INTRODUCTION

The term venture capital comprises of two words that is, “Venture” and “Capital”.
Venture is a course of processing, the outcome of which is uncertain but to which is
attended the risk or danger of “loss”. “Capital” means recourses to start an enterprise. To
connote the risk and adventure of such a fund, the generic name Venture Capital was
coined.

Venture capital is considered as financing of high and new technology based enterprises.
It is said that Venture capital involves investment in new or relatively untried technology,
initiated by relatively new and professionally or technically qualified entrepreneurs with
inadequate funds. The conventional financiers, unlike Venture capitals, mainly finance
proven technologies and established markets. However, high technology need not be pre-
requisite for venture capital.

Venture capital has also been described as ‘unsecured risk financing’. The relatively
high risk of venture capital is compensated by the possibility of high returns usually
through substantial capital gains in the medium term. Venture capital in broader sense is
not solely an injection of funds into a new firm, it is also an input of skills needed to set
up the firm, design its marketing strategy, organize and manage it. Thus it is a long term
association with successive stages of company’s development under highly risk
investment conditions, with distinctive type of financing appropriate to each stage of
development. Investors join the entrepreneurs as co-partners and support the project with
finance and business skills to exploit the market opportunities.

Venture capital is not a passive finance. It may be at any stage of business/production

cycle, that is, start up, expansion or to improve a product or process, which are associated
with both risk and reward. The Venture capital makes higher capital gains through
appreciation in the value of such investments when the new technology succeeds. Thus
the primary return sought by the investor is essentially capital gain rather than steady
interest income or dividend yield.

The most flexible definition of Venture capital is-

“The support by investors of entrepreneurial talent with finance and

business skills to exploit market opportunities and thus obtain capital gains.”

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CONCEPTUAL FRAMEWORK

Concept of Venture Capital

Venture capital commonly describes not only the provision of start up finance or ‘seed
corn’ capital but also development capital for later stages of business. A long term
commitment of funds is involved in the form of equity investments, with the aim of
eventual capital gains rather than income and active involvement in the management of
customer’s business.

Features of Venture Capital

High Risk

By definition the Venture capital financing is highly risky and chances of failure are high
as it provides long term start up capital to high risk-high reward ventures. Venture capital
assumes four types of risks, these are:

 Management risk - Inability of management teams to work together.

 Market risk - Product may fail in the market.

 Product risk - Product may not be commercially viable.

 Operation risk - Operations may not be cost effective resulting in

increased cost decreased gross margins.

High Tech

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

Equity Participation & Capital Gains

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

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Participation In Management

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

Length of Investment

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

Illiquid Investment

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

Difference between Venture Capital & Other Funds

Venture Capital Vs Development Funds

Venture capital differs from Development funds as latter means putting up of industries
without much consideration of use of new technology or new entrepreneurial venture but
having a focus on underdeveloped areas (locations). In majority of cases it is in the form
of loan capital and proportion of equity is very thin. Development finance is security
oriented and liquidity prone. The criteria for investment are proven track record of
company and its promoters, and sufficient cash generation to provide for returns
(principal and interest). The development bank safeguards its interest through collateral.

Venture Capital Vs Seed Capital & Risk Capital

It is difficult to make a distinction between venture capital, seed capital, and risk capital
as the latter two form part of broader meaning of Venture capital. Difference between
them arises on account of application of funds and terms and conditions applicable. The
seed capital and risk funds in India are being provided basically to arrange promoter’s
contribution to the project. The objective is to provide finance and encourage
professionals to become promoters of industrial projects. The seed capital is provided to
conventional projects on the consideration of low risk and security and use conventional
techniques for appraisal. Seed capital is normally in the form of low interest deferred loan

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as against equity investment by Venture capital. Unlike Venture capital, Seed capital
providers neither provide any value addition nor participate in the management of the
project. Unlike Venture capital Seed capital provider is satisfied with low risk-normal
returns and lacks any flexibility in its approach.

Risk capital is also provided to established companies for adapting new technologies.
Herein the approach is not business oriented but developmental. As a result on one hand
the success rate of units assisted by Seed capital/Risk.

Seed Capital Scheme Venture capital Scheme

Basis Income or aid Commercial viability
Beneficiaries Very small entrepreneurs Medium and large
entrepreneurs are also
covered
Size of assistance Rs. 15 Lac (Max) Up to 40 percent of
promoters’ equity
Appraisal process Normal Skilled and specialized
Estimates returns 20 percent 30 percent plus
Flexibility Nil Highly flexible
Value addition Nil Multiple ways
Exit option Sell back to promoters Several ,including Public
offer
Funding sources Owner funds Outside contribution
allowed
Syndication Not done Possible
Tax concession Nil Exempted
Success rate Not good Very satisfactory

Table 1.1: Difference between Seed Capital Scheme and Venture capital Scheme

Venture Capital Vs Bought Out Deals

The important difference between the Venture capital and bought out deals is that bought-
outs are not based upon high risk- high reward principal. Further unlike Venture capital
they do not provide equity finance at different stages of the enterprise. However both
have a common expectation of capital gains yet their objectives and intents are totally
different.

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 The Venture Capital Spectrum

The growth of an enterprise follows a life cycle as shown in the diagram below. The
requirements of funds vary with the life cycle stage of the enterprise. Even before a
business plan is prepared the entrepreneur invests his time and resources in surveying the
market, finding and understanding the target customers and their needs.

Building a sustainable business

IPO

Expansion

Product
Development
Start up

Business
Plan
Concept Time

Venture Private Public Public Equity for

Seed Capital
Family Angel Capital Equity Equity Restructuring
Personal
Partners Investor Buyouts

Figure 2.1: Venture Capital Spectrum

Venture capital was started as early stage financing of relatively small but rapidly
growing companies. However various reasons forced venture capitalists to be more and
more involved in expansion financing to support the development of existing portfolio
companies. With increasing demand of capital from newer business, Venture capitalists
began to operate across a broader spectrum of investment interest. This diversity of
opportunities enabled Venture capitalists to balance their activities in term of time
involvement, risk acceptance and reward potential, while providing on going assistance to
developing business.

Different venture capital firms have different attributes and aptitudes for different types of
Venture capital investments. Hence there are different stages of entry for different
Venture capitalists and they can identify and differentiate between types of Venture

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capital investments, each appropriate for the given stage of the investee company, These
are:-

1. Early Stage Finance

 Seed Capital
 Start up Capital
 Early/First Stage Capital
 Later/Third Stage Capital

2. Later Stage Finance

 Expansion/Development Stage Capital
 Replacement Finance
 Management Buy Out and Buy ins
 Turnarounds
 Mezzanine/Bridge Finance

Not all business firms pass through each of these stages in a sequential manner. For
instance seed capital is normally not required by service based ventures.

The table below shows risk perception and time orientation for different stages of venture
capital financing.

Financing Stage Period (funds Risk Activity to be financed

locked in years) perception
Early stage finance 7-10 Extreme For supporting a concept or
Seed idea or R & D for product
development
Start up 5-9 Very high Initializing operations or
developing prototypes
First stage 3-7 High Start commercial production
and marketing
Second stage 3-5 Sufficiently Expand market & growing
high working capital need
Later stage finance 1-3 Medium Market expansion,
acquisition & product
development for profit
making company
Buy out-in 1-3 Medium Acquisition financing

Turnaround 3-5 Medium to high Turning around a sick

company
Mezzanine 1-3 Low Facilitating public issue

Table 1.2: Venture Capital- Financing Stages

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Seed Capital

It is an idea or concept as opposed to a business. European Venture capital association

defines seed capital as “The financing of the initial product development or capital
provided to an entrepreneur to prove the feasibility of a project and to qualify for
start up capital”.

The characteristics of the seed capital may be enumerated as follows:

 Absence of ready product market

 Absence of complete management team
 Product/ process still in R & D stage
 Initial period / licensing stage of technology transfer

Start up Capital

It is stage 2 in the venture capital cycle and is distinguishable from seed capital
investments. An entrepreneur often needs finance when the business is just starting
Start up capital is defined as: “Capital needed to finance the product development, initial
marketing and establishment of product facility. “

The characteristics of start-up capital are:-

i. Establishment of company or business. The company is either being organized or is

established recently. New business activity could be based on experts, experience or a
spin-off from R & D.

ii. Establishment of most but not all the members of the team. The skills and fitness to
the job and situation of the entrepreneur’s team is an important factor for start up finance.

iii. Development of business plan or idea. The business plan should be fully developed
yet the acceptability of the product by the market is uncertain. The company has not yet
started trading.

Early Stage Finance

It is also called first stage capital is provided to entrepreneur who has a proven product, to
start commercial production and marketing, not covering market expansion, de-risking
and acquisition costs.

At this stage the company passed into early success stage of its life cycle. A proven
management team is put into this stage, a product is established and an identifiable market
is being targeted.

The characteristics of early stage finance may be: -

 Little or no sales revenue.

 Cash flow and profit still negative.

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 A small but enthusiastic management team which consists of people with technical
and specialist background and with little experience in the management of growing
business.
 Short term prospective for dramatic growth in revenue and profits.

The early stage finance usually takes 4 to 6 years time horizon to realization.

Second Stage Finance

It is the capital provided for marketing and meeting the growing working capital needs of
an enterprise that has commenced the production but does not have positive cash flows
sufficient to take care of its growing needs.

The characteristics of a second stage finance are:

 A developed product on the market

 A full management team in place
 Sales revenue being generated from one or more products
 There are losses in the firm or at best there may be a break even but the
surplus generated is insufficient to meet the firm’s needs.

Later Stage Finance

It is called third stage capital is provided to an enterprise that has established commercial
production and basic marketing set-up, typically for market expansion, acquisition,
product development etc. It is provided for market expansion of the enterprise. The
enterprises eligible for this round of finance have following characteristics.

I. Established business, having already passed the risky early stage.

II. Expanding high yield, capital growth and good profitability.
III. Reputed market position and an established formal organization structure.

There are four sub divisions of later stage finance.

 Expansion / Development Finance

 Replacement Finance
 Buyout Financing
 Turnaround Finance

Expansion / Development Finance

An enterprise established in a given market increases its profits exponentially by

achieving the economies of scale. This expansion can be achieved either through an
organic growth, that is by expanding production capacity and setting up proper
distribution system or by way of acquisitions. Anyhow, expansion needs finance and
venture capitalists support both organic growth as well as acquisitions for expansion.

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At this stage the real market feedback is used to analyze competition. It may be found that
the entrepreneur needs to develop his managerial team for handling growth and managing
a larger business.
Replacement Finance

It means substituting one shareholder for another, rather than raising new capital resulting
in the change of ownership pattern. Venture capitalist purchase shares from the
entrepreneurs and their associates enabling them to reduce their shareholding in unlisted
companies. They also buy ordinary shares from non-promoters and convert them to
preference shares with fixed dividend coupon. Later, on sale of the company or its listing
on stock exchange, these are re-converted to ordinary shares. Thus Venture capitalist
makes a capital gain in a period of 1 to 5 years.

Buy - out / Buy - in Financing

It is a recent development and a new form of investment by venture capitalist. The funds
provided to the current operating management to acquire or purchase a significant share
holding in the business they manage are called management buyout.
Management Buy-in refers to the funds provided to enable a manager or a group of
managers from outside the company to buy into it.

 Turnaround Finance

It is rare form later stage finance which most of the venture capitalist avoid because of
higher degree of risk. When an established enterprise becomes sick, it needs finance as
well as management assistance foe a major restructuring to revitalize growth of profits.
Unquoted company at an early stage of development often has higher debt than equity; its
cash flows are slowing down due to lack of managerial skill and inability to exploit the
market potential.

Bridge Finance

It is the pre-public offering or pre-merger/acquisition finance to a company. It is the last

round of financing before the planned exit. Venture capitalist help in building a stable and
experienced management team that will help the company in its initial public offer. Most
of the time bridge finance helps improves the valuation of the company. Bridge finance
often has a realization period of 6 months to one year and hence the risk involved is low.
The bridge finance is paid back from the proceeds of the public issue.

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 VENTURE CAPITAL IN INDIA

Evolution of VC Industry in India

The first major analysis on risk capital for India was reported in 1983. It indicated that
new companies often confront serious barriers to entry into capital market for raising
equity finance which undermines their future prospects of expansion and diversification.
It also indicated that on the whole there is a need to revive the equity cult among the
masses by ensuring competitive return on equity investment. This brought out the
institutional inadequacies with respect to the evolution of venture capital.

In India, the Industrial finance Corporation of India (IFCI) initiated the idea of VC when
it established the Risk Capital Foundation in 1975 to provide seed capital to small and
risky projects. However the concept of VC financing got statutory recognition for the first
time in the fiscal budget for the year 1986-87.

The Venture Capital companies operating at present can be divided into four groups:
• Promoted by All – India Development Financial Institutions
• Promoted by State Level Financial Institutions
• Promoted by Commercial banks
• Private venture Capitalists.

 Promoted by all India development financial institutions

The IDBI started a VC fund in 1987 as per the long term fiscal policy of government of
India, with an initial capital of Rs. 10 cr which raised by imposing a cess of 5% on all
payments made for the import of technology know- how projects requiring funds from
rs.5 lacs to rs 2.5 cr were considered for financing. Promoter’s contribution ranged from
this fund was available at a concessional interest rate of 9% ( during gestation period)
which could be increased at later stages.

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

The risk capital foundation established by the industrial finance corporation of India
(IFCI) in 1975, was converted in 1988 into the Risk Capital and Technology Finance
company (RCTC) as a subsidiary company of the ifci the rctc provides assistance in the
form of conventional loans, interest –free conditional loans on profit and risk sharing
basis or equity participation in extends financial supoort to high technology projects for
technological upgradations. The RCTC has been renamed as IFCI Venture Capital Funds
Ltd.(IVCF)

 Promoted by State Level Financial Institutions

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

The government of Andhra Pradesh has also promoted the Andhra Pradesh Industrial
Development Corporation (APIDC) venture capital ltd. To provide VC financing in
Andhra Pradesh.

 Promoted by commercial banks

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

The State Bank Venture Capital Funds provides financial assistance for bought –out deal
as well as new companies in the form of equity which it disinvests after the
commercialization of the project.

Canbank Venture Capital Fund provides financial assistance for proven but yet to b
commercially exploited technologies. It provides assistance both in the form of equity and
conditional loans.

 Private Venture Capital Funds

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

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Some of the companies that have received funding through this route include:
• Mastek, on of the oldest softwear house in India
• Ruskan software, Pune based software consultancy
• SQL Star, Hyderabad-based training and software development consultancy
• Satyam infoway, the first private ISP in India
• Hinditron, makers of embedded software
• Selectia, provider of interactive software selectior
• Yantra, ITLInfosy’s US subsidiary, solution for supply chain management
• Rediff on the Net, Indian website featuring electronic shopping, news,chat etc.

INDUSTRY LIFE CYCLE:

From the industry life cyle we can know in which stage we are standing. On the
basis of this management can make future strategies of their business.

INTRODUCTION GROWTH

Figure: 1.3 Industry life cycle

The growth of VC in India has four separate phases:

Phase I - Formation of TDICI in the 80’s and regional funds as GVFL & APIDC in the
early 90s.

The first origins of modern venture capital in India can be traced to the setting up of a
Technology Development Fund in the year 1987-88, through the levy of access on all
technology import payments. Technology Development Fund was started to provide
financial support to innovative and high risk technological programmes through the
Industrial Development Bank of India.

The first phase was the initial phase in which the concept of VC got wider acceptance.
The first period did not really experience any substantial growth of VCs’. The 1980’s
were marked by an increasing disillusionment with the trajectory of the economic system
and a belief that liberalization was needed. The liberalization process started in 1985 in a

12
limited way. The concept of venture capital received official recognition in 1988 with the
announcement of the venture capital guidelines.

During 1988 to 1992 about 9 venture capital institutions came up in India.

 Technology involved should be new, relatively untried, very closely held, in the
process of being taken from pilot to commercial stage or incorporate some significant
improvement over the existing ones in India

 Promoters / entrepreneurs using the technology should be relatively new,

professionally or technically qualified, with inadequate resources to finance the
project.

Between 1988 and 1994 about 11 VC funds became operational either through
reorganizing the businesses or through new entities.

Phase II - Entry of Foreign Venture Capital funds (VCF) between 1995 -1999

The second phase of VC growth attracted many foreign institutional investors.During this
period overseas and private domestic venture capitalists began investing in VCF. The new
regulations in 1996 helped in this. Though the changes proposed in 1996 had a salutary
effect, the development of venture capital continued to be inhibited because of the
regulatory regime and restricted the FDI environment. To facilitate the growth of venture
funds, SEBI appointed a committee to recommend the changes needed in the VC funding
context. This coincided with the IT boom as well as the success of Silicon Valley start-
ups. In other words, VC growth and IT growth co-evolved in India

Phase III - (2000 onwards) - VC becomes risk averse and activity declines:

Not surprisingly, the investing in India came “crashing down” when NASDAQ lost 60%
of its value during the second quarter of 2000 and other public markets (including those in
India) also declined substantially. Consequently, during 2001-2003, the VCs started
investing less money and in more mature companies in an effort to minimize the risks.
This decline broadly continued until 2003.

Phase IV – 2004 onwards - Global VCs firms actively investing in India

Since India’s economy has been growing at 7%-8% a year, and since some sectors,
including the services sector and the high-end manufacturing sector, have been growing at
12%-14% a year, investors renewed their interest and started investing again in 2004. The
number of deals and the total dollars invested in India has been increasing substantially.

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Growth of venture capital in India

Growth of VC in India
USD Million No. of Deals
16000 450
14234
14000 387 400

350
12000
299 300
10000 280
250
8000 7500
6390
200
6000 170
146 150
4000 110 71
100
78 2200
56
2000 1160 937 1650 50
591 470
0 0
2000 2001 2002 2003 2004 2005 2006 2007 1st half
of 2008
Value of deals No.of deals

Figure: 1.4 Growth of Venture capital in india

The venture capital is growing 43% CAGR. However, in spite of the venture
capital scenario improving, several specific VC funds are setting up shop in India,
with the year 2006 having been a landmark year for VC funding in India. The total
deal value in 2007 is 14234 USD Million. The NO. of deals are increasing year by
year. The no. of deals in 2006 only 56 and now in 2007 it touch the 387 deals. The
introduction stage of venture capital industry in India is completed in 2003 after
that growing stage of Indian venture capital industry is started.

There are 160 venture capital firms/funds in India. In 2006 it is only but in 2007
the number of venture capital firms are 146. The reason is good position of capital
market. But in 2008 no. of venture capital firms increase by only 14. the reason is
crashdown of capital market by 51% from January to November 2008. The No. of
venture capital funds are increasing year by year.

2000 2001 2002 2003 2004 2005 2006 2007 2008

841 77 78 81 86 89 105 146 160

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Venture capital growth and industrial clustering have a strong positive correlation.
Foreign direct investment, starting of R&D centres, availability of venture capital
and growth of entrepreneurial firms are getting concentrated into five clusters. The
cost of monitoring and the cost of skill acquisition are lower in clusters, especially
for innovation. Entry costs are also lower in clusters.
The venture capital firm invest their money in most developing sectors like health
care, IT-ITes,, telecom, Bio-technology, Media& Entretainment, shipping &
ligistics etc.

2007 VC INVESTMENTS BY INDUSTRY TOTAL

US$14.2Bn
1284 988
1638
1839

685

616
3979
1101
478
1628
IT&ITES Manufacturing
BFSI Eng & Construction
Healthcare & lifesciences Energy
Media&Entertinment Shipping&Logistics
Telecom Others

Source : TSJ Venture Intelligence India

Figure: 1.5 Total sector wise venture capital investment-2007

Now venture capital is nascent stage in india. Now due to growth of this sector, the
venture capital industry is also grow. The top most player in the industries are
ICICI venture capital fund, Avishhkar venture capital fund, IL&FS venture capital
fund, Canbank.

Venture Capital investment in, 2008.

Venture Capital firms invested $274 million over 49 deals in India during the three
months ending September 2008. The VC investment activity during the period was
significantly higher compared to the same quarter last year (which had witnessed 36
investments worth $252 million) as well as the immediate previous quarter ($165 million
invested across 28 deals).

The latest numbers take the total VC investments in the first nine months of 2008 to $661
million (across 108 deals) as against the $648 million (across 97 deals) during the
corresponding period in 2007.

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Top Investments

The largest investment reported during Q3 2008 was the $18 million raised by online
tutoring services provider TutorVista from existing investors Sequoia Capital India and
LightSpeed Ventures.

Investments by Industry

Information Technology and IT-Enabled Services -Enabled Services (IT & ITES)
industry retained its status as the favorite among VC investors during Q3 ’08.

VC Investments by Industry
Industry Volume No. of Deals Value (US $ M)
Q3 ‘ 08 Q3’ 08 YTD
YTD**
IT & ITES 25 58 147 361
Top VC Investments
BFSI 5 8 34 54
Company Sector Amount Investors
Engg & Construction 3 4
(US$ M) 23 33
Healthcare &OnlineLife 6 Services 12 4 52
TutorVista 18.0 Sequoia Capital India,
Sciences (Remote Tutoring) Lightspeed Ventures
Education 2 3 IFC,17 NEA-IUV,
23
Connectiva Communications Tech 17.0 SAP
Systems
Other Services (Revenue Assurance)
1 6 Ventures,
15 Others 29
Manufacturing Online Services
2 (Video 12.0
2 NEA-IUV,
13 13 ePlanet
Seventymm Rental) Ventures, Matrix Partners
Media 2 5 11
India,DFJ 19
Equitas
Energy Micro Microfinance
2 12.0
6 Bellwether,
6 Others
48
Finance
Travel & Transport
HaloSource 1
Water Purifiers 2
11.5 4 Sino-India,
Origo 14 Unilever
Tech Ventures
Retail - 1 - 10
Telecom - 1 - 5

Table: 1.6 Venture capital investment by industry

Led by the $12 million investment by Bellwether and others into Chennai-based
microfinance firm Equitas, BFSI emerged as the second largest (in value terms) for VC
investments during the period.

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 INVESTMENT BY INDUSTRY (Q3 ' 08)

5% 4% 2%1%
6%
6%

2% 54%
8%
12%
IT & ITES BFSI
Engg & Construction Healthcare & Life Sciences
Education Other Services
Manufacturing Media
Energy Travel & Transport

Figure: 1.7 investment by industry Q3,2008

Investment by Stage

About 67% of VC investments during Q3 ‘08 were in the early stage segment.

VC Investments by Stage
Stage of Company Volume Value
Development
Q3 '08 YTD Q3 '08 YTD
Early 33 67 172 339
Growth 16 41 102 322

Table: 1.8 Venture investment by stage

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 STAGE WISE INVESTMENT

33%

67%

EARLY LATER

Figure: 1.9 Stage wise investment

Need for growth of venture capital in India

In India, a revolution is ushering in a new economy, wherein entrepreneurs mind set is
taking a shift from risk averse business to investment in new ideas which involve high
risk. The conventional industrial finance in India is not of much help to these new
emerging enterprises. Therefore there is a need of financing mechanism that will fit with
the requirement of entrepreneurs and thus it needs venture capital industry to grow in
India.

Few reasons for which active Venture Capital Industry is important for India include:

 Innovation : needs risk capital in a largely regulated,

conservative, legacy financial system

 Job creation: large pool of skilled graduates in the first

and second tier cities

 Patient capital: Not flighty, unlike FIIs

 Creating new industry clusters: Media, Retail, Call Centers and back office
processing, trickling down to organized effort of support services like office
services, catering, transportation

Methods of Venture Financing

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

Equity: All VCFs in India provide equity but generally their contribution does not exceed
49 percent of the total equity capital. Thus, the effective control and majority ownership
of the firm remains with the entrepreneur. They buy shares of an enterprise with an
intention to ultimately sell them off to make capital gains.

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Conditional Loan: It is repayable in the form of a royalty after the venture is able to
generate sales. No interest is paid on such loans. In India, VCFs charge royalty ranging
between 2 to 15 percent; actual rate depends on other factors of the venture such as
gestation period, cost-flow patterns, riskiness and other factors of the enterprise.

Income Note : It is a hybrid security which combines the features of both conventional
loan and conditional loan. The entrepreneur has to pay both interest and royalty on sales,
but at substantially low rates.

Other Financing Methods: A few venture capitalists, particularly in the private sector,
have started introducing innovative financial securities like participating debentures,
introduced by TCFC is an example.

19
COMPREHENSIVE STUDY OF INDIAN MARKET
VENTURE CAPITAL & ALTERNATIVE FINANCING
COMPARISON
Private Placement, IPO,

vendor financing, state Venture Capital

funding, strategic alliance,

parent company finance

Angel investment, licensing Bootstrapping(factoring,

self funding, friends, family, trade credit, leasing ), micro
Community bank loans, financing debt, sell
some assets, business credit
card

High

Low

Low High
Level of Risk

Figure: 2.1 venture capital & alternative financing comparison

20
Simply put, venture capital is not the right fit for our business and there are plenty
of other options available when it comes to finding capital.

Substitutes in Early stage

1. Angels

Most venture capital funds will not consider investing in anything under $1 million
to $2 million. Angels, however, are wealthy individuals who will provide capital
for a startup business. These investors have usually earned their money as
entrepreneurs and business managers and can serve as a prime resource for advice
on top of capital. On the other hand, due to typically limited resources, angels
usually have a shorter investment horizon than venture capitalists and tend to have
less tolerance for losses.

2. Private Placement

An investment bank or agent may be able to raise equity for our company by
placing our unregistered securities with accredited investors. However, you should
be aware that the fees and expenses associated with this practice are generally
higher than those that come with venture and angel investors. We will likely
receive little or no business counsel from private investors who also tend to have
little tolerance for losses and under-performance.

3. Initial Public Offering

If we are somehow able to gain access to public equity markets than an initial
public offering (IPO) can be an effective way to raise capital. Keep in mind that,
while the public market’s high valuations, abundant capital and liquidity
characteristics make it attractive, the transaction costs are high and there are
ongoing legal expenses associated with public disclosure requirements.

Later Stage Financing

1. Bootstrap Financing

This method is intended to develop a foundation for your business from scratch.
Financial management is essential to make this work. With bootstrap financing
you’re building a business from nothing, which means there is little to no margin
for error in the finance department. Keep a rigid account of all transactions and
don’t stray from your budget.

A few different methods of bootstrapping include :

Factoring, which generates cash flow through the sale of your accounts receivable
to a “factor” at a discounted price forscash.

21
Trade Credit is an option if you are able to find a vendor or supplier that will allow
you to order goods on net 30, 60 or 90 day terms. If you can sell the goods before
the bill comes due then you have generated cash flow without spending
anysmoney. Customers can pay you up front our services.

Leasing your equipment instead of purchasing it outright.

2. Fund From Operations

Look for ways to tweak your business in order to reduce the cash flowing out and
increase the cash flowing in. Funding found in business operations come free of
finance charges, can reduce future financing charges and can increase the value of
your business. Month-by-month operating and cash projections will show how
well we have planned, how you can optimize the elements of your business that
generate cash and allow you to plan for new investments and contingencies.

3. Licensing

Sell licenses to technology that is non-essential to our company or grant limited

licensing to essential technology that can be shared. Through outlicensing we can
generate revenue from up-front fees, access fees, royalties or milestone payments.

4. Vendor Financing

Similar to the trade credit related to bootstrap financing, vendors can play a big
role in financing your new business. Establish vendor relationships through our
trade association and strike deals to offer their product and pay for it at a date in
the near future. Selling the product in time is up to us. In hopes of keeping you as a
customer, vendors may also be willing to work out an arrangement if we need to
finance equipment or supplies. Just make sure to look for stability when you
research a vendor’s credentials and reputation before you sign any kind of
agreement. And keep in mind that many major suppliers (GE Small Business
Solutions, IBM Global Financing) own financial companies that can help you.

5. Self Funding

Search between the couch cushions and in old jacket pockets for whatever extra
money you might have lying around and invest it into your business. Obviously
loose change will not be enough for extra business funding, but take a look at your
savings, investment portfolio, retirement funds and employee buyout options from
your previous employer. You won’t have to deal with any creditors or interest and
the return on your investment could be much higher.

6. SBIR and STTR Programs

Coordinated by the SBA, SBIR (Small Business Innovation Research) and STTR
(Small business Technology Transfer) programs offer competitive federal funding

22
awards to stimulate technological innovation and provide opportunities for small
businesses. You can learn more about these programs at SBIRworld.com.

7. State Funding

If you’re not having any luck finding funding from the federal government take a
look at what your state has to offer. There is a list of links to state development
agencies that offer an array of grants and financial assistance for small
businessessonsAbout.com..

8. Community Banks

These smaller banks may have fewer products than their financial institution
counterparts but they offer a great opportunity to build banking relationships and
are generally more flexible with payment plans and interest rates.

9. Microloans

These types of loans can range from hundreds of dollars to low six-figure amounts.
Although some lenders regard microloans to be a waste of time because the
amount is so low, these can be a real boon for a startup business or one that just
needs to add some extra cash flow.

10. Finance Debt

It may be more expensive in the long run than purchasing, but financing your
equipment, facilities and receivables can free up cash in the short term or reduce
the amount of money that you need to raise.

11. Friends

Ask your friends if they have any extra money that they would like to invest.
Assure them that you will pay them back with interest or offer them stock options
or a share of the profits in return.

12. Family

Maybe you have a rich uncle or a wealthy cousin that would be willing to lend you
some money get your business running or send it to the next level. Again, make it
worth their while by offering interest, stocks or a share of the profits.

13. Form a Strategic Alliance

Aligning your business with a corporation can produce funding from upfront or
access fees to your service, milestone payments and royalties. In addition,
corporate partners may be able to provide research funding, loans and equity
investments.

23
14. Sell Some Assets

Find an interested party to buy some of your assets (computers, equipment, real
estate, etc…) and then lease them back to you. This provides an instant source of
cash and you will still be able to use whatever assets you need.

15. Business Lines of Credit

If your business has positive cash flow and has proven that it will cover its debts
then you may be eligible for a business line of credit. This type of financing is a
common service offered by most business banks and serves as business capital, up
to an agreed upon amount, that you can access at any time.

16. Personal Credit Cards

Using personal credit cards to finance a business can be risky but, if you take the
right approach, they can also give your business a lift. You should only consider
using this type of financing for acquiring assets and working capital. Never
consider this to be a long-term option. Once your company breaks even or moves
into the black, ditch the credit cards and move toward traditional bank financing or
lease agreements.

17. Business Credit Cards

Business credit cards carry similar risks as personal credit cards but tend to be a
safer alternative. While the activity on this card goes toward your credit report, a
business credit card can help you to build business credit, keep your business
expenses separate from your personal expenses and can make tax season easier to
manage.

GUIDELINES FOR OVERSEAS VENTURE CAPITAL

INVESTMENT IN INDIA

An amendment has also been carried out in the SEBI Act empowering the
Securities and Exchange Board of India (SEBI) to register and regulate Venture
Capital Funds (VCFs) and Venture Capital Companies (VCCs) through specific
regulations.

With a view to augment the availability of Venture Capital, the Government has
decided to allow overseas venture capital investments in India subject to suitable
guidelines as outlined below :

a. Offshore investment may invest in approved domestic Venture Capital

Funds/Companies set up under the new policy after obtaining FIPB
approval for the investment. An offshore venture capital company may

24
 contribute 100% of the capital of domestic venture capital fund, and
may also set up a domestic asset management company to manage the
Fund.

b. The tax exemption available to domestic VCFs and VCCs under Section
10(23F) of the Income Tax Act, 1961, will also be extended to domestic
VCFs and VCCs which attract overseas venture capital investments
provided these VCFs/VCCs conform to the guidelines applicable for
domestic VCFs/VCCs.

c. Income paid to offshore investors from Indian VCFs/VCCs will be subject

to tax as per the normal rates applicable to foreign investors.

d. Offshore investors may also invest directly in the equity of unlisted Indian
companies without going through the route of a domestic VCF/VCC.

 Hassle free entry/exit for foreign venture apital firm

SEBI registered Foreign Venture Capital Investors shall be permitted to make

investment on an automatic route within the overall sectorial ceiling of foreign
investment under Annexure III of Statement of Industrial Policy without any
approval from FIPB. Further, SEBI registered FVCIs shall be granted a general
permission from the exchange control angle for inflow and outflow of funds and
no prior approval of RBI would be required for pricing.

 DTAT (Double Tax Avoidance Treaties)

Foreign funds investing in India directly into Indian portfolio companies will not
be affected by the proposed amendment. As most of these funds have been set up
in tax neutral jurisdictions like Mauritius, they will continue to enjoy tax
exemption on capital gains tax under the Double Tax Avoidance Agreements,
effectively getting the equivalent of a “pass through” notwithstanding which sector
they invest in.

Controller of Capital Issue

The exist route available to the venture capitalist were restricted to the IPO route.
Pricing of the issue was dependent on Controller of Capital Issues (CCI)
regulations before deregulations. Many of the issues were underpriced.
Failure of OTCEOI so small companies could not hope for BSE/NSE listing.

 REALXATION IN IPO NORMS :

The SEBI norms for an IPO by a Venture Capital company / fund be relaxed. The
requirement of three years track record should be waived off for a Venture Capital

25
company / fund registered with SEBI. This will help the Venture Capital
company / fund to generate resources locally.

 SEBI registered VCFs have been permitted to invest in equity and equity
linked instruments of offshore venture capital undertakings, subject to overall
limit of USD 500 million and with prior SEBI approval. Investment can be
made only in those companies which have an Indian connection and the
investment can not exceed 10% of the VCFs investible funds.

 Taxes on emerging sector :

As per Union Budget 2007 and its broad guidelines, Government proposed to limit
pass-through status to venture capital funds (VCFs) making investment in nine
areas. These nine areas are biotechnology, information technology,
nanotechnology, seed research and development, R&D for pharma sectors, dairy
industry, poultry industry and production of bio-fuels.

 Liberalization:

The government is promoting growth in capacity utilization of available and

acquired resources and hence entrepreneurship development, by liberalizing norms
regarding venture capital.
FACTORS AFFECTING VENTURE CAPITAL

ECONOMIC FACTORS:

1. MERGER & ACQUISITION :

Venture backed liquidity events by year 2001-2008 through M&A

Quarter/Y Total M&A Deals Total Average

ear M&A with Disclosed M&AsDeal
Deals Disclosed M&A Size($M)
Values Value
($M)
2002 318 152 7,916.4 52.1
2003 290 122 7,721.1 63.3
2004 339 186 15,440.6 83.0
2005-1 81 45 4,351.9 96.7
2005-2 81 34 4,725.0 139.0
2005-3 101 48 18,056.0 376.2
2005-4 87 39 2,594.0 66.5
2005 350 166 29,727.0 179.1
2006-1 107 52 5,607.5 107.8
2006-2 105 40 4,018.5 100.5

26
 2006-3 94 42 3,894.8 92.7
2006-4 62 26 5,616.8 216.0
2006 368 160 19,137.6 119.6
2007-1 82 29 4,540.3 156.6
2007-2 87 36 3,972.3 110.3
2007-3 100 52 10,810.0 207.9
2007-4 86 43 9,084.1 211.3
2007 355 160 28,406.7 177.5
2008-1 70 28 3,602.4 128.7
2008-2 50 14 2,397.3 171.2
2008 120 42 5,999.7 142.9

Table: 2.2 Venture backed liquidity events

by year 2001-2008 through M&A

VENTURE BACKED LIQUIDITY BY EVENTS

9000 8512.6 180
169
8000 160
VALUE OF DEALS

7000 5999.7 140

No.OF DEALS

6000 120
120
5000 100
4000 80
3000 60
2000 40
1000 20
0 0
FIRST TWO QUARTER OF FIRST TWO QUARTER OF
2007 2008

Value of Deals No. of Deals

Figure: 2.3 Venture backed M & A deals

 MERGERS AND ACQUISITIONS VOLUME DECLINES

In the second quarter of 2008, 50 venture-backed M&A deals were completed, 14

of which had an aggregate deal value of $2.4 billion. M&A volume of 120
transactions in the first half of 2008 was down 28 percent from the first half of
2007 when 169 transactions were completed. The average disclosed deal value for
the quarter was $171.2 million. Due to this V/C is directly affected negatively
because M&A is the exit route for Venture capital industry.

2. INFLATION RATE

27
 INFLATION v/s VC GROWTH RATE
8 7.4 300

VC GROWTH RATE
INFLATION RATE 251.06 250
5.8
6 240.91
200
5 4.5

4 150
3.2
3
100
89.79
2
50
1 33.33
0 0
2004 2005 2006 2007

INFLATION RATE VC GROWTH RATE

Figure: 2.4 Inflation V/S Venture capital growth rate

IMPACT

In above chart the inflation rate is decreased to 4.5 in 2005 from 7.4 in 2004. At
same time the growth of VC is also declining to 33.33% in 2005 from 251.06% in
2004. From the above chart we can conclude that inflation and VC has positive
relationship. Now in June 2008 the inflation rate was 11.9 and the NO. of deal in
first two quarter in 2008 was 170 and value of deal was 6390 US$mn and in third
quarter of 2008 there was only four deals. And in October the inflation touch the
13.01%. Due to increase in inflation rate the people will going to spend more.
Thus, their savings will decrease.

3. GDP GROWTH RATE

GDP V/S VC GROWTH RATE

12 300
GDP GROWTH RATE(%)

VC GROWTH RATE(%)

251.06 9.4 9.6

10 8.5 240.91 250
7.5
8 200
6 150
4 89.79 100
2 33.33 50
0 0
2004 2005 2006 2007

GDP GROWTH RATE VC GROWTH RATE

Figure: 2.5 GDP V/S Venture capital growth rate

28
IMPACT

In above chart there was a positive relation ship there was between GDP growth
rate. But in 2007 the growth of VC was decline to 89.79% from 240.91% in 2006
but here the value of deal was increasing. In 2008 the growth rate is 9% and
project the next year GDP 8% to 9%. So there is a hope, the growth of VC industry
can be increased. India is the 4th largest economy in terms of PPP. GDP of India is
US$ 3787.3 billion in PPP terms.

4. CONTRIBUTION OF SECTOR IN GDP:

GDPCOMPOSITION

19%

54%
27%

AGRICULTURE INDUSTRY SERVICES

Figure: 2.6 Contribution of sector in GDP

In Indian GDP growth rate the contribution of service and manufacturing sectors
are increasing. In 1991 the contribution of service and industry sectors are 41%
and 27% and now in 2008 it is 54% and 27% respectively.

5. IMPRESSIVE GROWTH IN INDUSTRY SECTOR :

Items 2004-05 2005-06 2006-07 2007-08(AE)

Industry 9.8 10.15 11 8.1
Mining and Quarrying 7.5 4.87 5.7 4.7
Manufacturing 8.7 8.98 12 8.8
Electricitym gas water supply 7.5 4.68 6 6.3
Construction 14.1 16.46 12 9.8

29
6. IMPRESSIVE GROWTH IN SERVICES SECTOR

Most of the venture capital industry invest their money in IT companies, hotels,
Items 2005-06 2006-07 2007-08(AE)
Services 10.34 11.9 10.7
Trade, hotels, transport & 11.51 11.8 12.0
communication
Financial, real estate & 11.41 13.9 11.8
business services
Community, social and 7.21 6.9 7.3
personal services
transport, communication, bio-technology, BIFS etc. This shows an impressive
growth year by year. This are emerging sectors for venture capital industry.

7. SENSEX CRASHDOWN
SENSEX IN 2008
20000
17578.72 17287.31
18000
16000 17648.71 16415.57 14355.75
14000 15644.44 12860.43
12000 13461.6 14564.53
9092.72
10000
8000 9788.06
6000
4000
2000
0
N

G
IL
H

AY

NE

V
B

LY

T
JA

O
C

U
FE

PR

JU

SE
M

JU

O
AR

N
A
M

Figure: 2.7 SENSEX in 2008

IMPACT
The SENSEX is down by 51% from January 2008 to Nov 2008. So one company
is try to come up with IPO. IPO in first two quarter of 2007 is 43 and value of IPO
is 6337.4 and in first two quarter of 2008 there is only 5 IPO and value is only
282.7 through VC Company go for exit. Because IPO is one of the exit route for
Venture capitalist from the company. It is also favorable for venture capital

30
company because no one try to come up with IPO so they must go to the venture
capital for money

8. SMALL SCALE INDUSTRIES

No. deals V/S No. of SMEs

450 128.44 130

400 387
123.42 125
350
299
300 120
118.59
250
115
200 113.95
146
150 109.49 110
100 71
56 105
50
0 100
2003 2004 2005 2006 2007

No. of deals No. of SMEs

Figure: 2.8 No. of deals V/S No. of SMEs

IMPACT

VC, to be able to contribute to developing entrepreneurship in India, needs to concentrate

its investment in small and medium enterprises. A “Package for Promotion of Micro
and Small Enterprises” was announced in February 2007. This includes measures
addressing concerns of credit, fiscal support, cluster-based development, infrastructure,
technology, and marketing. Capacity building of MSME Associations and support to
women entrepreneurs are the other important features of this package. SMEs have been
allowed to manage their direct/indirect exposure to foreign exchange risk by
booking/canceling/roll over of forward contracts without prior permission of RBI.

9. INTEREST RATE :

31
 INTEREST RATE

PERCENTAGE
10 8.73 9.11
7.98
8 7.23
6.11
6
4
2
0
MA MA MA JUNE-- JULY--
RCH--06 RCH--07 RCH--08 08 08

Figure: 2.9 Interest Rate

IMPACT:

The interest rate increase year by year. It is 6.11% in March-2006 and now in July
2008 it is 9.11%. venture capital firms generally borrow from banks now if
interest rates are increasing interest cost of venture capital firms will also increase
which led reduce the profitability of Venture Capital firms. Because if anyone is
investing in any option he will look for good return, so here if they will maintain
their own profits they will have to give less return to investors then investors will
go for other options. Here increase in bank rates affect Venture Capital firms in
both ways from the suppliers as well as buyers side.

10. CURRENCY RISK :

Exchange Rate(INR/US$)
60
EXCHANGE RATE

47.73 48.42 45.95

50 45.75 44.87 44.09 45.11
40.01
40
30
20
10
0
2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007-
01 02 03 04 05 06 07 08

Figure: 2.10 Exchange Rate(INR/US$)

IMPACT

32
  From the above chart we can see that exchange rate is highly fluctuated.
Nowadays the exchange rate touches to 50 Rs. Per dollar. Now due to
globalization venture capital firms are entering at global level.

11. EXPORT AND IMPORT

VALUE OF EXPORT AND IMPORT

200 185.7 185.7

180
149.2 155.5
US dollars in billions

160
140 126.4
120 111.5
103.1
100 83.6
78.1
80 61.4 63.8
52.7
60
40
20
0
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

EXPORT IMPORT

Figure: 3.1 Value of export and import

IMPACT :

The value sof Import and export are increasing year by year. In 2002-03 the value
of import and export are 52.7 and 61.4 US$bn respectively and in 2007-08 the
value of import and export are 155.7 and 185.7 US$bn. It means industry need
more money for import and export. So it is an opportunity for venture capital. On

33
the other side when company going to export the company must have good contact
with other country’s company.

12. LACK OF FINANCIAL TRANSPERANCY AND OTHER

PROCESSES :

Again, partly because the Indian economy was a “socialistic and closed”
economy and partly because Indian entrepreneurs are not as proficient at
business development as their counterparts in the US, Indian start-ups lack
financial transparency and often have limited experience in implementing
effective financial processes. This usually makes the task of the Venture Capital
much more difficult not only during the due-diligence phase, but also in helping
the start-up grow rapidly.

FACTOR FAVOURABL UNFAVOURABLE BOTH

E
MERGER& √
ACQUISITION,IPO
INFLATION RATE √

GDP GROWTH √
RATE
SENSEX √
CRASHDOWN
SMALL SCALE √
INDUSTRIES
INTEREST RATE √
CURRENCY RISK : √

EXPORT & √
IMPORT
REPO RATE √

Table: 3.2 Result of Economic factors

SOCIAL FACTORS:
1. Demographic factor:
 AGE:
Population Demographic Shift

34
Age % of population 1997 2002 2007
Under 15 years 37.20% 33.50% 30.00%
Between 15-59 years 56.10% 59.30% 62.30%
Above 60 years 06.60% 06.90% 07.50%

Table: 3.3 Population Demographic Shift

AGE BETWEEN 15-59 YEARS

64 62.3
PERCENTAGE

62
60 59.3

58
56.1
56
54
52
1997 2002 2007

Figure: 3.4 Population demographic shift between 15-59 years

In above chart we can see young working people in India are increasing rapidly.
Earlier the young working peoples are 56.1% out of total population and nowadays
it is 62.3%. Young people out of total population.

 UNEMPLOYMENT RATE:
UNEMPLOYMENT RATE

9.5 9.2
10 8.8 8.8 8.9
7.8
PERCENTAGE

8 7.2

6
4
2
0
2002 2003 2004 2005 2006 2007 2008

Figure: 3.5 Unemployment rate

In India the unemployment rate is very high. No doubt it is decreasing year by
year. It is 9.5% in 2004 and now it is 7.2% in 2008.

35
  INDIAN ENTREPRENEUR LACKS IN MARKETING, SALES
AND BUSINESS DEVELOPMENT EXPERTISE :
An Indian entrepreneur is found to be quite adept technically and definitely at par
with similar entrepreneurs in developed countries. However, entrepreneurs in
India generally lacked expertise in marketing, sales and business development
areas, especially when compared to their counterparts in the US. Furthermore,
since India had socialistic economic policies during 1947-1992, there is a lack of
good talent in marketing and sales professionals who can thrive in an extremely
competitive environment.

 INDIAN ENTREPRENEURS ARE HESISTANT TO GIVE UP

CONTROL :
Indian entrepreneurs are usually hesitant about giving up control. In fact, most
of the entrepreneurs in India currently receive their initial funding from family
and friends, and even if they do not do so, the Indian social system is such that
relatives and friends still end up being a major influence. Also, company can
borrow money from bank and other financial institution at lower than Venture
capital rather give substantial share to the VC.

 ORIGIN OF IMMIGRANT ENTREPRENEUR

PERCENTAGE OF FOUNDERS

ORIGIN OF IMMIGRANT ENTERPRENEUR

30

25

20

15

10

0
A
Y
N

L
A
A
IA

N
K

D
N
A

E
A

E
IN

A
D

A
A
IW

IR
H
IN

N
M

R
JA

O
A
C

A
IS
R

K
T

C
E
G

COUNTRY OF ORIGIN

Figure. 3.6: origin of immigrant entrepreneur

Salaries of skilled people are rising 15-20% annually in India and China. Skilled
immigrants have contributed to greatly to US industrial growth but there is a huge
immigration backlog:

– Legal, Educated, skilled workers currently waiting for green cards

– 500,040 in main employment-based visa categories plus 555,044 family members

36
 – Over 1 million skilled immigrants waiting for yearly quota of 120,000 visas – with
8,400 max/country

FACTOR FAVOURABLE UNFAVOURABLE BOTH

DEMOGRAPHIC FACTOR

AGE & √
UNEMPLOYMENT RATE

INDIAN ENTREPRENEUR √
LACKSIN MARKETING,
SALES AND BUSINESS
DEVELOPMENT
EXPERTISE

INDIAN √
ENTREPRENEURS ARE
HESISTANT TO GIVE UP
CONTROL

ORIGIN OF IMMIGRANT √
ENTREPRENEUR

Table: 3.7 Result of demographic factors

GEOGRAPHIC FACTOR :

1. EMERGING CITIES

TOP CITIES ATTRACTING VENTURE CPITAL INVESTMENTS(2007)

City NO. Of Deals Value(US$M)

Mumbai 109 5995
Delhi (Include Noida 63 2688

37
 & Gurgaon)
Bangalore 49 685
Hyderabad 41 1380
Chennai 32 824
Ahmedabad 14 492
Kolkata 12 339

Table: 5.6 Top cities attracting venture capital investment

Cities Sectors
Mumbai Software services, BPO, Media, Computer
Graphics, Animation, Finance and Banking
Bangalore All IP-led companies; IT and IT-enabled
services, Biotechnology
Delhi Software services, IT enabled services,
Telecom.
Chennai IT and Telecom
Hyderabad IT and IT enabled services, Pharma
Pune Biotech, IT, BPO
Source: IVCA

Table: 3.8 city wise sectorial investment by venture capital

In Venture Capital industry most of the deals are made in emerging city like Mumbai,
Delhi, Bangalore, Chennai, Kolkata. In this industry Venture Capital firms invest their
money in most highly risk and emerging sector like bio-technology, IT-ITES, real estate,
healthcare and these sectors are highly developed in this emerging city. So there is a great
opportunity for Venture Capital to invest their money in this city.

FIVE FORCE ANALYSIS:

Substitute
Products

Bargaining Rivalry among Bargaining

power of buyer competing power of
sellers supplier

Investor supply money company receives VC

38
 Threats from
new entrants

Figure: 3.9 Porter’s five force model

39
 KEY SUCCESS FACTORS FOR VENTURE CAPITAL INDUSTRY
IN INDIA

Knowledge becomes the key factor for a competitive advantage for company. Venture
Capital firms need more expert knowledge in various fields. The various key success
factors for venture capital industry are as follow:

 Knowledge about Govt. changing policies:

Investment, management and exit should provide flexibility to suit the business
requirements and should also be driven by global trends. Venture capital investments
have typically come from high net worth individuals who have risk taking capacity. In
this context the judgement of the judiciary raising doubts on treatment of tax on
capital gains made by firms registered in Mauritius gains significance - changing
policies with a retrospective effect is undoubtedly acting as a dampener to fresh fund
raising by Venture capital firms.

 Quick Response time :

The company have flat organization structure results in quicker decision making. The
entrepreneur is relieved of the trauma that one normally goes through in an interface with
a funding institution or a development agency. They follow a clearly defined decision
making process that works with clock like precision, which means that if they agree on a
funding schedule entrepreneur can count on them to stick it.

 Knowledge about Global Environment :

With increasing global integration and mobility of capital it is important that Indian
venture capital firms as well as venture financed enterprises be able to have opportunities
for investment abroad. This would not only enhance their ability to generate better
returns but also add to their experience and expertise to function successfully in a
global environment.

 Good Human Resource :

Venture capital should become an institutionalized industry financed and managed by

successful entrepreneurs, professional and sophisticated investors. Globally, venture
capitalist are not merely finance providers but are also closely involved with the investee
enterprises and provide expertise by way of management and marketing support. This
industry has developed its own ethos and culture.

 Balance between three factors :

Venture Capital backed companies can provide high returns. However, despite of success
stories like Apple, FedEx of Microsoft, a lot of these deals fail. It is said that only one
out of ten companies succeed. That's why every deal has an element of potential profit
and an element of risk, depending on the deals size. To be successful, a Venture Capital
Company must manage the balance between these three factors.

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 Financial markets and
the industries to invest in

Risk management skills Knowledge Possible investees and

and contacts to investors external expertise

Figure: 3.10 frame work for key success factor

Knowledge is key, to get the balance in this "Magic Triangle". With knowledge we mean
knowledge about the financial markets and the industries to invest in, risk
management skills and contacts to investors, possible investees and external
expertise. High profits, achievable by larger deals, are not only important for the
financial performance of the Venture Capital company. As a good track record they are
also a vital argument to attract funds which are the basis for larger deals. However, larger
deals imply higher risks of losses.

 Industrial attractiveness

Market growth rate

CAGR OF VC

16000 14234
VALUE OF DEALS

14000
12000
10000
8000 43%
6000
4000
2000 1160

0
2000 2007

Figure: 4.1 CAGR of venture capital industry

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From the above graph we can say that Venture capital industry is growing at the CAGR
of 43%. And the value of deals in 2000 was 1160 which increased to 14234 in the year of
2007. which shows substantial increase in the number of deals. This attract the new
entrepreneur to enter in the industry.

Intensity of competition :

NO. OF VC FIRMS IN INDIA

180 160
160 146
NO. OF VC FIRMS

140
120 105
100 86 89
81 77 78 81
80
60
40
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008

YEARS

Figure: 4.2 Number of venture capital firms in india

Here the number of venture capital firms is increasing year by year. In 2001 it is only 77
now it has been increased to 160 in the year of 2008. the reason behind that is there is
over all growth in the GDP and also substantial growth position in sectors
likebiotechnology, ITes, retailing, telecom etc. due to this more players are eager to
establish their foothold in the industry.

Regulatory policy

Minimum contribution and fund size : the minimum investment in a Venture Capital Fund
from any investor will not be less than Rs. 5 lacs and the minimum corpus of the fund
before the fund can start activities shall be at least Rs. 5 crores. And the foreign players
can easily enter in the venture capital industry of India. An offshore venture capital
company may contribute 100% of the capital of domestic venture capital fund. There are
other hurdles to enter in the industry so there is favorable condition for them to enter in to
venture capital industry in India.

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 Domestic economic factors:
• GDP growth rate

GDP V/S VC GROWTH RATE

12 300
GDP GROWTH RATE(%)

VC GROWTH RATE(%)
251.06 9.4 9.6
10 8.5 240.91 250
7.5
8 200

6 150

4 89.79 100
2 33.33 50

0 0
2004 2005 2006 2007

GDP GROWTH RATE VC GROWTH RATE

Figure: 4.3 GDP V/S VC Growth rate

In above chart there was a positive relation ship there was between GDP growth rate. But
in 2007 the growth of Venture Capital was decline to 89.79% from 240.91% in 2006 but
here the value of deal was increasing. In 2008 the growth rate is 9% and project the next
year GDP 8% to 9%. So here we can conclude that there is good growth prospect for the
venture capital players to enter in the horizon of India.

INFLATION v/s VC GROWTH RATE

8 7.4 300

7
VC GROWTH RATE

251.06 250
INFLATION RATE

5.8
6 240.91
200
5 4.5

4 150
3.2
3
100
89.79
2
50
1 33.33
0 0
2004 2005 2006 2007

INFLATION RATE VC GROWTH RATE

Figure: 4.4 Inflation V/S Venture capital growth rate

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In above chart the inflation rate is decreased to 4.5 in 2005 from 7.4 in 2004. At same
time the growth of Venture Capial is also declining to 33.33% in 2005 from 251.06% in
2004. From the above chart we can conclude that inflation and Venture Capital has
positive relationship. Now in June 2008 the inflation rate was 11.9 and the NO. of deal in
first two quarter in 2008 was 170 and value of deal was 6390 US$mn and in third quarter
of 2008 there was only four deals. And in October the inflation touch the 13.01%.

• EXPORT AND IMPORT

VALUE OF EXPORT AND IMPORT

200 185.7 185.7

180
149.2 155.5
US dollars in billions

160
140 126.4
120 111.5
103.1
100 83.6
78.1
80 61.4 63.8
52.7
60
40
20
0
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

EXPORT IMPORT

Figure: 4.5 value of export import

The value of Import and export are increasing year by year. In 2002-03 the value of
import and export are 52.7 and 61.4 US$bn respectively and in 2007-08 the value of
import and export are 155.7 and 185.7 US$bn. It means industry need more money for
import and export. So it is an opportunity for venture capital. On the other side when
company going to export the company must have good contact with other country’s
company. So for that venture capital industry is useful because they have good contact
and affiliation network with other country’s company.

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CONCLUSION
The study provides that the maturity if the still nascent Indian Venture Capital market is
imminent.

Venture Capitalists in Indian have notice of newer avenues and regions to expand. VCs
have moved beyond IT service but are cautious in exploring the right business model, for
finding opportunities that generate better returns for their investors.

In terms of impediments to expansion, few concerning factors to VCs include;

unfavorable political and regulatory environment compared to other countries, difficulty
in achieving successful exists and administrative delays in documentation and approval.

In spite of few non attracting factors, Indian opportunities are no doubt promising which
is evident by the large number of new entrants in past years as well in coming days.
Nonetheless the market is challenging for successful investment.

Therefore Venture capitalists responses are upbeat about the attractiveness of the India as
a place to do the business.

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