Project On .....

Venture capital & its scope in India
Project Report on: VENTURE CAPITAL AND ITS SCOP IN INDIA Submitted By BHAGYASHRI P. KAMBLE T.Y. Banking & Insurance Semester: [v] Submitted To:
University Of Mumbai Project Guide: Prof.RAHUL MAHABDE Academic Year 2011-2012
1 Thakur college of science & commerce
CERTIFICATE This is to certify that the project entitled is successfully done by Bhagyashri kamble During the Third Year, Fifth Semester of B.com [Banking and Insurance ] under the University Of Mumbai through the Thakur College Kandivali , Mumbai 400101. of Science & Commerce,
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DECLARATION
I am BHAGYASHRI KAMBLE, from Thakur College of Science & Commerce, student of T.Y.B.Com (Banking and Insurance), semester V, Examination Seat no:-__________. Here by submit my project report on VENTURE CAPITAL AND SCOP IN INDIA I also declare that this project which is the partial fulfillment of the requirement for the degree of T.Y.B.Com (Banking and Insurance) of the Mumbai University is the result of my own efforts with help of experts.
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ACKNOWLEDGEMENT It gives me immense pleasure in presenting the project on venture capital and scop in india. Firstly, I take the opportunity in thanking almightily and my parents without whose continuous blessings, I would not have been able to complete this project. I would like to thank my project guide Prof Rahul mahabde for her great help, valuable opinions, advice and suggestions in fulfillment of this project. I am thankful to our college for all the possible assistance and support, by making available the required books and the internet room which have proved useful to me in successfully completing my project. I hope that I have succeeded in presenting this project to the best of my abilities.
INDEX
SR.NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 TOPIC INTRODUCTION METHODS OF VENTURE FINANCING THE ORIGIN OF VENTURE CAPITAL INVESTMENT IN VENTURE CAPITAL BY BANKS 4.2 A VENTURE CAPITALIST AND BANKERS/MONEY MANAGERS VENTURE CAPITAL FUNDS FOR MICRO FINANCE IN INDIA CONCEPT OF VENTURE CAPITAL VENTURE CAPITAL INDUSTRY IN INDIA THE VALUATION PROCESS PROBLEMS FACED BY VENTURE CAPITAL IN INDIA HOW TO BECOME A VENTURE CAPITALIST FOUNDERS/MANAGEMENT TEAM45 THE BENEFITS OF VENTURE CAPITALISTS CASE STUDY CONCLUSION BIBLIOGRAPHY PAGE NO. 6 9 15 18 21 27 29 31 36 39 42 45 48 60 61 62
CHAPTER 1 Introduction to venture capital Venture Capital is a form of "risk capital". In other words, capital that is invested in a project (in this case - a business) where there is a substantial element of risk relating to the future creation of profits and cash flows. Risk capital is invested as shares (equity) rather than as a loan and the investor requires a higher rate of return" to compensate him for his risk. The main sources of venture capital in the UK are venture capital firms and "business angels" - private investors. Separate Tutor2u revision notes cover the operation of business angels. In these notes, we principally focus on venture capital firms. However, it should be pointed out the attributes that both venture capital firms and business angels look for in potential investments are often very similar. What is venture capital? Venture capital provides long-term, committed share capital, to help unquoted companies grow and succeed. If an entrepreneur is looking to start-up, expand, buy-into a business, buy-out a business in which he works, turnaround or revitalize a company, venture capital could help do this. Obtaining venture capital is substantially different from raising debt or a loan from a lender. 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. As a shareholder, the venture capitalists return is
dependent on the growth and profitability of the business. This return is generally earned when the venture capitalist "exits" belling its shareholding when the business is sold to another owner.
Venture Capital in India In India the Venture Capital plays a vital role in the development and growth of innovative entrepreneurships. Venture Capital activity in the past was possibly done by the developmental financial institutions like IDBI, ICICI and State Financial Corporations. These institutions promoted entities in the private sector with debt as an instrument of funding. For a long time funds raised from public were used as a source of Venture Capital. This source however depended a lot on the market vagaries. And with the minimum paid up capital requirements being raised for listing at the stock exchanges, it became difficult for smaller firms with viable projects to raise funds from public. In India, the need for Venture Capital was recognized in the 7th five year plan and long term fiscal policy of GOI. In 1973 a committee on Development of small and medium enterprises highlighted the need to faster VC as a source of funding new entrepreneurs and technology. VC
financing really started in India in 1988 with the formation of Technology Development and Information Company of India Ltd. (TDICI) promoted by ICICI and UTI. The first private VC fund was sponsored by Credit Capital Finance Corporation (CFC) and promoted by Bank of India, Asian Development Bank and the Commonwealth Development Corporation viz. Credit Capital Venture Fund. At the same time Gujarat Venture Finance Ltd. and APIDC Venture Capital Ltd. were started by state level financial institutions. Sources of these funds were the financial institutions, foreign institutional investors or pension funds and high net-worth individuals. The venture capital funds in India are listed in Annexure I. Venture Capital Investments in India The venture capital investment in India till the year 2001 was continuously increased and thereby drastically reduced. Chart I shows that there was a tremendous growth by almost 327 percent in 1998-99, 132 percent in 1999-00, and 40 percent in 2000-01 thereafter venture capital investors slow down their investment. Surprisingly, there was a negative growth of 4 percent in 2001-02 it was continued and a 54 percent drastic reduction was recorded in the year 2002-2003.
CHAPTER 2 Methods of Venture Financing
Venture capital is typically available in three forms in India, they are: 1) Equity: All VCFs in India provide equity but generally their contribution does not exceed 49 percent of the total equity capital. Thus, the effective control and majority ownership of the firm remains with the entrepreneur. They buy shares of an enterprise with an intention to ultimately sell them off to make capital gains. 2) Conditional Loan: It is repayable in the form of a royalty after the venture is able to generate sales. No interest is paid on such loans. In India, VCFs charge royalty ranging between 2 to 15 percent; actual rate depends on other factors of the venture such as gestation period, cost-flow patterns, riskiness and other factors of the enterprise. 3) Income Note: It is a hybrid security which combines the features of both conventional loan and conditional loan. The entrepreneur has to pay
both interest and royalty substantially low rates.
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4) Other Financing Methods: A few venture capitalists, particularly in the private sector, have started introducing innovative financial securities like participating debentures, introduced by TCFC is an example.
2.3Future of Venture Capital in India Rapidly changing economic environment accelerated by the high technology explosion, emerging needs of new generation of entrepreneurs in the process and inadequacy of the existing Venture capital funds/schemes are indicative of the tremendous scope for venture capital i n I n d i a a n d p o i n t e r s t o t h e n e e d f o r t h e creation of a sound and broad-based venture capital Movement India. There are many entrepreneurs in India with a good project idea but no previous entrepreneurial track record to leverage their firms, handle customers and bankers. Venture capital can open a new window for such entrepreneurs and help them to launch their projects successfully. With rapid international march of technology, demand for newer technology and products in India has gone up tremendously. the pace
of development of new and indigenous technology in the country has been slack in view of the fact that several process developed in laboratories are not commercialized because of unwillingness of people to take entrepreneurial risks, i.e. risk their Funds as also undergo the ordeal of marketing the products and process. In such a situation, venture financing assumes more significance. It can act not only act as a financial catalyst but also provide strong impetus for entrepreneurs to develop products involving newer technologies and commercialize them. This will give a boost to the development of new technology and would go a long way in broadening the industrial base, creation of jobs, provide a thrust to exports and help in the overall enrichment of the economy Small businesses never seem to have enough money. Bankers a n d S u p p l i e r s naturally, are important in financing small business growth through loans and credit, but an equally important source of long term. Growth Capitalis the venture capital firm. Venture Capital financing may have an extra bonus, for if a small firm has an adequate equity base; banks are more willing to extend credit.Venture capitalist money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an important source of equity for Start-up Companys .Venture capital is capital typically provided by outside investors for financing of ne, growing or struggling businesses. Venture capital investments generally are high risk investments but offer the potential
for above average returns and/or a percentage of ownership of the company. A venture capitalist (VC) is a person who makes such investments. A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third -party investors in enterprises that are too risky for the standard capital markets or bank loans. The term Venture Capital is understood in many ways. In a narrow sense, it refers to, investment in new and tried enterprises that are lacking a stable Record of growth .In a broader sense, Venture capital refers to the commitment of capital ass hard holding, for the formulation and setting up of small firms specializing in new ideas or new technologies. It is not merely an injection of fund into a new firm, it is a simultaneous input of skill needed to set up the firm, design its marketing strategy and organize and manage it. It is an association with successive stages of firm development with distinctive types of financing appropriate to each stage of development.
According to International Finance Corporation (IFC), venture capital is equity or e q u i t y f e a t u r e d c a p i t a l seeking investment in new ideas, new companies, n e w production, new process or new services that offer the potential of high returns on investments. As defined in Regulation 2(m)of SEBI (Venture Capital Funds) Regulation , 1996"venture capital fund means a fund established in the form of a company or trust which raises monies through loans, donations issue of
securities or units as the case m a y b e , a n d m a k e s o r proposes to make investments in accordance with t h e s e regulations. thus venture capital is the capital invested in young, rapidly growing or changing companies that have the potential for high growth. The VC may also invest in a firm that is unable to raise finance through the conventional means. Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, weal thy individuals, foreign investor s, and the venture capitalists they. Venture capitalists generally: Finance new and rapidly growing companies; Purchase equity securities; Assist in the development of new products or services; Add value to the company through active participation; Take higher risks with the expectation of higher rewards; Have a long-term orientation When considering an investment, venture capitalists carefully screen the technical andbusiness merits of the proposed company. Venture capitalists only invest in a smallpercentage of the businesses they review and have a long -term perspective. Goingforward, they actively work with the company's management by contributing their experience and
business savvy gained from helping other companies with similar growth challenges
Venture capitalists mitigate the risk of venture investing by developing a portfolio of young companies in a single venture fund. Many times they will co-invest with other professional venture capital firms. In addition, many venture partnership will 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, Yahoo, Aortal and Genentech are famous examples of companies that received venture capital early in their development. Venture Capital is the business of establishing an investment fund in the form of equity financing via investments in the common stocks, preferred stocks and convertible debentures of various companies. These companies are seen to have high growth potential and are able to be listed on the stock exchange in order to gain the highest returns in dividends and capital gain.
CHAPTER 3 The Origin of Venture Capital In the 1920's & 30's, the wealthy families of and individuals investors provided the start up money for companies that would later become famous. Eastern Airlines and Xerox are the more famous ventures they financed. Among the early VC funds set up was the one by the Rockefeller Family which started a special fund called VENROCK in 1950; to finance new technology companies.USA is the birth place of Venture Capital Industry as we know it today. During most its historical evolution, the market for arranging such financing was fairly informal, relying primarily on the resources of wealthy families. In 1946, American Research and Development Corporation (ARD), a publicly traded, closed-end investment company was formed. ARD's best known investment was the start-up financing it provided in 1958 for computer maker Digital Equipment Corp.ARD was eventually profitable, providing its original investors with a 15.8 percent annual rate of return over its twenty -five years as an independent firm. GeneralDoriot, a professor at Harvard Business School, set up the ARD, the first firm, as opp osed to private individuals, at MIT to finance the comm ercial promotion of
5 Characteristics of Venture Capital The three primary characteristics of venture capital funds which may them eminently suitable as a source of risk finance are:(1) that it is equity or quasi equity investments;(2) it is longterm investment; and(3) it is an active from of investment. First, venture capital is equity or quasi equity because the investor assumes risk. There is no security for his investment. Venture capital funds by participating in the equity capital Institutionalize the process of risk taking which promotes successful domestic technology development. Investors of venture capita have no liquidity for a period of time. Venture capitalist or funds hope that the company they are backing will thrive and after five to seven years from making the investment it will be large and profitable enough to sell its shares in the stock market. But a reward is thee for liquidity and waiting. The venture capitalists hope to sell their share for many times what they paid for. If the unit fails the venture Capitalists losses everything. The probability distribution of expected returns for most venture capital investment is highly skewed to the right. The success rate is 10-20 percent. Secondly,
venture capital is long-term investment involving both money and time.Finally,venture capital vestment involves participation in the management of the company. Venture capitalist participates in the Board and guides the firm on strategic and policy matters. The features of venture capital generally are, financing new and rapidly growing companies; purchase of equity shares; assist in transformation of innovative technology based ideas into products and services; and value to company by active participation; assume risks in the expectation of large rewards; and possess a long-term perspective. These features of venture capital render it eminently suitable as a source of risk capital for domestically developed technologies. New venture p r o p o s a l s i n h i g h t e c h n o l o g y a r e a a r e a t t r a c t i v e b e c a u s e o f t h e perceived possibility of substantial growth and capital gains. Although venture capital e v o l v e d a s a m e t h o d o f e a r l y s a g e f i n a n c i n g i t i n c l u d e s d e v e l o p m e n t , expansion and buyout financing for units which are unable to raise funds Through normal financing channels. Units in developing countries need funds for financing various stages of development. Such a broad approach would help venture funds to diversify their investment and spread risk
CHAPTER 4
Investment in Venture Capital by Banks To encourage the flow of finance for Venture capital commercial banks are allowed to invest in venture capital without any limit since April 1999. The monetary and credit policy for the year 1999-2000 provides that the overall ceiling of investment by banks in ordinary shares, convertible debentures of corporate and units of mutual funds w h i c h i s c u r r e n t l y a t 5 p e r c e n t o f their incremental deposits will stand automatically enhanced to the exte nt of banks investments in venture capital Further, the Monetary and Credit Policy (1999-2000) provides for the inclusion of investment in venture capital under priority sector lending
Corporate Venturing Even though corporate venturing is an attractive alternative, most companies find it difficult to establish systems, capabilities and cultures that make good venture capital firms. Corporate managers seldom have the same freedom to fund innovative projector to cancel them midstream. Their skills are honed for managing mature businesses and not nurturing startup companies. If a firm is to apply the venture capital model, it must understand the
characteristics of the model and tailor its venture capital program to its own circumstances without losing sight of these essentials
4.1 Role of venture Capitalists Conventional financing generally extends loans to companies, while VC financing invests in equity of the company. Conventional financing looks to current income i.e. dividend and interest, while in VC financing returns are by way of capital appreciation. Assessment in conventional financing is conservative i.e. lower the risk, higher the chances of getting loan. On the other hand VC financing is a risk taking finance where potential returns outweigh risk factors. Venture Capitalists also lend management support and provide entrepreneurs with many other facilities. They even participate in the management process. VCsgenerally invest in unlisted companies and make profit only after the company obtains listing. VCs extend need based support in a number of stages of investments unlike single round financing by conventional financiers. VCs are in for long run and rarely exit before 3 years. To sustain such commitment VC and private equity groups seek extremely high returns a return of 30% in rupee terms. A bank or an FI will fund project as long as it is sure that enough cash flow will be generated to repay the loans.VC is not a lender but an equity partner. Venture capitalists take higher risks by investing in an early-stage company with littler no history, and they expect a higher return for their high-risk equity investment. Internationally, VCs look at an internal
rate of return (IRR) north of 40% plus. InIndia, the ideal benchmark is in the region of an IRR of 25% for general funds and m o r e t h a n 3 0 % f o r I T - s p e c i f i c funds. With respect to investing in a business, institutional venture capitalists look for average returns of at least 40 per cent to 50per cent for start-up funding. Second and later stage funding usually requires at least a20 per cent to 40 per cent retur n compounded per annum. Most firms require large portions of equity in exchange for startup financing.
Management of investee firms The venture funds add value to the company by active involvement in running of enterprises in which they invest. This is called "hands on" or "pro-active" approach. Draper falls in this category. Incubator funds like e-ventures also have a similar approach towards their investment. However there can be "hands off" approach like that of Chase. ICICI Ventures falls in the limited exposure category. In general, venture funds who fund seed or start ups have a closer interaction with the companies and advice on strategy
CHAPTER 5
4.2 Difference between a venture capitalist and bankers/money managers Banker is a manager of other people's money while the venture capitalist is basically an investor. Venture capitalist generally inve sts in new vent ures started by technocrats who generally are in need of entrepreneurial aid and funds. Venture capitalists generally invest in companies that are not listed on any stock exchanges. They make profits only after the company obtains listing. The most important difference between a venture capitalist and conventional investors and mutual funds is that he is a specialist and lends management support and also Financial and strategic planning Obtain bank and other debt financing Access to international markets and technology Introduction to strategic partners and acquisition targets in the region Regional expansion of manufacturing and marketing operations Obtain a public listing
5.3Problems generally associated with Venture Capital 1. The risk associated with true venture capital is greater than when providing capital to an established business. Despite the best efforts and intentions, some start-ups will not succeed. That is simply part of the game. In today's market, though, especially if dealing with highly leveraged corporations, we have seen there is substantial risk associated with well established businesses as well as with start -ups. The risk is different, though, and people providing true venture capital recognizes this risk -reward trade-off. 2. Most investors have an unrealistic view of venture capital. They expect the high returns publicized with respect to successful new ventures but do not want to take the attendant risk. Consequently, such investors go into the marketplace looking for opportunities, claiming to offer venture capital, but never finding an investment that meets their requirements. 3. Most venture fund managers come from banking, professional money management or corporate management; while some come directly from business school and have been employees of venture capital firms for their entire career. Consequently, the vast m a j o r i t y o f venture capital company employees - at any level - h a v e n o a c t u a l venture" or entrepreneurial experience, particularly with start-ups. A lack of experience and understanding translates into a lack of comfort with the
creation phase of a business and a reluctance to invest in such deals. 4. Entrepreneurs, in general, have different goals, motivations and personalitys than bankers or corporate executives, who may expect to see people like themselves as clients. These differences can often create a gap between the venture capitalist and the entrepreneur sufficient to result in a rejection of the business proposal irrespective of the merits of the business. 5. The principal source of capital for most entrepreneurs is friends and family. Once that source runs out (if it exists at all), venture capital companies may be the only alternative to obtain funding which, most likely, are small or insufficient in comparison to the cost of, for instance, building a factory or buying a profitable going concern. Few venture capital companies want to spend the time evaluating small deals when, within the constraints of their investing limits and in the same amount of time, they could participate in fewer but larger deals. 6. Three key elements to a successful new venture are (not in order of priority): good idea, adequate capital and good management. A failure of any one of these elements can doom the enterprise. Due primarily t o a l a c k o f e x p e r i e n c e i n t h e creation or start-up phase, venture capital companies are often lacking in their ability to evaluate and recognize:
(a) a "good idea" because ideas and the projections associated with them are so intangible, unlike - so they think - the projections of an established company; (b) "adequate capital" for a start-up because traditional venture capital companies may n o t h a v e t h e e x p e r i e n c e t o understand whether the entrepreneur's goals can be achieved with the capital requested or to help t h e e n t r e p r e n e u r d e t e r m i n e t h e appropriate capital requirements for a start-up ;(c) the presence or absence of adequate entrepreneurial management, which can be different than that of a large established corporation; a good example of which waste changing need of Apple Computers when it replaced Steven Jobs with John Sculley. 7. Despite the fact that many fund managers will say that inadequate management is t h e p r i m a r y r e a s o n f o r business failure, they will rarely devote time to a s s i s t management to help achieve a greater likelihood of success. Consequently, some investments are destined to fail from the start; and many firms use everyone elses failures as a reason for them to avoid start-ups. 8. Many companies and individuals complain that they have money to invest in good" projects, but none can be found. First, what is "good" for one person or firm may not be "good" for another. That definition is guided by goals and requirements of the individual investor. An older investor may be looking for income while a
younger investor may be looking for appreciation. Often, those goals are unrealistic as applied to venture capital and big companies all prepared - even desperate - to back internet ventures Fund raising difficulties At one point, she says, $1bn a week was being offered to entrepreneurs attracting too many people who were "mercenaries not missionaries to the world of enterprise. B u t w h e n t h e market woke up, and dot.com and tech stocks c r a s h e d i n A p r i l , i t became impossible for even well-managed internet companies to raise additional money. Pets.com and other e-trailers needed more capital to grow - and that was no longer available at any price. Now, she says, it is unlikely that anyone would fund any internet company for at least the next two years, and e-trailers, or dot.com companies selling to consumers, are the mad cow disease" of the venture capital world - no one will touch them at all. And in future, the pace of investment will be slower and more measured, taking 3-5years to bring companies to the stage at which they can be floated on the stock market- and that venture capitalists will resume their role of "company coach" rather than pure deal-makers. Profit hopes dimmed And now, one of the factors limiting the further expansion of venture capital firms I their need to spend more time managing their existing portfolio - "tending to the sick and needy" in the words of the chief of one dot.com that has survived, Bongos JohnHunt.Mr Knoblauch says that in the height of the euphoria one year ago, venture capitalists began to believe that they could make a profit on nearly any company they backed. But now, they expect only about one in five of the companies they back to become amajor success - but those successes, with returns of 10-20 times
investment, will still make the whole fund profitable. Vital role Venture capitalists will still play a vital role as catalysts for Silicon Valley's future. It was the presence of the world's most soph isticated venture capital industry that attracted John Hunt of Bongo from the UK to San Francisco. Venture capitalists have played a crucial part in launching his company, which provides the software for electronic wallets used for shopping on the internet. bongo was created in the offices of venture capital firm Sequoia, who introduced the UK based company, then called Smart port, to its Silicon Valley rival, Chari and they agreed to merge with each other 30 minutes into the meeting. Sunny outlook And Bongos other venture capital partner, Atlas, played a central role in helping them secure their first customer, the large US bank Citibank. It is networks like these which will secure the future of the Valley, according to historian and city planner Anna Lee Saxenian . Nowhere else have venture capitalists such a close connection with their industry, she argues, with most moving from being entrepreneurs themselves. Their understanding of the technology, the markets, and the competition means that entrepreneurial knowledge is shared and is transferred more quickly here than anywhere else. It is that culture that will ensure that, despite the sharp change in market sentiment, Silicon Valley will remain the world's high-tech incubator.
CHAPTER 6
Venture capital funds for micro finance in India Microfinance is the provision of a broad range of financial services to poor and low-income households and their microenterprises (Asian Development Bank). Microfinance Institutions (MFIs) have, hence, traditionally been funded by developmental bodies such as the World Bank, United Nations, Asian Development Bank, or charities and NGOs. The underlying rationale for this is a perception / history of the lack of viability of these initiatives. The approach of funding agencies has been that of donors, and not investors. However, as its capital needs grow and the odds for making money improve along with philanthropy, the microfinance sector is increasingly turning to profitmotivated private investors. Investor attention to microfinance is an outcome of the fact that the Indian microfinance sector is reaching a higher level of visibility and recognition. The government has also identified the microfinance area as one of high priority. As a result of all this, private equity players, specially venture capital companies are beginning to evince an interest in investing in microfinance. While internationally there are institutions such as Unites Private Equity and individuals such as eBay founder Pierre Omiya who are setting aside funds for the sector, in India, Maharashtra government funded Urjankar, Delhi-based Look Capital and the IFC-APIDC combine are forerunners in this initiative. Yet, there are issues of awareness, regulation and scale of economies
that they face. The paper intends to examine the scope of venture capital investments in MFIs surviving, growing and prospering to the benefit of millions of underserved bottom-of-the-pyramid individuals in the Indian context. Indianfinancialsystemhasanotherpartthatcomprisesalarge number ofprivately owned, decentralized and relativelysmall-sized financial intermediaries,and which makes a more or lesscompetitive market. While some of them are primarilyengaged in fund-based activities, the other primarily providefinancial services of diverse kinds. For convenience,the former may be called non-bank financial companies(NBFCs), and the latter non-bank financial servicescompanies (NBFSCs). Venture capital is a new type offinancial intermediary, which emerged during the 1970sin the U.S., in the early 1980s in the U.K., in the mid-1980s in Japan and Canada and around 1987 in Indiaandnow people talk of venture capital industry or venturecapital market comprising a large number of Venture Capital Funds (VCFs).
CHAPTER 7
CONCEPT OF VENTURE CAPITAL Venture Capital means many things to many people. According to Jane Koloski Morris, an editor of the publication, Venture Economics, venture capital is providing seed, start-up and first stage financing and also funding the expansion of companies that have already demonstrated their business potential but do not yet have access to the public securities market or to credit oriented institutional funding sources.. The European Venture Capital Association describes it as risk finance for entrepreneurial growth oriented companies. It is investment for the medium or long-term seeking to maximizemedium or long-term return for both parties. It is a partnership with the entrepreneur in which the investor can add value to the company because of his knowledge, experience and contact base. International Finance Corporation, Washington D.C. 17C(W) defines VC as an equity or equity featured capital seeking investmentin new ideas, new companies, new products, newprocesses or new services, that offer the potential of highreturns on investment. It may also include investmentin turnaround situations. In India, the Securities andExchange Board of India has laid down those activities that would constitute eligible business activities qualifying for the concessions available to a recognized venture
capital fund. Securities and Exchange Board of India (Venture Capital Funds) Regulation, 1996 the principal regulation, published in the Gazette of India on December 4, 1996 defines Venture Capital Funds as a fund established in the form of or trust a Company having a dedicated pool of capital which raises moneys through loan, donations, issue of securities or units as the case may be, and makes or proposes to make investmentsin accordance with these regulations. The VCFsplay an important role in supplying management and marketing expertise to unlisted, new and small private businesses, especially in technology-oriented and knowledge-intensive businesses or industries which may havelong development cycles and which usually do not haveaccess to convential sources of capital because of theabsence of suitable collateral and the presence of high risk. Broadly speaking, the scope of activities of VCFs include provision of Seed capital for industrial start-ups, Additional capital to new businesses at various stages of their gorowth, Equity financing or leverage buy-out financing to management groups for taking over other companies, Bridge finance,
Capital to Mature enterprises for expansion, diversification and restructuring. EVOLUTION OF VENTURE CAPITAL Since its beginnings in 1946 through the American Research and Development Corporation of General Deriot, venture capital business has expanded quite fast. Presently, VC in one form or the other bas come to stay in over thirty five countries including Japan, Taiwan, India, South Korea, Singapore, Philippines, Malaysia in Asia, Brazil and Argentina in South America and Kenya and Nigeria in Africa. However barring US, UK, Japan, Canada, Germany, Sweden and Netherlands, the industry has a relatively limited activity base measured in terms of number of registered VC firms, committed capital or invested capital measured as share of GDP.
CHAPTER 8
VENTURE CAPITAL INDUSTRY IN INDIA India has a large sophisticated financial system including private and public, formal and informal actors. In addition to formal financial institutions, informal institutions such as family and moneylenders are importantsources of capital. India has substantial capital resources, but the bulk of this capital resides in the bankingsystem.In India the VC industry had its formal introductionin the budget speech of the Finance Minister in 1988.The UTI set up a VCF of Rs 20 crore in collaboration with the ICICI for fostering industrial development in 1988-89. Technology Development and Information Company of India Ltd. (TDICI) established by the UTI jointly with the ICICI acts as an adviser and manager of the Fund. The UTI launched Venture Capital Unit Scheme (VECAUS-I) to raise resources for this fund. It set up a Second Venture Capital Fund in March 1990 with a capital of Rs 100 crore, with the objective of financing Greenfield ventures and steering industrial development.Pursuant to the budget speech announcement acessof 5% was levied on all payments for import of technology/know-how resulting in the creation of a sizable poolof funds. The Venture Fund that was created out of thiscess was to be administered by the Industrial Development Bank of India. It was started with an initial capital of Rs 10 crore for assisting projects which promote commercial applications of indigenously developed
technology, or which adapt imported technology for wider applications.The IFCI sponsored in 1985 the Risk CapitalFoundation (RCF) to give positive encouragement tonew entrepreneurs. The RCF was converted into RCTFC on January 12, 1988. It provides both risk capital and technology finance under one roof to innovative entrepreneurs and technocrats for their technology orientedbeen based either on new technology or on new usagesof existing technology. They included, inter alia, manufactureof antibiotic drugs radio paging systems, pay phones, calcium silicate bricks, polymer concrete, granite and marble processing machinery, and so on. ANZ Grindlays Bank has set up Indias first private sector venture capital fund, namely India Investment Fund with an initial capital of Rs 10 crore subscribed by NRIs. Among the Indian banks, the subsidiaries of SBI and Canara bank have floated VCFs They provide either equity capital or conditional loans. The projects assisted by them belong to industries such as watches, watches, seamless metal, cement and ceramics. REGULATORY FRAMEWORK IN INDIA The government regulations and policy has a significant impact on the growth and development of VC industry. SEBI is the nodal agency for registration and regulation for both domestic and overseas venture capiFINANCE tal funds. SEBI rules permit the establishment of venture capital institutions under any of the following methods.
i. Venture Capital Funds set-up Asset Management Companies (AMC) that screens, makes and manages individual investments. ii Venture Capital Company established as a company satisfy the eligibility criteria drafted by SEBI for the purpose of registration namely: a. Memorandum of association has its main activity of carrying out the business of venture capital fund. b. Memorandum and articles of association explicity prohibits invitation to the public to subscribe to its securities.
I) Venture Capital Fund established as a trust satisfy the eligibility criteria drafted by SEBI for the purpose of registration, namely. a. the instrument of trust is in the form of a deed and has been duly registered under the provisions of the Indian Registration Act, 1908. b. the main objective of the trust is to carry on the activity of a venture capital fund. The government has also sought to develop the VC industry by giving tax breaks and concessions on the income of VCF/VCC. Under the Section 10(23FB) of the Income Tax Act, any income of VCF/VCC is totally
exempt from tax. However, such privileges are not available to the shareholders of a VC company.
THE VENTURE INVESTMENT PROCESS As the name suggests, Venture Capital is a risk capital. The VCs look at various key factors while assessing a proposal. Hence, activities of a VC fund follow a typical sequence. The typical stages in an investment cycle are as below: Generating a Deal flow Due Diligence Investment valuation Pricing and structuring the Deal Value addition and monitoring and Exit
CHAPTER 9 THE VALUATION PROCESS The entire investment valuation process is aimed at arriving at an acceptable price. In countries where free pricing regimes exist the evaluation process goes through the following sequence: 1. Evaluate the future revenue and profitability 2. Forecast likely future value of the firm based on expected market capitalization or expected acquisition proceeds depending upon the anticipated exit from the investment. 3. Target on ownership position in the investee firm so as to achieve desired appreciation on the proposed investment. The appreciation desired should yield a hurdle rate of return on a Discounted Cash Flow Basis. 4. Symbolically the valuation exercise may be represented as follows: NPV=[(Cash)/(Post)]* [(PAT*PER)]*K; Where NPV=Net present value of the cash flows relating to the investment comprising outflow by way of investment and inflows by way of interest/dividends (if any) and realization on exit. The rate of return used for discounting is the hurdle rate of
return set by the VC investor. Post=Pre+Cash. Cash represents the amount of cash being brought into the particular round of financing by the VC investor. Pre is the pre-money valuation of the firm estimated by the investor. While technically it is measured by the intrinsic value of the firm at the time of raising capital, it is more often a matter of negotiation driven by the ownership of the company that the VC investor desires and the ownership that the founders/management team is prepared to give away for the required amount of capital. PAT is the forecast of Profit After Tax in a year and often agreed upon by the founders and the investors (as opposed to being arrived at unilaterally). It would also be net of preferred dividends, if any. PER is the price-earnings multiple that could be expected of a comparable firm in the industry . It is not always possible to fund such a comparable fit in VC situations. That necessitates, therefore, a significant degree of judgment on the part of the VC to arrive at alternative PER scenarios. K is the present value interest factor (corresponding to a discount rate r) for the investment horizon It is quite apparent that PER times PAT represents the value of the firm at that time and the complete expression really represents the investors share of the value of the investee firm. The following example illustrates this framework:
THE VENTURE INVESTMENT IN INDIA Indian Venture Capitalists constitute Foreign Institutional Investors, all India Financial Institutions, Multilateral Development Agencies and Banks. Largely India-born investors living outside the country, particularly the software and information technology sector who have played a key role in financing their native lands hightechnology industry, have fueled the huge increase in India particularly the software and information technology sector. According to the resent estimate by Nasscom, the venture capital investment in India is slated to rise to a massive Rs 50,000 crore by 2008, up from Rs. 2,200 crore in 200001. But this is very small compared with the $105 billion the venture capital companies invested in the US in 2000-01.
CHAPTER 10 PROBLEMS FACED BY VENTURE CAPITAL IN INDIA
Unlike U.S. where the largest single source of funds for U.S. venture capital funds since the 1980s has been public-and private sector pension funds, in India, there are large pension funds but they are prohibited from investing in either equity or venture capital vehicles. This means they cannot be a source of capital. For any venture idea to succeed there should be a product that has a growing market with a scalable business model. The IT industry being one of the most suited industries in India for VC funding, till recently had a service centric business model. Products developed for Indian markets lack scale. With the slump in the new economy sectors and collapse of the dotcoms, VCs are presently following a highly selective approach in financing. The selective financing has also arisen due to problem V.C. Funds are facing in making an exit from their V.C. Investments which is by way of equity/equity type instruments. Also, there was absence of proper environment and policy support. The result of these various impediments was a micro management of investment, complicating the activities of the venture capital firms without either increasing effectiveness or reducing risk to any appreciable extent. Impediments to the development of
venture capital also can be traced to Indias corporate and currency laws. Earlier days of licensing raaj and the IPO boom also resulted in venture capital activity not on an upswing in India. Also, in the absence of seasoned institutional investors, advanced- county standards of investor protection that would normally be imposed by such investors have not developed There was not even a self-regulatory group. Internationally, venture funds have evolved in an atmosphere of structure flexibility, fiscal neutrality and operational adaptability. And, we need to provide regulatory simplicity and structural flexibility on the same lines. There is also the need for a level playing field between domestic and offshore venture capital investors, Nasscom said For venture capital funds, which deal in high-risk investments, structuring flexibility, is very important to meet their business strategies. In India, such structures like Limited Liability Partnership (LLP) and Limited Liability Company (LLC) are not recognized under the Indian Partnership Act and the Companies Act, which are commonly used and widely Accepted structures internationally. For development of VC industry in India on global lies and also to facilitate and attract the foreign investment in venture capital industry such alternative structures need to be provided. Further, for every investment and disinvestment, RBI approvals are required in respect of pricing of securities. In the case of venture capital fund with 100% investment by foreign investors, though the Government of India guidelines provide for only one-time FIPD approval, in practice the requirement of taking approval for pricing of securities
from RBI still remains.The investment horizon for a venture capital fund is for a longer duration Life of minimum 7 years is kept because investment is made in unlisted companies and they take time to scale up and give an exit to the venturecapital fund. Typically, the venture capital fund invests in the 1st 3 years and divests from its investment from 4th year onwards which may go upto 10 years from the date of the setting up of the fund.
CHAPTER 11 How To Become A Venture Capitalist A lot of business graduates are keen on becoming venture capitalists these days. Unfortunately, there is no space available for all prospective venture capitalists out there. To become successful venture capitalists, individuals need a great deal of charisma and some luck. The entire VC industry depends on networking of venture capitalists. Historically, most venture capitalists are seasoned executives looking for a career change or MBAs with several years of experience and a deep knowledge of a specific industry. However, over the past few years most venture capitalists have been recent management graduates who landed themselves jobs in venture capital firms. venture capitalists are involved in a range of activities including evaluation of investment opportunities, financial analysis, identification of key areas of risks and opportunities, interaction with clients, bankers, advisers and management, deal execution and financial modeling. Venture capitalists also have a great deal of responding to emails and voicemails to care of. The reason for this is that the success of the VC firm depends a lot on the charisma and networking capabilities of venture capitalists. Venture capitalists are often involved in meetings with entrepreneurs. During the presentation of the business plan,
venture capitalists need to analyze whether the business plan is viable business proposition or not. If necessary, venture capitalists may require entrepreneurs to make a more detailed study of the market. Venture capitalists take a long time in deciding which companies they are going to invest in. Some venture capitalists specialize in financing only to technology companies. Venture capitalists also frequently take a role in overseeing the venture at board level. They are available to provide information to a new entrepreneur that can make the difference that enables an idea to become a successful business. Venture capitalists seek businesses capable of growing rapidly within a short period of time. Entrepreneurs presenting their business plans before venture capitalists need to be able to demonstrate an advantage in the chosen market. To identify successful products, venture capital firms usually employ venture capitalists that have outstanding business management and analytical skills. This is to ensure that venture capitalists understand the wide variety of sectors involved are able to accurately assess the risks and prospects of start-up ventures and companies seeking to fund growth. What Do Venture Capitalists Look For? Venture capitalists generate profits by providing equity financing to startups that have high growth potential. Venture capitalists buy the equity of a startup and liquidate their shares either through an IPO or through an acquisition. Given this situation, the growth potential and the risk factor of the startup
critically determine the profits VCs generate. The success of a startup depends on a number of factors. Venture capitalists carefully examine each factor before they decide to fund the startup. Venture capitalists assess the risk using the following factors:

Founders/Management Team Competitive Advantage Market Potential Barriers to entry Exit Strategy
CHAPTER 12 Founders/Management Team Management teams typically constitute the founders along with other individuals committed to the startup idea. This team typically plays the pivotal role in executing the startups day to day operations. The management team should be able to steer the startup through risky and volatile situations. Therefore, Venture capitalists assess the strength of a management team by examining the members from three different perspectives. First, Venture capitalists look for professional experience, most notably a proven track record. Every startup is associated with marketing and operational efforts. Therefore, venture capitalists expect the management team to contain an experienced marketing executive along with an experienced operational executive. And if the startup idea is based on an innovative idea, VCs would like to have the inventor or a technology expert on board. Second, Venture capitalists look for admirable personal traits in the entrepreneurs such as reliability, reputation, trustworthiness, etc. Venture capitalists want the entrepreneurs to run the show, so they would like to deal with entrepreneurs who have established credibility within the industry. Venture capitalists generally tend to invest in entrepreneurs whose reputation can be verified. Third, Venture capitalists look for entrepreneurial abilities in the team. Heading startups is much more difficult than heading large organizations, primarily because of the limited resources most
startups generally have. Startups are synonymous with huge risks, and the management team should not only be extremely passionate and willing to persevere about an idea, but also have the ability to take a calculated risk. Market Potential A startups market potential defines the total sales that the startup can eventually make. Market potential depends on three individual parameters: market need, market size and market penetrability. Market need describes the problem the startup intends to solve. The higher the need, the higher the probability that the startup will generate sales. Market size describes the quantity/size of the sales opportunities for the solution that the startup offers. A bigger market can allow the startup to generate higher revenue. Finally, market penetrability refers to how easy it is to make sales and generate revenue. In other words, market penetrability refers to the marketing efforts that the startup needs to exert before it penetrates into the market. Not all markets are easy to enter in spite of the market need and size. For example, even if a startup develops a revolutionary car that gets 1000 miles per gallon millage, the startup wouldnt find it any easier to penetrate into the market than a better marketed vehicle that gets 500 miles per gallon. The new car still has to pass several safety regulations set by the National Highway Traffic Safety Administration before it can be brought onto the market. This is a relatively time consuming process. And even after the governmental regulations, the car has to appeal to the general public.
Startups face several challenges in determining the size of their markets. First, researching the market requires resources that most startups cannot afford. Second, as startups are based around radical ideas, it can be difficult to identify the target market. Third, at times, it becomes very hard to clearly define what kind of value the business idea offers to customers. For example, the venture capitalists that funded Splunk (www.splunk.com) had trouble articulating the company value offered to customers. However, Splunk turned into a successful company. Venture capitalists closely look at the market potential for a startup idea before they decide to fund the idea. Entrepreneurs should focus on clearly defining the market before approaching investors.
CHAPTER 13
The Benefits Of Venture Capitalists So you are serious about starting a new business and have been thinking of using the help of venture capitalists and VC funding. More and more new business owners have been exploring the benefits of using venture capitalists to provide the startup capital to get the company going. Venture capitalists provide funding as a type of investment that is offered by to those who are willing to help in the business. This is very similar to getting a loan from the bank since these people will eventually become a strategic partner but at a lower interest rate. There are many ways to get in contact with someone who will agree to VC funding. A former boss who has and is waiting for something good to invest in, friends, family members and even strangers that may want to try something new. It will be a good idea to do a background check on your venture capitalists to know if this person is able to deliver. During the course of the meeting, this individual will probably boast of businesses that started because of the help extended and knowing how these are doing is a good indicator to see if this individual can be trusted. The venture capitalist does not just provide VC funding. With the years of experience in the same industry, this person can give advice on h Basic Information 122 About Vc Funding 6 Viewed: 6199 Times
VC funding represents financial investment in a highly risky proposition in the hope of earning a high rate of return. Venture capital has an important role in the financing of startup and early businesses, as well as businesses in turn around situations. The main sources of VC funding for a company consist of equity capital, preference capital, and debenture capital and term loans. Equity capital means ownership capital in which equal shareholders collectively own the company, enjoying the rewards and at the same time facing the multiple risks of the ownership. However their liability is limited to their capital contributions. In VC funding, the equity capital funds are permanent funds and there is no liability for repayment. It simply enhances the creditworthiness of the company. In general, the larger the equity base in a VC funding, the higher the ability of the company to obtain credit. Thus you may consider VC funding as the lifeblood of a start-up company. In VC funding preference capital is just a hybrid form of financing because it has some characteristics of the equity capital and some attributes of the debenture capital. It resembles equity in the way that the preference divided is payable only out of distributable profits and is not an obligatory payment and is similar to debenture capital in that the dividend rate on preference dividend is usually fixed and preference stockholders do not normally enjoy the right to vote. When using preference capital funds in VC funding there is no legal obligation to pay preference dividend and there is no redemption liability in the case of perpetual preference shares.
Debenture capital is also a part of VC funding and it is similar to promissory notes because they are instruments for raising longterm debt capital. The holders of debenture capital are the creditors of the company. The obligation of the company towards its debenture holders in a company with VC funding, is similar to that of a borrower who promises to pay interest and capital at specified times. Contrary to the preference or equity capital the specific cost of debt capital is much lower because the interest on debentures is tax-deductible. Debenture financing in a VC funding does not result in dilution of control since debenture holders are not entitled to vote. The downside for entrepreneurs is that the capitalists with VC funding usually get a say in company decisions, in addition to a portion of the equity. That is why venture capital is not suitable for entrepreneurs. Term loans, also known as term finance in a VC funding are in general a source of debt finance that is generally repayable in more than one year but less than ten. They are employed to finance acquisition of fixed assets and working capital margin. Most venture capital funds have a fixed life of ten years with the possibility of a few years of extensions to allow for private companies still seeking liquidity. The investing cycle of VC funding for most funds is generally three to five years, after which the focus is managing and making follow-on investments in an existing portfolio. ow to run the business even if he or she already has an idea on what t Raising Venture Capital For Your New Businesses Raising venture capital for your new business can be a difficult process for anyone looking to start a business. With so many
startup capital options available, it is important you research the opportunities available to find the one that works the best for you. No matter what type of venture capital you are looking at, you need to be sure you have a thorough business plan established so you have documented answers to any questions that may be asked by your potential creditors. One option to raise venture capital for a new business is to visit your local financial institution. When you are going there you will need a well-drafted business plan, accurate cash flow projections, a description of the collateral for security, the debtto-equity ratio, your financial history and personal and business credit profiles. You might also need to submit the last tax returns and bank statements from the past three years. Another option for raising startup capital is to apply for a state or federal grant. Now these grants are highly competitive and have many restrictions that may make them less interesting as a form of venture capital. No matter though, it is important to find out if you will be able to receive one. The best place to start is the Small Business Administration where you will find a list of available state and federal grants. As mentioned before, one of the most important parts of securing venture capital for your new business is to have a well thought out business plan so you are able to answer any questions that may come your way. Securing startup capital for your new business can be a difficult process but with the numerous options available, you can be assured that you will find one that will work for you.
Learn the Ins and Outs of VC Investments New business owners often face difficulties in obtaining capital. Some turn to venture capital (VC) options to help them get started. Before you use this type of investment to fund your business, make sure you understand the advantages and disadvantages. Understanding Venture Capital
If you are looking for ways to fund your business, do you understand venture capital, its advantages and disadvantages? If not, here you will find all you need to know as well as the pros and cons of this type of funding. Venture capital is also known as seed capital or private capital. It is mostly used to help businesses that have high potential for growth. One company that is no stranger to most people is Digital Equipment Corporation (DEC) which was founded in 1957 using venture capital funds obtained from George Doriot who owned the venture capital firm American Research and Development Corporation (ARDC). Venture capital funds are used primarily for companies who may not have sufficient operating history to qualify for traditional loans through a bank. Most start-up high technology companies have used venture capital funds in order to get
started. In most cases, these companies are required to provide the venture capital company with a form of profit sharing by providing the venture capital firm equity in the company.
Venture capital funds are not easy to obtain. In fact, most business owners who apply for venture capital funds will be turned down. Unless a business plan can easily demonstrate high rates of return within a five year period, chances are very good that the request for venture capital funds will be turned down. Cons of Venture Capital
Securing venture capital typically means that you have to give up something in exchange for the funding. Most venture capital firms are not interested in merely receiving the capital that they have invested along with a standard interest rate. In fact, there are some things that venture capital firms may ask for that may surprise you. These include: Management Position - In many cases, a venture capital firm will want to add a member of their team to the start up company's management team. This is generally to ensure that the company can be successful, though this can also create internal problems.
Equity Position - Most venture capital firms require that the company give up an equity position to them in return for their funding. This amount is not small, in many cases it can be as much as 60 percent of the equity in the company. In effect, this means that the entrepreneur is not controlling their business; it is being controlled by the venture capital firm. Decision Making - One of the biggest problems that many entrepreneurs face when they agree to accept venture capital is they often are giving up many key decisions in how their company will operate. Venture capital firms that have taken an equity position want a "seat at the table" when any major decision is made and they often have the power to override decisions. Business Plans - When a business plan is written and submitted for financing considerations, most finance companies will agree to sign a non-disclosure agreement. This is not the case in most venture capital firms. Venture capital firms will nearly always refuse to sign a non-disclosure agreement due to the legal ramifications of doing so. This can put ideas from an entrepreneur at risk. Funding Plan - If an entrepreneur writes their business plan and determines they need $500,000 to get the business launched, they may be lulled into thinking that these funds will come up front. This is simply not the case. Venture capital firms almost always set goals and milestones for releasing funds. Funding from venture capital firms is typically done in stages with an eye on the expansion of the business.
These are only a few of the possible problems an entrepreneur could face when they secure venture capital funding. It is important that they carefully review all agreements and have them reviewed by an attorney as well. Venture Capital Proposals In order to best ensure that a proposal will be seriously considered by venture capital organizations, an entrepreneur should furnish several basic elements. After beginning with a statement of purpose and objectives, the proposal should outline the financing arrangements requested, i.e., how much money the small business needs, how the money will be used, and how the financing will be structured. The next section should feature the small business's marketing plans, from the characteristics of the market and the competition to specific plans for getting and keeping market share. A good venture capital proposal will also include a history of the company, its major products and services, its banking relationships and financial milestones, and its hiring practices and employee relations. In addition, the proposal should include complete financial statements for the previous few years, as well as pro forma projections for the next three to five years. The financial information should detail the small business's capitalizationi.e., provide a list of shareholders and bank loansand show the effect of the proposed project on its capital structure. The proposal should also include biographies of the key players involved with the small business, as well as contact information for its principal suppliers and customers. Finally, the entrepreneur should outline the advantages of the proposal
including any special and unique features it may offeras well as any problems that are anticipated. If, after careful investigation and analysis, a venture capital organization should decide to invest in a small business, it then prepares its own proposal. The venture capital firm's proposal would detail how much money it would provide, the amount of stock it would expect the small business to surrender in exchange, and the protective covenants it would require as part of the agreement. The venture capital organization's proposal is presented to the management of the small business, and then a final agreement is negotiated between the two parties. Principal areas of negotiation include valuation, ownership, control, annual charges, and final objectives. The valuation of the small business and the entrepreneur's stake in it is very important, as it determines the amount of equity that is required in exchange for the venture capital. When the present financial value of the entrepreneur's contribution is relatively low compared to that made by the venture capitalistsfor example, when it consists only of an idea for a new product then a large percentage of equity is generally required. On the other hand, when the valuation of a small business is relatively highfor example, when it is already a successful company then a small percentage of equity is generally required. Hosmer warns that entrepreneurs are likely to find that the valuation of their businesses provided by a venture capital organization will not be as high as they would like. The percentage of equity ownership required by a venture capital firm can range from 10 percent to 80 percent, depending on the amount of capital provided and the anticipated return. But
most venture capital organizations want to secure equity in the 30-40 percent range so that the small business owners still have an incentive to grow the business. Since venture capital is in effect an investment in a small business's management team, the venture capitalists usually want to leave management with some control. In general, venture capital organizations have little or no interest in assuming day-to-day operational control of the small businesses in which they invest. They have neither the technical expertise or managerial personnel to do so. But venture capitalists usually do want to place a representative on each small business's board of directors in order to participate in strategic decision-making. Many venture capital agreements include an annual charge, typically 2-3 percent of the amount of capital provided, although some firms instead opt to take a cut of profits above a certain level. Venture capital organizations also frequently include protective covenants in their agreements. These covenants usually give the venture capitalists the ability to appoint new officers and assume control of the small business in case of severe financial, operating, or marketing problems. Such control is intended to enable the venture capital organization to recover some of its investment if the small business should fail. The final objectives of a venture capital agreement relate to the means and time frame in which the venture capitalists will earn a return on their investment. In most cases, the return takes the form of capital gains earned when the venture capital organization sells its equity holdings back to the small business or on a public stock exchange. Another option is for the venture capital firm to arrange for the small business to merge with a
larger company. The majority of venture capital arrangements include an equity position, along with a final objective that involves the venture capitalist selling that position. For this reason, entrepreneurs considering using venture capital as a source of financing need to consider the impact a future stock sale will have on their own holdings and their personal ambition to run the company. Ideally, the entrepreneur and the venture capital organization can reach an agreement that will help the small business grow enough to provide the venture capitalists with a good return on their investment as well as to overcome the owner's loss of equity. Advantages and disadvantages of venture capital 1. 2.
o
Venture capital provides the funding that a company needs to expand its business. It also offers a number of value added services. The primary advantage of venture capital is that they allow entrepreneurs to build their company with OPM. The venture capitalist then hopes that your company increases in value and ultimately has a liquidity event (e.g. IPO or sells to another company) so that they can get a return on their invested capital. In addition to capital, venture capitalist can be an invaluable source of information, resources and contacts to help you be successful. More times than not, venture capitalists have experience building companies themselves so they can really help you
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3.
o
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think strategically about how to grow and be successful. 4.

o
Most venture capitalists seek to realize their investment in a company in three to five years. If an entrepreneurs business plan contemplates a longer timetable before providing liquidity, venture capital may not be appropriate. Entrepreneurs should also consider: The disadvantage is that securing a deal with a VC can be a long and complex process. You'll be required to draw up a detailed business plan, including financial projections for which you're likely to need professional help. You may be able to get support from your local Business Link for this. Also, if you get through to the deal negotiation stage, you'll have to pay legal and accounting fees, whether or not you're successful in securing funds.
CHAPTER 13 Case StudyVenture capitalists supply the funds to budding entrepreneurs who want to start their own companies - and 40% of such deals in the US take place in Silicon Valley Venture capitalists also help nurture those companies to success, supplyingintroductions to potential customers or partners, assistance with raising more funds,and even management support.And venture capital has been one of the extraordinary growth industries in the Valley,with the amount of money invested in venture capital funds rising in the decade from$1bn in 1990 to $20bn in 1999 - and nearly doubling again to $35bn in 2000. Dot.com fall-out Ann Winblad, founder of venture capital firm Hummer Winblad, with $1bn in fundsunder management, was one of the victims of the dot.com fall-out.Her company had backed one of the biggest and most well-known internet companiesselling to consumers, Pets.com, which stopped trading despite millions of dollars inprivate investment and an enthusiastic stock market flotation.In her sleek, woodenbeamed offices in San Francisco's newly fashionable SoModistrict, which has become a beacon for dot.com companies, she explained what wentwrong.I n h e r v i e w , t h e increasing frenzy in the stock market for internet c o m p a n i e s - whatever their business pl an or chances of profitability - had meant that too many companies had been funded and brought to the stock market too quickly.Too many inexperienced people came into the venture capital marketplace, withfinanciers, bankers,
CHAPTER 14
Conclusion
In recent years the growth of Venture Capital Business has been drastically decreasing due to many reasons. The regulator has to liberalize the stringent policies and pave the way to the venture capital investors to park their funds in most profitable ventures. Though an attempt was also made to raise funds from the public and fund new ventures, the venture capitalists had hardly any impact on the economic scenario for the next few years. At present many investments of venture capitalists in India remain on paper as they do not have any means of exit. Systems in order that venture capitalists find it easier to.
BIBLIOGRAPHY BOOKS REFERRED VENTURE CAPITAL IN INDIA
WEBSITES WWW.GOOGLE.COM WWW.VENCAP IN INDIA.COM

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Venture capital & its scope in India

University Of Mumbai Project Guide: Prof.RAHUL MAHABDE Academic Year 2011-2012

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CHAPTER 2 Methods of Venture Financing

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