Transcript
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Major Research Project
[For the partial fulfillment of requirement towards degree in Master of Business
Administration (MBA), 2009-11 of Devi Ahilya Vishva Vidhalay (DAVV), Indore]
On
venture Capital Analysis:An EmpiricalStudy
Guided By: - Submitted By:-
Mr.M.L .Patidar Hemant JainMBA IV Semester
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Project SummaryThe report of the present study has been divided into 7 chapters.
Chapter 1: contains Introduction which includes Conceptual Framework,
Introduction of topic, Review of Literature, & Rationale of study.
Chapter 2: contains Research Methodology which includes Objectives of study,
Method of Research, Nature of the study, both for Data collection and Data Analysis.
Chapter 3: contains Data Analysis which contains Method of data analysis (type of
statistical tool).It includes various graphs, charts and tables.
Chapter 4- contains Findings and Conclusions which includes Conclusion , Policy
implications (advices), Limitations of the study.
Chapter 5: contains References
1- Bibliography-preferred books, journals, other papers (in alphabetical order)
2- -Webliography (website references (in alphabetical order)
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Certificate of Faculty Guide
This is to certify that HEMANT JAIN student of Master of Business
Administration(Full Time) program has completed Major Research Project on
Venture Capital Analysis: An Empirical Study under my guidance and
supervision.
The research done by him is original and genuine and all the data collected is
found to be authentic and submitted to me.
Date: __________ Mr. M.L.PATIDAR
Place: Indore Faculty Guide LKCT,
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Declaration
For the partial fulfillment of requirement towards degree in Master of Business
Administration, 2009-11 of Devi Ahilya Vishva Vidhalaya, Indore, I present this
project entitled Venture Capital Analysis: An Empirical Study this project
completed under the supervision of Mr. M.L.PATIDAR, faculty guide in LKCT,
Indore.
I declare that the work presented in
the major research project is my genuine work, except as acknowledge in the text
and foot notes. According to my knowledge this material has not submitted either
in whole or in part for a degree at this institute or at any such institute earlier.
Student Name
HEMANT JAIN
MBA (FT) IV
Roll.No-09170320
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Acknowledgement
The feeling of gratitude when expressed in words is only a fraction of
acknowledgement. I cannot express my gratitude fully in words to all those who
have extended their consistent support to enable to complete the project.
I would like to express my thanks & gratitude to my
Major Research Project mentor Mr. M.L.Patidar, Faculty LKCT, for the
valuable guidance he/she has given me on the Major Research Project. She/he
has given me all the freedom to work and helping & advising me throughout
project. Every step in my project had a demand of deep understanding of the
concepts which was only possible with the help of our professor, students.
A part from this, I would like to thank all the respected professors who trim the
silver lamp of knowledge kept the scared of flame bright towards me. I would
also like to thank all the respondents who helped me whole heartedly by
providing me valuable information.
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Chapter-1
Conceptual Frame Work
Concept of Venture CapitalStage of Venture CapitalMethod of Venture FinancingVenture Capital Process
Introduction
Introduction of Venture CapitalVenture CapitalistVenture Capital In India
Review of Literature
Rationale of Study
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CONCEPT
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 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 companys development under highly risky
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.
Feature 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 startup 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.
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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.
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 developmentinitiative. It helps by identifying key resource person. They want one seat on the
companys 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
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on project planning, monitoring, financial management, including working capital and
public issue. Venture capital investor cannot interfere in day today management of the
enterprise but keeps a close contact with the promoters or entrepreneurs to protect his
investment.
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.
Stages of Venture Capital Funding:
The Venture Capital funding varies across the different stages of growth of a firm.
The various stages are::
1. Pre seed Stage:-:Here, a relatively small amount of capital is provided to an
entrepreneur to conceive and market a potential idea having good future
prospects .The funded work also involves product development to some extent.
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2. Seed Stage:- : Financing is provided to complete product development and
commence initial marketing formalities.
3. Early Stage / First Stage:-: Finance is provided to companies to initiate
commercial manufacturing and sales.
4. Second Stage:-In the Second Stage of Financing working capital is provided
for the expansion of the company in terms of growing accounts receivable and
inventory.
5. Third Stage:-: Funds provided for major expansion of a company having
increasing sales volume. This stage is met when the firm crosses the breakeven
point.
6. Bridge / Mezzanine Financing or Later Stage Financing:-:Bridge
/Mezzanine Financing or Later Stage Financing is financing a company just
before its IPO (Initial Public Offer). Often, bridge finance is structured so that it
can be repaid, from the proceeds of a public offering.
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.
The Venture Capital Process
The Venture Capital Investment Process:
The venture capital activity is a sequential process involving the following six steps:
1. Deal origination
2. Screening
3. Due diligence Evaluation
4. Deal structuring
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5. Post-investment activity
6. Exit
Indianmba.com (Fig 1.1)
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Venture Capital Investment Process
Deal origination:
In generating a deal flow, the VC investor creates a pipeline of deals or
investment opportunities that he would consider for investing in.
Deal may originate in various ways. referral system, active search system, and
intermediaries. Referral system is an important source of deals.
Deals may be referred to VCFs by their parent organizations, trade partners,
industry associations, friends etc. Another deal flow is active search through
networks, trade fairs, conferences, seminars, foreign visits etc.
Intermediaries is used by venture capitalists in developed countries like USA, is
certain intermediaries who match VCFs and the potential entrepreneurs.
Screening:
VCFs, before going for an in-depth analysis, carry out initial screening of all
projects on the basis of some broad criteria. For example, the screening process
may limit projects to areas in which the venture capitalist is familiar in terms of
technology, or product, or market scope.
The size of investment, geographical location and stage of financing could also
be used as the broad screening criteria.
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Due Diligence:
Due diligence is the industry jargon for all the activities that are associated with
evaluating an investment proposal. The venture capitalists evaluate the quality of
entrepreneur before appraising the characteristics of the product, market or
technology. Most venture capitalists ask for a business plan to make an
assessment of the possible risk and return on the venture.
Business plan contains detailed information about the proposed venture. The
evaluation of ventures by VCFs in India includes;
Preliminary evaluation: The applicant required to provide a brief profile of the
proposed venture to establish prima facie eligibility.
Detailed evaluation: Once the preliminary evaluation is over, the proposal is
evaluated in greater detail. VCFs in India expect the entrepreneur to have:-
Integrity, long-term vision, urge to grow, managerial skills, commercial
orientation.
VCFs in India also make the risk analysis of the proposed projects which
includes:
Product risk, Market risk, Technological risk and Entrepreneurial risk. The final
decision is taken in terms of the expected risk-return trade-off as shown in
Figure.
Deal Structuring: Structuring refers to putting together the financial aspects of the
deal and negotiating with the entrepreneurs to accept a venture capitals
proposal and finally closing the deal.
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To do a good job in structuring, one needs to be knowledgeable in areas of
accounting, cash flow, finance, legal and taxation. Also the structure should take
into consideration the various commercial issues (ie what the entrepreneur wants
and what the venture capital would require protecting the investment).
Documentation refers to the legal aspects of the paperwork in putting the deal
together. The instruments to be used in structuring deals are many and varied.
The objective in selecting the instrument would be to maximize (or optimize)
venture capitals returns/protection and yet satisfies the entrepreneurs
requirements. The instruments could be as follows:
Instrument Issues
Loan Clean vs secured
Interest bearing vs non interest bearing
convertible vs one with features (warrants)
1st Charge, 2nd Charge,
loan vs loan stock
Maturity
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Preference shares redeemable (conditions under Company Act)
participating
par value
nominal shares
Warrants exercise price
expiry period
Common shares new or vendor shares
par value
partially-paid shares
(Fig 1.2)
,In India, straight equity and convertibles are popular and commonly used.
Nowadays, warrants are issued as a tool to bring down pricing.
A variation that was first used by PACT and TDICI was "royalty on sales". Under
this, the company was given a conditional loan. If the project was successful, the
company had to pay a % age of sales as royalty and if it failed then the amount
was written off.
In structuring a deal, it is important to listen to what the entrepreneur wants, but
the venture capital comes up with his own solution. Even for the proposed
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investment amount, the venture capital decides whether or not the amount
requested,
is appropriate and consistent with the risk level of the investment.
The risks should be analyzed, taking into consideration the stage at which the
company is in and other factors relating to the project. (eg exit problems, etc)
Post Investment Activities :
Once the deal has been structured and agreement finalized, the venture
capitalist generally assumes the role of a partner and collaborator. He also gets
involved in shaping of the direction of the venture.
The degree of the venture capitalists involvement depends on his policy. It may
not, however, be desirable for a venture capitalist to get involved in the day-to-
day operation of the venture. If a financial or managerial crisis occurs, the
venture capitalist may intervene, and even install a new management team.
Exit:
Venture capitalists generally want to cash-out their gains in five to ten years after
the initial investment. They play a positive role in directing the company towards
particular exit routes. A venture may exit in one of the following ways:
1. Initial Public Offerings (IPOs)
2. Acquisition by another company
3. Purchase of the venture capitalists shares by the promoter,
4. Purchase of the venture capitalists share by an outsider.
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BRIEF PROFILE OF MAJOR PLAYERS
IDBI Venture Capital FundThis was established in1986 with the objective to finance projects whose requirements
range between Rs. 5lakhs to 2.5crores. The promoters stake should be
at least 10percent for the ventures below Rs. 50lakhs and 15percent
for those above 50 lakhs. Financial assistance is extended in the form of
unsecured loans involving minimum legal formalities. Interest at concessional
rate of 9percent is charged during technology development and trial run
of production stage and it will be 17percent once the product is commercially
traded in the market by the financially assisted firm. IDBI venture capital
funds extends its financial assistance to the ventures likely to be engaged in the
fields of chemicals, computer software, electronics, bio-technology, non-conventional
energy, food products, refractoriness and medical equipments.
Technology Development and Information Company of India Limited (TDICI)
This venture Capital fund was jointly floated by Industrial Credit & Investment
Corporation of Ind ia ( ICIC I) and Uni t Tru st of I ndi a (U TI) to f inan ce the
pr oj ec ts of pr of es si on al technocrats who take init iative in designing and
developing ind igenous techno logy in the country. Technology Development and
Information Company of India Limited (TDICI) was launched with an authorized
capital base of Rs. 20 crores and the same was targeted to be increased to
Rs. 40 to 50crores.
TDICI favors the firms seeking financial assistance for developing
information technology, management consultancy, and pharmaceutica l.
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Unit Trust of India (UTI)
In 1988-99 UTI set-ups a venture capital fund of Rs. 20 crores in collaboration with
ICICI for fostering industrial development. TDICI estab lished by UTI jointly
with ICICI acts as an advisor and manager of the fund. UTI launched venture capital
unit scheme (VECAUS-I) to raise resources for this fund. It has set up a second venture
capital fund in March 1990 with capi tal of Rs. 100 crores with the objective of
financing green field ventures and steering industrial development.
Risk Capital and Technology Finance Corporation Ltd. (RCTFC)
IFCI had sponsored in 1985, Risk Capital Foundation (RCF) to give positive
encouragement to the new entrepreneurs. RCF was converted into RCTFC on 12th
January, 1988. It provides both risk capital and technology finance and roof to
innovative entrepreneurs and technocrats for their technology oriented ventures.36
Small Industrial Development Bank of India (SIDBI)
Small Industrial Development Bank of India (SIDBI) has decided to set-up a venture
capital fund in July 1993, exclusively for support to entrepreneurs in the small
sector. Initially corpus has been created by setting apart Rs. 10 crores. The
fund would be augmented in future, depending upon requirements.
Andhra Pradesh Industrial Development Corporation (APIDC)
APIDC Venture Capital Ltd. (APIDC-VCL) was promoted by APIDC with an
author ized capital of Rs.2 million on 29th August 1989. Its main objective is to
encourage technology-based ventures particu larly those started by first
generation technocrat entrepreneurs adventures involving high risk in the state of
Andhra Pradesh.
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Gujarat Venture Finance Limited (GVFL)
GVFL has been promoted by the Gujarat Industrial Investment Corporation Limited
(GIIC)in 1990, to provide financial support to the ventures whose
requirements range between 25 lakhs and 2 crores. Total corpus of Rs. 24 crores of
the referred venture capital fund was co-financed by GIIC, state financial corporation,
some private corporate and World Bank.
Thef i rms engaged in b iotechnology, surg ica l inst ruments, conservat io
n of energy and foodprocessing industries are financed by GVFL.
Commercial Banks Sponsored Venture Capital Funds
State Bank of India, Canara Bank, Grindlays Bank and many other banks have
participated in the venture capital fund building Industry in order to provide
financial assistance to the projects associated with high risks. SBI venture
cap ita l i s moni tored through SBI capital markets. Can banks venture capital
functions through Canbank. Financial services and India Investment Fund represents
the venture capital launched by Grindlays Bank.
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Introduction
The venture capital investment helps for the growth of innovativeentrepreneurships in India.
Venture capital has developed as a result of the need to provide non
conventional, risky finance to new ventures based on innovative
entrepreneurship.
Venture capital is an investment in the form of equity, quasi-equity and
sometimes debt - straight or conditional, made in new or untried concepts,
promoted by a technically or professionally qualified entrepreneur.
Venture capital means risk capital.
Venture capital is money provided by professionals who invest alongside
management in young, rapidly growing companies that have the potential to
develop In to significant economic contributors.
. Venture capital is an important source of equity for start- up companies.
Professionally managed venture capital firms generally are private partnershipsor closely-held corporations funded by private and public pension funds,
endowment funds, foundations, corporations, wealthy individuals, foreign
investors, and the venture capitalists themselves.
Venture capitalists generally:
Finance new and rapidly growing companies Purchase equity securities.
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Assist in the development of new products or services
Add value to the company through active participation
Take higher risks with the expectation of higher rewards
Have a long-term orientation.
When considering an investment, venture capitalists carefully screen the
technical and business merits of the proposed company.
Venture capitalists only invest in a small percentage of the businesses they
review and have a long-term perspective.
They also actively work with the company's management, especially with
contacts and strategy formulation.
Venture capitalists mitigate the risk of investing by developing a portfolio of
young companies in a single venture fund.
Many times they co-invest with other professional venture capital firms. In
addition, many venture partnerships manage multiple funds simultaneously. Fordecades, venture capitalists have nurtured the growth of America's high
technology and entrepreneurial communities resulting in significant job creation,
economic growth and international competitiveness.
Companies such as Digital Equipment Corporation, Apple, Federal Express,
Compaq ,Sun Microsystems, Intel, Microsoft and Genetech are famous examples
of companies that received venture capital early in their development.
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Definition:-
Jane Koloski Morris, editor of the well known industry publication, Venture
Economics, defines venture capital as 'providing seed, start-up and first stage
financing' and also 'funding the expansion of companies that have already
demonstrated their business potential but do not yet have access to the public
securities market or to credit oriented institutional funding sources.
The organization for economic co-operation and development :-
Capital provided by firms who invest alongside management in young companies that
are not quoted on the stock market. The objective is high return from the investment.
value is created by the young company in partnership with venture capitalists money
and professional expertise
Internatoinal finance corporation :equity or equity featured capital seeking
investment in new ideas, new companies ,new products, new process or new services
that offer the potential of high returns on investment. it also include investment in
turnaround situation.
Bank of England quarterly bulletin:venture capital investment is defined as
an activity by which investors support entrepreneurial talent with finance and business
skill to exploit market opportunities and thus obtain long term capital gain
The European Venture Capital Associationdescribes it as risk finance forentrepreneurial growth oriented companies. It is investment for the medium or long
Term return seeking to maximize medium or long term for both parties. It is a
partnership with the entrepreneur in which the investor can add value to the company
because of his knowledge, experience and contact base.
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What is a Venture Capitalist?
The typical person-on-the-street depiction of a venture capitalist is that of awealthy financier who wants to fund start-up companies.
The perception is that a person who develops a brand new change-the-world
invention needs capital; thus, if they cant get capital from a bank or from their
own pockets, they enlist the help of a venture capitalist.
The venture capitalist may look at several hundred investment opportunities
before investing in only a few selected companies with favorable investment
opportunities.
These "angel investors" will mentor a company and provide needed capital and
expertise to help develop companies.
Angel investors may either be wealthy people with management expertise or
retired business men and women who seek the opportunity for first-hand
business development.
Factor to be considered by venture capitalist in
selection of investment proposal
There are basically four key elements in financing of ventures which are studied in
depth by the venture capitalists. These are:
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1. Management:- :The strength, expertise & unity of the key people on the board
bring significant credibility to the company. The members are to be mature,
experienced possessing working knowledge of business and capable of taking
potentially high risks.
2. Potential for Capital Gain:-:An above average rate of return of about 30 -
40% is required by venture capitalists. The rate of return also depends upon the
stage of the business cycle where funds are being deployed. Earlier the stage,
higher is the risk and hence the return.
3. Realistic Financial Requirement and Projections:- The venture
capitalist requires a realistic view about the present health of the organization as well
as future projections regarding scope, nature and performance of the company in
terms of scale of operations, operating profit and further costs related to product
development through Research & Development.
4. Owner's Financial Stake:-The financial resources owned & committed by
the entrepreneur/ owner in the business including the funds invested by family,
friends and relatives play a very important role in increasing the viability of the
business. It is an important avenue where the venture capitalist keeps an open eye.
Venture Capital in INDIA
Venture capital was introduced in India in mid eighties by All India Financial
Institutions with the inauguration of Risk Capital Foundation (RCF) sponsored by
IFCI with a view to encourage the technologists and the professional to promote
new industries.
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Consequently the government of India promoted the venture capital during 1986-
87 by creating a venture capital fund in the context of structural development and
growth of small-scale business enterprises.
The Indian Venture Capital Industry (IVCI) is just about a decade old industry as
compared to that in Europe and US. In this short span it has nurtured close to
one thousand ventures, mostly in SME segment and has supported building
technocrat/professionals all through.
The 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 19876 as per the long term fiscal policy of government of
India, with an initial capital of Rs. 10 cr which raised by imposing acess of 5% on all
payments made for the import of technology know- how projects requiring funds
fromrs.5 lacs to rs 2.5cr were considered for financing. Promoters contribution ranged
from this fund was available at a concessional interest rate of 9% ( during gestation
period)which could be increased at later stages.
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.
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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 support to high
technology projects for technological up gradations. 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 Pradesh, 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 Grind lays bank
Venture Capital Fund have been set up by the respective commercial banks to
undertake vc activities.
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The State Bank Venture Capital Funds provides financial assistance for bought out
deals 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
20thCenture Venture Capital Company, Indus Venture Capital Fund, Infrastructure
Leasing and Financial Services Ltd.
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, ITLInfosys US subsidiary, solution for supply chain management .
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Some important Venture Capital Funds in India:-
1. APIDC Venture Capital Limited, , Babukhan Estate, Hyderabad 500 001
2. Canbank Venture Capital Fund Limited, IInd Floor, Kareem Towers,
Bangalore.
3. Gujarat Venture Capital Fund 1997, Ashram Road, Ahmedabad 380 009
4. Industrial Venture Capital Limited, Thyagaraya Road, Chennai 600 017
5. Gujarat Venture Capital Fund 1995 Ashram Road Ahmedabad 380 009
6. Karnataka Information Technology Venture Capital Fund Cunningham Rd
Bangalore
7. India Auto Ancillary Fund Nariman Point, Mumbai 400 021
8. Information Technology Fund, Nariman Point, Mumbai 400021
9. Tamil nad InfoTech Fund Nariman Point, Mumbai 400021
10. Orissa Venture Capital Fund Nariman Point Mumbai 400021
11. Uttar Pradesh Venture Capital Fund Nariman Point, Mumbai 400021
12. SICOM Venture Capital Fund Nariman Point Mumbai 400 021
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REVIEWOFLITERATURE
According to Vijayalakshman & Dalvi,
Whenever Indian policy makers have to encourage any industry. The usual practice is
to grant that the industry tax breaks for a limited period. This definitely acts as a positive
incentive for that industry. However, what is required is a thorough understanding of the
industry requirement framing and implementation of aggregative strategy for its
development. VC funds are not even registered with SEBI in spite of all the benefit
available. VC industry is one, which will today prepare a base for a strong tomorrow.
What is need for the development of VC industry is not only tax breaks but simpler
procedures legislation for simplified exit form investment, more transparency and legal
backing to participate in business amongst other things.
According to Kumar and Kaura,
The present study reports four factors which are used by the venture capitalist to screennew venture proposals. Using Kendalls tau-c analysis, the study brings out strong
association between several variable pair. Broadly, the analysis finds that:
Successful venture teams put in sustained efforts o identified target markets.
They are highly meticulous while attending to the details.
These teams are adept at dealing with risk because of their impeccable past
experience.
Indian venture capitalists do not seem to be much enamored of technology
venturing; at least some of the successful funded by them do not seem to show
signs of being hi- tech. The study brings out four important variables which are
highly unique to successful venture in India. They are:
Ability to evaluate and react to risk
Attention to details
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Market share
Profits.
Evaluating risk seems to be an area where unsuccessful venture fail. Since
successful teams focus on established markets and meticulously pursue these
markets to gain market share, they achieve desired profits
According to Robbie, (1997)
Robbies, et. al. (1997) highlights the monitoring policies of funded units by venture
capitalists and studies the performance targets, monitoring information, and monitoring
actions through a questionnaire-based survey. The survey was administered to 108
British Venture Capital Association members and total of 77 responses were gathered
in the study. The findings related to performance targets and other monitoring issues
were considerable addition to the literature in the subject.
The issues concerning board of directors' role in venture backed companies are widely
debated topics in academic research. The findings of the study by Fried et.al. (1998)
emphasize that the board of directors are a more involved in the venture backed firms
than boards where members do not have large ownership at stake. The study provides
an empirical evidence of variation in the boards' involvement and shows its relevance inperformance management of funded units.
According To Kumar, (June 2003)
This study focus on the industry should concentrate more on early stage business
opportunities instead of later stage. It is the experience world over and especially in the
United States of America that the early stage opportunities have generated exceptionalreturns for the industry. He also suggests that individual capitalists should follow a
focused investment strategy. The specialization should be in a board technology
segment.
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According to Kumar, (March, 2004)
The industry should concentrate more an early stage business opportunities instead oflater stage. It is the experience world over and especially in the United states of
America that the early stage opportunities have generated exceptional for the industry.
It is recommended that the venture capitalists should retain their basic feature that
taking retain their basic feature that is taking high risk. The present situation may
compel venture capitalists to opt for less risky opportunities but it is against the sprit of
venture capitalism. The established fact is big gains are possible in high risk projects.
According to Kumar, (May 2004)
The Indian Venture Capital Industry has followed the classical model of venture capital
finance. The early stage financing which includes seeds, startup & early stage
investment was always the major part of the total investment. Whenever venture
capitalists invest in venture certain basic preference play a crucial role in investment
decision. Two such considerations are location preferences and ownership preferences.
Seed stage finance is provided to new companies for the use in product development &
initial marketing company may be in the process of setting up the business or may be in
the business for short period but have not reach the stage of commercialization.
According to Mishra, (July 2004)
There is abundant empirical research conducted in developed countries which addressthe relative investment evaluation criteria taken into account in the screening process
for new venture investment proposals. Zopunidis (1994) provides a useful summary of
the previous research in this field. The identification of selection criteria has been
researched using different methodologies such as simple rating of criteria (perpetual
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and deal specific responses) Knight, 1986; Dixon, 1991; Hall and Hofer, 1993; Rah,
Jung and Lee, 1994), construct analysis (Fried and Hisrich,1994), verbal protocols
(Zhacharakis and Meyer, 1998), and quantitative compensatory models (Muzyka, Birley
and Leleux, 1996; Shepherd, 1999). Multi methods (case analysis, study of
administrative records, published interviews, questionnaire and personal interviews)
approach has also been used (Riquelme, 1994) to enhance understanding of
investment criteria and also extend it to other aspects of investment process like deal
structuring and divestment.
According to Subash and Nair, (May 2005)
According to theses persons though the modern concept of venture capital stated
during 1946 and now practiced by almost all economies around the world, there seems
to be a slowdown of venture capital activities after 2000.There may be a long list of
reasons for this situation, where people feel more risky to put their money in new and
emerging ventures. Hardly 5% of the total venture capital investment globally is given to
really stage ventures. In all the years people around the world has seen the potentiality
of venture capital in promoting different economies of the world by improving the
standard of living of the people by expanding business activities, increasing
employment and also generating more revenue to the government.
According to Chary, (September 2005)
There has been a plethora of literature on venture capital finance, which is helping the
practitioners viz., venture capital finance companies and fund manager for betterunderstanding the role of venture capital in economic development. There are number
of studies on the venture capital and activities of venture capitalists in developed
countries.
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According to Vijayalakshman & Dalvi, ((Jan., 2006)
Whenever Indian policy makers have to encourage any industry. The usual practice is
to grant that the industry tax breaks for a limited period. This definitely acts as a positive
incentive for that industry. However, what is required is a thorough understanding of the
industry requirement framing and implementation of aggregative strategy for its
development. VC funds are not even registered with SEBI in spite of all the benefit
available. VC industry is one, which will today prepare a base for a strong tomorrow.
What is need for the development of VC industry is not only tax breaks but simpler
procedures legislation for simplified exit form investment, more transparency and legal
backing to participate in business amongst other things.
I.M.Panday (2009)
In his scholarly work Venture Capital: The Indian Experience focuses his attention on
the strategic role of venture capital in the development of technology, innovative
entrepreneurship and small enterprises in India; the development process of venture
capital by a systematic analysis of venture capital practices and policies in India; and
the policy initiatives necessary for the success of venture capital in developing countries
based on the Indian experience.
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RATIONALE OF STUDY
To confine that Venture Capital is related to such divers topic as corporate
finance, leverage buyouts, merchant banking financing of start-ups, small
business management, entrepreneurship development, business incubators,
technology transfers, and economic development.
The present study is confined to a specific aspect of venture capital i.e. appraisal
of working of venture capital in developing country like India for proper
perspective; the scope of the study has been widened to include the practices
and experiences of the developed and some developing countries.
To show that Capital is relatively small and emerging activity. The number of
players in the industry is limited.
To determine that It also indicates the geographical coverage is at all India bases
adventure capital funds are spread in different parts of the country. As far as the
time period covered under the study is concerned, all possible efforts are made
to find out data from different authentic sources.
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Chapter-2
Research Methodology
Objective
Method of Research
Tools Of Data Collection
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OBJECTIVE OF STUDY
When we are going to study something there is specific purpose for our study. It may be
for our course, as hobby, for passing our time, to find out genuine solution for any
problem or to draw out certain inferences out of the available data. The objectives of my
study are:
To find out the venture capital investment volume in India.
To study the problem faced by venture capitalist in India.
To study the future prospects of venture capital financing.
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This research is an exploratory research. The major purpose of this research is
description of state of affairs as it exists at present.
Exploratory research is a type of research conducted for a problem that has not been
clearly defined.
The results of exploratory research are not usually useful for decision-making by
themselves, but they can provide significant insight into a given situation.
Although the results of qualitative research can give some indication as to the
"why", "how" and "when" something occurs, it cannot tell us "how often" or "how
many".
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Tools of Data Collection
Data
Type Of Data
Secondary Data
Secondary data is the work or findings which are already present.
Secondary data is in the form of published and unpublished documents, reports,
magazines, letters etc. e.g. if the data published by RBI on currency, National Income,
Exports or Imports, is used in some other statistical enquiry, it will be termed asSecondary data.
It refers to the statistical material which is not originated by the investigator himself but
obtained from someone else's records, or when Primary data is utilized for any other
purpose at some subsequent enquiry it is termed as Secondary data. This type of data
is generally taken from newspapers, magazines, bulletins, reports, journals etc.
According to M.M. Blair, "Secondary data are those already in existence for some
other purpose than the answering of the question in hand."
Source Of Data Collection
Internet
Magazine
Journal
Newspaper
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Chapter-3
Data Analysis
And
Interpretation
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Data Analysis
Analysis of data is a process of inspecting, cleaning, transforming, and
modeling data with the goal of highlighting useful information, suggesting
conclusions, and supporting decision making. Data analysis has multiple facets
and approaches, encompassing diverse techniques under a variety of names, in
different business.
The process of evaluating data using analytical and logical reasoning to examine
each component of the data provided. This form of analysis is just one of the
many steps that must be completed when conducting a research experiment.
Data from various sources is gathered, reviewed, and then analyzed to formsome sort of finding or conclusion. There are a variety of specific data analysis
method, some of which include data mining, text analytics, business intelligence,
and data visualizations.
Data Interpretation:
Interpretation of data is done by using statistical tools like pie diagrams, bargraphs, and also using quantitative techniques accurate information is obtained.
A number of tables, graphs are prepare to bring out the main characteristics ofthe data.
Classification:-
Data classification is sorting of data according to class, segment or category.
Once data is classified it is easier to analyze it and draw conclusions.
http://www.businessdictionary.com/definition/process.htmlhttp://www.businessdictionary.com/definition/data.htmlhttp://www.businessdictionary.com/definition/examine.htmlhttp://www.businessdictionary.com/definition/component.htmlhttp://www.businessdictionary.com/definition/form.htmlhttp://www.businessdictionary.com/definition/analysis.htmlhttp://www.investorwords.com/11189/step.htmlhttp://www.businessdictionary.com/definition/completed.htmlhttp://www.businessdictionary.com/definition/research.htmlhttp://www.businessdictionary.com/definition/experiment.htmlhttp://www.businessdictionary.com/definition/source.htmlhttp://www.businessdictionary.com/definition/method.htmlhttp://www.investorwords.com/9996/include.htmlhttp://www.businessdictionary.com/definition/data-mining.htmlhttp://www.businessdictionary.com/definition/analytics.htmlhttp://www.businessdictionary.com/definition/business-intelligence-BI.htmlhttp://www.businessdictionary.com/definition/business-intelligence-BI.htmlhttp://www.businessdictionary.com/definition/analytics.htmlhttp://www.businessdictionary.com/definition/data-mining.htmlhttp://www.investorwords.com/9996/include.htmlhttp://www.businessdictionary.com/definition/method.htmlhttp://www.businessdictionary.com/definition/source.htmlhttp://www.businessdictionary.com/definition/experiment.htmlhttp://www.businessdictionary.com/definition/research.htmlhttp://www.businessdictionary.com/definition/completed.htmlhttp://www.investorwords.com/11189/step.htmlhttp://www.businessdictionary.com/definition/analysis.htmlhttp://www.businessdictionary.com/definition/form.htmlhttp://www.businessdictionary.com/definition/component.htmlhttp://www.businessdictionary.com/definition/examine.htmlhttp://www.businessdictionary.com/definition/data.htmlhttp://www.businessdictionary.com/definition/process.html8/3/2019 VENTURE CAP. Final Hemant
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Tabulation:-
For the numerical identification and distinction of the available data, tabulation isused. Tabulation helps to compare and contrast the data.
OBJECTIVE 1:-
To Find out the venture capital investment volume in India
Financing By Industry
Industry RS. Crore
Information technology VCF: Rs. 564 crore
Telecommunications VCF: Rs. 1092 croer
Pharmaceuticals VCF: Rs. 457 croer
Biotechnology VCF: Rs. 186 crore
Media/ Entertainment VCF: Rs. 903crore
Services Sector VCF: Rs. 1168 crore
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Industrial Products VCF: Rs. 947 crore
Real Estate VCF: Rs. 8700 crore
Others VCF: Rs. 11559 crore
TOTAL VCF: Rs. 25576 crores
www.sebi.gov.in (Fig: 3.1)
(Fig: 3.2)
564 1092457
186903
1168
947
8700
11559
Financing By Industry
Information technology
Telecommunications
Pharmaceuticals
Biotechnology
Media/ Entertainment
Services Sector
Industrial Products
Real Estate
Other
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Interpretation: In this diagram highest finance received by others 11559 crore and
secondly finance received by Real Estate 8700 crore
Venture Capital Investment by Stage
Investment Stages $ millionSeed/start-up 36
Other early stages 51
Later stages 228
(Fig: 3.3)
36
51
228
Investment by stage
start-up
early stages
later stages
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Decrease in seed/start-up investment, but increase in large later-stage
investments
Q1 2011 investments were increasingly concentrated in later-stage deals (73
percent of all value) both in terms of deals (63 percent) and value (73 percent)
compared to Q1 2010. The combined value of financing in all early stages in Q1
2011 was $87 million, an 18 percent decline relative toQ1 2010 . This decline is
attributable to fewer investments in other early-stage investments as seed and
start-up financings remained relatively unchanged year-over-year
Interpretation: This diagram shows the highest finance is received by the
venture in later stage 228$million of any venture.
Venture Capital by Type Investors
Investors $ million
Foreign Fund 100
Private industry 68Institutions 10Government 61
Other 29
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(Fig: 3.4)
Interpretation:-This Graph shows the highest contribution of fund FII
100$million and secondly Private industry 68$ million to develop the Industry.
VC EXIT
EXIT VOLUME EXIT VALUE($ mn)
Buyback 15 1695.32
IPO 15 502.22
M&A 40 1238.13Open market 76 1448.54
Secondary sales 18 160.85
100
68
10
61
29
Venture Capital By Type Investors
Foreign Fund
Private industry
Institution
Government
other
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(Fig: 3.5)
Interpretation: - This Graph shows the highest EXIT VALUE of BUY BACK
1695.32$ million and secondly OPEN MARKET 1448.54$ million.
1695.32
502.221238.13
1448.54
160.85
Exit Value $ mn
Buy back
IPO
M&A
Open market
Secondary Market
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Unfortunately, our country lacks on both fronts. The necessary capital can beobtained from the venture capital firms who expect an above average rate of
return on the investment.
The financing firms expect a sound, experienced, mature and capablemanagement team of the company being financed. Since the innovative project
involves a higher risk, there is an expectation of higher returns from the project.
The payback period is also generally high (5 7 years). The other issues that led
to such a situation include:-
License Raj and The IPO Boom
Till early 90s, under the license raj regime, only commodity centric businesses
thrived in a deficit situation
To fund a cement plant, venture capital is not needed. What was needed was
ability to get a license and then get the project funded by the banks and DFIs.
In most cases, the promoters were well-established industrial houses, with no
apparent need for funds. Most of these entities were capable of raising funds
from conventional sources, including term loans from institutions and equity
markets.
Scalability
The Indian software segment has recorded an impressive growth over the lastfew years and earns large revenues from its export earnings, yet our share in the
global market is less than 1 per cent.
Within the software industry, the value chain ranges from body shopping at the
bottom to strategic consulting at the top.
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Higher value addition and profitability as well as significant market presence take
place at the higher end of the value chain.
If the industry has to grow further and survive the flux it would only be through
innovation. For any venture idea to succeed there should be a product that has a
growing market with a scalable business model.
The IT industry (which is most suited for venture funding because of its "ideas"
nature) in India till recently had a service centric business model. Products
developed for Indian markets lack scale.
Mindsets
Venture capital as an activity was virtually non-existent in India. Most venture
capital companies want to provide capital on a secured debt basis, to established
businesses with profitable operating histories.
Most of the venture capital units were offshoots of financial institutions and banks
and the lending mindset continued. True venture capital is capital that is used to
help launch products and ideas of tomorrow. Abroad, this problem is solved by
the presence of `angel investors.
They are typically wealthy individuals who not only provide venture finance but
also help entrepreneurs to shape their business and make their venture
successful.
Returns, Taxes and Regulations
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There is a multiplicity of regulators like SEBI and RBI. Domestic venture funds
are set up under the Indian Trusts Act of 1882 as per SEBI guidelines, while
offshore funds routed through Mauritius follow RBI guidelines.
Abroad, such funds are made under the Limited Partnership Act, which brings
advantages in terms of taxation.
The government must allow pension funds and insurance companies to invest in
venture capitals as in USA where corporate contributions to venture funds are
large.
Exit
The exit routes available to the venture capitalists were restricted to the IPO
route. Before deregulation, pricing was dependent on the erstwhile CCI
regulations.
In general, all issues were under priced. Even now SEBI guidelines make it
difficult for pricing issues for an easy exit.
Given the failure of the OTCEI and the revised guidelines, small companies could
not hope for a BSE/ NSE listing. Given the dull market for mergers and
acquisitions, strategic sale was also not available.
Valuation
The recent phenomenon is valuation mismatches. Thanks to the software boom,
most promoters have sky high valuation expectations.
Given this, it is difficult for deals to reach financial closure as promoters do not
agree to a valuation.
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This coupled with the fancy for software stocks in the bourses means that most
companies are preopening their IPOs.
Consequently, the number and quality of deals available to the venture funds
gets reduced Some other major problems facing by venture capitalist in India are:
Requirement of an experienced management team.
b. Requirement of an above average rate of return on investment. Longer
payback period.
c. Uncertainty regarding the success of the product in the market.
d. Questions regarding the infrastructure details of production like plant
location, accessibility, relationship with the suppliers and creditors,
transportation facilities, labour availability etc.
e. The category of potential customers and hence the packaging and pricing
details of the product.
f. The size of the market.
g. Major competitors and their market share.
h. Skills and Training required and the cost of training.
i. Financial considerations like return on capital employed (ROCE), cost of
the project, the Internal Rate of Return (IRR) of the project, total amount of
funds required, ratio of owners investment (personnel funds of the
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entrepreneur), borrowed capital, mortgage loans etc. in the capital
employed.
OBJECTIVE :-3
To study the future prospect of Venture Capital Financing .
Prospects of Venture Capital Financing
With the advent of liberalization, India has been showing remarkable
growth in the economy in the past 10 - 12 years.
The government is promoting growth in capacity utilization of available
and acquired resources and hence entrepreneurship development, by
liberalizing norms regarding venture capital.
While only eight domestic venture capital funds were registered with SEBI
during 1996-1998, 14 funds have already been registered in 1999-2000.
Institutional interest is growing and foreign venture investments are also
on the rise.
Many state governments have also set up venture capital funds for the IT
sector in partnership with the local state financial institutions and SIDBI.
These include Andhra Parades, Karnataka, Delhi, Kerala and Tamil Nadu.
The other states are to follow soon.
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Chapter-4
ConclusionPolicy Implication
Limitation of Study
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Conclusion of the study
A number of people in India feel that financial institution is not only Conservativesbut they also have a bias for foreign technology & they do not trust On the
abilities of entrepreneurs.
Some venture fails due to few exit options.The team usually a two or three man
team. It does not possess therequired depth In top management. The team is
often found to have technicalskills but does not possess the overall organization
building skills team is oftenshort sited.
Venture capitalists in India consider the entrepreneurs integrity &urge to grow as
the most critical aspect or venture evaluation.
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.
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Policy Implication
In the light of the conclusions reached related to the theoretical analysis of present
status and working of venture capital in India, endeavor is made to offer some
suggestions and recommendations to make the venture capital more useful in the
country:
1. The investment should be in turnaround stage. Since there are many sick industries
in India and the number is growing each year, the venture capitalists that have
specialized knowledge in management can help sick industries. It would also be highly
profitable if the venture capitalist replace management either good ones in the sickindustries.
2. It is recommended that the venture capitalists should retain their basic feature that is
tasking high risk. The present situation may compel venture capitalists to opt for less
risky opportunities but is against the spirit of venture capitalism. The established fact is
big gains are possible in high risk projects.
3. There should be a greater role for the venture capitalists in the promotion of
entrepreneurship. The Venture capitalists should promote entrepreneur forums, clubs
and institutions of learning to enhance the quality of entrepreneurship.
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Limitations of Study
The biggest limitation was time because the time was not sufficient as there waslot of information to be got & to have it interpretation
The data required was secondary & that was not easily available.
Study by its nature is suggestive & not conclusive
Expenses were high in collecting & searching the data
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Chapter-5
References
Bibliography
Webliography
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A) Bibliography
I.M. Panday, Financial Management, Vikas Publication Pvt. Ltd. 2009,Ninth
Edition.
I.M. Panday- venture capital development process in India.
I. M. Panday- venture capital the Indian experience, Publisher Prentice Hall of
India 2010.
Satyanarayana Chary, Venture Capital Concept and Application, Macmillan
Publisher India 2005.
Dr.Vasan Desai, The Indian Financial System and Development, Second
Edition 2009.
Gavin c. Reid ,Venture Capital Investment,2002.
David Glade Stone, Laura glade Stone, Venture Capital Investing,2004.
Joseph W. Bartlett, Fundamentals Of Venture Capital, Publisher-Madison
Books, Edition (Nov17,1999).
Paul. Gompers, Josh Lerner, The Venture Capital Cycle, Second Edition
(Aug11,2006).
G. Ramesh Babu, Financial Service In India, Publisher-Concept publishing
Company,2005.
Berkery, Dermot Raising VC for Entrepreneur, McGraw Hill 2008.
Pankaj Sahai, Smooth Ride of VC-How to get VC funding for Business.
Dilek Cetindamer , The Growth Of VC: A Cross Cultural 2007.
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B) Various News Paper
The Economic Times.
The Times Of India.
C) Webliography
www.indiainfoline.com
www.vcapital.com
www.investopedia.com
www.vcinstitute.com
www.sebi.gov.in
www.ivca.org
Economictimes.indiatimes.com
Timeofindia.indiatimes.com
www.indiamba.com
www.wekipedia.com
http://www.vcapital.com/http://www.vcapital.com/http://www.investopedia.com/http://www.investopedia.com/http://www.vcinstitute.com/http://www.vcinstitute.com/http://www.sebi.gov.in/http://www.sebi.gov.in/http://www.ivca.org/http://www.ivca.org/http://www.indiamba.com/http://www.indiamba.com/http://www.wekipedia.com/http://www.wekipedia.com/http://www.wekipedia.com/http://www.indiamba.com/http://www.ivca.org/http://www.sebi.gov.in/http://www.vcinstitute.com/http://www.investopedia.com/http://www.vcapital.com/8/3/2019 VENTURE CAP. Final Hemant
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