap alternatives. Software and
other intellectual property are generally the most common cases whose value is unproven. That is why;
Venture capital funding is most widespread in the fast-growing technology and biotechnology fields.

 Features of Venture Capital

Nature: Venture Capital is a long-term investment. Since the project is risky, it may
take time to earn profits. Therefore, it takes time to get the refund of capital as well as
return on it. The investors can exist on success of the project by off-loading them
investment. But it takes long time to get the success.

Form: Venture Capital is mainly in the form of equity capital. Investors can subscribe
the equity capital and provide the necessary funds to complete the project. The
amount of equity invested by the Venture Capitalist is normally up to 49%of the total
equity capital required for the project.

Borrowers: The borrowers are the new entrepreneurs who raise Venture Capital
because they cannot get such an amount from the general investors.

Type of project: Venture Capital projects are high risk, high technology and long

term projects.

Management: Venture Capital projects are managed jointly by the entrepreneurs and

15
Venture Capitalists. However, Venture Capitalist should not interfere in day to day
activities of the management. The Venture Capitalist can take active part in the
management and decision-making.

New venture: Venture Capital investment is generally made in new enterprises which
use new technology to produce new products, with an expectation of high gains or
sometimes, spectacular returns.

Continuous involvement: Venture Capitalists continuously involve themselves with

the client’s investments, either by providing loans or managerial skills or any other
support.

Mode of investment: Venture Capital is basically an equity financing method, the

investment being in relatively new companies when it is too early to go to the capital
market to raise funds. In addition, financing also takes the form of loan
finance/convertible debt to ensure a running yield on the portfolio of the Venture
Capitalists.

Objective: The basic objective of a Venture Capitalist is to make a capital gain in

equity investment at the time of exit, and regular on debt financing. It is a long-term
investment in growth-oriented small/medium firms. It is a long-term capital which is
injected to enable the business to grow at a rapid pace, mostly from the start-up stage.
Hands-on approach: Venture Capital institutions take active part in providing value added services such as
providing business skills to investee firms. They do not
interfere in management of the firms nor do they acquire a majority/controlling
interest in the investee firms. The rationale for the extension of hands-on management
is that Venture Capital investments tend to be highly non-liquid.

High risk-return ventures: Venture Capitalists finance high risk-return ventures.

Some of the ventures yield very high return in order to compensate for the high risks
related to the ventures. Venture Capitalists usually make huge capital gains at the time
of exit.

Nature of firms: Venture Capitalists usually finance small and medium-sized firms
during the early stages of their development, until they are established and are able to

raise finance from the conventional industrial finance market. Many of these firms are
new, high technology-oriented companies.
16
Liquidity: Liquidity of Venture Capital investment depends on the success or
otherwise of the new venture or product. Accordingly, there will be higher liquidity
where the new ventures are highly successful.

 Venture Capitalists
A Venture Capitalist is a person or investment firm that makes venture
investments, and these Venture Capitalists are expected to bring managerial and
technical expertise as well as capital to their investments. A Venture Capital fund
refers to a pooled investment vehicle that primarily invests the financial capital of
third-party investors in enterprises that are too risky for the standard capital
markets or bank loans. Venture Capital firms typically comprise small teams with
technology backgrounds (scientists, researchers) or those with business training or
deep industry experience.
A core skill within VCs is the ability to identify novel technologies that have
the potential to generate high commercial returns at an early stage. By definition, VCs
also take a role in managing entrepreneurial companies at an early stage, thus adding
skills as well as capital, thereby differentiating VC from buy-out private equity, which
typically invests in companies with proven revenue, and thereby potentially realizing
much higher rates of returns. Inherent in realizing abnormally high rates of returns is
the risk of losing all of one's investment in a given startup company. As a
consequence, most Venture Capital investments are done in a pool format, where
several investors combine their investments into one large fund that invests in many
different start up companies. By investing in the pool format, the investors are
spreading out their risk to many different investments versus taking the chance of
putting all of their money in one start up firm.

 Venture Capital Structure

Venture Capital firms are typically structured as partnerships, the general
partners of which serve as the managers of the firm and will serve as investment
advisors to the Venture Capital funds raised. Venture Capital firms in the United
States may also be structured as limited liability companies, in which case the firm's
managers are known as managing members. Investors in Venture Capital funds are
known as limited partners. This constituency comprises both high net worth
individuals and institutions with large amounts of available capital, such as State and
Private pension funds, University financial endowments, insurance companies

and pooled investment vehicles, called funds.

17
Most Venture Capital funds have a fixed life of 10 years, with the possibility
of a few years of extensions to allow for private companies still seeking liquidity. The
investing cycle for most funds is generally three to five years, after which the focus is
managing and making follow-on investments in an existing portfolio. This model was
pioneered by successful funds in Silicon Valley through the 1980s to invest in
technological trends broadly but only during their period of ascendance, and 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
initially unfunded and subsequently "called down" by the Venture Capital fund over
time as the fund makes its investments. There are substantial penalties for a limited
partner (or investor) which fails to participate in a capital call.
Normally can take anywhere from a month or so to several years for Venture
Capitalists to raise money from limited partners for their fund. At the time when all of
the money has been raised, the fund is said to be closed, and the 10-year lifetime
begins. Some funds have partial closure when one half (or some other amount) of the
fund has been raised. "Vintage year" generally refers to the year in which the fund
was closed and may serve as a means to stratify VC funds for comparison. This shows
the difference between a Venture Capital fund management company and the Venture
Capital funds managed by them.
From investors point of view funds can be traditional where all the investors
invest with equal terms or asymmetric where different investors have different terms.
Typically, the asymmetry is seen in cases where there's an investor that has other
interests such as tax income in case of public investors.
Venture Capitalist firms differ in their approaches. There are multiple factors, and
each firm is different. Some of the factors that influence VC decisions include:
1. Some VCs tend to invest in new ideas, or knowledge-based companies. Others
prefer investing in established companies that need support to go public or grow.
2. Some invest solely in certain industries.
3. Some prefer operating locally while others will operate nationwide or globally
4. VC expectations often vary. Some may want a quicker public sale of the company
or expect fast growth. The amount of help a VC provides can vary from one firm
to the next.

 Role of Venture Capital Firms

The general partners and other investment professionals of the Venture

Capital firm are often referred to as "Venture Capitalists" or "VCs". Typical career
backgrounds vary, but broadly speaking; Venture Capitalists come from either an
operational or a finance background. Venture Capitalists with an operational
background tend to be former founders or executives of companies similar to those
18
which the partnership finances or will have served as management consultants.
Venture Capitalists with finance backgrounds tend to have investment banking or
other corporate finance experience.
Although the titles are not entirely uniform from firm to firm, other positions at
Venture Capital firms include:

Venture partners: Venture partners are expected to source potential investment

opportunities ("bring in deals") and typically are compensated only for those deals
with which they are involved.

Principal: This is a mid-level investment professional position, and often

considered a "partner-track" position. Principals would be promoted from a senior
associate position or who has commensurate experience in another field, such
as investment banking, management consulting, or a market of particular interest
to the strategy of the Venture Capital firm.

Associate: This is typically the most junior apprentice position within a Venture
Capital firm. After a few successful years, an associate may move up to the
"senior associate" position and potentially principal and beyond. Associates often
have worked for 1–2 years in another field, such as investment
banking or management consulting.

Entrepreneur-in-Residence (EIR): EIRs are experts in a particular domain and

perform due diligence on potential deals. EIRs are engaged by Venture Capital
firms temporarily (six to 18 months) and are expected to develop and pitch startup
ideas to their host firm although neither party is bound to work with each other.
Some EIRs move on to executive positions within a portfolio company.

19
 CHAPTER – 03

LITERATURE
REVIEW

20
Venture capital finance in India was known since nineties. It is now has successfully emerged for all the
business firms that take up risky projects and have high growth prospects. The private organization which
does not want to take finance from the society may have their view on venture capital. It has potential to
become an important source for financing of small-scale enterprises (SSEs). Venture capital finance is often
thought of as ‘the early stage financing of new and young enterprises seeking to grow rapidly. According to
Pratt: There is a popular misconception that high-technology is the principal driving factor behind the
investment decision of a US venture capitalist. Only a small minority of venture capital investments are in
new concepts of technology where potential technical problems add a significant amount of risk to the new
business development.

 Review of literature
A Study on Determinants of Investment Decisions: Venture Capitalist’s Perspective by Prashant T. Patil,
Rd. V. N. Sankar, and Rd. Mahilika A. Sona wane. (2016), Venture Capital industry in India is
growing faster due to favourable economic conditions and conducive business environment. Entrepreneurial
background, idea / product viability, business sustainability and competition are the major determinants on
demand side considered by VC firms in screening of proposal for investment. And finally, the study also
reveals that investors are looking for managerial control in the venture where they are going to invest as their
investments are at risk in early and growth stage of investments.
Groh, A. P. and Von Liechtenstein, H. (2011), contributed to the knowledge of the capital flow from
institutional investors via venture capital (VC) funds as intermediaries to their final destination,
entrepreneurial ventures. They found the top criteria to be the expected deal flow and access to transactions,
a VC fund's historic track record, entrepreneur local market experience, the match of the experience of team
members with the proposed investment strategy, the team's reputation, and the mechanisms proposed to
align interest between the investors and the VC funds.
Sivakumar and Kithara, (2009) has given the inherent strength by way of its human capital, technical
skills, cost-competitive workforce, research and entrepreneurship. India can unleash a revolution of wealth
creation and rapid economic growth in a sustainable manner. There is a need for risk finance and venture
capital environment which can leverage innovation, promote high-fi technology and harness knowledge-
based ideas.
Subbalakshmi (2004) has published an edited volume on venture capital industry in India. The book
compiles various research articles in relation to the role of venture capital in fostering entrepreneurship
leading to overall economic growth. The origin and the regulatory framework of Indian venture capital
industry as well as the development of venture capital in US, Taiwan and China.
Kumar and Kauri (2003) this study found out that a sustained effort was continuously required in the target
market which was highly meticulous. This research concluded that Indian venture capitalists do not seemed
to be biased in favour of high technology ventures and also the numbers of successful ventures were not hi-
tech.
Mason and Harrison; (1999), Mishra et al.; (2005) venture capital plays a key role in the entrepreneurial
process by providing equity capital and managerial support for young, rapidly-growing, high risk and high-
tech private companies with the potential to develop into significant global businesses.
Ride and Hirsch (1994) described that venture capitalists eliminate the proposals that are unable to meet the
venture capital firms’ investment criteria. Some ventures were previously unsuccessful in certain sectors,

and seems generally unpromising. Some quick and broad criteria were frequently used to select the deals that
will be later on subjected to an in-depth evaluation.

21
Bygrave and Timmons, (1992) the nature of venture capital process involves transactions between
investors (limited partners), venture capital firms (general partners) and the portfolio
companies/entrepreneurs was highlighted in this study.

 Need for the study

1. The study has been conducted to create awareness and to gain the practical knowledge about venture
capital finance.
2. To identify the venture capital funds that are listed in the securities exchange board of India (SEBI)

 Objectives of the study:

1. To get a new insight and to be familiarize about venture capital funds.

2. To identify the top ten performing Venture Capital funds in India.
3. To know about the present scenario of venture capital funds in our nation.
4. To analyse growth of venture capital investment in different sectors of our economy.

 Growth of venture capital in India

The development of the organized venture capital industry in India, as is in existence today, was slow and
belaboured, circumscribed by resource constraints resulting from the overall framework of the socialistic
economic paradigms. Although funding for new businesses was available from banks and government-
owned development financial institutions, it was provided as a collateral-based money on project-
financing basis, which made it difficult for the newest entrepreneurs, especially those who were technology
and services based, to raise money for their ideas and businesses. Most entrepreneurs had to rely on their
own financial resources, and those of their families and well-wishers or private financiers to realize their
entrepreneurial dreams.
In 1972, a committee on Development of Small and Medium Enterprises highlighted the need to foster
venture capital as a source of funding new entrepreneurs and technology. This resulted in a few incremental
steps being taken over the next decade-and-a-half to facilitate venture capital funds into needy
technologically oriented small and medium Enterprises (SMEs), namely:
 National financial institutions like
1. Industrial Finance Corporation of India Ltd (IFCI-1948) provides medium- and long-term finance to
industries. Risk Capital Foundation, sponsored by IFCI, was set-up in 1975 to pro-mote and support new
technologies and businesses.

2. Industrial Credit and Investment Corporation of India Ltd (ICICI-1955) the primary objective is to meet
the foreign exchange requirements of industrial concerns and for promoting medium and large industries in
the private sector. Programme for Advancement of Commercial Technology (PACT) Scheme was
introduced by ICICI in 1985 In 1988, ICICI emerged as a venture capital provider with Unit Trust of India.
As now, there are a number of venture capital institutions in India. Financial banks like ICICI have stepped
in to this and have their own venture capital subsidiaries.

22
3. Industrial Development Bank of India (IDBI-1964) coordinates the activities of other financial
institutions, supplements their resources to plan and promote the medium and the large industries, the Seed
Capital Scheme and the National Equity Scheme was set up by IDBI in 1976. The idea of venture capital
gained momentum in the budget of 1986-87. A 5% cess was levied on all know-how imports to create the
corpus of the venture fund floated by IDBI in 1987. Later, a study was undertaken by the World Bank to
examine the possibility of developing venture capital in the private sector, based on which the
Government of India took a policy initiative and announced guidelines for venture capital funds (VCFs) in
India in 1988.

4. Industrial Reconstruction Bank of India (IRBI-1985) functions both as a lending and a reconstruction
agency and provides finance in term loans, in the form of term loans underwriting guarantees etc

5. Small Industries Development Bank of India (SIDBI-1990) for developing and financing small scale
industries.

 Specialized institutions like:

Risk Capital and Technology Finance Corporation Ltd (RCTC-1988) Provides risk capital and technology
finance for the project envisaging promotion, transfer and adaption of new technologies.

Technology Development and Information Company of India Ltd (TDICI-1988) the TDICI was set up
jointly with the ICICI and UTI to provide assistance in the form of project loan etc, to small and medium
industries conceived by technocrat entrepreneurs.

Tourism Finance Corporation of India Ltd (TFCI-1989) Provides assistance in the form of
rupee loans, underwriting securities, equipment leasing for developing tourism industry
including holiday report, hotels, amusement parks and entertainment complex.

 Venture capital financing in India: a study of venture capitalist's valuation,

structuring, and monitoring practices

Venture capital as a source of financing high technology, small and medium enterprises (SMEs) is well
established in the developed economies. Now, this activity is becoming a focus of attention in emerging
markets. India has registered a significant growth in terms of the amount and number of venture capital
funds. But there is no academic research to date, devoted to understanding how this new investor class
behave through the investment cycle. This research is the first-ever investigation of how venture capitalists
in India conduct the Valuation, Structuring and Monitoring of their investments. After introduction, the
thesis presents an overview of the Indian economy, followed by its financial landscape. The third chapter
covers a survey of the economic contribution that SMEs make and the funding problems they face, together
with a review of the Indian venture capital sector. An extensive literature review on venture capital research
follows.
After finding the research gaps, a theoretical framework, based on the adverse selection, moral hazard,
corporate governance, and the asymmetric information that characterises the risk capital market is used.
Eight hypotheses are developed to test how venture capitalists address the adverse selection through (a) a
variety of information sources used in preparing the valuation memorandum, and (b) applying various
quantitative and qualitative methods to determine the realistic value. How do they address moral hazard by

23
(a) using covenants in their deal structures, and (b) what financial products are used to minimise the risk?
Finally, how frequently and extensively do they monitor their investee companies to overcome the
information asymmetry and corporate governance problems?
Data from 40 of the most active 42 venture capitalists operating in India were gathered. Then, the data were
analysed using Chi Square, Cluster Analysis, ANOVA and Logistical Regression. The results present a
descriptive profile of the Indian venture capital sector, including the characteristics of the fund management
teams, the sectors and stages of investments and the tests of the hypotheses. This is followed by methodical
statistical analysis by splitting the sample based on seven demographic characteristics. The final chapter
includes the conclusion, recommendations and the implications of this research for the venture capitalists,
entrepreneurs and regulators.
Finally, future research areas are suggested that may further improve the understanding of the venture
capital market in India.

The private equity firm is typically made up of limited partners (“LPs”) and general partners (“GPs”). The
LPs are the outside investors. They provide the capital and typically comprises of institutional investors like,
insurance companies, endowment funds (Harvard, Stanford, Princeton and Yale all aggressively invest their
endowment in private equity), foundations, banks, retirement / pension funds, family investment offices as
well as high net worth individuals. They are termed limited partners in the sense that their liability extends
only to the capital they contribute. Generally, the minimum commitment for an LP is $1 million (A Primer
on the Structure of Private Equity Firms, Byte Code, March, 2014).
In Indian scenario, private equity transactions differ in nature and can be broadly categorized into three
types- early stage and venture capital; growth stage; and buyouts. The target companies for a majority of the
private equity transactions that take place in India are either private or closely held public unlisted
companies. Private equity investments in listed companies are relatively less frequent, due to acquisitions of
listed companies being highly regulated and restrictions on enforceability of a number of shareholder rights
typically sought by private equity investors. On account of regulatory reasons leveraged buyouts (LBOs) are
not common in Indian, unlike various other jurisdictions including the US and the UK. The most commons
structures used in private equity investments in Indian companies involve either a primary subscription or a
secondary purchase of existing securities or a combination of both. Lately, the trend of various private equity
investors has been not to take huge amount of direct exposure in the shape of pure equity, but instead to
structure their investments as a combination of equity shares and convertible instruments (namely,
compulsorily convertible preference shares or compulsorily convertible debentures) that may convert in
terms of pre-defined performant milestones or other parameters of a similar nature. Investing through
compulsorily convertible instruments is also often resorted to in cases where there is a mismatch between the
valuations of the target company as ascribed by the promoter and the private equity investor. In such
situations, middle path may be attained by way of an adjustment to the conversion formula attached to
compulsorily convertible instrument, depending on the target meeting the pre-agreed performance
milestones (Malik Rupinder, Shankar Siddharth and Gaur Vassal, 2013).Looking into the global scenario,
the private equity or leveraged buyout (LBO) market has grown substantially over two decades. If we move
back to 1991, the value of new transactions was $10 billion and by the latter part of 2005 and first part of
2006 they reached $500 billion.
This annualized total was equivalent to 5% of the capitalization of the U.S. stock market and 1.4% of global
GDP. Although the volume of transactions has rose substantially, the salient facet is the growth in the value
of both individual and aggregate transactions. In the U.S. the number of transactions nearly doubled between
2000 and 2005, while the value rose four-fold.

24
 CHAPTER – 04

RESEARCH
METHODOLO
GY
25
For studying the venture capital investment process, venture capital firms operating across different cities in
India such as Bangalore, Mumbai, Chennai, Pune, Delhi etc., have been considered. Foreign VC/PE firms
investing in India were also approached through their offices located in India. For studying the role played
by the venture capitalists in the development of the ventures, responses were collected from the companies
that had raised VC funding in Gujarat. For this study, the ventures from which the VC had already made an
exit were also included in order to have a larger set of responses for meaningful analysis. For studying the
funding preferences of young entrepreneurs, again the responses were collected from the firms located in
Gujarat. Care has been taken to include only knowledge based and innovative entrepreneurial ventures. For
the purpose of the study, entrepreneurial ventures are defined as those ventures that are pursuing
opportunities, characterized by innovative practices beyond what a small business might exhibit, high risk
and have growth and profitability as their main goals.The innovation may be in the product or service itself,
or in the business processes used to deliver it. Demand side studies were restricted to geographic region of
Gujarat due to convenience, access available and willingness to share the information on the part of investee
companies.

Data Sources and Research Approach

It is well established that while the secondary data provides good conceptual clarity and direction to begin
with, primary data based on empirical study often helps the researcher get insightful inferences about the
subject of interest. Hence, for the purpose of gaining maximum possible knowledge related to the study,
both the data sources have been duly and optimally used.

Primary Data

Primary data from venture capitalists across India and entrepreneurs from Gujarat was collected using the
survey approach through structured questionnaires. These surveys covered various issues to meet the
objectives of the study. A survey questionnaire was developed building upon the insights obtained through
structured interview with Gujarat Venture Finance Limited (GVFL) and various other venture capitalists and
academicians approached at VC-PE meet organized at IIM-A during February, 2009. Questionnaires were
prepared in English considering the profiling of the respondents on demand (knowledge entreprenrus) and
supply side (venture capitalists) of the studies.

Secondary Data

For studying the evolution and growth of venture capital industry at international (US, Europe and Asia-
Pacific), national (India) and regional (Gujarat) level, secondary data was considered. The literature studies
related to venture capital and private equity, articles, journals, books, previous students’ projects at IIM-A,
other published and unpublished sources, internet web pages and electronic database like ebsco were used as
secondary sources. Various libraries, particularly of IIM-A, were accessed to collect the information.
Reports

with respect to industry statistics available free on the website of IVCA and VentureIntelligence were used
for supporting the industry statistics.

Sample Selection and Contact Methods

26
A sampling plan basically entails the sample selection criteria, sampling unit, sampling technique, sample
size, element and respondent definition for the survey.

(A) For Studying the Venture Capital Investment Process by Indian Venture
Capitalists (Supply Side)

The database of 163 venture capital firms was complied for this study. In order to assemble this database, the
first and the obvious choice was to look for the members of Indian Venture Capital Association (IVCA).
However, upon the closer scrutiny of the Indian venture capital industry, it was found that the data were
questionable in two ways. First, it included a few set of actors that may not be classified as venture capital
firms.
There are many members registered with the association that were intermediaries facilitating the investments
by the VC in the investee companies but not actually investing themselves in those investee companies.
Second, the association did not have some VC firms as members. The next choice was to compile the list
from the SEBI registered funds. But the same problem was encountered there too. There were 127 funds
registered with SEBI as on September 2008. It is worth noting here that these are the funds and not the firms.
A single firm may have multiple funds for investment in different sectors and stages of venture
development. For this survey, the responding unit was a firm and not the fund so as to capture the
investment approach of the entire firm for all these funds rather than a fund specific approach.
With respect to IVCA, there are around 50 members registered with the association as on September 2008.
Hence, database of 163 VC firms in India was compiled in contrast to much smaller number of firms listed
by IVCA and SEBI.
The list was then expanded by including VC firms found in a number of other sources namely Indian School
of Business (ISB), Hyderabad’s database of VC firms, list of VC firms compiled by National
Entrepreneurship Network (NEN) in India and various newspaper articles that frequently report about the
new investments happening in India.
By bringing all these data together, a gross list of 163 VC firms was assembled. This list included only VC
firms operating in India. Foreign VC/PE firms investing in India were also part of the list and they were
approached through their offices located in India.
The next task was to assemble contact details of the firms for distributing thequestionnaires among them.
The contact details of these VC firms were downloaded from the websites of these respective firms.
Besides, the contact details, information regarding these funds, investment strategies, portfolio firms, and top
management teams were also collected through their web pages. This was to ensure that these are the firms
investing at early expansion and expansion stages because the funds active only in buyout deals were not a
part of the survey.
Out of 163 firms, 81 firms responded to the survey. However, only 38 responses were found to be useful as
they had returned the completely filled in questionnaires. 18 VC firms declined to participate in the survey
for various reasons such as confidentiality, policy of not participating in such survey, lack of time to
complete the comprehensive details, they had stopped investing in the current scenario etc. Further, 25 VC
firms were intermediaries and hence could not participate in the survey. The survey was conducted during
October 2008 to June 2009. Thus, nine months following the launch of the survey, after several rounds of
reminder (almost every month through emails followed by phone calls), only 38 responses were considered
to be useful for

analysis resulting in the response rate of 23% approximately. In those cases, where other members of team
replied, it was again ensured that they are not merely junior staff members. In many cases, telephonic talk
were organized with the members of venture capital team on the appointed day and time.

27
(B) For Studying the Role Played by the Venture Capitalist in the Development of
the Ventures in Gujarat (Demand Side)

The study was carried out in the companies that had raised venture capital funding Gujarat. For surveying
the VC funded entreprenurs in Gujarat, the first taks was to assemble the list of such entrepreneurs.
However, there was no aggregate statistics available that presents the details of the venture capital
investments in Gujarat.
Therefore, to select the representative sample, Gujarat Venture Finance Limited (GVFL which is making
substantial investments across various sectors and stages of venture development through its various funds,
in Gujarat as well as outside Gujarat, was approached. As per the opinion of the officials at GVFL, the
investment deals, which can be typically categorized as venture capital investment (i.e. investments by the
firms at the early expansion stages), are being carried out majorly by GVFL in Gujarat.
As mentioned in the report, VCs have specific geographical preferences for investments. They prefer local
investing rather long distance investing for better monitoring and control. And VC firms in India are highly
concentrated in the western part (Mumbai) and southern part (Bangalore) of the country. So, naturally they
may hesitate to consider the option of investing in Gujarat. If such investment deals are taking place though
in less number, they are normally in syndication with a local partner i.e. GVFL. Or such deals are private
equity deals and buyout deals. However, study of these kinds of deals was outside the scope of the research.
Further, to generate the list of the VC funded ventures in Gujarat, the details of the
portfolio investment companies available from the websites of the venture capital
companies were also investigated. However, there were no concrete venture capital
investments found in the state. So, finally it was decided to make a detailed quantitative
analysis of all the venture capital funded companies by GVFL in Gujarat.
GVFL has funded 68 ventures across India, out of which it made an exit from 57
ventures till 2009. So at present it has 11 companies in its portfolio. Since the study was
limited to only Gujarat, the ventures funded by GVFL in Gujarat were considered for the
survey purpose. It has funded total 26 ventures in Gujarat, of which it made an exit from
15 of the ventures. All these 26 ventures were approached for the study. Out of all these
ventures, 22 ventures funded by GVFL in Gujarat had responded to the survey resulting
in a response rate of 85%. Four ventures which were not a part of the study were those
ventures that had been closed down since a long time or there was a change in the
management and the original management was not approachable. So, these 22 ventures
studied included the combination of both the kinds of the ventures i.e. ventures from
which GVFL had already made an exit and the ventures in which it continues to have
investments. From these 22 ventures, GVFL had made an exit from 12 of them (11 full
and 1 partial exit). Only in two cases, GFVL had invested in syndication with other
venture capitalist. Otherwise it had invested individually in all the rest of the cases.
These 22 ventures are spread across different parts of Gujarat like Ahmedabad, Baroda,

Bhuj, Gandhinagar, Sanand and Valsad. The ventures which are headquartered in
Ahmedabad were approached personally during working hours. The ventures situated

28
outside Ahmedabad were approached through emails and telephone calls. In all the cases,
the respondents were requested to fill the questionnaire with full honesty and correct
information. The respondents for the survey were the CEOs, Managing Directors or the
Heads of the Finance departments of the company.

(C) For Studying the Funding Preferences of Young Entrepreneurs from Gujarat
(Demand Side)

To select the representative sample of the population, various relevant sources were used
with the help of which a comprehensive list of the entrepreneurs for the study was
complied. Search began with premier education institutes in Ahmedabad like NIRMA
University and Entrepreneurship Development Institute of India (EDI) that are running
various courses on entrepreneurship. Generally, those who already have family
businesses and want to join/diversify them enroll for such courses. The representatives of
such institutes were approached by the researcher for collecting the contact details of
such students. With the help of the email IDs and other telephonic details, these students
who have already passed out and became entrepreneurs; were approached for the survey.
Further, incubate (entrepreneurs availing the facility at the incubation centres) at Centre
for Innovation and Entrepreneurship (CIIE) of IIM, Ahmedabad; National Design
Business Incubation (NDBI) of National Institute of Design (NID); Mudra Institute of
Communications and Dhirubhai Ambani Institute of Information and Communication
Technology; were contacted. For this purpose, incubates who are availing the facilities of
the incubation cells at present and those who have already left these incubation centres
were contacted.
To extend the list of such entrepreneurs further, two web sources i.e. The National
Entrepreneurship Network (NEN), and Plugged in were used. NEN, founded in 2002, is
a not-for-profit initiative of the Wadhwani Foundation, working to inspire, educate and
support the next generation of high-growth entrepreneurs in India. NEN was co-founded
by five of India's premier academic institutions like IIT Bombay, IIM Ahmedabad, SP
Jain Institute Bombay, IBAB Bangalore and BITS Pilani. NEN had introduced TATA
NEN Hottest Startup Awards, in association with TATA, a rapidly growing business
group in India in 2008. The purpose was to recognize and support high-impact startups
that innovate, solve hard problems, grow fast and create jobs. For preparing the list of the
entrepreneurs, the startups nominated for this competition from Gujarat were selected
and approached for the survey. Like NEN, Plugged In- Learning through Technology;

also has a list of startups from Gujarat. Plugged In has evolved into a nationally

29
acclaimed organization operating various innovative high impact programs for the
entrepreneurs.
In addition to these resources, while conducting the VC supported survey, it was
discovered that GVFL receives number of proposals every day for funding requirements.
With the help of GVFL’s staff executives, some of these relevant cases were also
contacted for the survey.
Now-a-days, many management institutes are also gearing up their students towards
entrepreneurship rather adopting routine corporate jobs. The placement cells of such
management institutes were also approached for enlarging the list of the entrepreneurs.
Particularly, IIM-A placement data was very helpful in reaching to those students who
have adopted entrepreneurship as a career option.
Lastly, the newspaper articles featuring the success or failure story of entrepreneurs were
regularly being tracked and also aided the discovery of many such entrepreneurs from
Gujarat. Particularly, the column of “Starting Up” from The Economic Times on every
Friday features the innovative entrepreneurial ventures nationally. Out of these, ventures
from Gujarat were selected for preparing the list.
Also, a kind of snowball sampling was followed where, the respondents were asked to
identify others who belong to the target population of interest. Subsequent respondents
were selected based on referrals. The existing startups have been contacted to give
references of their family and friends who have started such innovative ventures in
Gujarat. Thus, by compiling all these resources together, a gross list of the
entrepreneurs/startups was prepared.
After compiling this list, all these entrepreneurs were approached for the survey. In
majority of these cases, the email Ids of these entrepreneurs was collected. As these
startups form the part of knowledge based or technology based sector, they were more
comfortable responding to the survey electronically rather physically. In few of the cases,
the interviews were conducted on telephone as well while the researcher met in person
few entrepreneurs in Ahmedabad for survey purpose.
The survey period was the same as that of VC supported entrepreneurs’ survey i.e.
November-December 2008 to May-June 2009. Unlike other survey (VC survey and the
VC supported entrepreneurs survey), these entrepreneurs were more wiling to share the
information so, though there was a follow up to sending of the questionnaire but it was
not so extensive as compared to the prior two surveys. Without exception, majority of
the entrepreneurs approached for the survey were forthcoming with their response and
displayed significant interest and involvement. That truly shows the passion of the youth
to help improve existing entrepreneurial ecosystem in the state.
The respondents were the entrepreneurs/promoters of these startups. In total, it was

possible to generate the responses from 43 startups from the state. Most of these
30
responses came from Ahmedabad city of Gujarat which is considered to be an
entrepreneurship hub of the state. This fact is quite evident from the list of the nominees
available on the website of TAT NEN Hottest startups. They have listed 18 high growthhigh impact ventures
on the website from Gujarat of which 14 were from Ahmedabad
city. Further, as mentioned before, all the incubation centres of Gujarat are also located
in Ahmedabad. All the premier institutes promoting entrepreneurship and supporting the
innovations are situated in Ahmedabad. Considering all these facts, it is natural to
conclude that the maximum responses (91%) were from Ahmedabad city.

 Research Instrument Development

Prior to selecting survey approach for the research, several other methods for data
collection, potentially viable for such a study, have been considered and assessed. Brief
evaluation of these alternatives is presented below.
Though case studies are used as means to validate findings from other methods and to
deepen the knowledge in specific areas, case study research is rarely applied
methodology in VC/PE research. This is due to the tendency of the VC/PE firms to
withhold the detailed information about transactions thinking that this information is
confidential. Hence, comprehensive and reliable case data can not be obtained. For
studies related to entrepreneurs, due to unwillingness on their part to share all the
financial and non-financial details with respect to role performed by the VC, it was not
possible to write detailed cases on such companies. In the survey also, financial details
like the bifurcation of equity holdings between the promoter and the VC, were not
mentioned in few of the cases.
Participatory action research, whereby the researcher gets directly involved in the
investment process, would have permitted deep insights into specific situation. Action
research would have been very useful in order to fully understand the entire venture
capital investment process. However, as a matter of policy, these firms would not allow a
third party, even the researcher, to be closely involved in such a process. This is again
due to very high concern for confidentiality of information. In literature review, there are
no specific instances of scientific studies based upon participatory action research.
A large amount of data published by various associations and research agencies in the
area of venture capital could have been used for performing time series analysis or
multivariate data analysis. Such vast data facilitates generalization of findings but on the
contrary, dilutes the ability to analyse the relationships of variables in-depth. In fact,
availability of consolidated data on venture capital investment in India is rather poor.
The main source of information is in the form of highly aggregated statistics produced
annually by IVCA and other research agencies like Venture Intelligence. Small venture

31
capital firms which are not the members of this association are excluded for the purpose
of reporting the data. So the reported data may be biased towards larger deals. Moreover,
databases do not contain information necessary to fully understand the reasons for
certain transaction.
Considering the merits and demerits of all methods, it was felt that for collecting useful
data a survey method was appropriate. VC/PE firms were more willing to share
information about the investment preferences and styles in surveys on the condition that
the information provided by them would be treated highly confidential and on an
anonymous basis, rather than for specific cases or databases, which tie the data to
identify the VC/PE firms.

 Data Analysis Plan

(A) For Studying the Venture Capital Investment Process by Indian Venture
Capitalists (Supply Side)

As mentioned previously, the useful responses for the survey were only 38. Hence, use
of parametric statistical models was not desirable because these models essentially
require larger samples and their underlying assumption is normality in data distribution.
The more appropriate methodology to approach a small sample situation is to employ
distribution free non-parametric statistical models. Hence, present study used nonparametric statistical
analysis for inferring the patterns in data. Apart from the problem
of sample size, parametric tests also require certain assumptions about populations and
data that were violated by the venture population studied herein. The assumptions of
normality of the data were investigated with the help of Kolmogorov-Smirnov test for
each variable that was subject to use of sophisticated statistical analysis.
For most of our propositions, the Mann-Whitney U test, Friedman One Way Anova Test,
Kruskal Wallis test etc, were used. The selection of non-parametric statistics imposed
some limitations on our research. Most notably, it was not possible to measure the
magnitude of statistical relationships. Statistical Package for Social Science (SPSS) 12
was applied for analysis of the data in the present study.
With respect to study of characteristics of participating VC firms in the survey, the
responses were analysed with the help of simple frequency tabulation showing frequency
and percentages. For analysing number of portfolio companies and members with
entrepreneurial background, descriptive statistics such as mean, median, mode and
standard deviation, were also calculated. For studying the investment policy variables
like preference for sector and stage of investment, use of financing instruments etc. the
same methodology of frequency tabulation was applied. Here, for studying the minimum

32
and maximum investment limits and equity stake by the VC, again the descriptive
statistics were calculated. For many of these variables where only frequencies are
calculated, these variables were found to be nominally scaled or dichotomous type where
the use of further sophisticated statistical analysis was not applicable.
For analyzing the importance of geographical proximity, the VCs were asked to rate the
importance of the same on a scale of extremely important ((5), very important (4), neutral
(3), somewhat important (2) and not important (1). The figures in the bracket represent
the weights assigned to the respective measurement scale. This facilitated the calculation
of weighted average score for the geographical importance from the VC’s point of view.
In the entrepreneur’s survey as discussed later in the study, the same question was asked
to the entrepreneurs to judge the importance given by them for locating themselves near
to the VC. In order to compare the statistically the differences in the importance assigned
to geographical proximity by both the parties, Mann- Whitney U test was performed.
Further, with respect to the policy of VCs for investing in the businesses earlier funded
by angels or incubated earlier, again Mann Whitney U test was performed. The
differences in the perceptions were statistically tested among the two groups of VC i.e.
those (VCs) who have invested in such businesses and those who have not invested in
such businesses towards the early stage funding options.
For studying the syndication policy of the investors, various reasons for syndication were
rated on the same importance scale as highlighted earlier i.e. extremely important, very
important, neutral, somewhat important and not important. Here, simply the weighted
average mean was calculated to highlight the importance assigned to various reasons, as
mentioned in the content of the questionnaire above.
In pre-investment activities, variables regarding the use of deal sources and evaluation
criteria were studied in detail. To highlight the differences in the use of deal sources
among the VC firms in India as against their age (i.e. recently established, already
established and in between these two), Kruskal-Wallis test was used.
To find out the importance of evaluation criteria by Indian VCs, scale used by
MacMillan et al. (1985) was followed in this survey too. The present study applied
previously validated constructs and measurement variables. The evaluation criteria used
here were the same as used in all these different studies because the variables identified
in these studies were developed over a period of time and are robust when it comes to
reliability. In the study by Tyebjee and Bruno (1984) and the study by MacMillan et al.
(1985) the responses were factor-analyzed to determine what major groupings of criteria
occurred among criteria. Since, many sophisticated statistical tools like factor analysis,
cluster analysis, regression etc. have already been applied by the researchers over a
period of time, the present study merely calculates the mean scores and the results are
almost similar to the previous studies on the same theme. And as the sample size for the

33
study was relatively small, the factor analysis was not considered.
With respect to value adding functions, VCs were asked to rate their perceptions of the
involvement in the business of the investee on a scale of high, medium, low and no
involvement. For defining the value added functions by the VC, the same areas/functions
as used in the study of Berg-Utby et al. (2007) were followed for the reason that this
categorization of the functional areas was supported with the discriminant validity.
Internal consistency is provided with composite reliability as well as Cronbach’s alpha.
Further, the categorization and the measurement scales were tested by means of a
confirmatory factor analysis by these researchers. In the present study, the mean and
standard deviations were calculated for all these value adding functions categorized into
four parts namely: product development (technical), marketing, general business management and
accounting and finance. Further, these perceptions of the VCs were
compared with the entrepreneurs’ expectations from the investors using Mann-Whitney
U test.
For monitoring and control, the variables with respect to means of formal monitoring and
methods of exercising control were analysed with simple frequency tabulation.
Preferences of Indian VCs for collecting the information were analysed with Friedman
Test. For the areas that VCs normally control, descriptive statistics (mean and standard
deviations) were calculated to highlight the areas where higher degree of control was
exercised by the VCs.
Lastly, for divestment mechanism, the exit options, time frame and the targeted rate of
returns were analysed with the help of simple frequency tabulation.

(B) For Studying the Role Played by the Venture Capitalist in the Development of
the Ventures in Gujarat (Demand Side)

Like VC survey, here also due to small sample size (the number was 22) and the
violation of the assumption of normality of data, parametric testes could not be applied.
For analyzing most of the variables, distribution free non-parametric tests like MannWhitney U test,
Wilcoxon Matched Pair Signed Ranks test, Kruskal-Wallis, Spearman’s
Correlation etc. were used. The application of these tests has been discussed herein
detail. SPSS 12 is applied for analysis of the data.
For studying the profiling of the entrepreneurs who have/had raised VC funding from
GVFL (age, education, location, nativity, previous work experience, reasons for being an
entrepreneur, reasons for starting venture in Gujarat) and various venture specific details
(stage, sector, ownership structure, number of ventures) simple frequency tabulations and
bar charts were used. As these variables were nominally scaled, performing further
statistic was not possible here. There are two kinds of VC funded entrepreneurs i.e.
entrepreneurs with entrepreneurial background and entrepreneurs without such
34
background. So, for studying the relationship between the entrepreneurial family
background and the support extended by the family members to them, Mann-Whitney U
test was performed.
For analyzing the use of business plan competitions, bootstrapping techniques,
incubation facility and raising funds from angel investors before approaching the VC,
again frequency tabulations with a combination of bar charts were used as these variables
were not capable for further statistic analysis due to their nominal scale. For analyzing
the familiarity of these entrepreneurs towards incubation centres and angel investors,
Wilcoxon Matched Pair Signed Ranks test was applied with a null hypothesis that there
is no difference in the familiarity of the entrepreneurs towards incubation centres and
angel investors. Wilcoxon Matched Pair Signed Ranks test is used for examining the
differences in the location of two populations based on paired observation, taking into
account the magnitude of the difference. Descriptive statistics were also calculated for
these variables.
As mentioned before, prior to probing into the role of the VC in the development of the
venture, various investment related details like year of raising funding, instrument of
financing, exit option, syndication, rounds of funding, time gap between application to
approval etc; were analysed simply with frequency tabulations and percentages. For
analyzing amount of investment and bifurcation of equity holding between the promoter
and the VC, descriptive statistics like mean, median, mode and standard deviations were
calculated.
Now concentrating upon the main theme, i.e. studying the differences between the
expected contribution (prior to VC investment) and the actual contribution as perceived
by the entrepreneurs (post VC investment), Wilcoxon Matched Pair Signed Ranks test
was applied with a null hypothesis that there was no significant difference in the
expected and actual contribution by the VC with respect to various functional areas as
discussed above. The composite mean scores for the expected and actual contribution for
the areas like product development, marketing, general business management and
accounting/finance were calculated and compared with a study of Berg-Utby et al.
(2007). As mentioned in the VC survey, the categorization of the functional areas as used
in the study of Berg-Utby et al. (2007) was supported with the discriminant validity and
internal consistency is provided with composite reliability as well as Cronbach’s alpha.
For studying the satisfaction level of the entrepreneurs, Kruskal-Wallis test was
performed with a null hypothesis that there was no significant difference in the satisfaction level of the
entrepreneurs of the ventures with VC exit, partial VC exit and
the ventures where still GVFL holds investment. With respect to the perceptions of
entrepreneurs regarding VCs in general, weighted average mean scores were computed
for each of the positive and negative statements.
35
Finally, the entrepreneurs were asked whether they have any plans for expansion in

further and if so, whether they will prefer to approach the same VC. For analyzing these
nominally scaled variables again simpler frequency tabulations were used.

(C) For Studying the Funding Preferences of Young Entrepreneurs from Gujarat
(Demand Side)

The results of the study have been analysed with frequency tabulations, charts,
descriptive statistics and relevant statistical tests. It is worth noting here that, again due
to small sample size and the violation of the assumption of normality of data, distribution
free non-parametric tests, specifically, Mann-Whitney U Test and Wilcoxon Matched
Pair Signed Ranks Test were applied wherever possible. For studying the relationship
between the variables where there was a scope for applying the parametric tests, first of
all, Kolmogorov-Smirnov test was run to detect whether the sampling distribution
follows a normal distribution. The application of these tests has been discussed herein
detail. SPSS 12 is applied for analysis of the data.
Various demographic and social variables and venture specific details, as mentioned
before in the details of the questionnaire, were analysed simply with frequency
tabulations, percentages and bar charts. As majority of these variables are non-metric by
nature, application of statistics test was not possible here. This study like the study of VC
supported entrepreneurs, also had two kinds of entrepreneurs i.e. entrepreneurs with
family business background and entrepreneurs without such backup. So, for studying the
relationship between the family business background and the support of family members,
Mann-Whitney U test was performed.
For analyzing the sources of funds used at the initial stages, frequency tabulations and
percentages were applied. And the ratio between the promoters’ contribution viz a viz
other sources of financing, was analysed with the descriptive statistics. For those entrepreneurs who had not
availed any sort of external funding, the reasons for the same
were analysed again with the help of frequency and percentages. For use of business plan
competitions and bootstrapping techniques as described in the previous section,
frequency and percentage analysis have been used. These variables were again
categorical.
For comparing the awareness of these entrepreneurs regarding the equity investment
options, particularly, angel capital and venture capital, Wilcoxon Matched Pair Signed
Ranks test was applied. Here also, the familiarity of the entrepreneurs regarding angel
capital and venture capital was measured as metric variable. Further, the familiarity of
these entrepreneurs with respect to angel capital was compared with the familiarity of the
VC supported entrepreneurs with the help of Mann-Whitney U test. These two groups
36
were not compared for venture capital as it is quite obvious that the VC supported

entrepreneurs know very well about this option as compared to non-VC supported
entrepreneurs.
Further, the perceptions of these entrepreneurs for equity investors were analysed with
the help of descriptive statistics. Besides, these rating of perceptions were compared with
the similar rating by VC baked entrepreneurs with the help of Mann-Whitney U test. In
case of those entrepreneurs who had availed bank funding for their ventures, the reasons
for availing the same were analysed with frequency tabulation and percentages. And the
experience of the entrepreneurs with respect to various parameters of baking services
were analysed again with the descriptive statistics. Finally, the willingness of the
entrepreneurs to expand their operation in future, preferred sources of funding for the
same and willingness to approach investors in Gujarat or Outside Gujarat have been
analysed with frequency and percentages.

 Conclusion
This chapter on research methodology describes various methodological steps involved in carrying out this
study. An overview about the research design, data collection sources and methods, sampling procedure and
data analysis plan helps to understand the research approach used. For all the three studies as discussed in
the chapter descriptive research design was used. A survey of venture capitalists across India and the
entrepreneurs (with and without VC funding) from Guajart was conducted based upon the structured
questionnaires. The respondents were contacted through emails, telephone calls and personal visits wherever
possible. The data collected were quantitatively analysed with frequency tabulations, charts, descriptive
statistics and certain nonparametric tests. A brief on different variables of interest and their appearance in the
venture capitalists’ and pentrepreneurs’ questionnaires provides direction for data analysis.

37
 CHAPTER – 05

LIMITATION
OF
STUDY…

38
Fried and Hirsch (1994, p.29) argue that: ‘traditional financial research methodologies are not well suited to
an examination of the VC examination process. The transactions involved are private; what little information
is available comes from secondary sources. Over the past decade, researchers in this field have increasingly
gained access to primary data, both quantitative and qualitative. To draw any meaningful conclusions on the
development and operation of the VC industry in India, we believed strongly that it was essential to follow
this approach.
Our findings are based on a comprehensive interview programme that benefited from unprecedented
cooperation from the VC community in India. The principal source of primary data was a questionnaire,
distributed before and then discussed during the interviews.
There was also ample opportunity to explore related topics during the course of the discussions with the
venture capitalists.
Our questionnaire drew upon survey instruments used in prior studies in the developed world, including:
Tyabji and Vickery (1988); Sapienza (1989); Gompers (1998); Wright and Robbie (1996); and Reid (1998).
The initial drafts of the questionnaire were then pre-tested with a number of practitioners in India and a
selection of UK academics.
The aim was to identify and eliminate potential problems of interpretation (Hunt et al., 1982; Zilina and
Gagnon, 1981); this process led to a significant strengthening in the structure, content and language of the
document.
The final format comprised a general introduction, eliciting information about the fund’s origin, size,
management team, investment portfolio and so on. This was followed by sections covering the three key
themes under investigation, namely the valuation, structuring and monitoring of VC deals. The questions
called for a variety of responses, from closed questions inviting participants to use nominal, ordinal or ratio
scales to more open-ended questions. The Statistical Package for Social Sciences (SPSS) was used for
processing and analysing the data.
Wright and Robbie (1998) caution against relying upon ‘evidence’ gained from small and potentially biased
sample sizes. The Chairman of the IVCA was therefore enlisted to gain the cooperation of IVCA members
(30 firms as at 2000). However, one of the authors had been involved with the VC industry for several years;
he spent considerable time in India, assessing market trends and consulting with practitioners to identify
active VC firms among non-IVCA members.
A provisional list of 47 VC firms was drawn up before it was discovered that five of this number had closed
their operations or merged with other VC firms. The questionnaire was thus mailed to all active VC firms in
India (42 in total). Forty fund managers agreed to take part in the study; this extremely high degree of
participation reflected the value placed on the project by practitioners. The country was divided into four
regions, and interviews took place in eight cities over 2000/2001 (Ahmedabad, Bangalore, Bombay, Kolkata
[formerly Calcutta], Chennai, Hyderabad, New Delhi and Pune). The minimum duration for a meeting was
35 minutes, the maximum well over two hours, and the average (an hour and three-quarters) was much
closer to the latter than the former. Although this methodology was expensive and time consuming, it proved
to be time well spent in building a complete picture of the industry.
The response rate of 95 per cent (40 fund managers from 42 contacted) is exceptionally high for the VC
sector. In the developed world, the maximum response rates have been around 60 per cent, for example: Fiat

(1995); Wright and Robbie (1996). In their studies of European VC markets, Minitart et al. (1997) received
lower response

Today due to the economic crisis and the change in job market. Entrepreneurship has gained market. A
number of technocrats in India today plan to setup their own shops and capitalize this opportunity. In today’s
highly dynamic economic climate with regular technological inventions, few traditional business models
may survive but margin lies more towards more innovative business ideas. Today it is not the conglomerates
39
that fuel economic growth but are the new SMEs and other innovative businesses. The bright reason for
global economic growth today lies in the hand of the small and medium enterprises. For example, in India
SMEs alone contribute to almost 40% of the gross industrial value added in the Indian economy. Whereas in
the United States 55% of their global exports are supported by very SMEs with not more than 50 employees
and 10% exports are generated by companies with 800 or more employees. There is a paradigm shift from
the earlier physical production and economies of scale model to new ventures with technological
advancements providing services and under process industry.

ADVANTAGES OF VENTURE CAPITAL

1. It injects long term equity finance which provides a solid capital base for future growth
2. The venture capitalist is a business partner, sharing both the risks and rewards. Venture capitalists are
rewarded by business success and the capital gain.
3. The venture capitalist is able to provide practical advice and assistance to the company based on past
experience with other companies which were in similar situations.
4. The venture capitalist also has a network of contacts in many areas that can add value to the
company, such as in recruiting key personnel, providing contacts in international markets, introductions to
strategic partners, and if needed co-investments with other venture capital firms when additional rounds of
financing are required.
5. The venture capitalist may be capable of providing additional rounds of funding should it be required
to finance growth.

DISADVANTAGES OF GOING TO VENTURE CAPITAL FINANCE

1. The agreement of funding is passed on a contract which could be partial ownership or other profit
sharing which if not properly negotiated by the entrepreneur he might lose ownership of his whole business
or idea and future to them.
2. Intrusion and control: the VC get the right to drive the firm thereby can take strategic decision or can
drive them to his advantage if the deal is not guided properly.

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 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 insignificant job
creation, economic growth and international competitiveness. Companies such as Digital Equipment

Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and Genetic are famous
examples of companies that received venture capital early in their development. In India these funds are
governed by the Securities and Exchange Board of India (SEBI) guidelines. According to this venture capital
fund means a fund established in the form of a company or trust, which raises money through loans,
donations, issue of securities or units as the case may be, and makes or proposes to make investments in
accordance with these regulations.(Source: SEBI (Venture Capital Funds), Regulations, 1996).

40
  Top 5 sectors attracting venture capital finance in 2019

Last year was a buoyant one for venture capital (VC) investment in UK and European companies – a trend
which defied broader concerns about international trade tensions, economic growth prospects and, of course,
Brexit.
US-based funds showed themselves to be vigorously interested in expanding European and UK businesses,
while large corporates invested into growth companies as a means of outsourcing R&D and innovation,
patterns which are expected to be sustained this year.
The healthy appetite among VC investors and venture debt providers was particularly evident when it came
to opportunities in technology.
This looks likely to continue in 2019, as tech-enabled solutions based on artificial intelligence (AI) and
blockchain in particular prove increasingly popular.
Life sciences were also a big draw for venture funding in 2018, especially healthcare technology (healthtech)
and personalised medicines.
Growth in this sector is being supported by demographic changes, improved diagnostics and developing
regulations around cannabis-based drugs.
Here is a snapshot of some of the specific business activities that are likely to attract the most VC and
venture debt this year.

 Cybersecurity (and fintech)

Much VC attention is being concentrated on cybersecurity, particularly its application in the growing fintech
space, payment services and financial services platforms more generally.
Fuelled by a spike in high-profile breaches over the last few years, numerous businesses have set up to
provide solutions for thwarting cybercrime and combat the increasingly prevalent risks of fraud, money
laundering and terrorist financing activities.
Having advised on a number of financings of cybersecurity businesses last year, it is clear that the fast-
evolving cyber threat is being taken seriously.
The size of the fines being dished out for cyber breaches since the EU General Data Protection Regulation
(GDPR) came into force in May 2018 have prompted many businesses to decide that investing in
cybersecurity is worth the cost.

 AI (and retail tech)

The far-reaching capabilities of AI and machine learning (ML) have lodged these types of technology firmly
at the top of the priority list for many VC providers.
This is especially noticeable in the retail sector, at the intersection between increasingly enormous reservoirs
of customer data and changing consumer behaviour.

E-commerce giants have quickly assumed a dominant presence in the internet retail sector by combining
commercial nous with the latest technology – building and constantly updating solutions for working out
what to sell, how much to stock and how best to distribute it.

41
In the last few years, new start-up and growth businesses have begun using AI to harness the data generated
by the online-leanings of shoppers to develop analytics platforms and planning tools to improve sales
performance for smaller retailers.
AI-based retail solutions in particular are being rapidly adopted by the fast-moving consumer goods
(FMCG) sector and across both bricks and mortar and online shopping outlets.
With potential to be rolled out across numerous sectors, including pharmaceuticals, consumer electronics
and cosmetics, this form of retail tech is likely to attract significant venture investment over the next 12
months.

 Edtech
Educational technology (edtech) is gaining momentum as an innovative way of delivering education and
training for students and employees.
We see many more developers of next generation learning solutions poised to receive growth funding over
the coming 12 months.

 Health-tech and med-tech

The life sciences/healthtech sector is one of the broadest churches attracting growing numbers of VC
followers.
Companies that leverage opportunities presented by converging personalised healthcare and the use of
medical devices for at-home diagnostics and treatment are beginning to pull away from the pack when it
comes to VC and venture debt funding, particularly from US sources.
Developments in areas such as surgical devices attracted significant capital during 2018, while the move to
digitalise patient data has led to a boom in clinical IT systems.
In the UK and Europe, ageing populations, better diagnostics and a rise in certain medical conditions have
spurred the development of improved treatments in parallel with technologies which reduce the cost of
operations and treatment plans for healthcare providers.
As the trends driving VC investment in healthtech show no signs of abating, this is an area where we
anticipate substantial venture funding growth for the foreseeable future.

 Medicinal cannabis treatments

Changing regulations and attitudes around medicinal cannabis treatments have quickly gained an
enthusiastic following among life-sciences investors.
Although this is still a nascent area in Britain, VC investors with experience of working with cannabis
treatment developers in North America are eagerly watching how this market unfolds in the UK and Europe.
Last year, Fieldfisher advised a joint venture between a UK think tank and a Canada-listed medicinal
cannabis grower – formed to research clinically validated cannabis-based medicines – on a multimillion-
pound VC investment from a consortium of investors to further develop its products and protect the
intellectual property (IP) of its discoveries.
As legislation and public attitudes in this area evolve, many more deals of this nature are likely to be struck.
Moves to safeguard IP will also tick up, as companies seek to protect the results of expensive research and
trials.

 What to think about when bringing in venture capital finance

42
One of the key features of VC deals is the freedom to tailor transactions to suit the priorities of both the
investor – who is focused on securing maximum returns – and the investee – who does not want to be unduly
stifled by obligations to funding providers.
Structuring deals for the maximum benefit of both parties requires sufficient protection for the investor, so
that company founders remain aligned with the interests of their backers, while at the same time leaving
management with enough flexibility to operate the business day-to-day.
Ideally, investees will engage with their VC backers, so that they can access their network of contacts and
tap into their experience of similar businesses. It is therefore usually desirable for both parties that the target
company has an active VC investor director on the board, either in an executive, non-executive or at the very
least a board observer role.
Prior to receiving VC investment, many companies will have operated on a “bootstrapping basis”, so proper
funding gives the company the chance to put things right that may have been glossed over in the early stages
of the business, such as GDPR compliance.
We are increasingly seeing VCs inserting subsequent conditions into investment agreements so there is a
contractual obligation to improve IP protection, terms and conditions, and public-facing internet statements
and privacy policies.
This is not just a legal necessity. It also serves to professionalise the documentation and appearance of the
company when engaging in contract negotiations with customers and suppliers.

43
 CHAPTER – 06
DATA
INTERPRETATION
(ANALYSIS)

44
Going back to 2008, global annual VC investment sat at $53 billion, which means that there has been a 17%
CAGR in financing over the past decade. The etymology of this extended cycle would require its own
article, but some catalysts have been:

1. $12.3 trillion of quantitative easing since the 2008 Economic Crisis has suppressed fixed income
yields leading to a surge in equity investing and the first $1 trillion market cap companies.
2. The Web 2.0 “software is eating the world” tech revolution. Bringing investment opportunities
through advances in collaborative technologies, mass mobile internet adoption, and erosion of Capex
costs via cloud computing.
3. An increased governance preference to stay private has given rise to more private rounds and bigger
investors choosing private markets over their public counterparts.
The first macro point to highlight about the state of venture capital is that the volume of deals made has
fallen from a peak of 20,000 in 2015. Prior to then, the amount invested and volume of deals were seen to be
positively correlated events, these have since decoupled. The chart below demonstrates this trend vividly.

Global Venture Capital Financing by Stage: 2010 – 2018

1) There Are Less Fundable Startups out There

Americans started more businesses in 1980 than they did in 2013. Over a similar period, the blend of young
companies (less than 1 year old) in the economy also fell by 44%. On the startup side, Crunchbase data for
the past decade shows that peak startup creation came in 2015. Since then, numbers have halved. Assuming
quality has remained the same, this will have contributed to there being fewer startups to seed for interested
investors.

Global and Geographic Startup Creation by Year

45
The decline in startups can be attributed to two core reasons:

1. The financial reality not matching the romantic, media-fueled perception of contemporary startup
culture.
2. More streamlined pattern-matching of investors’ interest, which has narrowed focus into
concentrated areas.
Modern tools, such as DIY website editors, free cloud storage and social media soapboxes can make it seem
tantalizingly easy to start a business. But for many, when faced with the edge of the cliff of jumping in
financially, it can be the moment to back out. The Atlantic noted that in a survey of 1,200 millennials by the
Economic Innovation Group, more felt that they could have a successful career by staying at one company
and climbing the ladder, over founding their own one. Statistics such as this resonate that nowadays the
increased press coverage and fêting of entrepreneurs may make it appear that there are more businesses
around, but this is still an iceberg’s tip that can blur overall perception.
The “institutionalization” of entrepreneurship is an interesting behavioral trend through more pattern-
matching used to judge a startup’s potential for success. This may have resulted in reduced VC funding, due
to investor interest being narrowed into specific areas, such as:

1. Second-time founders win: Stanford University research states that “the number of prior firms
going public [per founder] increases the next firm’s revenues by an average of 115% each.”

2. The “Ivy League” fast track: Prestige from an association with renowned investors, or
accelerators, can assist a startup’s prospects. For example, Y Combinator accelerated startups are 3x
more likely to become unicorns.

3. Founder profiling biases: gender, ethnic, geographic and even alma mater investment
preference imbalances actually work against VCs, by giving them a smaller sandbox of startup
opportunities to pick from.

FALSE POSITIVE MACROECONOMIC DATA

46
 Macroeconomy stats can obfuscate certain points through their all-encompassing generalization of
certain factors. Employment and business creation are two such figures, which are popular proxies
for venture creation. New business applications reportedly hit a “record high” in the USA in 2018,
yet deeper analysis into the definition of this term shows diminished quality: New businesses with
“significant” signs of becoming ongoing, wage-paying ventures, have actually fallen since 2005.

USA Business Applications and New Business Formation Statistics

One reason for this could be the increasing popularity of workers shifting into the gig economy,
which in turn raises applications for small one-person limited company structures.

2) Investment Standards Have Risen and Become More Concentrated

The fall in seed investing has corresponded with fewer companies—as an overall proportion—
making it to Series A rounds. Although, the companies that do raise venture capital financing are
raising more money through higher round sizes.

One hurdle contributing to this tighter funnel is the increased performance requirements being sought
by investors. Back in 2010, approximately 15% of US Series A invested startups were making
revenue, which has now risen to almost 70%. This, in turn, has corresponded with survival rates from
Seed to Series A halving, to less than 4%.

Fewer US Startups are Reaching Series A Rounds but More are Generating
Revenue

47
From 2011 to 2018, the median size of Series A rounds grew from $3 million to $8 million, growth
which is positively correlated at 0.78 to the increase in time between seed and A rounds for the
period. Startups becoming older is evident across the board: In the past decade, the median age of a
startup that had raised angel/seed funding rose by over 1 year to 2.85 years. This increased maturity
is being instigated by larger investors who are happy to invest larger amounts but are waiting longer
to see how the startup’s progression pans out. Startups raising seed rounds inevitably feel this
pressure by having to prove traction and product market fit more vividly.

Despite inflation largely being kept in check in the developed world, the 167% increase in median
Series A round sizes over the past decade has largely been influenced by a couple of factors: startup
ecosystem costs increasing and the winner-take-all mentality of blitzscaling. The latter will be
addressed first.

Rapidly capturing markets with large funding reserves has coincided with the rise of “supergiant”
funding rounds of over $100 million becoming more popular. Such rounds provide startups with war
chests with which to expand, scale, and overwhelm competitors quicker. Within the space of three
years, the number of these rounds on a moving average basis has more than doubled from 20 to 50.

48
Supergiant VC Rounds 2016 – 2018: Number of VC Funding Rounds of Over
$100 Million

In addition to raising more money through larger rounds, successful startups are raising more
numbers of extension rounds too, which helps to explain absolute VC funding rising, but a falling
number of companies being funded.

Back in 2009, over 90% of American startups raised just one round prior to their Series A
(Pitchbook.) Fast forward 10 years; now the figure is only 30%. The bifurcation of early-stage
venture capital rounds into subsets like pre-seed and seed plus has allowed startups to extract more
VC funding from increased tactical awareness of getting exactly how much they need, at the right
time.

US Series A Startups by Total Number of Rounds Raised Previously, by

Year

49
 RESOURCE SCARCITY IS INCREASING OPERATIONAL COSTS

Startup operational costs have increased markedly over the past decade. Through the five years from
2009 to 2014, annual real estate and payroll costs in San Francisco grew by 12% and 15%
respectively. Employee costs are driven by the need to find scarce talent, especially in the
engineering space. To give context to these figures, across the same period across the whole of the
US, real wages fell by 0.20%.

Only in recent years have early education systems began to adapt syllabi to prepare the future
workforce for the digital economy. In the UK alone, failure to adapt is estimated to cause a loss of
£141.5 billion ($180 billion) to GDP growth. Take a hot area like artificial intelligence; it’s claimed
that there are currently fewer than 10,000 people in the world with the necessary skills to undertake
serious research in this domain.

3) Inflation from Non-VCs Participating More in Venture Capital Deals

VCs are not the only ones to invest in startups, after the dot-com bubble burst, one third of corporates
investing in the space immediately fled. Since then, their quarterly investment has recovered from
$848 million globally in Q3 2001 to a high of almost $50 billion by Q2 2018. Along with corporates,
there is also significant investment interest from other “outsiders” such as sovereign wealth funds,
hedge funds, and endowments. 72% of sovereign wealth funds, for example, now invest in VC deals
directly, with their commitments doubling on a yearly basis.

Corporates are the most significant outsider investor and they alone now participate in between 15 –
20% of all venture deals, a 50% increase from five years ago. Part of this rise can be attributed to the
Japanese conglomerate Softbank, which has invested almost $70 billion into startups since 2016,
through its Vision Fund vehicle.

Corporate VC Quarterly Participation in Global Venture Deals: 2010 – 2018

50
 The increase in investment will have contributed, in part, to the inflation of round sizes, especially
from Series A onwards. Corporate VCs tend to focus on startups reaching the scale-up stage because
at that point potential impact can be more clearly visualized within the context of their own
operations; only ~7% of corporate VC investment goes into seed.

The shift towards increased corporate VC has been driven by a number of factors, some of which are
concurrent to the global industry trends mentioned at the beginning:

1. Cash balances: Since 2008, corporate balance sheet cash reserves have doubled to over $2
trillion. This all has to get spent somehow. Even share buyback windfalls can recycle into
venture capital/equity markets.

2. The Disruptive Innovation movement: An acknowledgment that external

investment/partnerships are more effective than the ineffective echo chamber of internal R&D
labs.

3. Financial success: With corporates struggling to innovate and find useful projects, using
corporate development teams to invest in startups has shown to offer intangible knowledge
transfer and tangible financial benefits. The chart below shows that for the sample surveyed,
most units were bringing in compelling returns.
4.

2017 Survey of Financial Returns (Internal Rate of Return) Earned by

Corporate Venture Capital Units

51
 It has been shown that corporate VCs can be less price and time sensitive towards venture investing
than their closed-ended fund counterparts. Only 40% of corporate VCs actually include financial
returns as a metric in employee appraisals. With the invested capital not having hard timelines for
being returned and with softer goals being stressed, it would not be radical to suggest that the rise of
corporate VC has put upward pressure on round sizes. In 2018, Pitchbook noted that valuations in
companies with corporate backers were 2.5x higher than those without.

 State of Venture Capital Funds: Returns Steady and Fundraising Up

Previous research into venture capital fund returns has shown that, similar to startup investing, it’s a game of
the few haves and the many have-nots. What still persists, though, is the difficulty in tracking a holistic
sample set of data to objectively test this hypothesis.
Historically there were four research companies that specialized in tracking aggregate fund returns: Burgiss,
Cambridge Associates, Preqin, and Pitchbook. Despite their efforts—along with new upstarts—tracking
aggregate returns can be imprecise, for a number of reasons that were summarized in this paper:

1. Incomplete data due to privacy pressures on LPs to not report.

2. Backfill/survivorship bias where successful funds eventually report and fill in prior returns.
3. Inconsistencies from soft reporting commitments from participants.
4. Subjective and unchallenged valuation reporting.

52
Despite the issue of accessing enough data, attitudes towards overcoming it should be pragmatic. A large
weight of judgment on the success of the VC asset class should be viewed through the signaling properties
of what’s going on day-to-day. If more funds are being raised, more GPs are being lauded and more firms

are hiring, then that’s generally a sign that—outside of very perverse incentives—LPs in funds are happy
with what they are seeing.
Nevertheless, with the data that is available, the key assertion to be made is that venture capital fund returns
are showing strong signs. With the exception of a period in 2016, they have been positive and oscillate
around the acceptable par for the course level of a 20% IRR.

Global Venture Capital Industry Rolling One-Year IRR Horizons by Fund

Size

This will be explored later, but notice how funds of over $250 million AUM ride the waves and troughs
higher than their smaller fund counterparts.
Looking at alternative asset performance on a macro level, over the past decade, none of them have
outperformed the S&P 500 by a significant margin.

2008 – 2017 Global Alternative Asset Indexed Returns

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Within the view of a longer investment horizon, this should not be put down to negligence on the part of
alternative asset investors. Stock markets have had an unprecedented run during this time. What is
particularly noticeable is that VC has largely stayed in line with its older sibling: private equity, an asset
class that can be seen as less risky (beta of 2.2, versus VC’s 2.6) through its investment preference for fewer
and older companies with less chance of outright failure.

Alternative assets have, however, increased significantly in popularity. In 2017 there were $8.8 trillion of
assets under management globally, with the sector having grown by 12.1% annually since the financial
crisis. VC funds have capitalized upon this, with the amount of capital raised per year growing by 100%
over the decade to $78 billion in 2018 (excluding Softbank, which is technically a corporate VC unit).

2010 – 2018 Global Venture Capital Fund-Level Capital Raising Amount and Count

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Mirroring the trends seen in startups, less VC funds are raising more capital. What is impressive
within the context of this is how relatively small VC firms are from an employment perspective
compared to the capital they deploy. Looking at a subset of data (Crunchbase) from firms that appear
to be active, a picture of what a “median firm” looks like from an HR perspective emerges. The
efficiency of them is stark: globally there are 3.8 firm employees in total per portfolio investment,
dropping to a parsimonious 1.7 in Europe.

55
CHAPTER – 07

FINDING

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  10 Tips for Finding Outside Investors for Your Business
Investors might be friends and family, angel investors, or venture capitalists. Startups tend to go with
investors when they can, because it’s hard for them to get business loans. And established small businesses
will occasionally look for investors, even though that means sharing ownership, instead of standard business
credit.
Are you still with me? Good. Here are my 10 tips—oh, and by the way, I did raise venture capital for Palo
Alto Software, makers of Bplans, at one point. I’ve been a consultant to venture capital for 35 years, and
I’ve been an angel investor for 10 years.

1. Don’t say venture capital when you mean angel investment, or friends and family funding
Many people use the wrong words to describe the type of funding they’re seeking.Venture capital is a subset
of outside investment, and the hardest to get. If you have to ask whether your startup is a venture capital
candidate, then it probably isn’t. Angel investment is not venture capital. Funding from friends and family is
not venture capital.
Furthermore, it’s important to understand the differences. Start with this article on the difference between the
two—and from here on, I’m going to be talking mostly about angel investors, with a touch of friends and
family funding. Because, as you’ll see in that article, venture capital is rarified air—quite specialized.

2. Don’t do anything in bulk

When seeking funding, avoid email templates like the plague. Serious investors don’t read executive
summaries, or watch a pitch—much less read a business plan—when it looks like it’s being sent in bulk to
multiple investors.
That idea dates back to the 1980s when people imagined that investors were looking at business plans
coming in unsolicited. Actually, they weren’t, but sometimes they pretended they were. Not anymore.

3. Do your research first

For getting funding from friends and family—which I’ve never done—the best tip I ever heard was not to
ask your people directly whether they’d invest or not. Instead, describe the business and ask them who they
know who might be interested. That’s less awkward by good measure if your people aren’t interested. They
can promise to think about who might be interested, without saying directly that they aren’t. And if they are
interested, then that’s an invitation to speak up about it.
For angel investors, always identify your targets carefully before moving forward. Identify a select few angel
investors or angel groups that invest the amount you need, in your industry, at your stage of development, in
your region.
Angel investors and groups each have their unique interests, identities, and personalities. They have
preferences about where they invest, at what stage, and what amounts. Most of them have websites, and
most of the websites announce their preferences. They don’t want to deal with people who aren’t in their
category and don’t know it. They expect you to know.
The Angel Capital Association lists investors and investor groups, and has statistics, advice, and general
information.

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You can also search the web for local leads (search “angel investors [your location]” and industry-specific
leads (search “angel investor [your business type]” ). Lastly, you can register at Gust, which is free to
startups and small businesses, to see profiles of angel investors and listings of angel groups.

4. Forget the businesses that prey on hopeful entrepreneurs by selling databases and leads and such
Those contacts are already rubbed raw by unsolicited emails and phone calls. It doesn’t work that way; it has
to be one at a time.
Furthermore, those businesses that take your money with the pretense that angels (or even less likely, VCs)
will browse your summary and find you are cheating you. The deals chase the money; the money doesn’t
chase the deals.

5. Approach a select few target angels or groups only one at a time, carefully
Be patient. Look first for introductions by checking with people you know who might know them, alumni
relationships, business associations, their public speaking dates, and any contacts in the companies in which
they’ve already invested.
Don’t be afraid to submit to groups using their website form or call their switchboards, but keep that as a last
resort. Your chances are way better if you fit their normal profile and you’ve been able to meet one of the
partners, or get an introduction from somebody they know.

6. Have an extremely good tag line and instant summary

Start with the elevator pitch and get the key points down, but the theoretical 60 seconds of the classic
elevator pitch is too much. You need to be able to describe your business in a sentence or two and that
sentence has to be intriguing.
People have had success with “the [some well-known business] of [some new business area].” For example,
Alibaba was called “The Amazon.com of China.” I ran into a company calling itself “the Netflix of kids’
toys,” and with that, the idea was instantly clear.
For more on this, read my five-part series in this space that starts with Personalize Your Pitch, as well as 7
Key Components of an Elevator Pitch and 5 Things Missing from Most Entrepreneur Pitches.
But don’t count on 60 seconds—be able to do it in three sentences.

7. Have an extremely good quick video or a one-page pitch

Put together an excellent quick video or one page pitch, and send that as the follow-on email when you talk
with an angel or get an introduction.
Expect the real information exchange to happen in email. The expected follow up to that quick three
sentences is a summary, in email. These days, a great video works better than an email summary.
Keep it secure, not public, and a simple password system like Vimeo or one of its competitors is best. The
YouTube email-based permissions are risky because everybody has too many email addresses these days,
and confusion is likely. Make it seamless. And I like the LivePlan pitch too, but I also have to disclose that
I’m biased—I have an interest in LivePlan.

8. If your summary video—or summary memo—works, then the next step is a pitch
In practice, what happens is there is a contact, you send the follow-up video or summary, and then you wait,
anxiously, to be invited to pitch. The pitch is a slide deck, yes, but that’s not what matters; it’s the angels’
chance to meet you, check you out, see your team, and hear your story.

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There’s a lot about the pitches on this website. Check this out. Still, don’t think success or failure depends on
the pitch. It doesn’t. It depends on the story, the credibility, and the angels’ assessment of your future
prospects. My personal favorite is my list of 10 things I hated about pitches I’ve been through.

9. Have a business plan ready before you finish the summary or the pitch
The business plan is the screenplay; the pitch is the movie. Don’t do the plan too big or too formal because
it’s not going to last and should never be older than two to four weeks.
Don’t swallow the myth about investors not reading your plan. The truth at the core of that myth is that
investors will reject your business without reading your plan—but they won’t invest in it without reading the
plan. No business gets money without going through rigorous study and examination first (they call that
“due diligence”), and the plan is the active document for the due diligence.
Although, for the record, there are some exceptions. When a well-known successful entrepreneur, the people
we read about in the headlines, takes a new business to angels they already know, then those people will
often get the investment without the same due diligence.
Angels do compete for those deals. And unfortunately, those people—the stars—will then tell the rest of us
that investors don’t read plans. If you need a template to help you get started, Bplans offers a free,
downloadable business plan template.

10. Expect the process to take way longer than you think it will
Due diligence alone will be several months of unending requests for more documentation. When VCs say
yes they really mean maybe, and when they say maybe they really mean no.

 How to Find the Right VC To Fund Your Business

Getting an offer from the perfect VC partner must begin with research. You can only score meetings with
VCs by first creating a targeted outreach list of firms that are aligned with your business.
The first phase of this process is understanding which VCs are a good fit for your company’s goals. The
second phase is securing the meeting. This post will give you the tools to accomplish both of these tasks.

Phase I: Create a target list of VCs that are a good fit for your company.
All venture capital firms have a specific focus regarding the kinds of companies they fund: They might
invest mainly in software, consumer products, fintech, green technologies, AI or any other number of
categories. And each firm focuses on different stages of investment (seed, early-stage, series A, series B and
series C). Thus, the first step in reaching out to VCs is research. Here’s how to start.
1. Find venture capital firms that invest in companies like yours.
Create a roster of VCs that are likely to be interested in the kind of deal you’re offering, both in terms of
industry and product. Look for firms that have a track record of investing in your industry and have funded
companies similar to yours in terms of revenue growth and product focus.
You can start your search for specific firm names on CB Insights, a highly-regarded resource that offers data
on active VC firms and associated industries. Additionally, check out the CB Insights data-driven top 100
ranking to familiarize yourself with the heavy hitters of the VC world.

2. Ensure the firm invests in the stage of funding that you seek.
Which stage of financing are you in? Before adding a VC firm to your target list, be sure it’s actively
pursuing deals in your stage.
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Most venture capital firms share their investment ethos or criteria on their company website. For example,
the investment criteria for Hummer Winblad Venture Partners (HWVP) identifies a focus on first
institutional investments in “disruptive,” “emerging” software companies. If you have an early-stage
company developing a software product, HWVP could be the right investment partner, and you should add it
to your target list. If not, you should leave it off.

3. Check out the firm’s past deals.

Another way to determine if your company fits within a VC’s investment ethos is to review the firm’s recent
deals, which you can usually find online. Even top-ranked venture capital firms like Accel Partners openly
list their past deals. Reviewing them will help you determine if your company fits the firm’s prototype.
For example, Accel offers details on the type of businesses it seeks--and specific names of companies
they’ve funded--in a blog post about their investment in fintech company Monzo:
“Over the years at Accel, we’ve backed many businesses reshaping large consumer categories with
delightful user experiences,” the post reads. “Spotify with music, Etsy and Flipkart with commerce or
Deliveroo with food are great examples.”
VC firms are transparent about the types of investments they make, so do your research upfront to find out if
your company is a fit. You can also work backward: Locate a business similar to yours that has gotten
funded, and find out which firm invested.

4. Consider location.
Some firms only invest locally, while others are open to investing beyond their city and state. If you're based
in Denver and one of your target venture capital firms is based in San Francisco, be sure it makes out-of-
state investments before sending an email.
It’s worth noting that some regions receive more VC funding than others. More than 80 percent of the
country’s venture capital investment goes to just five metros--San Francisco, New York, Boston, San Jose
and Los Angeles--according to City Lab analysis of PitchBook data. If you’re operating a company outside
of these metros, you might as well be competing for remaining 20 percent. However, VC firms are
increasingly willing to invest outside their regions, TechCrunch notes.

The present study mainly covers the venture capitalists choice of investments and the perception of
entrepreneurs on the venture capital financing in Tamil Nadu. The important findings recorded in the
preceding chapters of the present research report with the suitable suggestions, incorporated in this chapter,
are as follows:
It is found that out of the 150 entrepreneurs, 98 (65.33 per cent) are males whereas the remaining 52
respondents (34.67 per cent) are females. It can be concluded that the males are interested in the activities of
venture capital market than females.

It is observed that the important age groups of the respondents are 41 to 50 years and 31 to 40 years. They
constitute 23.33 and 22.00 per cent to the total respectively. The respondents who are below 31 years
constitute 21.33 per cent.

It is followed by the age group of 51-60 years and above 60 years. It is shown that the majority of the
respondents are married. They constitute 63.34 per cent to the total respondents. It is followed by unmarried
respondents and widowers/divorced, which constitute 26.33 per cent and 10.33per cent respectively.
60
 It is illustrated that the level of education among the respondents. The important levels of education among
them are graduation and post-graduation which constitute 22.67 per cent and 21.33 per cent respectively. It
is followed by diploma, SSLC/+2 and professional/technical education which constitute 20.00 per cent,
19.33 per cent and 16.67 per cent respectively.

It is inferred that the important occupational pattern of the respondents belongs to agricultural family, who
constitute 34.67 per cent. The business family constitutes 31.33 per cent to the total respondents. 25.33 per
cent of them are government employment family and only 8.67 per cent are private employment
family.

It is found that the important monthly income groups among the respondents in the present study are Rs.
10,000 to 20,000 and Rs. 20,000 to 30,000, which constitute 26.67 and 24.00 per cent to the total,
respectively.

It is portrayed that out of 150 entrepreneurs, 107(71.33) per cent of them belong to the nuclear family
system, and the remaining 28.67 per cent of the respondents belong to the joint family system. The analysis
concluded that the nuclear family system is the dominant system among the respondents in the study
area.

It is understood that the majority of the respondents’ households has the family size of 3-6 members. It
constitutes 51.33 per cent and it was followed by below 3 members and above 6 members respectively
which constitute 24.67 per cent and 24.00 per cent respectively.

It has been observed that nearly 120 (80.00 per cent) of the members belong to Hinduism, 21 (14.00 per
cent) belong to Christianity and 9 (6.00 per cent) of them belong to Islam. Thus, it is clearly understood that
the majority of the members are Hindus in the study area.

It is shown that majority of the members belong to the Backward Class which constitutes 55 (36.67 per
cent) followed by Most Backward Class, Forward Class and Scheduled Caste/Scheduled Tribe which
constitutes 32.00 per cent, 23.33 per cent and 8 per cent) respectively.

It is understood that out of 150 sample respondents, the majority of them (65.33 per cent) fall under the
category of urban area and the remaining 34.67 per cent fall under the category of rural area.

It has been inferred that families with two earning members constitute 64 (42.67 per cent) followed by 55
(36.67 per cent) with only one earning member in the family and 20 (13.33 per cent) with three members in
the family. The families with four and above four earning members together constitute only 11 (7.33
percent) of the total.

The majority of the respondents’ income from other source is house property. They constitute 33.33 per cent
and they were followed by respondents whose income from other sources are investment, business and
agriculture which constitute 26.67 per cent, 26.00 per cent and 18.00 per cent respectively.

61
 It is shown that the important total family income groups among the entrepreneurs in the present study are
Rs. 20,000 to 40,000 and Rs. 40,000 to 60,000, which constitute 32.67 and 20.67 per cent to the total,
respectively.

It is found that out of 150 entrepreneurs, 42 (28.00 per cent) contribute their share for family is upto 25 per
cent and it is followed by 75 to 100 per cent, 25 to 50 per cent and 50 to 75 per cent respectively.

It is understood that out of the 150 entrepreneurs, 82 (54.67 per cent) belong to the category of hereditary
and 68 (45.33 per cent) of them are coming under the category of first generation.

It is shown that a majority (44.67 per cent) of the entrepreneurs is doing business for 10 to 15 years and it is
followed by 15-20 years, more than 20 years, 5 to 10 years and less than 5 years which constitute 18.66 per
cent, 13.33 per cent, 12.67 per cent and 10.67 per cent respectively.

It is portrayed that out of 150 venture capitalists, 65 (43.33 per cent) of them come under the category of
small enterprises followed by medium, micro and big enterprises which constitute 26.00 per cent, 20.00 per
cent and 10.67 per cent respectively.

It is understood that out of the 150 entrepreneurs, 32 (21.33 per cent) come under the category of expansion
stage and it is followed by early growth stage, matured stage, start up stage, turn around stage and seed stage
which constitute 19.33 per cent, 17.33 per cent, 14.67 per cent, 14.67 per cent and 12.67 per cent
respectively.

It is inferred that out of the 150 entrepreneurs, 30 (20.00 per cent) come under the category of health care
and life sciences industries and it is followed by media and entertainment, manufacturing, banking and
financial services, engineering and communication, IT & ITES, shipping and logistics, telecom and energy.

It is observed that out of the 150 entrepreneurs, 46 (30.67 per cent) come under the category of proprietary
concern and it is followed by private limited company, partnership/LLP, co-operative society/trust, self-help
group and publiclimited company which constitute 26.66 per cent, 22.67 per cent, 12.00 per cent,
4.67 per cent and 3.33 per cent respectively.

It is found that the important variables that influence the entrepreneurs starting the venture capital
undertaking through ICICI are independence, family background and passion for innovation since the mean
scores are 3.8036, 3.8027 and 3.7182 respectively. Among the entrepreneurs belonging to the IFCI, these are
family background, long cherished dream to become an entrepreneur and passion for innovation since the
respective mean scores are 3.8186, 3.8617 and 3.7241.

It is inferred that the important variables that influence the entrepreneurs to attract the venture capital fund
through ICICI are differentiation with competition, innovation and creativity and marketing strategy since
the mean scores are 3.8681, 3.8181 and 3.7976 respectively. Among the entrepreneurs belonging to the IFCI,

these are experience and competency of the entrepreneur, integrity and ethical behaviour and tax benefit
mean scores are 3.8625, 3.8186 and 3.8086.

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Regarding the level of satisfaction of the entrepreneurs towards the performance of venture capital fund
companies, it is depicted that out of the 150 entrepreneurs, 39 (26.00 per cent) fall under the high level
satisfaction group, 79(52.67 per cent) come under the category of medium level satisfaction and 32 (21.33
per cent) fall under the low level satisfaction group

In order to test the relationship between the level of satisfaction and the profile variables, the Null
Hypotheses (H0) were framed and tested with the help of the Chi-Square test. It is found from the Chi-
Square test that out of eight profile variables, marital status, education, family size, nature of family,
occupation and monthly income were significant association with level of satisfaction towards the
performance of venture capital companies. Hence, the null hypotheses were rejected for the above six profile
factors. In case of other two variables such as gender and age are not significant. Hence, the null hypotheses
were accepted for the variables such as gender and age.

Regarding the factor analysis, the following factors are influencing the satisfaction level of the entrepreneurs
towards the performance of venture capital companies in Tamil Nadu:
 Ownership Status
 Information Rights
 Management Activities
 Confidentiality
 Fees levied by the VCFC
 Individuality Status
 Employment agreements

It is found that the important variables that influence the entrepreneurs for their success through venture
capital undertakings for ICICI entrepreneurs are VC’s vast network enables the recruitment of talented
people, VC’s vast network facilitating mobilization of finance at favourable terms and Creativity and
innovation since the mean scores are 3.8489, 3.0866 and 3.6923 respectively.

Among the entrepreneurs belonging to the IFCI, these are Overall improvement in corporate governance,
Process-driven undertaking not impacted by management Shake-ups and VC’s vast network enables the
recruitment of talented people mean scores are 3.8386, 3.6824 and 3.6814.
Regarding the SWOT analysis, it is observed that the statement namely profitable business with positive
cash flows ranked first by both the category of entrepreneurs among ICICI and IFCI venture capital
companies. The vast network is the next strength for both types of entrepreneurs. Ranking differs for other
strengths and the big growing market share is considered as the least strength by both category of
entrepreneurs.

It is shown that ICICI entrepreneurs accorded first place to technological of obsolescence with an average
score of 2.06 and . The entrepreneurs viewed poor inventory control as the second weakness with an average
score of 1.99. The lack of working capital was accorded last place. The entrepreneurs of IFCI observed poor
inventory control as the first weakness with an average score of 2.19, technological of obsolescence was
ranked second with an average score of 2.14. The limited product life was accorded the last rank by IFCI
entrepreneurs.

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It is found that the major opportunities for venture capital undertakings. ICICI entrepreneurs accorded easy
liquidity with low interest rates as the first opportunity with a score of 2.67. The technological changes was
ranked second with an average score of 2.63. Leading to increased demand was viewed as the least ranked
opportunity for ICICI venture capital undertakings.

The IFCI entrepreneurs perceived technological changes as the first opportunity with an average score of
2.62 and easy liquidity with low interest rates was accorded with second rank. High entry barriers for new
entrants were considered to be the third opportunity for the entrepreneurs with an average score of 2.49.
Leading to increased demand was considered as the last opportunity by both the ICICI and IFCI
entrepreneurs.

It is inferred that the entrepreneurs have ranked the threats according to their perception of the threats
prevailing in the global market. ICICI entrepreneurs considered high tax rates and confusing and unstable
government regulations and procedures as their first and second threats, respectively. Poor infrastructure is
ranked as the tenth threat.
In case of IFCI entrepreneurs ranked low entry barriers as their first and foremost threat with an average
score of 1.62. Confusing and unstable government regulations and procedures and high tax rates were
ranked second and third respectively by the IFCI entrepreneurs. They considered too much of corruption as
the tenth threat.

It is depicted that positive Skewness in the case of strength and opportunities whereas negative Skewness in
the distribution of weakness and threats. This means that Skp value is relatively less skewed in case of
strength and opportunities and more skewed for threats and weaknesses.

Regarding the factor analysis, the following factors are influencing the problems faced by the entrepreneurs
of venture capital undertakings in Tamil Nadu:
 Lack of Human Resource Management
 Lack of raw material and finance
 Poor Infrastructural facilities
 Lack of Research and Development
 Lack of awareness on venture capital

Regarding the perception on the factors influencing the entrepreneurs to promote venture capital fund, the
significant difference among the two group of entrepreneurs has been identified in the perception experience
and competency of the entrepreneur, Create of awareness on venture capital activities through informed
websites/ Seminar /Conferences, Establishment of business incubators, Fiscal and tax incentives, Corporate
sectors encouraged to participate in venture capital, FIs and high net worth individuals encouraged to invest
in venture funds, Encouragement to One Person Company /Limited Liability Partnership, Simplifying
bankruptcy loss, Strengthening secondary market for small Companies, Creating new instruments like
venture debt instruments, Development of systematic risk management system like SMERA credit rating
etc., and Developing recognition and rewards system for venture capital undertakings since the respective ‘t’
statistics are significant at five per cent level.

Regarding the perception on the options to influence the entrepreneurs toexit from their venture capital
undertakings, the significant difference among the two group of entrepreneurs has been identified in the
perception experience and competency of the entrepreneur, Selling of the stake to strategic buyer, Initial
Public offering in India or overseas, Secondary sale in stock market, Merger with an existing listed company
and Management / Company buy-back, since the respective ‘t’ statistics are significant at five per cent le.

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 CHAPTER – 08

RECOMMODATION

65
From the literature discussed, on venture capital, it has been fund that access to early stage financing to
technology-based enterprises is crucial. These innovative enterprises are core to commercializing
innovation, sustaining job creation and improving the competitiveness of the economy. However, problems
in securing timely, adequate and effective access to capital inhibit company creation and survival resulting
into failure of these ventures. As discussed, the main risks associated with the funding to knowledge based
enterprises include assessing intangible assets, complexity of the technology, and uncertainty of cash flows.
To promote the growth of such entrepreneurial ventures, provision of venture capital can be a stimulant. A
vibrant venture capital industry will fill the gap between the capital requirements of technology and
knowledge enterprises and funding available from traditional lenders such as banks.

A favourable change that has been happening in India is that of the quality of enterprises. It is on an
ascending curve with growing number of young technically qualified entrepreneurs added. Once upon a
time, starting up a business in India was a difficult task but the situation has changed for better. During the
earlier times, economic growth was also slow, job and business opportunities were mainly overseas, there
were infrastructure bottlenecks and government was relatively unsympathetic to business needs in general.
Similarly, funds for early stage and growth companies were very limited as banks and financial institutions
were not keen on providing loans and credit facilities to knowledge based enterprises. But now, scope for
young entrepreneurs has increased alongwith various opportunities. Government policies have become more
conducive to growth. And above all, there is a lot of awareness among people and young entrepreneurs in
India today. Another thing that has worked in the favour of these entrepreneurs is that funding has become
easier as compared to the past. The eco-system for fostering entrepreneurship has also evolved and become
more conducive with incubation centres, angels and venture funds contributing to the growth of early stage
enterprises.

In this process of transformation, the regulatory environment and the modes of support in terms of
investment and financing needed, plays a major role. While reviewing the macro environment for the
venture capital in India in general and Gujarat in particular, it was felt that there are some deficiencies in the
ecosystem which if addressed properly can further facilitate the development of the venture capital industry.
It is worthwhile to note here that a few recommendations for development of the venture capital industry in
India as outlined below fall in line with SEBI appointed K B Chadrasekhar committee’s suggestions (2000).
Recommendations for promotion of venture capital industry and making it more robust, at national level and
at state level (for Gujarat) are presented as under.

 Recommendation for the Development of Indian Venture Capital Industry

Venture Capital Investments in Areas other than Technology

One of the concerns for venture capital investment in India is that VCs continue to invest in the areas they
are most familiar with i.e. predominantly ‘Information Technology’.

Though other sectors like health care, education and retailing have started drawing the attention of the VCs
in India; Information Technology (IT) receives the highest share in the pie. For increasing the overall
competitiveness of the Indian startups, there is a need to broaden the horizon of the areas for venture capital
investment by directing it to biotechnology, telecommunications, agriculture, food processing, tourism and
other service sectors. Government policies for promoting the venture capital funding in India, should,
therefore, focus on how the funds are actually invested especially in the areas less targeted by the VCs due to
lack of technology focus; rather just on increasing available funding.

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Involvement of Sophisticated Investors like Pension Funds

The structuring of venture capital funds is such that in the short run, these funds incur losses but these are
matched by the long term capital gains. So, it is very essential that the investors investing in venture capital
funds must be able as well as prepared to wait for a longer period of time for significant returns and they
must also have the loss bearing capacity, if it happens occasionally. In developed countries like US, pension
funds are the primary investors in venture capital industry. These investors can stay invested for a longer
period of time as they have to meet the pension liabilities in far distance future. In India, present pool of
funds available for venture capital is very limited and is predominantly contributed by foreign funds. If the
venture capital funding is to grow, the government should relax constraints on institutional investments in
domestic venture funds. The pool of domestic venture capital must be augmented by increasing the list of
sophisticated investors like pension funds, provident funds and insurance funds; and by permitting them to
invest a small percentage of their corpus in registered venture capital funds up to prudential limits with due
safeguards.

Harmonization of Regulations for Venture Capital Industry

The regulatory, tax and legal environment should play a facilitating and promotional role for the venture
capital industry to prosper in India. Internationally, venture capital funds have evolved in an atmosphere of
structural flexibility, fiscal neutrality and operational adaptability. At present, the venture capital activity in
India comes under the purview of different sets of regulations. SEBI (Venture capital Funds) Regulation,
1996 lays down the overall regulatory framework for registration and operations of venture capital funds in
India. Overseas venture capital investments are subject to the Government of India.

Guidelines for Overseas Venture capital Investment in India dated September 20, 1995. For tax exemptions,
venture capital funds also need to comply with the Income Tax Rules made under Section 10(23FA) of the
Income Tax Act. These multiple set of guidelines and other requirements have created inconsistencies and
also resulted into negative perceptions about the regulatory environment in India. India needs to provide
regulatory simplicity and structural flexibility by harmonizing SEBI regulations and Income Tax rules of
CBDT. This would provide better flexibility to VCs in structuring the investment instruments as well as
availing of tax breaks. Since SEBI is responsible for overall regulation and registration of venture capital
funds, the need is to harmonize and consolidate within the framework of SEBI regulations to provide
uniform, hassle free, one window clearance. It is essential to have a single regulatory framework under SEBI
Act, for registration and regulation of venture capital funds in India.

Development of Relevant Secondary Capital Market/Stock Exchange for

Smaller Companies

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Younger and smaller companies are leveraging on innovative breakthroughs, carrying out the classic
Schumpeterian ‘creative destruction’ to create wealth. Options for raising capital for such small companies
are restricted when there is an absence of equity markets for listing and trading of small-cap companies. It
also means that the options before a seed investor especially VCs, in terms of finding a market and for exit,
remain obscure. Thus, establishment of secondary market for younger promising companies will also help in
developing the venture capital market, as it provides an alternative exit market through Initial Public Offer
(IPO) exits. Government can assist in this directly through the creation of second-tier stock markets for
IPOs. Stock market that is specifically designed for smaller companies will be a win- win situation for the
companies as well as the investors. For the investors, the major advantage is in the creation of a market that
is small enough for the company to attract the attention of other shareholders including bigger companies
and VCs and thereby also provide appropriate exit options. For companies, it will ensure visibility, help in
raising additional capital and help to broaden the shareholder base. Creation of such an exchange will also
help generate significant ‘network’ with the wider business community. There are examples of similar
exchanges set up in other parts of the world, most notably the Alternative Investment Market (AIM) in
London. Of course, such exchange will have to frame rules and policies suited to the requirements of small-
cap companies as well as investors. Adequate monitoring and quality checks are also needed to ensure
public trading of shares of small companies within a well-supervised, yet simplified, regulatory
environment.

Provision of Venture Capital Funding to Small and Medium Enterprises

(SMEs)

To develop entrepreneurship, venture capital needs to concentrate its investment in small and medium
enterprises. The SMEs, account for 95% of the industrial units and contribute 40% of the value addition in
manufacturing and exports. Many entrepreneurs in this segment have successful ideas but lack adequate risk
capital more specifically equity capital. For high risk projects, SMEs are yet not able to raise adequate funds
from the banks. This is supported by a study of RBI. As per the study, credit granted to SMEs has declined
from 26% to 17% between March 1997 and 2007 (Economic Times, Ahmedabad, 10th September, 2009).
Further, these entrepreneurs are not able to provide collaterals asked by the banks and other financial
institutions. They can not tap equity market as they will not be able to meet SEBI requirements concerning
the networth and profit track records.

It is in this context, that the rationale for exploring the equity option for them should be emphasized. One of
the strategies could be provision of dedicated VC fund for SMEs, which would invest as little as ` 2 crores to
` 50 crores for funding their innovations. Presently private VCFs prefer to invest ` 50 crores or more and
hence are irrelevant to SMEs. VCFs can be set up for specific sectors like engineering, information
technology, FMCG, and the like. Sector specific knowledge and experience will help VCFs in identifying
potential ideas better. The development of regional VCFs along with regional banks active in that region
may also be considered. The database of these banks can help in identifying the star performers. Also banks
can be actively involved in marketing those regional VCFs. A number of funds have been created by the
government to help SMEs to access capital such as various schemes of SIDBI, but these may not be
sufficient. Besides provision of VCF for this sector, government can undertake various programmes as
implemented in US through Small Business Innovation Research (SBIR) and Small Business Technology
Transfer (STTR). In US, each year, the federal agencies that participate in SBIR and STTR set aside 2.5%
and 0.3%, respectively, of their extramural R&D budgets. In India, also government agencies with large
research and development budgets may set aside a small fraction of their funding for competitions among

such small businesses wherein the small businesses that succeed in these competitions keep the rights to
technology developed and are encouraged to commercialize the technology. The basic objective of such

68
programme should be to induce private sector to invest in small companies that may not otherwise be able to
raise capital.

Setting Up a Public Fund through Public Private Partnership (PPP) for

Funding Startups

To encourage venture capital investment in the startups, public funds with partnership of the private sector
may be formed at the national as well as state level. Such mechanisms are again found in US. In its Small
Business Investment Company (SBIC) scheme, private seed and venture capital funds can borrow the funds
from government at favourable terms. These loans are then invested in the start ups as equity. This would
increase governments’ involvement in funding the ventures indirectly. And the investors are also encouraged
to enter into risk financing.

Since the venture capital financing is risky, the failure of investment or the adverse outcome can result into
overall poor returns for the investors. In order to protect the investors for the downside of the returns,
government can assume a proportion of the costs of project failure in form of some guarantee. This may
cover up to certain percentage of the costs of project failure with a cap per portfolio. This kind of protection
would have high utility for small funds where if they write off significant proportion of their portfolio
investments for the loss, residual funds for investing in other ventures will fall below a viable limit. Like
down-side protection scheme, there can be an upside leverage scheme which multiplies the financial benefits
from successful investments to the investors.

Increased Involvement of the Venture Capitalist in Development of the

Enterprises

While surveying the entrepreneurs funded by Gujarat Venture Finance Limited (GVFL) in Gujarat, it was
revealed that GVFL plays highly satisfactory role as a board member but the entrepreneurs expect still more
operational involvement from the venture capitalist in areas like marketing, production and other human
resource areas.
Entrepreneurs in India generally lack expertise in marketing, sales and business development areas,
especially when compared to their counterparts in the US. Therefore, it may be suggested that VCs in India
in general and Gujarat in particular, have to be more operationally involved with startups and rather simply
attending board meetings from time to time. The VCs will have to provide a clear value proposition to the
startups and in some cases the VCs may even have to go to the extreme of closing contracts and brining in
the revenue on behalf of a startup rather than simply ‘opening doors’ by providing the contracts.

 Recommendation for Development of Venture Capital Industry in Gujarat

Though the state has presence of entrepreneurial ethos, it has not resulted into a large enough flow of new
technology venture ideas. For encouraging innovations in Gujarat from grassroots level, the synergies
between education, innovation and entrepreneurship should be developed intensively. Education is
indispensable for knowledge based entrepreneurship which in turn is a precondition for the development of
the venture capital market. Innovation helps in catalyzing the entrepreneurship by converting the
commercially viable ideas into wealth. An entrepreneurial culture further drives formation of wealth from

69
knowledge and leads movement for innovation. The concept and the culture of the entrepreneur must
become the part of the societal framework for the development of the venture capital industry in the state.
Few of the recommendations as discussed below will certainly help in strengthening this link among
education, innovation and entrepreneurship.

Entrepreneur and Investor Education

Sometimes access to capital is not just money or funding problem but the lack of knowledge on supply side
as well as demand side i.e. on the part of providers and seekers of funds. During the survey of the venture
capitalists in India, it was found that there are many VCs with adequate funds looking to invest in the state
but that they find it difficult to invest in promising projects due to lack of quality deal flow. In order to solve
this problem, it is essential to educate investors and entrepreneurs as both these parties do not have enough
knowledge of each the other’s needs, of market opportunity or of the way in which investors look at
management and how management looks at investors.

A part from the skills or knowledge based entrepreneurship, the awareness regarding the venture capital
investment is significantly low in the state. As discussed in the chapter on data analysis and findings, the
entrepreneurs from Gujarat know little about the concept of Venture capital as well as Angel Capital. To
increase the awareness and upgrade the skills of both, the entrepreneurs as well as the venture capitalists, it
may be suggested to set up venture capital training centre at the state level which may engage in some
educational activities for these entrepreneurs and investors. Entrepreneurs would benefit in terms of skills
development for refining a commercial proposition and business plan so that it is more meaningful,
appropriate, realistic and appealing to investors. The investors can also enhance their skills in understanding
of the market, evaluation of the proposals, due diligence, valuation of the deals etc. This centre can work
closely with incubation centres in the state, consultants, private equity specialists and other development
institutions that can instill best practices and are skilled at identifying good managers, nurturing and
coaching venture capital funds. The centre may also facilitate collaboration and networking amongst venture
capital professionals as well as entrepreneurs. The centre may also perform other activities like business
consulting and information disseminating for knowledge based enterprises in the state. The development of
such centre that promotes entrepreneurship and more conducive business culture will go a long way in
facilitating venture capital investing in Gujarat.

One of the major challenges faced by the VCs in India at present is that the industry does not have the right
talented personnel required to manage the venture capital funds in a professional manner. Venture capital
funds necessitate professionals with entrepreneurial temperament and abilities, highest integrity and strong
management skills. These professionals are not merely finance providers but they are also closely involved
with the operations of the investee companies. Unfortunately, such professionals are not easily available
particularly in developing countries like India. Besides, existing venture capital professionals have graduated
from banking industry and they carry the same lending mindset to financing of venture capital industry as
well. Actually, their approach should be more like an investment banker or a development banker with flair
of entrepreneurship. To achieve this, venture capital industry should be institutionalized and managed by
sophisticated professionals, investors and entrepreneurs, with initiative, drive and vision. This will ensure a
critical mass for the industry to achieve sustainable growth. The new trend has started in this direction in
India. Recently many entrepreneurs step in to organizing various courses with emphasize on experience
sharing and training in various aspects of venture capital financing to develop such professionals with
entrepreneurial orientation.

70
Centre for Innovation Incubation and Entrepreneurship (CIIE) at IIM Ahmedabad, as a part of the incubation
programme. The comprehensive education programme as suggested here can be undertaken in association
with such incubation centres as well. Various management schools in the state can promote the concept of
venture capital by designing exclusive courses on Entrepreneurship and Venture Development. These
programmes will help in inculcating risk taking and entrepreneurial attitude among the youth of today.
Venture fairs must be organized in developed cities of the state to bring together venture capitalists and
entrepreneurs and raise the level of awareness. The business plan competitions organized by management
schools in Gujarat from time to time, particularly by IIM-A, is a step in the right direction. As discussed in
the chapter on data analysis, business plan competitions provide a good platform to the emerging
entrepreneurs to receive the feedback from the academicians and the investors.

Thus, there is an urgent need to provide financial literacy to startups and increase awareness on the activities
of angel/VC financing through greater involvement with educational, research institutions, and incubation
centres. Venture funds like GVFL, other financing institutions and incubation centres like CIIE, should
encourage entrepreneurship promotion and education schemes designed to find, assist and train new
technology entrepreneurs.

Role of Incubation Centres

For the development of the dynamic venture capital market, it is essential to improve the supply of equity
finance to technology-based firms and startups. And for improving the flow of such equity finance, it is
crucial to develop skilled and knowledge based entrepreneurs to provide the business credibility that will
attract the finance in the first place. In this sense, entrepreneurship especially knowledge based
entrepreneurship, is considered to be a pre-condition for the development of the vibrant venture capital
market. Therefore, the efforts should be directed towards encouraging such kind of entrepreneurship in the
state. Incubators are one such link in the entrepreneurial ecosystem that can fill this gap by providing the
requisite managerial, marketing, infrastructural and networking support to the emerging entrepreneurs in the
state.

Significant research is taking place in various fields such as pharmaceuticals, information technology, bio-
technology and service areas in Gujarat. However, findings are not commercialized due to lack of funds and
also lack of managerial and marketing support. Business incubators can nurture such venture ideas at the
seed or startup stage. They can also operate as intermediaries that can strengthen the linkages between the
research and development taking place in state and angel investors as well as venture capitalists, who can
meet the further funding requirement of the entrepreneurs incubated by them. They can also hold seminars
from time to time either independently or in association with the venture capital training centre as discussed
above. While valuable work is already being done by various incubators in the state like CIIE, NIDB,
Comcubator and GIAN, still there is huge scope for them to further trigger the entrepreneurship in the state.
There is a need to significantly increase the number of the business incubation opportunities for
entrepreneurship by comprehensively exploring various policy options.

Developing Angel Investors Network

The vibrancy and quality of the venture capital market and the availability of angel funds are closely related.
The Ottawa Angel Alliance has looked systematically at the relationship between angels and venture capital
investment in a given region (Report on ‘Access to Capital’ prepared by Alberta Council of Technologies,
August 2007).

71
They found a direct relation to the quality of venture capital investment in a region to that of an active angel
investment community. Therefore, for venture capital to flourish in the state, it is equally essential that
angels are well supported. Venture capital industry lacks the presence of angel investors in India in general
and Gujarat in particular, who contribute significantly to the financing of the startups. The success of
Sillicon Valley which is a nurturing ground for venture capital funded companies can be due to the support
provided by angel investors. They provide initial/seed stage financing till the company becomes eligible for
venture funding. Angel capital is more likely to come from high networth individuals who are entrepreneurs
themselves and possess domain knowledge. Angel capital market is quite fragmented and not as formalized
as venture capital market in India. There are many successful Gujarati businessmen in India as well as
overseas. These ultra high net worth individuals may be willing to provide funding support to the promising
entrepreneurs from Gujarat. However, high cost of setting up any syndicated fund and lack of awareness
restrain them from making such investments. Connecting these individuals with technology entrepreneurs
the state will also help to build a technology corridor. Therefore, there is a real and apparent need to form a
network of such successful high net worth individuals and the members of this network can invest in the
proposals depending upon their area of expertise either as an individual or as a part of syndication. As angel
investors are driven by emotional returns rather than pure financial returns, they may be attracted on this
front to support the other entrepreneurs from their home ground. SEBI should register such groups of high
net worth individuals located in India or overseas, who meet the criteria of being independent investors, as
accredited investors and offer them the same rights for example, tax pass through privileges; as granted to
registered VC firms. Certain other fiscal incentives could help in pushing such individuals into becoming
angel investors. Canada has one such provision, for a 30% setoff for angel investments by individuals. Such
fiscal incentives in the form of a setoff against taxable income may be provided for individuals who invest in
startups.

Instituting Sidecar Funds for Angel Capital and Venture capital Investments
in Gujarat

As mentioned earlier, venture capital firms prefer to invest at the expansion stages. Investing in small
amount would prove to be costlier as they might not be able to cover their initial investment overhead
mainly due diligence expenses. Because of this approach of the venture capitalists, the small but attractive
proposals from the entrepreneurs are not entertained by these investors. On the other hand the high networth
individuals popularly known as angel investors will be investing in the small amounts because their capacity
to invest as individual is limited. In order to nurture the funding requirement of enterprises with small to
medium capital requirement, government can provide certain funding support known as ‘sidecar’ funds. In
this investment mechanism, for every investment made, the government may offer a “match” of some kind.
From the entrepreneurs’ perspective, this would reduce the capital required from the investors and would
help them to move to the next stage of venture development. For execution of this proposition, there should
be a network of investors either angels or venture capitalists investing in the state. All these investors
investing in the state will have to be registered with this network/syndication and the activities of the
network can be monitored by some representative either from the government side or the network itself. The
government will provide the funding with a condition that the recipient of sidecar funds be part of a
syndicated fund as opposed to a stand-alone fund. Such matching is established in the UK, Belgium, France,
Austria and some states in the US. A key feature of such a proposal is that the final decision as to who gets
funds is with the investor, not with the government. The government invests in the fund to support
innovation – as a public asset - and does not scrutinize the investment decisions, but holds the fund
accountable for best decision making. Thus, provision of side car funds would result into increasing the
number and amount of deals, improving the quality of the investments and helping to attract and develop
new investors into the investment community.

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Involvement of the Corporates

As discussed previously in the chapter on venture capital scenario in Gujarat, one of the missing links in the
development of the entrepreneurial ecosystem in the state has been the serious involvement of the corporates
in funding the start ups. Lack of substantial capital flow from big corporate players to startup entrepreneurs
at the seed stage makes it difficult to sustain a critical mass of seed funding in the entrepreneurial sector. The
state houses many key players across diverse sectors; to name a few like Adani, NIRMA, Torrent, Rasna,
Paras Phrma, Cadila Pharma, Shah Alloys Limited, Alembic, Claris, Intas, Dishman and many more. These
established corporates together with high net worth individuals should create such networks and provide
early stage support in terms of funding, mentoring and networking to emerging entrepreneurs from the state
and government should provide all support to such initiative. The corporates may invest directly or may set
up corporate venture capital fund. Recently, one such initiative has been taken wherein Mr. Narayan Murthy
of Infosys has set up a venture capital fund to encourage the startups and support them with funding as well
as networking assistance.

Alternatively, these entities from diverse sectors may also form a consortium and set up a joint venture
capital fund to respond to the investment opportunities in the state. This would be a win-win situation for
both the parties i.e. corporates involved in funding and the startups being funded. Startups can also reap the
advantages like access to customers, markets, technology, best practices, manufacturing, brands, and so on.
Similarly, corporates can keep up with the rapidly changing market and technology scenarios. For this to
happen, corporate sector should be encouraged to participate in the venture capital industry by providing
suitable tax incentives. Tax treatment plays a crucial role in the decision making of an investor. These
investors are basically interested in the tax treatment for the investment as well as the tax consequence of
their sale of this investment. Favourable tax treatment in this regard to these investors can be one of the
incentives to attract them to invest in the start ups.

Improved Accessibility and Availability of Data for Venture Capital Activity

To analyse the venture capital scenario in Gujarat, the data for venture capital investments specifically
information with respect to number of deals, amount of deals, break up of investments in various sectors and
stages of development as well as investments in various cities of Gujarat, were required. But unfortunately,
no such comprehensive data set was available at present in the state. There is only one venture capital
investment firm based in Gujarat at present, i.e. GVFL. The details of the investments made by the firm were
available from GVFL. But other than GVFL, there might be investments made by venture capital firms from
outside Gujarat. The details of such collective investments are absolutely absent in the state. There is an
obvious need to look into this matter. The investment figures are published time to time by the research
agencies like VentureIntelligence. But the major limitation is that these firms do not bifurcate between
venture capital and private equity deals and it was a costly affair to purchase these reports for research
purpose. Instead, the local venture capital training centre, as suggested above, can be appointed as a nodal
agency by the government to keep the track of all the venture capital investments happening in the state and
this information should be freely available to the concerned parties. This will also facilitate inter and intra
state comparison i.e. the figures of the venture capital investments can be compared with the previous
investments of the state itself as well as other states of the country.

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Implications of the Study

The findings of this research have practical implication for various stakeholders in the industry primarily,
entrepreneurs, venture capitalists and government. As the study on the venture capital investment process
defines all the stages across the process and the preferences of Indian VCs for various stages like the
preferred deal sources, criteria for screening and investment decision, means for monitoring and controlling
and exit methods and time frame; the entrepreneurs who desire to seek venture capital funding may prepare
themselves accordingly so as to qualify for such funding in future. Besides, for the entrepreneurs who have
already raised venture capital funding and are into postinvestment stage, the study findings may suggest the
kind of value addition and monitoring/controlling made by the VCs in various areas or operations of their
venture.

On the demand side, study is based upon the role played by GVFL in the development of the venture.
Differences between the expectations of the entrepreneurs before the venture capital investment and the
perceived actual contribution post-investment, with respect to the role of the venture capitalist, would
provide a valuable insight to GVFL for filling the gap between the two for future investments. It would also
provide a fair idea to GVFL about various positive or negative perceptions held by these entrepreneurs that
would help the firm in correcting the misconceptions about venture capital investments for future as well as
the present investee companies. As venture capital investment is considered to be reputation capital, the
study attempts to inform the venture capitalist about how the entrepreneurs utilize the name of the venture
capitalist for various activities like raising funds in future, hiring talent, introduction to new customers or
suppliers etc.
Findings of the study on funding preferences of young entrepreneurs from Gujarat will help the investors
understand the familiarity and the awareness level of the aspiring entrepreneurs operating at seed and start
up stages; towards early stage financing options. Again the analysis of perceptions of these entrepreneurs
towards the equity investors would be a platform for the venture capitalists to capitalize upon the positive
believes and over come the negative ones. Finally, the funding preferences of these entrepreneurs for future
expansion will help the venture capitalists explore the scope for this risk capital options.

Besides, various recommendations of the research at national (for India) and regional level (for Gujarat)
would facilitate the development of conducive ecosystem for venture capital. The study presents various
propositions to concerned regulatory authorities like; including pensions funds for investment in the venture
capital funds, synchronizing different regulations for the industry, development of relevant secondary capital
market/stock exchange for smaller companies, increasing the supply of venture capital funding to small and
medium enterprises (SMEs), providing education to entrepreneurs and investors, increased involvement of
the corporates, angel investors and incubators etc. If Gujarat has to be successful in developing a more
diversified economy, access to capital issues need to be resolved so that firms can prosper and grow.
Execution of these measures in the right spirit will provide structural flexibility, fiscal neutrality and
operational adaptability for the venture capital industry to flourish at a pace of global trends.

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 CHAPTER – 09

CONCLUSIO
N

75
In my opinion most start-ups will continue to raise the necessary funds in Germany. Firstly, venture capital
never played a significant role here and secondly a large range of new capital sources have been developed
over the last years. Corporate investors have become much more active and crowd funding offers a new way
to raise initial proof of concept financing. Universities and government agencies have also been offering
additional financing sources. So I believe that in terms of start-up financing there will not be a significant
impact from the declining venture capital funding. Internationally, this will probably be a different story.

But what does it mean for valuations? Again I believe that most German start-ups would not have been
sold/continued financing rounds to/with VC funds in any case. Trade exits are the normal route to go for
start-ups here and most corporates are not only willing to invest in start-ups but have been allocating
significant amounts of capital. In terms of pricing I also believe that Germany is looking at incredibly low
valuations anyhow and that equity markets are not an exit route for start-ups due to depressed listing
outlooks. Hopefully corporate capital availability will actually help to increase pricing levels here.

In my experience …

Overall, I believe that corporates will play a significantly larger role in the German start-up scene than VCs
ever had, have and will. The OTTO Group alone has an early phase incubator (Liquid Labs
http://www.liquidlabs.de/), later stage incubator (Project A http://www.project-a.com/) and a later stage VC
funding partner (eVentures http://www.eventures.vc/). Most other large German corporates are following
this trend and are establishing their own teams.

In addition, I am pretty sure that we will start to see an increasing number of more specialized incubators
that offer additional guidance and support as well as follow-up funding through corporate buyers. Here an
interesting trend from the US are specialized healthcare incubators like Rockhealth or Medstartr.

“Rockhealth is one of the growing incubators in the healthcare industry. They help teams with venture
capital, advice and their network to find proper healthcare business models & help to scale them. The startup
industry is just starting to innovate around healthcare and those incubators are likely to be in the centrum of
this development.” http://rockhealth.com/

These significantly more specialized funds will take over start-up financing and provide industry trade
buyers for growing start-ups. Entrepreneurs who are looking to grow their business should therefore forget
about impressing VCs and start building their corporate contact network.
This thesis dealt with the role of spatial proximity between venture capitalists and new ventures throughout
the VC investment process and is of high practical and scientific relevance.
Young and innovative high potential companies are central for the prosperous economic development of
regions. At the same time, venture capital is often one of the few financing options for these companies and
it is widely accepted that venture capitalists play a key role in
their development.994 Hence, it is of utmost importance to secure an appropriate availability of
venture capital for new ventures. However, it became clear throughout this thesis that the
supply of venture capital is highly clustered in many countries and that Germany is no exception in this
regard. Furthermore, it was revealed that spatial proximity between venture capitalists and new ventures
represents an important factor in VC financing relationships. The
clustering of venture capital supply and the importance of spatial proximity for the emergence
76
of VC financing relationships leads to important implications for entrepreneurs, venture capitalist, and policy
makers.
Despite the high practical relevance of this topic, to the best knowledge of the author no holistic theoretical
framework regarding the impact of spatial proximity on the likelihood to successfully pass the different
phases of the VC investment process existed prior to this thesis.
Moreover, for continental European countries very little was known about (i) the relationship
between certain characteristics of ventures, venture capitalists and/or financing rounds and the
observed spatial proximity between both parties and (ii) the impact of spatial proximity on the
likelihood of investment. In consequence, this thesis aimed to close these research gaps.
Thereby, this thesis may also be seen in the light of two, broader streams of research. The first
stream relates to the role of spatial proximity in various financial phenomena like venture
capital financing, mutual or hedge fund management, debt financing, or M&A.995 The second
stream of research aims to understand determinants of the emergence of business relationships
in the field of new venture financing, especially venture capital.996 This concluding chapter
presents the most important findings of the preceding analyses, discusses important implications, and
provides directions for future research.
Venture Capital can play a very important role in a sector where knowledge
and ideas can play a catalytic role. India has the largest scientific and technical
manpower in the world. Some ofthe institutes like Indian Institute of Technology
(IITs) and Indian Institute of Management (IIMs) are known as centres of
excellence in the field of engineering and management respectively. A large
number of engineers and managers graduating from these institutes over a period of
time convert themselves to entrepreneurs and they look at Venture Capital
financing for converting their ideas into successful commercial ventures. With the
growing economy good business opportunities are also likely to emerge from
transfer of technologies and marketing of ideas tested in developing countries.
Venture Capital may thus prove to be an ideal form of finance for new dynamic
enterprises.
The study reveals that there was an exponential rise in Venture Capital
financing in India during the first 6 years of the study (i.e.) from 1994-95 to 1999-
2000. It was followed by a downtrend in 2000-01 and 2001-02 particularly due to
the failure ofthe dot.com ventures where even many Venture Capitalists in the US
burnt their fingers, thereby leading to a overall decline in investment in the industry
worldwide. However, inspite ofit the Venture Capital industry has started creating
innovative firms in India and during the last 2 years of the study (i.e.) 2002-03 to
2003-04 many new entrepreneurial firms have ventured into new product
development and contract research for global firms. Considering the vast potential
of highly technically qualified human resource in the country and the thrust
attached by the government to the economic growth. Venture Capital in India is
undoubtedly heading towards a major growth prospects.
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A survey of the BT-venturehead.com states that most of the Venture
Capitalists expect more finance to flow into India and the Venture Capital industry
in India will grow over the next five years. The existing venture capitalists are
likely to work on salvaging their existing investments and will look forward to
merger and acquisition to cover their risk in some ofthe present ventures. It is also
said that the Venture Capital funds will stop diversifying and preferred investments
in a few specific sectors would concentrate on the industry they know better. So in
this process ventures with proven management and business models will get
priority over newer and innovative ideas.
However it is recommended that the Venture Capitalists should retain their
basic feature (i.e.) risk taking. The present situation many compel the Venture
Capitalists to opt for less risky opportunities but it is against the spirit of Venture
Capitalism, and also the individual Venture Capitalists should follow a focused
investment strategy. The specialization should be in a board technology segment.
At present the venture capitalists have a generalized method of investing in all
segments possible. The government of India and the SEBI are seriously making
attempts to facilitate more and more Venture Capital funds to flow into the country.
The Economic and securities market reforms are ideally placed to attract new
Venture Capitalists within the country and from abroad. The Venture Capital
industry now, in India is poised for tremendous growth in the years to come and
generate corporate giants to make India unbelievably a second to none world power
by the year 2020.

78
CHAPTER – 10

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