A Research Report ON Growth of Venture Capital Finance in India and Role of Business Confidence Index In partial fulfillment of the requirements for the degree of Master of Business Administration (Kurukshetra University, Kurukshetra; Session 2012- 14) Under Supervision of: Submitted By: Dr. Shilpa Jain Piyush Gupta
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A
Research Report
ON
Growth of Venture Capital Finance in India
and Role of Business Confidence Index
In partial fulfillment of the requirements for the degree of
Criteria” - ICFAI Journal of Applied Finance, Vol. 10, No. 7, pp. 71-93,
July 2004
This paper analyses the validity of venture evaluation model in India by
directly comparing the relative importance of evaluation criteria on the
funding decision with the relative importance to factors influencing venture's
empirical performance. In the light of the differences in investment
opportunities around India, and the nature of industrial development in
Growth of Venture Capital Finance in India and Role of Business Confidence Index | 27
South East Asia in general, the author anticipated that the investment criteria
employed by Venture Capital Firms (VCFs) in India would differ. A
questionnaire was administered to venture capitalists (regular members of
Indian Venture Capital Association) to determine the criteria they use to
decide on funding new ventures. The response rate was 100%. A list of forty
two criteria was developed on previously developed lists. The criteria fell
into six groups: the entrepreneur's personality, the entrepreneur's experience,
characteristics of the product or service, characteristics of the market,
financial consideration and characteristics of venture management team.
Answers were given on a four point rating scales. The results reveal that
criteria adopted by Indian VCs are different from those adopted by VCs in
other countries including US. The results also confirm that the
Sayed Ahmed Naqi and Samanthala Hettihewa “Venture capital or
private equity? The Asian experience”- Business Horizons Volume 50, Issue
4, July–August 2007
Venture capital in Asia has exhibited remarkable growth over the last two
decades. Researchers and practitioners have, however, expressed doubts as
to whether what is being reported as venture capital in Asia can really be
classified as such. Authors of scholarly studies often avoid this debate and,
consequently, fail to caution readers about the applicability of their research
findings. Through an exploration of the history, development, and
composition of venture capital in Asia, this article not only confirms
significant differences between Asian and traditional venture capital, but
also finds that venture capital in Asia differs little from what is commonly
called private equity. As such, a need exists within the venture capital
Growth of Venture Capital Finance in India and Role of Business Confidence Index | 28
literature to recognize this peculiarity of the Asian venture capital market.
Moreover, venture capitalists considering expansion into Asia must
comprehend the nature of the Asian market in order to avoid disillusionment
and frustrations which may result from inadequate understanding.
A. Thillai Rajan “Venture capital and efficiency of portfolio companies” -
IIMB Management Review, Volume 22, Issue 4, December 2010
Venture Capital (VC) has emerged as the dominant source of finance for
entrepreneurial and early stage businesses, and the Indian VC industry in
particular has clocked the fastest growth rate globally. Academic literature
reveals that VC funded companies show superior performance to non VC
funded companies. However, given that venture capitalists (VCs) select and
fund only the best companies, how much credit can they take for the
performance of the companies they fund? Do the inherent characteristics of
the firm result in superior performance or do VCs contribute to the
performance of the portfolio company after they have entered the firm? A
panel that comprised VCs, an entrepreneur and an academic debated these
and other research questions on the inter-relationships between VC funding
and portfolio firm performance. Most empirical literature indicates that the
value addition effect dominates the selection effect in accounting for the
superior performance of VC funded companies. The panel discussion
indicates that the context as well as the experience of the General Partners in
the VC firms can influence the way VCs contribute to the efficiency of their
portfolio companies.
Growth of Venture Capital Finance in India and Role of Business Confidence Index | 29
5 RESEARCH METHODOLOGY
Research Methodology is a way to systematically solve the research
problem. In it, step-by-step methods are followed to solve a particular
problem. It refers to a search for knowledge. It can also be defined as a
scientific and systematic search for pertinent information on a specific topic.
The study is carried out around different sources of data regarding Venture
Capital Finance in India. The data is analysed using different functions of
Microsoft Office Excel 2007 and Microsoft Office Word 2007. The main
statistical tools used are Correlation, Exponential Growth and Linear
Forecast.
5.1 Data Collection
The study is based on secondary data on Venture Capital Investments. The
data is collected from different publications and online resources including
SEBI’s Handbook of Statistics on Indian Securities Markets
SEBI’s website
Indian Venture Capital Association reports
Bain & Company’s reports
CII, Deloitte and E&Y survey results
Trading Economics website
and many other books, publications, reports and articles
Growth of Venture Capital Finance in India and Role of Business Confidence Index | 30
5.2 Research Design
Research Design is the way in which the research is carried out. It works as
a blue print. Research Design is the arrangement of conditions for the
collection and analysis of data in a manner that aims to combine relevance to
the research purpose with economy in procedure.
The Research design for the study is descriptive in nature. The research is
done with analog observations. Predictive analysis is done in order to know
pattern of near future investment patterns.
5.3 Limitations of Study
The Study is based on the data provided by different sources, any
incorrectness or biasness in same might also have been resulted in same for
this study.
Growth of Venture Capital Finance in India and Role of Business Confidence Index | 31
6 ANALYSIS AND INTERPRETATION
6.1 Analysing Growth of Venture Capital Finance in India and
Forecasting VC Investments in near future
To understand the scenario of venture capital investments in India, firstly we
looked at the Total Investment Details of SEBI Registered Venture Capital
Funds (VCF) and Foreign Venture Capital Investors (FVCI) as of Dec 31 of
each year starting 2007.
Year Total VC Investments (in Rs. Crores)
2007 28260
2008 33939
2009 42059
2010 47859
2011 56868
2012 55542
2013 69520
Table 1: Cumulative Total Investment Details of SEBI Registered Venture Capital Funds (VCF) and Foreign Capital Investors (FVCI) as of Dec 31 of each year
Growth of Venture Capital Finance in India and Role of Business Confidence Index | 32
With the help MS Word Excel, Growth Rate is determined for given values
from year 2007-2013 and prediction for next two years is made using
following GROWTH function:
GROWTH(known_Ys, known_ Xs, New_Xs, constant)
Here,
Ys = Known Values of Total Investments
Xs = Year corresponding to known Ys (2007-2013)
New Xs = Year for which Value to be forecasted (2014), (2015)
Constant = None
Following are the Forecasted Values of Total Investment in 2014 and 2015
using Growth function.
Year Expected Total VC Investments
(in Rs. Crores)
2014 80988
2015 93383
Table 2: Forecasted values of Total Investments by Venture Capital Funds as of Dec 31 of 2014 and 2015
Growth of Venture Capital Finance in India and Role of Business Confidence Index | 33
When values of Venture Capital Investments in India from 2007 to 2013 and
their forecasted values for 2014 and 2015 are plotted on a Line Graph,
following curve is obtained:
2007 2008 2009 2010 2011 2012 2013 2014 20150
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
Total VC Investments (in Rs. Crores)
Total Investments (in Rs. Crores)Exponential (Total Investments (in Rs. Crores))
Fig 1. Line Graph of Total Venture Capital (VC) investments from year 2007 to 2013 along with forecasted values for year 2014 and 2015
Interpretation
Fig. 1 shows the Line Graph of Total Venture Capital (VC) investments
from year 2007 to 2013 along with forecasted values for year 2014 and
2015. The black curve shows Exponential Growth curve for same. We can
infer that Venture Capital Investments in India have grown exponentially. If
Growth of Venture Capital Finance in India and Role of Business Confidence Index | 34
same trend continues, the investments by VC in India will be increasing in
near future.
Also, Investments have been slow in one year dropping from Rs. 56868
crores in 2011 to Rs. 55542 crores in 2012 but they have gained their
momentum back in 2013 by increasing more that 25%. The Value of
Investments in 2014 and 2015 is predicted to be near Rupees 81 and 93
thousand crores respectively.
Growth of Venture Capital Finance in India and Role of Business Confidence Index | 35
6.2 Analysis of Venture Capital Investments in different sectors of
economy
Now we look at the different sectors of Economy details Venture Capital
Investments of SEBI Registered Venture Capital Funds (VCF) and Foreign
Capital Investors (FVCI) as of Dec 31 of each year (FVCFs)
Table 3: Cumulative Total Investment Details of SEBI Registered Venture Capital Funds (VCF) and Foreign Capital Investors (FVCI) as of Dec 31 of each year
Growth of Venture Capital Finance in India and Role of Business Confidence Index | 36
Table 3 shows Annual Venture Capital Investments data for different sectors
of economy. Different sectors of economy for which data has been obtained
are Information Technology, Telecommunications, Pharmaceuticals,
Table 4: CII’s Business Confidence Index values, Change in Business Confidence, Percentage Change in VCFs, FVCFs and Total Venture Capital Investment in each Quarter from June 2011
Growth of Venture Capital Finance in India and Role of Business Confidence Index | 47
Here,Change in Business Confidence= Business Confidence Current year - Business Confidence in Previous year Percent Change in investment =
Correlation Coefficient has been derived using MS Excel’s CORREL Function on given values of data.
CORREL(array1,array2)
For our analysis here,
Array 1 = Array of values Change in Business ConfidenceArray 2 = Array of values of Percentage Change in VCFs, FVCFs and Total VC Investments
% change in total investment
% change in VCFs investment
% change in FVCFs investment
Correlation Coefficient with change in CII’s BCI
0.48 0.3 0.41
Table 5: Correlation Coefficient between Change in CII’s Business Confidence Index values and Percentage Change in VCFs, FVCFs and Total Venture Capital Investment in each Quarter from Jun 2011 to Dec 2013
Interpretation
Table 4 shows data of CII’s Business Confidence Index values, Change in
Business Confidence, Percentage Change in VCFs, FVCFs and Total
Venture Capital Investment in each Quarter from June 2011. In table 5,
Correlation Coefficient is used to measure the significance of Business
Growth of Venture Capital Finance in India and Role of Business Confidence Index | 48
Confidence survey by CII in case of Venture Capital Investments in the
country.
The correlation coefficient between Change in Business Confidence and
percent change in Total Investment, VCFs Investments and FVCFs
Investments comes out to be 0.48, 0.3 and 0.41 respectively. The correlation
coefficient turns out to be positive between the index values and investment
data. Although not significant at precision levels of 0.01 and 0.05, we can
infer that there is Positive Relation between Index and Venture Capital
Investment Rate.
For forthcoming (March 2014 – 51.2 and June 2014 – 45.7) quarters CII
Business Confidence Index shows a decrease in confidence values, therefore
we can infer that Venture Capital Investment in these quarters can be less
than Investments in last quarter of 2013.
But as we can see Business Confidence for September 2014 is going
significantly up (54.9), we can infer that there will be increase in Venture
Capital Investments in that quarter.
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7 Findings and Conclusion
7.1 Findings
There was an exponential increase in Venture capital from 2007 till
date
It is predicted that there will be good amount of Venture Capital
Investments about to occur in 2014 and 2015.
Around Rs. 81000 crores of VC investments will be made in 2014
2015 will see VC investments of around Rs 93400 Crores.
Real Estate Sector gets maximum share of Total Venture Capital
Investments among different sectors of Economy in 2013, followed by
Telecommunications and Information Technology.
Among different sectors of economy, Information Technology and
Real Estate are sectors with high growth rate of Venture Capital
Investment and is expected to do well in comings years as well.
In terms of Venture Capital investments made Telecommunications
and Media/Entertainment sectors are growing at medium pace.
Telecommunications have seen decline only in recent years, the most
obvious reason for it is the policy paralysis and scams around this
sector in India.
Services Sector and Industrial Products Sectors are not attracting
much VC investments and growing very slow.
Sectors of Pharmaceuticals and Biotechnology have been left quite far
in attracting VC investments. They have shown declining trend and
there is less hope from these sectors in upcoming years.
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Every Quarter, CII provides values Business Confidence Index based
on the perception of investors. When these values are correlated with
Investment details SEBI registered Venture Capital Funds (VCFs) and
Foreign Venture Capital Funds (FVCFs), they showed a positive
Correlation.
The CII’s Business Confidence Index for First two quarters of 2014
i.e. March 2014 and June 2014 has decreased from their previous
quarters. This will have negative effect on Venture Capital
Investments i.e. The Total Venture Capital investments will decrease
in these quarters.
For 3rd Quarter of 2014 i.e Sep 2014, The Business Confidence is
quite high and has increased sharply. This increase in confidence in 3 rd
quarter signifies the increase in Venture Capital Investments in India
towards end of this year.
Business Confidence Surveys like CII’s can predict the flow of
Venture Capital Investments in Long Term but cannot surely predict
small term movements in Investments Values.
Growth of Venture Capital Finance in India and Role of Business Confidence Index | 51
7.2 Conclusion
Venture capital financing has become a part of the popular business in India.
VC investments are growing at an exponential rate and one who is starting
or expanding his business can look it as a good option of financing its
venture.
For predicting the scenario of Venture Capital Investments in India in
upcoming years, analysts can look at Business Confidence Index by CII. Our
study shows that values of the Index and amount of Investments are
correlated. With our analysis we can infer that there will be an increase in
Venture Capital Investments in 3rd quarter of 2014.
In India, Information Technology and Real Estate are sectors with High
Growth in VC Investments whereas Pharmaceuticals and Biotechnology are
sectors with Declining Growth in VC Investments.
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8 REFERENCES
8.1 Bibliographic References
Bloomfield, Stephen. 2005. Venture Capital Funding - A practicle guide to raising
funds. s.l. : Kogan Page Limited, 2005.
Brigham, Eugene F. and Houston, Joel F. 2009. Fundamentals of Financial
How to get registered as a Venture Capital Fund - SECURITIES AND
EXCHANGE BOARD OF INDIA
Impact of Budget 2014-15 on Startup Companies - YOURSTORY.COM
India Private Equity Report 2014 – BAIN & COMPANY
Growth of Venture Capital Finance in India and Role of Business Confidence Index | 55
APPENDIX
Appendix I - Data Sets
Data Set 1: Industry wise Cumulative Investment Details of SEBI Registered Venture Capital Funds (VCF) and Foreign Capital Investors (FVCI)
Particulars as on December 31, 2013
(Rs. in Crore)
Sectors of Economy VCF FVCI Total*
Information Technology 954 4499 5325
Telecommunication 1468 7013 7798
Pharmaceuticals 420 646 1006
Biotechnology 222 142 326
Media/Entertainment 1148 827 1406
Services Sector 2428 2353 3697
Industrial Products 1252 1444 2377
Real estate 11482 1758 12048
Others 16026 26209 35535
Total 35400 44889 69520
*excludes Rs.10769 crore of FVCI investments through VCFs
Note:
1. The above report is compiled on the basis of quarterly information submitted to SEBI by registered Venture Capital Funds and Foreign Venture Capital Investors.
2. Due to change in reporting format with effect from the quarter ended 31st March 2010, the investment details for the March '10 and December '09 quarter are not strictly comparable.
Growth of Venture Capital Finance in India and Role of Business Confidence Index | 56
Data Set 4: India’s Business Confidence from “Trading Economies”
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Appendix II - Glossary of Terms and Abbreviations
Abbreviations
BCI Business Confidence IndexCII Confederation of Indian IndustriesCSI Current Situation IndexEI Expectation Index E&Y Ernst & YoungFVCI Foreign Venture Capital Investors IT Information TechnologyMBA Masters of Business AdministrationNASDAQ National Association of Securities Dealers Automated QuotationsNCR Nation Capital RegionSBA Small Business Administration SBICs Small Business Investment CompaniesSEBI Securities and Exchange Board of IndiaSME Small and Medium scale EnterpriseTDICI Technology Development and Information Company of IndiaVC Venture CapitalVCF venture capital firms VCs Venture Capitalists
Terms
Acquisition
The establishment of control in one business entity by another, often with the assistance
of private equity. Third party acquisition is a common Exit Mechanism for private equity
funds.
Acquisition Financing
Capital provided to a company to finance its controlling interest in another entity for
growth purposes.
Angel
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A wealthy individual who invests in entrepreneurial firms. Although angels perform
many of the same functions as venture capitalists, they invest their own capital rather
than that of institutional or other individual investors.
Bridge Financing
Capital provided on a short-term basis to a company prior to its going public or its next
major private equity transaction.
Capital Gains
The proceeds obtained on the sale of assets
Deal
Each transaction involving a private equity fund or funds in a given portfolio company
represents one round of financing. Each financing is made up of one or more investments,
depending on the presence of co-investors. Financings are also known as deals
Due Diligence
The process of assessing the business and financial viability of a potential investment
target, as well as the potential terms and conditions of an investment agreement.
Financings and Investments
Each transaction involving a private equity fund or funds in a given portfolio company
represents one round of financing. Each financing is made up of one or more investments,
depending on the presence of co-investors. Financings are also known as deals
Fund
A pool of capital raised periodically by a venture capital organisation. Usually in the
form of limited partnerships, venture capital funds typically have a ten-year life, though
extensions of several years are often possible.
Institutional Investor
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