“VENTURE CAPITAL AND ENTREPRENEURAL FINANCE” Y.M.Satish 1 , Jalauk.M.Ujalambkar2 , Nandana.Bhat 3 ABSTRACT Venture capital is a growing business of recent origin in the area of industrial financing in India. The various financial institutions set-up in India to promote industries have done commendable work. However, these institutions do not come up to the benefit of risky ventures when they are undertaken by new or relatively unknown entrepreneurs. They contend to give debt finance, mostly in the form of term loan to the promoters and their functioning has been more akin to that of commer cia l bank s. The fin anc ial ins tit uti ons have devi sed schemes suc h as see d capi tal scheme, Risk capital Fund etc., to help new entrepreneurs. However, to evaluate the projects and ext end financial ass ist anc e the y fol low the cri ter ia suc h as safety, sec uri ty, liquidity and profitability and not potentially. The capital market with its conventional financial instruments/ schemes does not come much to the benefit or risky venture. New institutions such as mutual funds, leasing and hire purchase Company’s have been established as another leasing and hire purchase Company’s have been established as another source of finance to industries. These institutions also do not mitigate the problems of new entrepreneurs who undertake risky and innovative ventures. India is poised for technological revolution with the emergence of new breed of entrepreneurs with requir ed professio nal temperament and tec hni cal knowhow. To make the innova tiv e techno logy of the entreprene urs a successful business venture, suppor t in all respe cts and more particularly in the form of financial assistance is all the more essential. This paper highlights the current status of entrepreneurs in India and financial problems faced by them along with this, the paper includes the solutions for these problems in terms of venture capital, its trends and current status in India and growth potential of the venture capital is concentrated. This paper al so di st inguis hes the vent ur e cap it al fr om regular sour ce of fi nance to the entrepreneurs. 1. Asst. Professor, Department of Management Studies, M S Ramaiah Institute of Technology. 2. Student, Department of Management Studies, M S Ramaiah Institute of Technology. 3. Student, Department of Management Studies, M S Ramaiah Institute of Technology.
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8/8/2019 Venture Capital and Entrepreneurial Finance
Venture capital is a growing business of recent origin in the area of industrial financing in India.
The various financial institutions set-up in India to promote industries have done commendable
work. However, these institutions do not come up to the benefit of risky ventures when they are
undertaken by new or relatively unknown entrepreneurs. They contend to give debt finance,
mostly in the form of term loan to the promoters and their functioning has been more akin to that
of commercial banks. The financial institutions have devised schemes such as seed capital
scheme, Risk capital Fund etc., to help new entrepreneurs. However, to evaluate the projects and
extend financial assistance they follow the criteria such as safety, security, liquidity and
profitability and not potentially. The capital market with its conventional financial instruments/
schemes does not come much to the benefit or risky venture. New institutions such as mutual
funds, leasing and hire purchase Company’s have been established as another leasing and hire
purchase Company’s have been established as another source of finance to industries. These
institutions also do not mitigate the problems of new entrepreneurs who undertake risky and
innovative ventures.
India is poised for technological revolution with the emergence of new breed of entrepreneurs
with required professional temperament and technical knowhow. To make the innovative
technology of the entrepreneurs a successful business venture, support in all respects and more particularly in the form of financial assistance is all the more essential.
This paper highlights the current status of entrepreneurs in India and financial problems faced by
them along with this, the paper includes the solutions for these problems in terms of venture
capital, its trends and current status in India and growth potential of the venture capital is
concentrated.
This paper also distinguishes the venture capital from regular source of finance to the
entrepreneurs.
1. Asst. Professor, Department of Management Studies, M S Ramaiah Institute of Technology.
2. Student, Department of Management Studies, M S Ramaiah Institute of Technology.
3. Student, Department of Management Studies, M S Ramaiah Institute of Technology.
8/8/2019 Venture Capital and Entrepreneurial Finance
Third stage Financing: At this stage, the future of the firm is very bright as sales continue to
grow rapidly, Customers are happy. Money from this stage is used to increase plant capacity,
marketing, working capital, product improvement and further expansion.
Bridge Financing: At this stage, the firm is a success and investment bankers agree to take it
public within about 6 months’ time. Bridge financing is a short-term form of financing used to
prepare a company for its IPO.
Methods of Venture Financing
The financing pattern of the deal is an extremely important element in venture financing.
Venture financing can take different form such as those outlined below.
Equity: Equity is the most desirable form of financing. VC firms participating in equity do so
through direct purchase of shares but their stake does not exceed 49%. These shares are retained
by them till the assisted projects making profit. The shares are then sold either to the promoter at
a negotiated price under buy back agreement or to the general public in the secondary market at a
profit.
Conditional Loan: In this form of venture financing, an interest free loan is provided during the
implementation period under the condition that royalty be paid on sales. The loan is to be repaid
according to a pre-determined schedule as soon as the company starts generating sales and
income. No interest is paid on these loans. In India, royalty charges are typically between 2 and
15 %; the actual rate depends on various factors such as gestation period, cost flow patterns, risk
and other factors.
Conventional Loan: In this form of assistance, a lower fixed rate of interest is charged till the
assisted units become commercially operational, after which the loan carries normal or higher rate of interest. The loan has to be repaid according to a pre-determined schedule of repayment
as per terms of loan agreement.
Income Note: This method is unique to India. It is a hybrid security which combines the feature
of both conventional and conditional loan. The entrepreneur has to pay both interest and royalty
on sales, but at substantially low rates.
8/8/2019 Venture Capital and Entrepreneurial Finance
2. VCFs promoted by the state government-controlled development finance institutions
• Andhra Pradesh Venture Capital Limited (APVCL) by Andhra Pradesh State Finance
Corporation (APSFC) and
• Gujarat Venture Finance Company Limited (GVCFL) by Gujarat Industrial InvestmentCorporation (GIIC)
3. VCFs promoted by Public Sector banks
• Can Bank Venture Capital Fund by Canara Bank
• SBI-Cap by State Bank of India.
4. VCFs promoted by the foreign banks or private sector companies and financial
institutions such as:
• Indus Venture Fund
• Credit Capital Venture Fund
• Grindlay's India Development Fund.
How to Finance Startup Business:
How entrepreneurs finance their company is one of the most critical decisions that they willmake during the course of their startup. The structure of their financing will be one of the keydrivers of the financial return from their venture. There are financing structures for companiesthat have small potential and structures for companies that have big potential. There is not a onesize fits all strategy for capitalizing a company.
Ultimately, financing a startup properly boils down to aligning the financing structure with the business opportunity and capital needs. In other words, the way in which you elect to financeyour company should at a high-level be determined by 1) how big of a business opportunity it presents and 2) how much capital is required to breakeven. While there are a number of other considerations, but I would argue that these are the first two dimensions to consider as theyshould help entrepreneurs more quickly find the right direction for their financial strategy. The2x2 chart below should help to illustrate how to think about which fundraising category that theyare in.
8/8/2019 Venture Capital and Entrepreneurial Finance
Venture Capital: If you have a big idea that can generate at least $50M in revenue and the business requires millions of dollars to get the company to a cash flow positive position, youshould probably pursue venture capital.
Not Viable: If your business requires significant capital, but is not poised to become a large business you may not be able to find a viable funding source. You will either need to find dumb money or trick savvy investors into believing your company has bigger prospects. If your company falls into this category, you should probably go back to the drawing board and find
another opportunity to pursue.
Bootstrap: If you have the potential to build a small business - one that generates single-digit or low double-digit millions in revenue - while requiring little capital to achieve breakeven, youhave a lifestyle business. In my opinion lifestyles business are best financed when the founderstake as little outside capital as possible - these are companies where it's really only exciting for founders if they own a large percentage of the equity. Additionally, by raising less capitalentrepreneurs will be able to avoid accruing a large amount of liquidity preference. If there is asignificant amount of liquidity preference in the company, it may be difficult for theentrepreneurs to realize a meaningful payout when the sell the company.
The following graph indicates the growth of venture capital and angel investments in India's IT
software and services sector:
It must be noted that during 1999, approximately 80 percent of the estimated US$ 30 billionworth of venture capital invested in United States, went to technology firms. India too, with itsstrengths in innovation and IT technology has attracted several Venture Capital firms. In 2000alone, 20 new venture capital funds have registered with SEBI, taking the total number to 30. Infact, VC or Angel investments in high tech firms in India have grown by over 5,000 percent fromRs. 70 crore to projected Rs. 2,200 crore between 1996 and 2000. And this figure is expected togrow to Rs. 50,000 crore by 2008.
In 2000 alone, 20 new venture capital funds have registered with SEBI, takingthe total number to 30. In fact, VC or Angel investments in high tech firms in Indiahave grown by over 5,000 percent from Rs. 70 crore to projected Rs. 2,200 crorebetween 1996 and 2000. And this figure is expected to grow to Rs. 50,000 crore by2008.
An analysis of financing by investment stages indicate the following figures:
8/8/2019 Venture Capital and Entrepreneurial Finance
Further, the major contributors to the funds were:
National Venture Capital Fund for Software and Information Technology Small IndustriesDevelopment Bank of India (SIDBI), in association with Ministry of Information Technology,Govt. of India, has set up a 10 year close ended venture capital fund called the "National VentureFund for Software and IT industry" (NFSIT).
Prime Minister, Atal Behari Vajpayee launched this fund in December 1999. NFSIT has a corpusfund of Rs. 100 crore and is a dedicated IT Fund with a focus on small-scale sector. Theobjective of the fund, besides meeting total financial requirements of the units, is to enable theseunits to achieve rapid growth rates and develop and maintain global competitiveness. The fundendeavors to develop international networking and enable assisted units to attract co-investments
from international venture capitalists. International linkages will help the assisted units to get alisting with foreign stock markets viz. NASDAQ; thereby achieving better valuations andoffering alternate exit routes to the investors.
A portion of the Fund has been earmarked for incubation projects that involve high risks andmight be used for development of software products. Software products require rigorous risk evaluation for which high degrees of expertise including international linkages are required. Thefund managed to attract a number of high-class professionals as investment managers in theAsset Management Company.
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Infosys Technologies, India's second-largest software exporter, said on Thursday its chairman's
wife sold company shares worth $92million for setting up a venture capital fund. Sudha Murthy,
wife of Infosys co-founder and chief mentor N.R. Narayana Murthy, sold 2 million shares, or
about 22 percent of her total holding, on the Bombay Stock Exchange on Thursday, the company
said in a filing.
Narayana Murthy had earlier sold 0.13 per cent of his stake in Infosys for Rs 174.30 crore to setup a venture capital fund. Murthy had sold eight lakh shares of Infosys for an aggregate value of
Rs 174.30 crore through market sale on the Bombay and National Stock exchange.
Murthy said his new venture capital fund will be called 'Catamaran', and will help entrepreneurs
across sectors such as healthcare, retail, technology with early stage investments. The Venture
Capital Fund will encourage and support young entrepreneurs having brilliant business ideas.
The Fund will primarily invest in India and may on a case-to-case basis consider investment
overseas. In order to ensure the agility of his new venture fund, the Infosys founder will initially
hire some 3-4 young, smart individuals to be based in Bangalore.
8/8/2019 Venture Capital and Entrepreneurial Finance