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REPORT
ON
“Study of Venture Capital
in India and its Aspects”Submitted in partial fulfilment of the requirement of MBA Degree of
Maharshi Dayanand University, Rohtak
Under the supervision of:
Mr Vivek Bhatia
Project Report – Institute of Technology and Management, Gurgaon
“No Learning is proper and effective withoutProper Guidance”
Every study is incomplete without having a well plan and concrete exposure to the student. Management studies are not exception. Scope of the project at this level is very wide ranging. On the other hand it provide sound basis to adopt the theoretical knowledge and on the other hand it gives an opportunities for exposure to real time situation.
This study is an internal part of our MBA program and to do this project in a short period was a heavy task.
Intention, dedication, concentration and hard work are very much essential to complete any task. But still it needs a lot of support, guidance, assistance, co-operation of people to make it successful.
I bear to imprint of my people who have given me, their precious ideas and times to enable me to complete the research and the project report. I want to thanks them for their continuous support in my research and writing efforts.
Project Report – Institute of Technology and Management, Gurgaon
I wish to record my thanks and indebtedness to Mr Vivek Bhatia - Faculty
International Business, ITM Gurgaon, whose inspiration, dedication and helping
nature provided me the kind of guidance necessary to complete this project.
I am extremely grateful to management of Institute of Technology & Management,
Gurgaon for granting me permission to be part of this college.
I would also like to acknowledge my parents and my batch mates for their guidance
and blessings
Table of Content1. Introduction
2. Significance of Study
3. Objective of Study
4. Research Methodology
Literature Review
Conceptual Framework
Operational Definition
5. Analysis & Interpretation
6. Findings
7. Suggestions
8. Conclusion
9. Limitation
Project Report – Institute of Technology and Management, Gurgaon
10.Bibliographies
11. Annexure
ANNEXURE I – NAME OF VENTURE CAPITAL FIRMS OUT
SIDE OF INDIA
ANNEXURE II – NAME OF VENTURE CAPITAL FIRMS IN
INDIA.
Introduction
A number of technocrats are seeking to set up shop on their own and capitalize on
opportunities. In the highly dynamic economic climate that surrounds us today, few
‘traditional’ business models may survive. Countries across the globe are realizing
that it is not the conglomerates and the gigantic corporations that fuel economic
growth any more. The essence of any economy today is the small and medium
enterprises. For example, in the US, 50% of the exports are created by companies
with less than 20 employees and only 7% are created by companies with 500 or more
employees. This growing trend can be attributed to rapid advances in technology in
the last decade. Knowledge driven industries like InfoTech, health-care, entertainment
and services have become the cynosure of bourses worldwide. In these sectors, it is
innovation and technical capability that are big business-drivers. This is a paradigm
shift from the earlier physical production and ‘economies of scale’ model. However,
starting an enterprise is never easy. There are a number of parameters that contribute
Project Report – Institute of Technology and Management, Gurgaon
to its success or downfall. Experience, integrity, prudence and a clear understanding
of the market are among the sought after qualities of a promoter. However, there are
other factors, which lie beyond the control of the entrepreneur. Prominent among
these is the timely infusion of funds. This is where the venture capitalist comes in,
with money, business sense and a lot more.
What is Venture Capital???The venture capital investment helps for the growth of innovative entrepreneurships
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. It refers to capital investment, both equity and debt, which carries substantial
risk and uncertainties. The risk envisaged may be very high may be so high as to
result in total loss or very less so as to result in high gains
The concept of Venture Capital Venture capital means many things to many people. It is in fact nearly impossible to
come across one single definition of the concept.
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 European Venture Capital Association describes it as risk finance for
entrepreneurial 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
Project Report – Institute of Technology and Management, Gurgaon
partnership with the entrepreneur in which the investor can add value to the company
because of his knowledge, experience and contact base.
Meaning of venture capital:
Venture capital is 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 companies.
Professionally managed venture capital firms generally are private partnerships or
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
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. For decades, venture capitalists have nurtured the growth of
America's high technology and entrepreneurial communities resulting in significant
Project Report – Institute of Technology and Management, Gurgaon
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.
(Source: National Venture Capital Association 1999 Year book)
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Private Equity Investing
Venture capital investing has grown from a small investment pool in the 1960s and
early 1970s to a mainstream asset class that is a viable and significant part of the
institutional and corporate investment portfolio. Recently, some investors have been
referring to venture investing and buyout investing as "private equity investing." This
term can be confusing because some in the investment industry use the term "private
equity" to refer only to buyout fund investing. In any case, an institutional investor
will allocate 2% to 3% of their institutional portfolio for investment in alternative
assets such as private equity or venture capital as part of their overall asset allocation.
Currently, over 50% of investments in venture capital/private equity comes from
institutional public and private pension funds, with the balance coming from
endowments, foundations, insurance companies, banks, individuals and other entities
who seek to diversify their portfolio with this investment class.
What is a Venture Capitalist?
The typical person-on-the-street depiction of a venture capitalist is that of a wealthy
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 can’t get
capital from a bank or from their own pockets, they enlist the help of a venture
capitalist.
In truth, venture capital and private equity firms are pools of capital, typically
organized as a limited partnership that invests in companies that represent the
opportunity for a high rate of return within five to seven years. The venture capitalist
may look at several hundred investment opportunities before investing in only a few
selected companies with favorable investment opportunities. Far from being simply
passive financiers, venture capitalists foster growth in companies through their
involvement in the management, strategic marketing and planning of their investee
companies. They are entrepreneurs first and financiers second.
Even individuals may be venture capitalists. In the early days of venture capital
investment, in the 1950s and 1960s, individual investors were the archetypal venture
Project Report – Institute of Technology and Management, Gurgaon
investor. While this type of individual investment did not totally disappear, the
modern venture firm emerged as the dominant venture investment vehicle. However,
in the last few years, individuals have again become a potent and increasingly larger
part of the early stage start-up venture life cycle. 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:
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.
Project Report – Institute of Technology and Management, Gurgaon
A Brief History
The concept of venture capital is not new. Venture capitalists often relate the story of
Christopher Columbus. In the fifteenth century, he sought to travel westwards instead
of eastwards from Europe and so planned to reach India. His far-fetched idea did not
find favor with the King of Portugal, who refused to finance him. Finally, Queen
Isabella of Spain decided to fund him and the voyages of Christopher Columbus are
now empanelled in history.
The modern venture capital industry began taking shape in the post – World War II
years. It is often said that people decide to become entrepreneurs because they see
role models in other people who have become successful entrepreneurs. Much the
same thing can be said about venture capitalists. The earliest members of the
organized venture capital industry had several role models, including these three:
American Research and Development Corporation, formed in 1946, whose biggest
success was Digital Equipment. The founder of ARD was General Georges Doroit, a
French-born military man who is considered "the father of venture capital." In the
1950s, he taught at the Harvard Business School. His lectures on the importance of
risk capital were considered quirky by the rest of the faculty, who concentrated on
conventional corporate management.
J.H. Whitney & Co also formed in 1946, one of whose early hits was Minute Maid
juice. Jock Whitney is considered one of the industry’s founders.
The Rockefeller Family, and in particular, L S Rockefeller, one of whose earliest
investments was in Eastern Airlines, which is now defunct but was one of the earliest
commercial airlines.
The Second World War produced an abundance of technological innovation,
primarily with military applications. They include, for example, some of the earliest
work on micro circuitry. Indeed, J.H. Whitney’s investment in Minute Maid was
Project Report – Institute of Technology and Management, Gurgaon
intended to commercialize an orange juice concentrate that had been developed to
provide nourishment for troops in the field.
In the mid-1950s, the U.S. federal government wanted to speed the development of
advanced technologies. In 1957, the Federal Reserve System conducted a study that
concluded that a shortage of entrepreneurial financing was a chief obstacle to the
development of what it called "entrepreneurial businesses." As a response this a
number of Small Business Investment Companies (SBIC) were established to
"leverage" their private capital by borrowing from the federal government at below-
market interest rates. Soon commercial banks were allowed to form SBICs and within
four years, nearly 600 SBICs were in operation.
At the same time a number of venture capital firms were forming private partnerships
outside the SBIC format. These partnerships added to the venture capitalist’s toolkit,
by offering a degree of flexibility that SBICs lack. Within a decade, private venture
capital partnerships passed SBICs in total capital under management.
The 1960s saw a tremendous bull IPO market that allowed venture capital firms to
demonstrate their ability to create companies and produce huge investment returns.
For example, when Digital Equipment went public in 1968 it provided ARD with
101% annualized Return on Investment (ROI). The US$70,000 Digital invested to
start the company in 1959 had a market value of US$37mn. As a result, venture
capital became a hot market, particularly for wealthy individuals and families.
However, it was still considered too risky for institutional investors.
In the 1970s, though, venture capital suffered a double-whammy. First, a red-hot IPO
market brought over 1,000 venture-backed companies to market in 1968, the public
markets went into a seven-year slump. There were a lot of disappointed stock market
investors and a lot of disappointed venture capital investors too. Then in 1974, after
Congress legislation against the abuse of pension fund money, all high-risk
investment of these funds was halted. As a result of poor public market and the
pension fund legislation, venture capital fund raising hit rock bottom in 1975.
Well, things could only get better from there. Beginning in 1978, a series of
legislative and regulatory changes gradually improved the climate for venture
Project Report – Institute of Technology and Management, Gurgaon
investing. First Congress slashed the capital gains tax rate to 28% from 49.5%. Then
the Labor Department issued a clarification that eliminated the pension funds act as an
obstacle to venture investing. At around the same time, there was a number of high-
profile IPOs by venture-backed companies. These included Federal Express in 1978,
and Apple Computer and Genetech Inc in 1981. This rekindled interest in venture
capital on the part of wealthy families and institutional investors. Indeed, in the
1980s, the venture capital industry began its greatest period of growth. In 1980,
venture firms raised and invested less than US$600 million. That number soared to
nearly US$4bn by 1987. The decade also marked the explosion in the buy-out
business.
The late 1980s marked the transition of the primary source of venture capital funds
from wealthy individuals and families to endowment, pension and other institutional
funds. The surge in capital in the 1980s had predictable results. Returns on venture
capital investments plunged. Many investors went into the funds anticipating returns
of 30% or higher. That was probably an unrealistic expectation to begin with. The
consensus today is that private equity investments generally should give the investor
an internal rate of return something to the order of 15% to 25%, depending upon the
degree of risk the firm is taking.
However, by 1990, the average long-term return on venture capital funds fell below
8%, leading to yet another downturn in venture funding. Disappointed families and
institutions withdrew from venture investing in droves in the 1989-91 periods. The
economic recovery and the IPO boom of 1991-94 have gone a long way towards
reversing the trend in both private equity investment performance and partnership
commitments.
In 1998, the venture capital industry in the United States continued its seventh straight
year of growth. It raised US$25bn in committed capital for investments by venture
firms, who invested over US$16bn into domestic growth companies US firms have
traditionally been the biggest participants in venture deals, but non-US venture
investment is growing. In India, venture funding more than doubled from $420
million in 2002 to almost $1 billion in 2003. For the first half of 2004, venture capital
investment rose 32% from 2003.
Project Report – Institute of Technology and Management, Gurgaon
Venture Capital in INDIAVenture 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. 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. Since then several venture capital
firms/funds (VCFs) are incorporated by Financial Institutions (FIs), Public Sector
Banks (PSBs), and Private Banks and Private Financial companies.
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 VC industry, through its investment in high
growth companies as well as companies adopting newer technologies backed by first
generation entrepreneurs, has made a substantial contribution to economy. In India,
however, the potential of venture capital investments is yet to be fully realized. There
are around thirty venture capital funds, which have garnered over Rs. 5000 Crores.
The venture capital investments in India at Rs. 1000.05 crore as in 1997, representing
0.1 percent of GDP, as compared to 5.5 per cent in countries such as Hong Kong.
Investment Philosophy Project Report – Institute of Technology and Management, Gurgaon
Venture capitalists can be generalists, investing in various industry sectors, or various
geographic locations, or various stages of a company’s life. Alternatively, they may
be specialists in one or two industry sectors, or may seek to invest in only a localized
geographic area.
Not all venture capitalists invest in "start-ups." While venture firms will invest in
companies that are in their initial start-up modes, venture capitalists will also invest in
companies at various stages of the business life cycle. A venture capitalist may invest
before there is a real product or company organized (so called "seed investing"), or
may provide capital to start up a company in its first or second stages of development
known as "early stage investing." Also, the venture capitalist may provide needed
financing to help a company grow beyond a critical mass to become more successful
("expansion stage financing").
The venture capitalist may invest in a company throughout the company’s life cycle
and therefore some funds focus on later stage investing by providing financing to help
the company grow to a critical mass to attract public financing through a stock
offering. Alternatively, the venture capitalist may help the company attract a merger
or acquisition with another company by providing liquidity and exit for the
company’s founders.
At the other end of the spectrum, some venture funds specialize in the acquisition,
turnaround or recapitalization of public and private companies that represent
favorable investment opportunities.
There are venture funds that will be broadly diversified and will invest in companies
in various industry sectors as diverse as semiconductors, software, retailing and
restaurants and others that may be specialists in only one technology.
While high technology investment makes up most of the venture investing in the U.S.,
and the venture industry gets a lot of attention for its high technology investments,
venture capitalists also invest in companies such as construction, industrial products,
business services, etc. There are several firms that have specialized in retail company
investment and others that have a focus in investing only in "socially responsible"
start-up endeavors.
Project Report – Institute of Technology and Management, Gurgaon
The basic principal underlying venture capital – invest in high-risk projects with the
anticipation of high returns. These funds are then invested in several fledging
enterprises, which require funding, but are unable to access it through the
conventional sources such as banks and financial institutions. Typically first
generation entrepreneurs start such enterprises. Such enterprises generally do not have
any major collateral to offer as security, hence banks and financial institutions are
averse to funding them. Venture capital funding may be by way of investment in the
equity of the new enterprise or a combination of debt and equity, though equity is the
most preferred route.
Since most of the ventures financed through this route are in new areas (worldwide
venture capital follows "hot industries" like InfoTech, electronics and biotechnology),
the probability of success is very low. All projects financed do not give a high return.
Some projects fail and some give moderate returns. The investment, however, is a
long-term risk capital as such projects normally take 3 to 7 years to generate
substantial returns. Venture capitalists offer "more than money" to the venture and
seek to add value to the investee unit by active participation in its management. They
monitor and evaluate the project on a continuous basis.
The venture capitalist is however not worried about failure of an investee company,
because the deal which succeeds, nets a very high return on his investments – high
enough to make up for the losses sustained in unsuccessful projects. The returns
generally come in the form of selling the stocks when they get listed on the stock
exchange or by a timely sale of his stake in the company to a strategic buyer. The idea
is to cash in on an increased appreciation of the share value of the company at the
time of disinvestment in the investee company. If the venture fails (more often than
not), the entire amount gets written off. Probably, that is one reason why venture
capitalists assess several projects and invest only in a handful after careful scrutiny of
the management and marketability of the project.
To conclude, a venture financier is one who funds a start up company, in most cases
promoted by a first generation technocrat promoter with equity. A venture capitalist is
not a lender, but an equity partner. He cannot survive on minimalism. He is driven by
maximization: wealth maximization. Venture capitalists are sources of expertise for
the companies they finance. Exit is preferably through listing on stock exchanges.
Project Report – Institute of Technology and Management, Gurgaon
This method has been extremely successful in USA, and venture funds have been
credited with the success of technology companies in Silicon Valley. The entire
technology industry thrives on it
Length of investment :
Venture capitalists will help companies grow, but they eventually seek to exit the
investment in three to seven years. An early stage investment make take seven to ten
years to mature, while a later stage investment many only take a few years, so the
appetite for the investment life cycle must be congruent with the limited partnerships’
appetite for liquidity. The venture investment is neither a short term nor a liquid
investment, but an investment that must be made with careful diligence and expertise.
Project Report – Institute of Technology and Management, Gurgaon
Stages of Venture Capital FundingThe 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.
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 break even 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.
Project Report – Institute of Technology and Management, Gurgaon
Methods of Venture FinancingVenture 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.
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.
Project Report – Institute of Technology and Management, Gurgaon
Venture Capital Fund Operation
Venture capitalists are very selective in deciding what to invest in. A common figure
is that they invest only in about one in four hundred ventures presented to them.
They are only interested in ventures with high growth potential. Only ventures with
high growth potential are capable of providing the return that venture capitalists
expect, and structure their businesses to expect. Because many businesses cannot
create the growth required having an exit event within the required timeframe, venture
capital is not suitable for everyone.
Venture capitalists usually expect to be able to assign personnel to key management
positions and also to obtain one or more seats on the company's board of directors.
This is to put people in place, a phrase that has sometimes quite unfortunate
implications as it was used in many accounting scandals to refer to a strategy of
placing incompetent or easily bypassed individuals in positions of due diligence and
formal legal responsibility, enabling others to rob stockholders blind. Only a tiny
portion of venture capitalists, however, have been found liable in the large scale
frauds that rocked American (mostly) finance in 2000 and 2001.
Venture capitalists expect to be able to sell their stock, warrants, options, convertibles,
or other forms of equity in three to ten years: this is referred to as harvesting. Venture
capitalists know that not all their investments will pay-off. The failure rate of
investments can be high; anywhere from 20% to 90% of the enterprises funded fail to
return the invested capital.
Many venture capitalists try to mitigate this problem through diversification. They
invest in companies in different industries and different countries so that the
systematic risk of their total portfolio is reduced. Others concentrate their investments
in the industry that they are familiar with. In either case, they work on the assumption
that for every ten investments they make, two will be failures, two will be successful,
and six will be marginally successful. They expect that the two successes will pay for
the time given to, and risk exposure of the other eight. In good times, the funds that do
succeed may offer returns of 300 to 1000% to investors.
Project Report – Institute of Technology and Management, Gurgaon
Interpretation: This diagram shows the venture capital financing in equity share and secondly they invest in redeemable preference shares to get higher returns.
Contributors of Funds
Contributors Rs. mn Per cent
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Foreign Institutional Investors 13,426.47 52.46%
All India Financial Institutions 6,252.90 24.43%
Multilateral Development Agencies 2,133.64 8.34%
Other Banks 1,541.00 6.02%
Foreign Investors 570 2.23%
Private Sector 412.53 1.61%
Public Sector 324.44 1.27%
Nationalized Banks 278.67 1.09%
Non Resident Indians 235.5 0.92%
State Financial Institutions 215 0.84%
Other Public 115.52 0.45%
Insurance Companies 85 0.33%
Mutual Funds 4.5 0.02%
Total 25,595.17 100.00%
Interpretation: This table shows the highest contribution of fund FII and secondly
AIFI to develop the Industry.
Project Report – Institute of Technology and Management, Gurgaon
Interpretation: This diagram shows the highest finance is received by the venture
in startup stage of any venture.
Project Report – Institute of Technology and Management, Gurgaon
Financing By Industry
Industry Rs million
Industrial products, machinery 2,599.32
Computer Software 1,832
Consumer Related 1,412.74
Medical 623.8
Food, food processing 500.06
Other electronics 436.54
Tel & Data Communications 385.09
Biotechnology 376.46
Energy related 249.56
Computer Hardware 203.36
Miscellaneous 1,380.85
Total 10,000.46
Project Report – Institute of Technology and Management, Gurgaon
Rs million
2,599.32
1,8321,412.74
623.8 500.06 436.54 385.09 376.46 249.56 203.36
1,380.85
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
Indu
stria
lpr
oduc
ts,
Com
pute
rSo
ftwar
e
Cons
umer
Rela
ted
Med
ical
Food
, foo
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Biot
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are
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s
Interpretation: In this diagram highest finance received by industrial products and
machinery and secondly finance received by computer software.
Project Report – Institute of Technology and Management, Gurgaon
Financing By States
Investment Rs million
Maharashtra2,566
Tamil Nadu1531
Andhra Pradesh1372
Gujarat1102
Karnataka1046
West Bengal312
Haryana300
Delhi294
Uttar Pradesh283
Madhya Pradesh231
Kerala135
Goa105
Rajasthan87
Punjab84
Orissa35
Dadra & Nagar Haveli32
Himachal Pradesh28
Project Report – Institute of Technology and Management, Gurgaon
Pondicherry22
Bihar16
Overseas413
Total9994
Source IVCA (2005-06)
Rs million
2,566
1531 13721102 1046
312 300 294
0
500
1,000
1,500
2,000
2,500
3,000
Mahar
ashtr
a
Tamil N
adu
Andhr
a Pra
desh
Gujarat
Karna
taka
West B
enga
l
Harya
naDelh
i
Interpretation: In this diagram highest finance given by the Maharashtra to the
ventures to promote the state economy growth.
Project Report – Institute of Technology and Management, Gurgaon
Project Report – Institute of Technology and Management, Gurgaon
Assessing Venture CapitalVenture funds, both domestic and offshore, have been around in India for some years
now. However it is only in the past 12 to 18 months, they have come into the
limelight. The rejection ratio is very high, about 10 in 100 get beyond pre evaluation
stage, and 1 gets funded.
Venture capital funds are broadly of two kinds - generalists or specialists. It is critical
for the company to access the right type of fund, ie who can add value. This backing
is invaluable as focused/specialized funds open doors, assist in future rounds and help
in strategy. Hence, it is important to choose the right venture capitalist.
The standard parameters used by venture capitalists are very similar to any investment
decision. The only difference being exit. If one buys a listed security, one can exit at a
price but with an unlisted security, exit becomes difficult. The key factors which they
look for in
The Management
Most businesses are people driven, with success or failure depending on the
performance of the team. It is important to distinguish the entrepreneur from the
professional management team. The value of the idea, the vision, putting the team
together, getting the funding in place is amongst others, some key aspects of the role
of the entrepreneur. Venture capitalists will insist on a professional team coming in,
including a CEO to execute the idea. One-man armies are passe. Integrity and
commitment are attributes sought for. The venture capitalist can provide the strategic
vision, but the team executes it. As a famous Silicon Valley saying goes "Success is
execution, strategy is a dream".
The Idea
The idea and its potential for commercialization are critical. Venture funds look for a
scalable model, at a country or a regional level. Otherwise the entire game would be
reduced to a manpower or machine multiplication exercise. For example, it is very
easy for Hindustan Lever to double sales of Liril - a soap without incremental capex,
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while Gujarat Ambuja needs to spend at least Rs4bn before it can increase sales by
1mn ton. Distinctive competitive advantages must exist in the form of scale,
technology, brands, distribution, etc which will make it difficult for competition to
enter.
Valuation
All investment decisions are sensitive to this. An old stock market saying "Every
stock is a buy at a price and vice versa". Most deals fail because of valuation
expectation mismatch. In India, while calculating returns, venture capital funds will
take into account issues like rupee depreciation, political instability, which adds to the
risk premia, thus suppressing valuations. Linked to valuation is the stake, which the
fund takes. In India, entrepreneurs are still uncomfortable with the venture capital
"taking control" in a seed stage project.
Exit
Without exit, gains cannot be booked. Exit may be in the form of a strategic sale
or/and IPO. Taxation issues come up at the time. Any fund would discuss all exit
options before closing a deal. Sometimes, the fund insists on a buy back clause to
ensure an exit.
Portfolio Balancing
Most venture funds try and achieve portfolio balancing as they invest in different
stages of the company life cycle. For example, a venture capital has invested in a
portfolio of companies predominantly at seed stage; they will focus on expansion
stage projects for future investments to balance the investment portfolio. This would
enable them to have a phased exit. In summary, venture capital funds go through a
certain due diligence to finalize the deal. This includes evaluation of the management
team, strategy, execution and commercialization plans. This is supplemented by legal
and accounting due diligence, typically carried out by an external agency. In India,
the entire process takes about 6 months. Entrepreneurs are advised to keep that in
mind before looking to raise funds. The actual cash inflow might get delayed because
of regulatory issues. It is interesting to note that in USA, at times angels write checks
across the table.
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Financing Options in General
The possibility of raising a substantial part of project finances in India through both
equity and debt instruments are among the key advantages of investing in India.
The Indian banking system has shown remarkable growth over the last two decades.
The rapid growth and increasing complexity of the financial markets, especially the
capital market have brought about measures for further development and
improvement in the working of these markets. Banks and development financial
institutions led by ICICI, IDBI and IFCI were providers of term loans for funding
projects. The options were limited to conventional businesses, i.e. manufacturing
centric. Services sector was ignored because of the "collateral" issue.
Equity was raised from the capital markets using the IPO route. The bull markets of
the 90s, fuelled by Harshad Mehta and the FIIs, ensured that (ad) venture capital was
easily available. Manufacturing companies exploited this to the full.
The services sector was ignored, like software, media, etc. Lack of understanding of
these sectors was also responsible for the same. If we look back to 1991 or even 1992,
the situation as regards financial outlay available to Indian software companies was
poor. Most software companies found it extremely difficult to source seed capital,
working capital or even venture capital.
Most software companies started off undercapitalized, and had to rely on loans
or overdraft facilities to provide working capital. This approach forced them to
generate revenue in the short term, rather than investing in product development. The
situation fortunately has changed.
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Research MethodologyREDMEN & MORY defines,”Research as a systematized effort to gain now
knowledge.”
It is a careful investigation for search of new facts in any branch of knowledge. The
purpose of research methodology section is to describe the procedure for conduction
the study. It includes research design, sample size, data collection and procedure of
analysis of research instrument.
Research always starts with a question or a problem. Its purpose is to find answers to
questions through the application of the scientific method. It is a systematic and
intensive study directed towards a more complete knowledge of the subject studied.
RESEARCH DESIGN :
Acc. to Kerlinger, “Research design is the plan structure & strategy of
investigation conceived so as to obtain answers to research questions and to control
variance.
Acc. to Green and Tull, “A research design is the specification of methods
and procedures for acquiring the information needed. It is the overall operational
pattern or framework of the project that stipulates what information is to be collected
from which sources by what procedures.
Its found that research design is purely and simply the framework for a study that
guides the collection and analysis of required data.
Research design is broadly classified into
Exploratory research design Descriptive research design Casual research design
This research is a Exploratory research . The major purpose of this research is
description of state of affairs as it exists at present.
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DATA COLLECTION
Secondary data
Secondary data is the data which is already collected by someone and complied for
different purposes which are used in research for this study. It includes:-
Internet
Magazine
Journal
Newspaper
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Literature Review 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 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
exceptional returns for the industry. He also suggests that individual capitalists should
follow a focused investment strategy. The specialization should be in a board
technology segment.
According to Kumar and Kaura, (March 2006)The present study reports four factors which are used by the venture capitalist to
screen new venture proposals. Using Kendall’s 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.
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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 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 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 Kumar, (March, 2004)
The industry should concentrate more an 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 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.
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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 manage for better
understanding 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.
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 through
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, (July, 2005)One of the integral aspects of venture funding is venture capitalist's involvement with
the entrepreneurial team. The relationship through broad interaction was explored by
Rosenstein (1988). A comparison was drawn between small and large firms with
regard to board interaction. While it is important in large firms the relative power of
small conventional firms, board interaction generally is undermined. Rosenstein et. a.
(1993) studied the finer aspects of boards in the venture funded companies in the
USA. From 98 candidates in the sample, the study attempted to bring out the changes
in the board size, board composition and control and their relation to value added to
the funded unit. The empirical analysis yielded results wherein the size of the board
increased after venture funding, indicating more transparency in board operations.
Through a case based approach Lloyd et. al. (1995) explored the aspect of deal
structuring and post investment staging of venture capitalists through venture
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capitalists' co-investing strategy. The study finds that even through venture capitalists
fix tight milestones and time lines they themselves contribute to many of the delays
that are experienced by a typical start up firm. This is because of the hierarchical co-
investing partners and the lack of understanding within the venture capitalist co-
investors as to what role they individually play in the development of their portfolio
company.
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 in performance management of funded units.
According to Mishra, (July 2004)
There is abundant empirical research conducted in developed countries which address
the 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
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)
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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.
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Conceptual Frame Work –
The Venture Capital Process The Venture Capital Investment Process: The venture capital activity is a sequential process involving the following six steps.