239396525-blackbook-project-on-venture-capital.pdf

VENTURECAPI TALI NI NDI A

CHAPTER1 I NTRODUCTI ON

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VENTURECAPI TALI NI NDI A TheVent ur ecapi t al sect ori st hemostv i br anti ndust r yi nt hef i nanci al mar ket t oday .Vent ur ecapi t al i smoneypr ov i dedbypr of essi onal swhoi nv est al ongsi demanagementi ny oung, r api dl ygr owi ngcompani est hathav et he pot ent i al t odev el opi nt osi gni f i canteconomi ccont r i but or s.Vent ur ecapi t al i s ani mpor t antsour ceofequi t yf orst ar t upcompani es. Vent ur ecapi t alcanbev i sual i zedas“ y ouri deasandourmoney ”conceptofdev el opi ng busi ness.Vent ur ecapi t al i st sar epeopl ewhopoolf i nanci alr esour cesf r om hi ghnet wor t hi ndi v i dual s,cor por at e,pensi onf unds,i nsur ancecompani es,et c.t oi nv esti nhi gh r i sk–hi ghr et ur nv ent ur est hatar eunabl et osour cef undsf r om r egul archannel sl i ke banksandcapi t almar ket s.Thev ent ur ecapi t ali ndust r yi nI ndi ahasr eal l yt akenof fi n. Vent ur ecapi t al i st snotonl ypr ov i demonet ar yr esour cesbutal sohel pt heent r epr eneur wi t hgui dancei nf or mal i zi nghi si deasi nt oav i abl ebusi nessv ent ur e.

Fi v ecr i t i cal successf act or shav ebeeni dent i f i edf ort hegr owt hofVCi nI ndi a, namel y :

 The r egul at or y ,t axand l egalenv i r onmentshoul d pl ayan enabl i ng r ol e as i nt er nat i onal l yv ent ur ef unds hav e ev ol v ed i n an at mospher e ofst r uct ur al f l exi bi l i t y , f i scal neut r al i t yandoper at i onal adapt abi l i t y .

 Resour cesr ai si ng,i nv est ment ,managementandexi tshoul dbeassi mpl eand f l exi bl easneededanddr i v enbygl obal t r ends.

 Vent ur e capi t alshoul d become as i nst i t ut i onal i zed i ndust r yt hatpr ot ect s i nv est or sandi nv est orf i r ms,oper at i ngi nanenv i r onmentsui t abl ef orr ai si ngt he l ar geamount sofr i skcapi t alneededandf orspur r i ngi nnov at i ont hr oughst ar t up f i r msi nawi der angeofhi ghgr owt har eas. 2

VENTURECAPI TALI NI NDI A  I nv i ewofi ncr easi nggl obali nt egr at i onandmobi l i t yofcapi t ali ti si mpor t antt hat I ndi anv ent ur ecapi t alf undsaswel lasv ent ur ef i nanceent er pr i sesar eabl et o hav egl obal exposur eandi nv est mentoppor t uni t i es.  I nf r ast r uct ur ei nt hef or m ofi ncubat or sandR&Dneedt obepr omot edusi ng gov er nmentsuppor tandpr i v at emanagementashassuccessf ul l ybeendoneby count r i es such as t he US,I sr aeland Tai wan.Thi si s necessar yf orf ast er conv er si onofR&Dandt echnol ogi cal i nnov at i oni nt ocommer ci al pr oduct s.

Wi t ht echnol ogyandknowl edgebasedi deassett odr i v et hegl obaleconomyi nt he comi ng mi l l enni um,and gi v en t hei nher entst r engt h bywayofi t shuman capi t al , t echni calski l l s,costcompet i t i v ewor kf or ce,r esear chandent r epr eneur shi p,I ndi acan unl eashar ev ol ut i onofweal t hcr eat i onandr api deconomi cgr owt hi nasust ai nabl e manner .Howev er , f ort hi st ohappen, t her ei saneedf orr i skf i nanceandv ent ur ecapi t al env i r onment ,whi ch can l ev er age i nnov at i on,pr omot et echnol ogy and har ness knowl edgebasedi deas. TheconceptofVent ur ecapi t al i sv er yr ecentascompar edt oUSA, UK, Eur ope, I sr ael et c. Vent ur eCapi t al f unct i onswer er unbydev el opmentf i nanci al i nst i t ut i onssuchast he I DBI( I ndust r i al Dev el opmentBankofI ndi a) , I CI CIBank, andSt at eFi nanci al cor por at i ons. Publ i cl yr ai sedf undswer et hemai nsour ceofVent ur eCapi t al .Thi ssour ceoff i nanci ng washowev ert hr eat enedbymar ketf i t s/v agar i esandf ol l owi ngt her ai si ngofmi ni mum pai dupcapi t al r equi r ement sf orbei ngl i st edatst ockexchanges, pr obl emswer ei n [ 2] st or ef orsmal l f i r mswi t hf easi bl epr oj ect s.

The7t hf i v ey earpl anaswel l ast hef i scal pol i cyoft heGov er nmentofI ndi a acknowl edgedt henecessi t yf orv ent ur ecapi t al .Year1973al sof ost er edv ent ur ecapi t al 3

VENTURECAPI TALI NI NDI A asasour ceoff undi ngnewent r epr eneur sandt echnol ogywhi chwasgi v enbyt her epor t oft heCommi t t eeonDev el opmentofsmal l andmedi um ent r epr eneur s.The gov er nmentofI ndi a, r el y i ngont heWor l dbank’ sst udyoft hei nspect i onoft hepot ent i al ofdev el opmentofVent ur eCapi t al i nt hepr i v at esect ort ooka1pol i cyi ni t i at i v eand communi cat edgui del i nesf orVent ur eCapi t al Fundsi n1988butt hesewer er est r i ct i v e; al l owi ngt heset t i ngupofVent ur eCapi t al Fundsbybanksorf i nanci al i nst i t ut i onsonl y . Year1988mar kedt heest abl i shmentoft heTechnol ogyDev el opmentandI nf or mat i on CompanyofI ndi aLt d.( TDI CI )pr omot edbyt heI CI CIandUTI( Uni tTr ustofI ndi a)and wasi mmedi at el yf ol l owedbyt heGuj ur atVent ur eFi nanceLt d.Howev er , t her ewasno si gni f i cantVent ur eCapi t al act i v i t yt i l l t hemi d1990s; unf r i endl ypol i cyandr egul at or y f r amewor kbei ngt hemaj orr easons.

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VENTURECAPI TALI NI NDI A

CHAPTER2 ORI GI NOF VENTURECAPI TAL

Thest or yofv ent ur ecapi t al i sv er ymuchl i ket hehi st or yofmanki nd.I nt hef i f t eent h cent ur y , Chr i st opherCol umbussoughtt ot r av el west war dsi nst eadofeast war dsf r om Eur opeandsopl annedt or eachI ndi a.Hi sf ar -f et chedi deadi dnotf i ndf av ourwi t ht he Ki ngofPor t ugal , whor ef usedt of i nancehi m.Fi nal l y , QueenI sabel l aofSpai ndeci dedt o f undhi m andt hev oy agesofChr i st opherCol umbusar enowempanel l edi nhi st or y .And 5

VENTURECAPI TALI NI NDI A t husev ol v edt heconceptofVent ur eCapi t al .

Themoder nv ent ur ecapi t ali ndust r ybegant aki ngshapei nt hepostWor l dWar2.I ti s of t ensai dt hatpeopl edeci det obecomeent r epr eneur sbecauset heyseer ol emodel si n ot herpeopl ewhohav ebecomesuccessf ulent r epr eneur sbecauset heyseer ol emodel s i not herpeopl ewhohav ebecomesuccessf ulent r epr eneur s.Mucht hesamecanbe sai daboutv ent ur ecapi t al i st s.Theear l i estmember soft heor gani zedv ent ur ecapi t al i ndust r yhadsev er al r ol emodel s, i ncl udi ngt heset hr ee:

Amer i canResear chandDev el opmentCor por at i on: For medi n1946,whosebi ggestsuccesswasDi gi t alEqui pment .Thef ounderofARD wasGener alGeor gesDor oi t ,aFr enchbor nmi l i t ar ymanwhoi sconsi der ed“ t hef at her ofv ent ur ecapi t al ” .I nt he1950s, het aughtatt heHar v ar dBusi nessSchool .Hi sl ect ur es ont hei mpor t anceofr i skcapi t alwer econsi der edqui r kybyt her estoft hef acul t y ,who concent r at edonconv ent i onal cor por at emanagement .

J. H.Whi t ney&Co: Al sof or medi n1946,oneoft hoseear l yhi t swasMi nut eMai dj ui ce.JockWhi t neyi s consi der edoneoft hei ndust r y ’ sf ounder s.

TheRockef el l erFami l y : LSRockef el l er , oneoft hoseear l i esti nv est ment swasi nEast er nAi r l i nes, whi chi snow def unctbutwasoneoft heear l i estcommer ci al ai r l i nes. TheI ndi anPr i v at eEqui t yandVent ur eCapi t al Associ at i onwasest abl i shedi n1993and i sbasedi nNewDel hi , t hecapi t al ofI ndi a.I VCAi samemberbasednat i onal 6

VENTURECAPI TALI NI NDI A or gani zat i ont hatr epr esent sVent ur ecapi t al andPr i v at eequi t yf i r ms, pr omot est he i ndust r ywi t hi nI ndi aandt hr oughoutt hewor l dandencour agesi nv est menti nhi gh gr owt hcompani es.I tenabl est hedev el opmentofv ent ur ecapi t al andpr i v at eequi t y i ndust r yi nI ndi aandt osuppor tent r epr eneur i al act i v i t yandi nnov at i on.TheI VCAal so ser v esasapower f ul pl at f or mf ori nv est mentf undst oi nt er actwi t heachot her .I n2006, t het ot al amountofpr i v at eequi t yandv ent ur ecapi t al i nI ndi ar eachedUS$7. 5bi l l i on [ 1] acr oss299deal s.

I VCAmember scompr i seVent ur ecapi t al f i r ms, I nst i t ut i onal i nv est or s, Banks, Busi ness i ncubat or s, Angel i nv est orgr oups, Fi nanci al adv i ser s, Account ant s, Lawy er s, Gov er nmentbodi es, Academi ci nst i t ut i onsandot herser v i cepr ov i der st ot hev ent ur e capi t al andpr i v at eequi t yi ndust r y .Member sr epr esentmostoft heact i v ev ent ur e capi t al andpr i v at eequi t yf i r msi nI ndi a.Thesef i r mspr ov i decapi t al f orseedv ent ur es, ear l yst agecompani es, l at erst ageexpansi on, andgr owt hf i nancef ormanagementbuy i ns/ buy out sofest abl i shedcompani es.Sof ar , t hebi ggestmemberf i r m ofI VCAi sI CI CI Vent ur eswhi chcur r ent l yhasa$750mi l l i onf und, andhas$450mi l l i onunder management .

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VENTURECAPI TALI NI NDI A

CHAPTER3 MEANI NGOF VENTURECAPI TAL

Vent ur e Capi t ali s def i ned as pr ov i di ng seed,st ar t up and f i r stst age f i nance t o compani esandal sof undi ngexpansi onofcompani est hathav edemonst r at edbusi ness pot ent i albutdonothav eaccesst opubl i csecur i t i esmar ketorot hercr edi tor i ent ed f undi ngi nst i t ut i ons. Vent ur eCapi t al i sgener al l ypr ov i dedt of i r mswi t ht hef ol l owi ngchar act er i st i cs:  Newl yf l oat edcompani est hatdonothav eaccesst osour cessuchasequi t ycapi t al 8

VENTURECAPI TALI NI NDI A and/ or ot herr el at edi nst r ument s.  Fi r ms, manuf act ur i ngpr oduct sorser v i cest hathav ev astgr owt hpot ent i al .  Fi r mswi t habov eav er agepr of i t abi l i t y .  Nov el pr oduct st hatar ei nt heear l yst agesoft hei rl i f ecy cl e.  Pr oj ect si nv ol v i ngabov eav er ager i sk.  Tur nar oundofcompani es

Vent ur eCapi t al der i v esi t sv al uef r om t hebr andequi t y , pr of essi onal i mage, const r uct i v e cr i t i ci sm,domai nknowl edge,i ndust r ycont act s;t heybr i ngt ot abl eatasi gni f i cant l y l owermanagementagencycost .

AVent ur eCapi t alFund( VCF)st r i v est opr ov i deent r epr eneur swi t ht hesuppor tt hey needt o cr eat eupscal abl ebusi nesswi t hsust ai nabl egr owt h,whi l epr ov i di ngt hei r cont r i but or swi t hout st andi ngr et ur nsoni nv est ment , f ort hehi gherr i skst heyassume. Thet hr eepr i mar ychar act er i st i csofv ent ur ecapi t alf undswhi chmaket hem emi nent l y sui t abl easasour ceofr i skf i nancear e: 

Thati ti sequi t yorquasi equi t yi nv est ment



I ti sl ongt er mi nv est mentand



I ti sanact i v ef or m ofi nv est ment .



Vent ur ecapi t al i st s

Whensomeoner ef er st ov ent ur ecapi t al i st , t hei maget hatcomesi nmi ndi sMr .Money bags.Weal lt hi nkofv ent ur ecapi t al i st sassomeonewhoi ssi t t i ngonmi l l i onsofdol l ar s andwhowi t ht hewav eofhi smagi cwandt ur nsy ourdr eamsi nt or eal i t y .Wel l ,i ft hat ’ s whaty out hi nki sal l aboutwhyr unaf t erhi m –“ pl aySant ay our sel f ” 9

VENTURECAPI TALI NI NDI A Vent ur eCapi t al i st si sl i keanyot herpr of essi onalwhoi spai df ordoi nghi sj ob,y es, v ent ur ecapi t al i sti snot hi ngbutaf undmanagerwhosej obi st omanagef undst hatar e r ai sed.Av ent ur ecapi t al i stget saf eet oi nv esti ncompani est hati nt er esthi si nv est or s.

Di f f er encebet weenaVent ur eCapi t al i standBanker s/ MoneyManager s.

 Bankeri samanagerofot herpeopl e’ smoneywhi l et hev ent ur ecapi t al i sti sbasi cal l y an i nv est or .

 Vent ur ecapi t al i stgener al l yi nv est si nnew v ent ur esst ar t edbyt echnocr at swho gener al l yar e

i nneedofent r epr eneur i al ai dandf unds.

 Vent ur ecapi t al i st sgener al l yi nv esti ncompani est hatar enotl i st edonanyst ock exchanges.Theymakepr of i t sonl yaf t ert hecompanyobt ai nsl i st i ng.  The mosti mpor t antdi f f er ence bet ween a v ent ur e capi t al i stand conv ent i onal i nv est or sandmut ual f undsi st hathei saspeci al i standl endsmanagementsuppor tand al so  Fi nanci al andst r at egi cpl anni ng  Recr ui t mentofkeyper sonnel  Obt ai nbankanddebtf i nanci ng  Accesst oi nt er nat i onal mar ket sandt echnol ogy I nt r oduct i ont ost r at egi cpar t ner sandacqui si t i ont ar get si nt her egi on  Regi onal expansi onofmanuf act ur i ngandmar ket i ngoper at i ons  Obt ai napubl i cl i st i ng.

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VENTURECAPI TALI NI NDI A  VENTURECAPI TALFLOW CHART:

CHAPTER4 11

VENTURECAPI TALI NI NDI A

ADVANTAGESAND DI SADVANTAGESOF VENTURECAPI TAL

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VENTURECAPI TALI NI NDI A Someadv ant agesofv ent ur ecapi t al ar e: 1)Vent ur eCapi t al i st s( VCs)canpr ov i dear el at i v el yl ar geamountofcapi t al bef or eacompanygoespubl i c. 2)ManyVCspr ov i demanager i al ort echni cal adv i cef orcompani est heyi nv esti n. 3)Successf ul VCsbr i ngl egi t i macyt onewv ent ur est heyi nv esti n. 4)VCsmayat t r actot heri nv est or s.

Somedi sadv ant agesofv ent ur ecapi t al ar e: 1)Thecostofv ent ur ecapi t al i shi gh. 2)Vent ur eCapi t al i st sar enotpat i enti nv est or s; per f or mancemustmeetor exceedexpect at i onswi t hi naspeci f i ct i me. 3)VCsar eknownt ot akecont r ol ofunder per f or mi ngcompani es.

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VENTURECAPI TALI NI NDI A

CHAPTER5 VENTURECAPI TAL I NI NDI A

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VENTURECAPI TALI NI NDI A

I nst i t ut i onal i zat i onofVCi nI ndi a Toest abl i sht hepr ocessofi nst i t ut i onal i sat i onofVent ur eCapi t alFundi ng( VCF)i nI ndi a i ti si mpor t antt oexami net hegr owt hoft hi si ndust r ywi t hi nt hecont extoft hel ar ger pol i t i cal andeconomi csy st em.

Thedev el opmentoft hev ent ur ecapi t ali ndust r yi nI ndi ai nt he1980’ sseemedal most ut opi an.I ndi a’ shi ghl ybur eaucr at i sedeconomy ,aconser v at i v esoci alandbusi ness out l ook and a r i sk av er se f i nanci alsy st em pr ov i ded l i t t l e encour agementand i nst i t ut i onal spacef ort hev ent ur ecapi t al i ndust r yt oadv ance.

Theear l i estment i onofv ent ur ecapi t alcamei n1973.Acommi t t eeappoi nt edbyt he I ndi angov er nmentt oexami net hepr omot i onofdev el opmentofSME’ shi ghl i ght edt he need t o endor se v ent ur e capi t alas a sour ce off undi ng new ent r epr eneur s and t echnol ogy . TheI ndi aneconomyi sadual i st i ceconomy ,domi nat edbyaf ewmassi v ePubl i cSect or Under t aki ngs( PSU’ s)ont heonehandandpr i v at esect ori ndust r ygi ant ssuchast he Tat asandBi r l asont heot her .Anent r epr eneurst ar t i ngasunr i sei ndust r ywoul dhav et o dosoonhi sownper sonalsav i ngsorl oansr ai sedt hr oughper sonalcont act sand f i nanci al i nst i t ut i ons. I n1988,t heWor l dBank,encour agi ngeconomi cl i ber al i zat i oni nt hi r dwor l dcount r i es, under t ookast udyt oexami net hepossi bi l i t yofdev el opi ngv ent ur ecapi t alf undi ng chi ef l yi nt he pr i v at e sect or .Accor di ngl y ,t he I ndi an gov er nmenti ssued i t sf i r st gui del i nest ol egal i sev ent ur ecapi t aloper at i ons.Theyal l owedst at econt r ol l edbanks andf i nanci ali nst i t ut i onst oest abl i shv ent ur ecapi t alsubsi di ar i es.Asar esul tv ent ur e capi t alf undi ngbecameanext ensi onf ordev el opi ngf i nanci ali nst i t ut i onssuchasI CI CI , 15

VENTURECAPI TALI NI NDI A I DBI , SI DBI , andSt at eFi nanceCor por at i ons.

I nt heabsenceofani ndependentandor gani zedv ent ur ecapi t ali ndust r yi nI ndi aunt i l al most1998,i ndi v i duali nv est or sanddev el opment alf i nanci ali nst i t ut i onspl ay edt he r ol eofv ent ur ecapi t al i st s.Ent r epr eneur swer el ar gel ydependentonpr i v at epl acement s, publ i cof f er i ngsandl endi ngbyf i nanci al i nst i t ut i ons.

Thegr owt hoft hev ent ur ecapi t al i ndust r yi nI ndi acanbedi v i dedi nt o2 phases.

Thef i r stphasebeganpost–r ef or m wi t hl i ber al i zat i onoft heI ndi aneconomy .The Techni cal Dev el opmentandI nf or mat i onCor por at i onofI ndi a( TDI CI , nowI CI CIv ent ur es) andt heGuj ar atVent ur eFi nanceLi mi t ed( GVFL)wer esetup.Sour cesoft hesef unds wer ef i nanci ali nst i t ut i ons, f or ei gni nst i t ut i onali nv est or sorpensi onf undsandhi ghnet wor t hi ndi v i dual s.

Thesecondphaseofv ent ur ecapi t algr owt hi nI ndi abeganwi t ht her eal i zat i ont hat v ent ur e capi t alf undi ng,as an i ndust r y has t o be r egul at ed.Subsequent l y ,t he Gov er nmentofI ndi ai ssuedgui del i nesi nSept ember1995f orov er seasi nv est menti n v ent ur ecapi t al i nI ndi a. I n1996, t heSecur i t i esandExchangeBoar dofI ndi a( SEBI )cameoutwi t hgui del i nesf or v ent ur ecapi t alf unds.Themov el i ber at edt hei ndust r yf r om anumberofbur eaucr at i c hassl esandpav edt hewayf orgr eat eraccesst ocapi t al .Mor eov er , compet i t i onbr ought 16

VENTURECAPI TALI NI NDI A pr of essi onal busi nesspr act i cesf r om t hemat ur emar ket si nt hewest .

I n1997,v ent ur ecapi t alf undi ngbecamepr omi nenti nt heI Tsect or .Al lv ent ur ecapi t al f undst hatwer easoft henbei ngempl oy edi not hersect or s,changedt hei rf ocust ot he I TandTel ecom i ndust r y .

Wi t ht heI Tboom t oday ,t heI ndi anv ent ur ecapi t ali ndust r yhasf i nal l yt ur nedt hecur v e. Howev eri ti sst i l l st r i v i nghar dt osuccessf ul l yandwhol l yt akeof f . Dur i ngt her ecessi onf r om 1999–2001mostoft hev ent ur ecapi t al i st sei t hercl osed downorshi f t edf ocus.Al mostal loft hem wi t ht heexcept i onofoneort wol i keGv FL cent er edonsuccessf ulf i r msf ort hei rgr owt handexpansi on.Vent ur ecapi t alf i r msal so gotengagedi nt of undi ngbuy out s,pr i v at i zat i onandr est r uct ur i ng.Cur r ent l y ,j ustaf ew f i r msar et aki ngt her i skofi nv est i ngi nt ot hest ar t upt echnol ogybasedcompani es. Thesuccessachi ev edi nt heI Tsect or , hasencour agedVCFi nsev er alot hersect or sl i ke bi ot echnol ogy , phar maceut i cal s and dr ugs, agr i cul t ur e, f ood pr ocessi ng, t el ecommuni cat i ons,cal lcent er s,busi nesspr ocessout sour ci ng( BPO)andser v i ces. Wi t hpr operpol i cysuppor tandf i nanci ngofr i skcapi t al ,ent r epr eneur shi pi nsmal land medi um sect orcansucceed. St at eGov er nment shav enowst ar t edt aki nganact i v epar ti nt hev ent ur ecapi t al I ndust r y . St at esl i keAndhr aPr adeshhav eAPI DCVCL,whi chi saj oi ntv ent ur ebet weent he Vent ur eastGr oupandt heAndhr aPr adeshI ndust r i alDev el opmentCor por at i onf undi ng SME’ sl i kebi ot echnol ogyf i r ms, phar maet c. Fi r st gener at i onent r epr eneur sar enow f i ndi ngi teasi ert or ai sev ent ur ef unds.Mor e v ent ur ef undsar enow bei ngi nv est edi nl ow t echnol ogyent er pr i seasi sseeni nt he caseofI CI CIVent ur est hathasast akei nShopper sSt op. 17

VENTURECAPI TALI NI NDI A

Ther ear eanumberoff unds,whi char ecur r ent l yoper at i onali nI ndi aandi nv ol v edi n f undi ngst ar t upv ent ur es.Mostoft hem ar enott r uev ent ur ef unds, ast heydonotf und st ar t ups.Whatt heydoi spr ov i demezzani neorbr i dgef undi ngandar ebet t erknownas pr i v at eequi t ypl ay er s.Howev er ,t her ei sast r ongopt i mi st i cunder t onei nt heai r .Wi t h t heI ndi anknowl edgei ndust r yf i nal l yshowi ngsi gnsofr eadi nesst owar dscompet i ng gl obal l yandawar enessofv ent ur ecapi t al i st samongent r epr eneur shi ghert hanev er bef or e, t hest ageseemsal l setf oranov er dr i v e. TheI ndi anVent ur eCapi t alAssoci at i on( I VCA) , i st henodalcent erf oral lv ent ur eact i v i t y i nt hecount r y .Theassoci at i onwassetupi n1992andov ert hel astf ewy ear s, hasbui l t upani mpr essi v edat abase.Accor di ngt ot heI VCA,t hepooloff undsav ai l abl ef or i nv est mentt oi t s20member si n1997wasRs25. 6bn.Outoft hi s,Rs10bnhadbeen i nv est edi n691pr oj ect s. Cer t ai nv ent ur ecapi t alf undsar eI ndust r yspeci f i c( i et heyf undent er pr i sesonl yi n cer t ai ni ndust r i essuch asphar maceut i cal s,i nf ot ech orf ood pr ocessi ng)wher eas ot her smayhav eamuchwi derspect r um.Agai n,cer t ai nf undsmayhav eageogr aphi c f ocus–l i keUt t arPr adesh,Mahar asht r a,Ker al a,et cwher easot her smayf undacr oss di f f er entt er r i t or i es.Thef undsmaybeei t hercl oseendedschemes( wi t haf i xedper i od ofmat ur i t y )oropenended.Thegr owt hofv ent ur ecapi t ali nI ndi af r om 20002006i sas f ol l ows:

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VENTURECAPI TALI NI NDI A

Asi nt heabov echar t ,i ti sobser v edt hatv ent ur ecapi t alhadagr eatf al lf r om 2000t o 2003f r om US$280mi l l i ont oUS$56mi l l i on.2004wasagoodst ar tf r om v ent ur e capi t al i nI ndi a.Andt her emor echancesofi ncr easei nv ent ur ecapi t al i nI ndi a. Thesear ev ent ur ecapi t al compani esi nI ndi a. 

Accel Par t ner sI ndi a



Ar t heonVent ur es



Ar t i manVent ur es



AugustCapi t al Par t ner s



Bl ueRunVent ur es



DFJI ndi a



Epi phanyVent ur es



Hel i onVent ur ePar t ner s 19

VENTURECAPI TALI NI NDI A 

I FCIVent ur eCapi t al Funds



I ndi aI nnov at i onI nv est or s



I nf r aCoAsi aDev el opmentPt eLt d.



I nv ent us( I ndi a)Adv i sor yCompany



JAFCOAsi a



Net zCapi t al



NexusI ndi aCapi t al



Ni r v anaVent ur eAdv i sor s



Oj asVent ur ePar t ner s



Rel i anceVent ur e



SAI FPar t ner s



Sequoi aCapi t al



Sr i j anCapi t al



TuscanVent ur es



Tr i dentCapi t al



Veddi sVent ur es



Vent ur eEast



Lambt echVent ur es

20

VENTURECAPI TALI NI NDI A

CHAPTER6 TYPESOF 21

VENTURECAPI TALI NI NDI A

VENTURECAPI TAL I NVESTORS

22

VENTURECAPI TALI NI NDI A The“ v ent ur ef unds”av ai l abl ecoul dbef r om  I ncubat or s  Angel i nv est or s  Vent ur eCapi t al i st s( VCs)  Pr i v at eEqui t yPl ay er s



I ncubat or s

Ani ncubat ori sahar dcor et echnocr atwhowor kswi t hanent r epr eneurt odev el opa busi nessi dea,andpr epar esacompanyf orsubsequentr oundsofgr owt h&f undi ng.E-

Vent ur es, I nf i ni t yi sexampl esofi ncubat or si nI ndi a.



Angel I nv est or s

Anangel i sanexper i encedi ndust r y br edi ndi v i dual wi t hhi ghnetwor t h. Ty pi cal l y , anangel i nv est orwoul d:  I nv estonl yhi schosenf i el doft echnol ogy  Takeact i v epar t i ci pat i oni nday t odayr unni ngoft hecompany  I nv estsmal l sumsi nt her angeofUSD13mi l l i on  Noti nsi stondet ai l edbusi nesspl ans  Sanct i ont hei nv est menti nupt oamont h  Hel pcompanyf or“ secondr ound”off undi ng

23

VENTURECAPI TALI NI NDI A

TheI NDUSEnt r epr eneur s( Ti E)i sacl assi cgr oupofangel sl i ke:Vi noddham,Sai l esh Meht a,KanwalRekhi ,Pr abhuGoel ,SuhasPat i l ,Pr akashAgr awal ,K. BChandr ashekhar . I nI ndi at her ei sal ackofhomegr ownangel sexceptaf ewl i keSaur abhSr i v ast av a& At ul Choksey( ex-Asi anpai nt s) .



Vent ur eCapi t al i st s( VCs)

VCsar eor gani zat i onsr ai si ngf undsf r om numer ousi nv est or s& hi r i ngexper i enced pr of essi onal manager st odepl oyt hesame.Theyt y pi cal l y :

 I nv estat“ second”st age  I nv estov eraspect r um ov eri ndust r y / i es  Hav ehandhol di ng“ ment or ”appr oach  I nsi stondet ai l edbusi nesspl ans  I nv esti nt opr ov eni deas/ busi nesses  Pr ov i de“ br and”v al uet oi nv est ee  I nv estbet weenUSD25mi l l i on

 Pr i v at eEqui t yPl ay er s

Theyar eest abl i shedi nv est mentbanker s.Ty pi cal l y :  I nv esti nt opr ov en/ est abl i shedbusi nesses 24

VENTURECAPI TALI NI NDI A  Hav e“ f i nanci al par t ner s”appr oach  I nv estbet weenUSD 5-100mi l l i on

CHAPTER7 CLASSI FI CATI ONOF VENTURECAPI TAL FUNDS

25

VENTURECAPI TALI NI NDI A Vent ur ef undsi nI ndi acanbecl assi f i edont hebasi sof : Basef or mat i on

Fi nanci alI nst i t ut i onsLedByI CI CIVent ur es, RCTC, I LFS, et c.  Pr i v at ev ent ur ef undsl i keI ndus, et c.  Regi onalf undsl i keWar bur gPi ncus,JFEl ect r a( most l yoper at i ngoutofHong Kong) .  Regi onal f undsdedi cat edt oI ndi al i keDr aper , Wal den, et c.  Of f shor ef undsl i keBar i ngs, TCW, HSBC, et c.  Cor por at ev ent ur esl i keI nt el . Tot hi sl i stwecanaddAngel sl i keSi v anSecur i t i es,At ulChoksey( exAsi anPai nt s)and ot her s.Mer chantbanker sandNBFCswhospeci al i zedi n" boughtout "deal sal sof und compani es.Mostmer chantbanker sl edbyEnam Secur i t i esnowi nv esti nI Tcompani es.

I nv est mentPhi l osophy Ear l yst agef undi ngi sav oi dedbymostf undsapar tf r om I CI CIv ent ur es,Dr aper ,SI DBI andAngel s.Fundi nggr owt hormezzani nef undi ngt i l lpr eI PO i st hesegmentwher e mostpl ay er soper at e.I nt hi scont ext , mostf undsi nI ndi aar epr i v at eequi t yi nv est or s.

Si zeOfI nv est ment Thesi zeofi nv est menti sgener al l yl esst hanUS$1mn,US$15mn,US$510mn,and gr eat ert hanUS$10mn.Asmostf undsar eofapr i v at eequi t yki nd,si zeofi nv est ment s hasbeeni ncr easi ng.I Tcompani esgener al l yr equi r ef undsofaboutRs3040mni nan 26

VENTURECAPI TALI NI NDI A ear l yst age whi ch f al lout si de f undi ng l i mi t s ofmostf unds and t hati s whyt he gov er nmenti spr omot i ngschemest of undst ar tupsi ngener al , andi nI Ti npar t i cul ar .

Val ueAddi t i onThev ent ur ef undscanhav eat ot al l y" handson"appr oacht owar dst hei ri nv est mentl i ke Dr aperor" handsof f "l i keChase.I CI CIVent ur esf al l si nt hel i mi t edexposur ecat egor y .I n gener al ,v ent ur ef undswhof undseedorst ar tupshav eacl oseri nt er act i onwi t ht he compani es and adv i ce on st r at egy ,et c whi l et he pr i v at e equi t yf unds t r eatt hei r exposur el i keanyot herl i st edi nv est ment .Thi si spar t i al l yj ust i f i ed,ast heyt endt o i nv esti nmor emat ur est or i es. Al i stoft hemember sr egi st er edwi t ht heI VCAasofJune1999,hasbeenpr ov i dedi n t heAnnexur e.Howev er ,i naddi t i ont ot heor gani zedsect or ,t her ear eanumberof pl ay er soper at i ngi nI ndi awhoseact i v i t yi snotmoni t or edbyt heassoci at i on.Add t oget hert hei nf usi onoff undsbyov er seasf unds,pr i v at ei ndi v i dual s,‘ angel ’i nv est or s andahostoff i nanci ali nt er medi ar i esandt het ot alpoolofI ndi anVent ur eCapi t alt oday , st andsatRs50bn, accor di ngt oi ndust r yest i mat es! Thepr i mar ymar ket si nt hecount r yhav er emai neddepr essedf orqui t esomet i menow. I nt hel astt woy ear s,t her ehav ebeenj ust74i ni t i alpubl i cof f er i ngs( I POs)att hest ock exchanges,l eadi ngt oani nv est mentofj ustRs14. 24bn.That ’ sl esst han12% oft he moneyr ai sedi nt hepr ev i oust woy ear s.Thatmakest heconser v at i v eest i mat eof Rs36bni nv est edi ncompani est hr ought heVent ur eCapi t al / pr i v at eEqui t yr out eal lt he mor esi gni f i cant . Someoft hecompani est hathav er ecei v edf undi ngt hr ought hi sr out ei ncl ude: 

Mast ek, oneoft heol destsof t war ehousesi nI ndi a 27

VENTURECAPI TALI NI NDI A 

Geomet r i cSof t war e, apr oducerofsof t war esol ut i onsf ort heCAD/ CAM mar ket



RuksunSof t war e, Punebasedsof t war econsul t ancy



SQL St ar ,Hy der abad based t r ai ni ng and sof t war e dev el opment

company 

Mi cr ol and,net wor ki ng har dwar e and ser v i ces company based i n

Bangal or e 

Sat y am I nf oway , t hef i r stpr i v at eI SPi nI ndi a



Hi ndi t r on, maker sofembeddedsof t war e



Power TelBoca,di st r i but oroft el ecomput i ngpr oduct sf ort heI ndi an

mar ket 

Redi f font heNet ,I ndi anwebsi t ef eat ur i ngel ect r oni cshoppi ng,news,

chat , et c 

Ent ev o,secur i t y and ent er pr i se r esour ce management sof t war e

pr oduct s 

Pl anet asi a. com, Mi cr ol and’ ssubsi di ar y , oneofI ndi a’ sl eadi ngpor t al s



Tor r entNet wor ki ng,pi oneerofGi gabi t scal edI Pr out er sf ori nt er / i nt r a

net s 

Sel ect i ca, pr ov i derofi nt er act i v esof t war esel ect i on

Thought hei nf ot echcompani esar eamongt hemostf av or edbyv ent ur e capi t al i st s,compani es f r om ot hersect or s al so f eat ur e equal l yi nt hei r por t f ol i os.Theheal t hcar esect orwi t hphar maceut i cal , medi cal appl i ancesand 28

VENTURECAPI TALI NI NDI A bi ot echnol ogy i ndust r i es al so get much at t ent i on i nI ndi a. Wi t ht he der egul at i onoft het el ecom sect or ,t el ecommuni cat i onsi ndust r i esl i keZi p Tel ecom andmedi acompani esl i keUTVandTel ev i si onEi ght eenhav ej oi ned t hel i stoff av or i t es.Sof ar ,t heset r endshav ebeeni nkeepi ngwi t ht hegl obal cour se. Howev er , r ecentdev el opment shav eshownt hatI ndi ai smat ur i ngi nt oamor e dev el opedmar ket pl ace;unconv ent i onali nv est ment si nagamutofi ndust r i es hav espr ungupal l ov ert hecount r y .Thi si ncl udes: I ndusLeagueCl ot hi ng,acompanysetupbyei ghtf or merempl oy eesof r eady madegar ment sgi antMadur a,whosetupshopont hei rownt odev el op auni quev i r t ualor gani zat i ont hatwi l ll i censegl obalappar elbr andsandsel l t hem, wi t houtowni nganymanuf act ur i nguni t s.Theydr eam t obui l danet wor k of2, 500out l et si nt hr eey ear sandt obeamongt het opt hr eer eady made br ands. Shopper sSt op,Mumbai ’ spr emi erdepar t ment alst or ei nnov at eswi t hr et ai l i ng and deci dest o go gl obal .Thi sdeali sf aci ng somepr obl emsi n get t i ng r egul at or yappr ov al s. Ai r f r ei ght ,t hecour i er companywhi chhasbeengr owi ngatar api dpaceand neededf undsf orheav yi nv est ment si nt echnol ogy , net wor ki ngandai r cr af t s. Pi z zaCor ner ,aChennaibasedpi zzadel i v er ycompanyt hati ssett ot akeon gl obalgi ant sl i kePi zzaHutandDomi nosPi zzawi t hi t si nnov at i v eser v i ci ng st r at egy .

Consor t i um f i nanci ng 29

VENTURECAPI TALI NI NDI A Wher et hepr oj ectcosti shi gh( Rs100mi l l i onormor e)andasi ngl ef undi s noti naposi t i ont opr ov i det heent i r ev ent ur ecapi t alr equi r edt henv ent ur e f undsmi ghtacti nconsor t i um wi t hot herf undsandt akeal eadi nmaki ng i nv est mentdeci si ons.Thi shel psi ndi v er si f y i ngr i skbuthowev eri thasnot beenv er ysuccessf ul i nt heI ndi acase.

CHAPTER8 STAGESOF 30

VENTURECAPI TALI NI NDI A

FI NANCI NGBY VENTURE CAPI TALI ST

31

VENTURECAPI TALI NI NDI A Vent ur ecapi t al canbepr ov i dedt ocompani esatdi f f er entst ages.Thesei ncl ude:

I .

Ear l y -st ageFi nanci ng



SeedFi nanci ng:Seedf i nanci ngi spr ov i dedf orpr oductdev el opment&r esear ch

andt o

bui l damanagementt eam t hatpr i mar i l ydev el opst hebusi ness

pl an.



St ar t upFi nanci ng:Af t eri ni t i alpr oductdev el opmentandr esear chi s

t hr ough,

st ar t upf i nanci ngi spr ov i dedt ocompani est oor gani zet hei r busi ness,bef or et he commer ci al l aunchoft hei rpr oduct s.



Fi r stSt ageFi nanci ng:I spr ov i dedt ot hosecompani est hathav eexhaust edt hei r

i ni t i al capi t al andr equi r ef undst ocommencel ar gescal e manuf act ur i ngandsal es.

I I .



Expansi onFi nanci ng

SecondSt ageFi nanci ng:Thi st y peoff i nanci ngi sav ai l abl et opr ov i dewor ki ng

capi t alf ori ni t i alexpansi onofcompani es,t hatar eexper i enci nggr owt hi naccount s r ecei v abl eandi nv ent or i es, andi sont hepat hofpr of i t abi l i t y .



Mezzani ne Fi nanci ng:When sal es v ol umes i ncr ease

t r emendousl y ,t he

company ,t hr ough mezzani ne f i nanci ng i s pr ov i ded wi t hf unds f orf ur t herpl ant expansi on, mar ket i ng, wor ki ngcapi t al orf ordev el opmentofani mpr ov edpr oduct . 32

VENTURECAPI TALI NI NDI A



Br i dgeFi nanci ng:Br i dgef i nanci ngi spr ov i dedt ocompani est hatpl ant ogo

publ i c wi t hi n si xt ot wel v e mont hs.Br i dge f i nanci ng i sr epai df r om under wr i t i ng pr oceeds.

I I I .

Acqui si t i onFi nanci ng

Ast het er m denot es,t hi st y peoff undi ngi spr ov i dedt ocompani est oacqui r eanot her company .Thi st y peoff i nanci ngi sal soknownasbuy outf i nanci ng.I ti snor mal l y adv i sabl et oappr oachmor et hanonev ent ur ecapi t al f i r m si mul t aneousl yf orf undi ng, as t her ei sapossi bi l i t yofdel ayduet ot hev ar i ousquer i esputbyt heVC.I ft heappl i cat i on f orf undi ngwer ef i nal l yr ej ect edt henappr oachi nganot herVCatt hatpoi ntandgoi ng t hr ought hesamepr ocesswoul dcausedel ay .I fmor et hanoneVCr ev i ewst hebusi ness pl ant hi sdel aycanbeav oi ded, ast hepr obabi l i t yofaccept ancewi l l bemuchhi gher .The onl ypr obl em wi t ht heabov est r at egyi st hepr ocessi ngf eer equi r edbyaVCal ongwi t h t hebusi nesspl an.I fy ouwer eappl y i ngt omor et hanoneVCt hent her ewoul dbeacost escal at i onf orpr ocessi ngt heappl i cat i on.Henceacostbenef i tanal y si sshoul dbegone i nt obef or eusi ngt heabov est r at egy .

Nor mal l yt her ev i ew oft hebusi nesspl anwoul dt akeamaxi mum ofonemont hand di sbur salf ort hef undst or eacht heent r epr eneuri twoul dt akeami ni mum of3mont hs t oamaxi mum of6mont hs.Oncet hei ni t i alscr eeni ngandev al uat i oni sov er ,i ti s adv i sabl et ohav eaper sonwi t hf i nancebackgr oundl i keaf i nanceconsul t antt ot ake car eofdet ai l sl i kenegot i at i ng t hepr i ci ng and st r uct ur i ng oft hedeal .Ofcour se al t er nat i v el yonecani nv ol v eaf i nanci alconsul t antr i ghtf r om t hebegi nni ngpar t i cul ar l y 33

VENTURECAPI TALI NI NDI A whent heent r epr eneurdoesnothav eamanagementbackgr ound.

CHAPTER9 CORPORATE VENTURI NG ( I NVESTMENT 34

VENTURECAPI TALI NI NDI A

PROCESS) VENTURECAPI TALPROCESSCHART

Ev ent houghi nv est orandt heent i r epr ocesst hatgoesi nt ot hewooi ngt hev ent ur e capi t al wi t hy ourpl an. 35

VENTURECAPI TALI NI NDI A Fi r st ,y ouneedt owor koutabusi nesspl an.Thebusi nesspl ani sadocumentt hat out l i nest hemanagementt eam,pr oduct ,mar ket i ngpl an,capi t alcost sandmeansof f i nanci ngandpr of i t abi l i t yst at ement s. Thev ent ur ecapi t al i nv est mentpr ocesshasv ar i ances/ f eat ur est hatar econt extspeci f i c andv ar yf r om i ndust r y ,t i mi ngandr egi on.Howev er ,act i v i t i esi nav ent ur ecapi t alf und f ol l owat y pi cal sequence.Thet y pi cal st agesi nani nv est mentcy cl ear easbel ow: 

Gener at i ngadeal f l ow



Duedi l i gence



I nv est mentv al uat i on



Pr i ci ngandst r uct ur i ngt hedeal



Val ueAddi t i onandmoni t or i ng



Exi t

I ]Gener at i ngADeal Fl ow I ngener at i ngadealf l ow,t hev ent ur ecapi t ali nv est orcr eat esapi pel i neof‘ deal s’or i nv est mentoppor t uni t i est hathewoul dconsi derf ori nv est i ngi n.Thi si sachi ev ed pr i mar i l yt hr oughpl uggi ngi nt oanappr opr i at enet wor k.Themostpopul arnet wor k obv i ousl yi st henet wor kofv ent ur ecapi t al f unds/ i nv est or s. I ti sal socommonf orv ent ur ecapi t al st odev el opwor ki ngr el at i onshi pswi t hR&D i nst i t ut i ons,academi a,et c,whi ch coul d pot ent i al l yl ead t o busi nessoppor t uni t i es. Under st andabl yt hecomposi t i onoft henet wor kwoul ddependont hei nv est mentf ocus oft hev ent ur ecapi t alf unds/ company .Thusv ent ur ecapi t alf undsf ocussi ngonear l y st aget echnol ogybaseddeal swoul ddev el opanet wor kofR&Dcent er swor ki ngi nt hose 36

VENTURECAPI TALI NI NDI A ar eas.Thenet wor ki scr uci alt ot hesuccessoft hev ent ur ecapi t ali nv est or .I ti sal most i mper at i v ef ort hev ent ur ecapi t ali nv est ort or ecei v eal ar genumberofi nv est ment pr oposal sf r om whi ch he can sel ecta f ew good i nv est mentcandi dat es f i nal l y . Successf ulv ent ur ecapi t ali nv est or si nt heUSAexami nehundr edsofbusi nesspl ansi n or dert omaket hr eeorf ouri nv est ment si nay ear . I ti si mpor t antt onot et hedi f f er ence bet ween t he pr of i l e oft he i nv est mentoppor t uni t i es t hata v ent ur e capi t alwoul d exami neandt hosepur suedbyaconv ent i onalcr edi tor i ent edagencyorani nv est ment i nst i t ut i on.Bydef i ni t i on,t hev ent ur ecapi t ali nv est orf ocusesonoppor t uni t i eswi t ha hi ghdegr eeofi nnov at i on. Thedealf l ow composi t i onandt het echni queofgener at i ngadealf l ow canv ar yf r om count r yt ocount r y .I nI ndi a,di f f er entv ent ur ecapi t alf unds/ compani eshav et hei rown met hods v ar y i ng f r om pr omot i onalsemi nar s wi t h R&D i nst i t ut i ons and i ndust r y associ at i onst odi r ectadv er t i si ngcampai gnst ar get edatv ar i oussegment s.A cl ear pat t er nbet weent hei nv est mentf ocusofaf und and t heconst i t ut i on oft hedeal gener at i onnet wor ki sdi scer ni bl eev eni nt heI ndi ancont ext .

I I ]DueDi l i gence Duedi l i gencei st hei ndust r yj ar gon f oral lt heact i v i t i est hatar eassoci at ed wi t h ev al uat i ngani nv est mentpr oposal .I ti ncl udescar r y i ngoutr ef er encechecksont he pr oposal r el at edaspect ssuchasmanagementt eam, pr oduct s, t echnol ogyandmar ket . Thei mpor t antf eat ur et onot ei st hatv ent ur ecapi t alduedi l i gencef ocusesont he qual i t at i v easpect sofani nv est mentoppor t uni t y .I ti sal sonotunusualf orv ent ur e capi t alf und/ compani est o setup an ‘ i nv est mentscr een’ .Thescr een i sa setof qual i t at i v e( somet i mesquant i t at i v ecr i t er i asuchasr ev enuear eal soused)cr i t er i at hat 37

VENTURECAPI TALI NI NDI A hel pv ent ur ecapi t alf unds/ compani est o qui ckl ydeci deonwhet herani nv est ment oppor t uni t y war r ant sf ur t herdi l i gence.Scr eens can be somet i mes el abor at e and r i gor ousandsomet i messpeci f i candbr i ef . Thenat ur eofscr eencr i t er i ai sal soaf unct i onofi nv est mentf ocusoft hef i r m att hat poi nt .Vent ur ecapi t ali nv est or sr el yext ensi v el yonr ef er encecheckswi t h‘ l eadi ngl i ght s’ i nt hespeci f i car easofconcer nbei ngaddr essedi nt heduedi l i gence. Av ent ur ecapi t al i stt r i est omaxi mi zet heupsi depot ent i alofanypr oj ect .Het r i est o st r uct ur ehi si nv est menti nsuchamannert hathecangett hebenef i toft heupsi de pot ent i ali ehewoul dl i ket oexi tatat i mewhenhecangetmaxi mum r et ur nonhi s i nv est menti nt hepr oj ect .Hencehi sduedi l i genceappr ai salhast okeept hi sf acti n mi nd. NewFi nanci ng Somet i mes,compani esmayhav eexper i encedoper at i onalpr obl emsdur i ngt hei rear l y st agesofgr owt horduet obadmanagement .Thesecoul dr esul ti nl ossesorcashf l ow dr ai nsont hecompany .Somet i mesf i nanci ngf r om v ent ur ecapi t almayendupbei ng usedt of i nancet hesel osses.Theyav oi dt hi st hr oughduedi l i genceandscr ut i nyoft he busi nesspl an. I nt er CompanyTr ansact i ons Wheni nv est ment sar emadei nacompanyt hati spar tofagr oup,i nt er company t r ansact i onsmustbeanal y zed.

I I I ]I nv est mentVal uat i on Thei nv est mentv al uat i onpr ocessi sanexer ci seai medatar r i v i ngat‘ anaccept abl e pr i ce’f ort hedeal .Ty pi cal l yi ncount r i eswher ef r eepr i ci ngr egi mesexi st ,t hev al uat i on 38

VENTURECAPI TALI NI NDI A pr ocessgoest hr ought hef ol l owi ngst eps:  Ev al uat ef ut ur er ev enueandpr of i t abi l i t y  For ecastl i kel yf ut ur ev al ueoft hef i r m basedonexper i encedmar ketcapi t al i zat i onor expect edacqui si t i onpr oceedsdependi ngupont heant i ci pat edexi tf r om t hei nv est ment .  Tar getan owner shi p posi t i on i nt he i nv est ee f i r m so as t o achi ev e desi r ed appr eci at i onont hepr oposed i nv est ment .Theappr eci at i ondesi r ed shoul dy i el da hur dl er at eofr et ur nonaDi scount edCashFl owbasi s.  Sy mbol i cal l yt hev al uat i onexer ci semayber epr esent edasf ol l ows:  NPV=[ ( Cash) / ( Post ) ]x[ ( PATxPER) ]xk, wher e  NPV=NetPr esentVal ueoft hecashf l owsr el at i ngt ot hei nv est mentcompr i si ng out f l ow bywayofi nv est mentandi nf l owsbywayofi nt er est / di v i dends( i fany )and r eal i zat i ononexi t .Ther at eofr et ur nusedf ordi scount i ngi st hehur dl er at eofr et ur nset byt hev ent ur ecapi t al i nv est or .  Post=Pr e+Cash  Cashr epr esent st heamountofcashbei ngbr oughti nt ot hepar t i cul arr oundof f i nanci ngbyt hev ent ur ecapi t al i nv est or .  ‘ Pr e’i st he pr emoneyv al uat i on oft he f i r m est i mat ed byt he i nv est or .Whi l e t echni cal l yi ti smeasur edbyt hei nt r i nsi cv al ueoft hef i r m att het i meofr ai si ngcapi t al . I ti smor eof t enamat t erofnegot i at i ondr i v enbyt heowner shi poft hecompanyt hatt he v ent ur ecapi t ali nv est ordesi r esandt heowner shi pt hatf ounder s/ managementt eam i s pr epar edt ogi v eawayf ort her equi r edamountofcapi t al  PATi st hef or ecastPr of i taf t ert axi nay earandof t enagr eeduponbyt hef ounder s andt hei nv est or s( asopposedt obei ng‘ ar r i v edat ’ uni l at er al l y ) .I twoul dal sobet henet 39

VENTURECAPI TALI NI NDI A ofpr ef er r eddi v i dends, i fany .  PERi st hePr i ceEar ni ngmul t i pl et hatcoul dbeexpect edofacompar abl ef i r mi nt he i ndust r y .I ti snotal way spossi bl et of i ndsucha‘ compar abl ef i t ’i nv ent ur ecapi t al si t uat i ons.Thatnecessi t at es, t her ef or e, asi gni f i cantdegr eeofj udgementont hepar tof t hev ent ur ecapi t al t oar r i v eatal t er nat ePERscenar i os.  ‘ k’i st hepr esentv al uei nt er estf act or( cor r espondi ngt oadi scountr at e‘ r ’ )f ort he i nv est menthor i zon. I ti squi t eappar entt hatPERt i mePATr epr esent st hev al ueoft hef i r m att hatt i meand t hecompl et eexpr essi onr eal l yr epr esent st hei nv est or ’ sshar eoft hev al ueoft he i nv est eef i r m.Thef ol l owi ngexampl ei l l ust r at est hi sf r amewor k: Exampl e:BestMouset r apLi mi t ed( BML)hasdev el opedapr ot ot y pet hatneedst obe commer ci al i zed.BMLneedscashofRs2mnt oest abl i shpr oduct i onf aci l i t i esandsetup amar ket i ngpr ogr am.BMLexpect st hecompanywi l l gopubl i ci nt het hi r dy earandhav e r ev enuesofRs70mnandaPATmar gi nof10% onsal es.Assume,f ort hesakeof conv eni encet hatt her ewoul dbenof ur t heraddi t i ont ot heequi t ycapi t al oft hecompany . Pr udentFundManager s( PFM)pr oposet ol eadasy ndi cat eofl i kemi ndedi nv est or s wi t hahur dl er at eofr et ur nof75%( di scount ed)ov eraf i v ey earper i odbasedonBML’ s sal esandpr of i t abi l i t yexpect at i ons.Fi r mswi t hcompar abl esal esandpr of i t abi l i t yand r i skpr of i l est r adeat12t i mesear ni ngsont hest ockexchange.Thef ol l owi ngwoul dbe t hesequenceofcomput at i ons: I nor dert ogeta75% r et ur np. a.t hei ni t i ali nv est mentofRs2mi l l i onmusty i el dan 5 accumul at i onof2x( 1. 75) =Rs32. 8mnondi si nv est menti ny ear5.

BML’ smar ketcapi t al i zat i oni nf i v ey ear si sl i kel yt obeRs( 70x0. 1x12)mi l l i on= Rs84mn. 40

VENTURECAPI TALI NI NDI A Per cent ageowner shi pi nBMLt hati sr equi r edt oy i el dt hedesi r edaccumul at i onwi l lbe ( 32. 8/ 84)x100=39% Ther ef or et hepostmoneyv al uat i onofBMLAtt het i meofr ai si ngcapi t al wi l l beequal t o Rs( 2/ 0. 39)mi l l i on=Rs5. 1mi l l i onwhi chi mpl i est hatapr emoneyv al uat i onofRs3. 1 mi l l i onf orBML Anot herpopul arv ar i antoft heabov emet hod i st heFi r stChi cago Met hod ( FCM) dev el opedbySt anl eyGol der ,al eadi ngpr of essi onalv ent ur ecapi t almanager .FCM assumes t hr ee possi bl e scenar i os – ‘ success’ ,‘ si deway s sur v i v al ’and ‘ f ai l ur e’ . Out comesundert heset hr eescenar i osar epr obabi l i t ywei ght edt oar r i v eatanexpect ed r at eofr et ur n: I nr eal i t yt hev al uat i onoft hef i r mi sdr i v enbyanumberoff act or s.The mor esi gni f i cantamongt hesear e: Ov er al leconomi ccondi t i ons:Abuoy anteconomypr oducesanopt i mi st i cl ong-t er m out l ookf ornew pr oduct s/ ser v i cesandt her ef or er esul t si nmor el i ber alpr emoney v al uat i ons.  Demandandsuppl yofcapi t al :whent her ei sasur pl usofv ent ur ecapi t alofv ent ur e capi t alchasi ngar el at i v el yl i mi t ednumberofv ent ur ecapi t aldeal s,v al uat i onsgoup. Thi scanr esul ti nunheal t hyl ev el sofl owr et ur nsf orv ent ur ecapi t al i nv est or s.  Speci f i cr at esofdeal s:suchast hef ounder ’ s/ managementt eam’ st r ackr ecor d, i nnov at i on/uni quesel l i ngpr oposi t i ons( USPs) , t hepr oduct / ser v i cesi zeoft hepot ent i al mar ket , et caf f ect sv al uat i onsi nanobv i ousmanner .  Thedegr eeofpopul ar i t yoft hei ndust r y / t echnol ogyi nquest i onal soi nf l uencest he pr emoney .Comput erAi dedSki l l sSof t war eEngi neer i ng( CASE)t ool sandAr t i f i ci al I nt el l i gencewer eonet i medar l i ngsoft hev ent ur ecapi t alcommuni t yt hathav enow gi v enpl acet obi ot echandr et ai l i ng. 41

VENTURECAPI TALI NI NDI A  Thest andi ngoft hei ndi v i dualv ent ur ecapi t alWel lest abl i shedv ent ur ecapi t al swho ar esoughtaf t erbyent r epr eneur sf oranumberofr easonscoul dgetawaywi t ht i ght er v al uat i onst hant hei rl essknowncount er par t s.  I nv est or ’ sconsi der at i onscoul dv ar ysi gni f i cant l y .Ast udybyanAmer i canv ent ur e capi t al ,‘ Vent ur eOne’ ,r ev eal edt hef ol l owi ngt r end.Lar gecor por at i onswhoi nv estf or st r at egi cadv ant agessuchasaccesst ot echnol ogi es, pr oduct sormar ket spayt wi ceas muchasapr of essi onalv ent ur ecapi t ali nv est or ,f oragi v enowner shi pposi t i oni na companybutonl yhal fasmuchasi nv est or si napubl i cof f er i ng.  Val uat i onof f er edoncompar abl edeal sar oundt het i meofi nv est i ngi nt hedeal . Qui t eobv i ousl y , v al uat i oni soneoft hemostcr i t i cal act i v i t i esi nt hei nv est mentpr ocess. I twoul dnotbei mpr opert osayt hatt hesuccessf oraf undwi l lbedet er mi nedbyi t s abi l i t yt ov al ue/ pr i cet hei nv est ment scor r ect l y . Somet i mest hev al uat i onpr ocessi sbr oadl ybasedont humbr ul emet r i cssuchas mul t i pl eofr ev enue.Thoughsuchmet hodswoul dappearr oughandr eady ,t heyar e of t enbasedonf ai r l ywel lest abl i shedi ndust r yav er agesofoper at i ngpr of i t abi l i t yand asset s/ capi t al t ur nov err at i os Suchv al uat i onasout l i nedabov ei spossi bl eonl ywher ecompl et ef r eedom ofpr i ci ngi s av ai l abl e.I nt heI ndi ancont ext ,wher eunt i lr ecent l y ,t hepr i ci ngofequi t yi ssueswas heav i l yr egul at ed, unf or t unat el yv al uat i onwasheav i l yconst r ai ned.

I V]St r uct ur i ngADeal St r uct ur i ngr ef er st oput t i ngt oget hert hef i nanci alaspect soft hedealandnegot i at i ng 42

VENTURECAPI TALI NI NDI A wi t ht heent r epr eneur st oacceptav ent ur ecapi t al ’ spr oposal andf i nal l ycl osi ngt hedeal . Todoagoodj obi nst r uct ur i ng, oneneedst obeknowl edgeabl ei nar easofaccount i ng, cashf l ow,f i nance,l egalandt axat i on.Al sot hest r uct ur eshoul dt akei nt oconsi der at i on t hev ar i ouscommer ci ali ssues( i ewhatt heent r epr eneurwant sandwhatt hev ent ur e capi t alwoul dr equi r et opr ot ectt hei nv est ment ) .Document at i onr ef er st ot hel egal aspect soft hepaper wor ki nput t i ngt hedeal t oget her . Thei nst r ument st obeusedi nst r uct ur i ngdeal sar emanyandv ar i ed.Theobj ect i v ei n sel ect i ng t he i nst r umentwoul d be t o maxi mi ze ( oropt i mi ze)v ent ur e capi t al ’ s r et ur ns/ pr ot ect i onandy etsat i sf yt heent r epr eneur ’ sr equi r ement s.Thei nst r ument s coul dbeasf ol l ows:

I nst r ument

I ssues

Loan

cl eanv ssecur ed I nt er estbear i ngv snoni nt er estbear i ng conv er t i bl ev sonewi t hf eat ur es( war r ant s) 1stChar ge, 2ndChar ge, St ockmat ur i t y

Pr ef er enceshar es

r edeemabl e( condi t i onsunderCompanyAct ) Par t i ci pat i ng Parv al ue nomi nal shar es 43

VENTURECAPI TALI NI NDI A War r ant s

exer ci sepr i ce, expi r yper i od

Commonshar es

Neworv endorshar es Parv al ue par t i al l y pai dshar es

Opt i ons

exer ci sepr i ce, expi r yper i od, cal l , put

I nI ndi a,st r ai ghtequi t yandconv er t i bl esar epopul arandcommonl yused.Nowaday s, war r ant sar ei ssuedasat ool t obr i ngdownpr i ci ng. Av ar i at i ont hatwasf i r stusedbyPACTandTDI CIwas" r oy al t yonsal es" .Undert hi s, t he companywasgi v enacondi t i onall oan.I ft hepr oj ectwassuccessf ul ,t hecompanyhad t opaya%ageofsal esasr oy al t yandi fi tf ai l edt hent heamountwaswr i t t enof f . I nst r uct ur i ngadeal ,i ti si mpor t antt ol i st ent owhatt heent r epr eneurwant s,butt he v ent ur ecapi t alcomesupwi t hhi sownsol ut i on.Ev enf ort hepr oposedi nv est ment amount ,t he v ent ur e capi t aldeci des whet herornott he amountr equest ed,i s appr opr i at eandconsi st entwi t ht her i skl ev eloft hei nv est ment .Ther i sksshoul dbe anal y zed,t aki ngi nt oconsi der at i ont hest ageatwhi cht hecompanyi si nandot her f act or sr el at i ngt ot hepr oj ect .( egexi tpr obl ems, et c) . Pr omot erShar es Asv ent ur ecapi t ali st of i nancegr owt h,v ent ur ecapi t ali nv est mentshoul di deal l ybe usedf orf i nanci ngexpansi onpr oj ect s( egnew pl ant ,capi t alequi pment ,addi t i onal wor ki ngcapi t al ) .Ont heot herhand,ent r epr eneur smaywantt osel lawaypar toft hei r i nt er est si nor dert ol ocki napr of i tf ort hei rwor ki nbui l di ngupt hecompany .I nsucha case,t hest r uct ur i ngmayi ncl udesomev endorshar es,wi t ht hebul koff i nanci nggoi ng i nt obuy i ngnewshar est of i nancegr owt h. 44

VENTURECAPI TALI NI NDI A Handl i ngDi r ect or ’ sAndShar ehol der ’ sLoans Fr equent l y ,acompanyhasexi st i ngdi r ect or ’ sandshar ehol der ’ sl oanspr i ort oi nv i t i ng v ent ur ecapi t al i st st oi nv est .Ast hemoneyf r om v ent ur ecapi t ali sputi nt ot hecompany t of i nancegr owt h,i ti spr ef er abl et ost r uct ur et hedealt or equi r et hesel oanst obe r epai dbackt ot heshar ehol der s/ di r ect or sonl yuponI POs/ exi t sandatsomemut ual l y agr eed per i od ( eg 1 or2 y ear saf t eri nv est ment ) .Thi swi l li ncr easet hef i nanci al commi t mentoft heent r epr eneurandt heshar ehol der soft hepr oj ect . At y pi calpr oposalmayi ncl udeacombi nat i onofsev er aldi f f er enti nst r ument sl i st ed abov e.Undernor malci r cumst ances,ent r epr eneur swoul dpr ef erv ent ur ecapi t al st o i nv esti nequi t yast hi swoul dbet hel owestr i skopt i onf ort hecompany .Howev erf r om t hev ent ur ecapi t al spoi ntofv i ew, t hesaf esti nst r ument , butwi t ht hel eastr et ur n, woul d beasecur edl oan.Hence, ul t i mat el y , whaty ouendupwi t hwoul dbesomei nst r ument s i nbet weenwhi char esol dt ot heent r epr eneur .

V]Moni t or i ngandFol l owUp Ther ol eoft hev ent ur ecapi t al i stdoesnotst opaf t ert hei nv est menti smadei nt he pr oj ect .Theski l l soft hev ent ur ecapi t al i star emostr equi r edoncet hei nv est menti s made.Thev ent ur ecapi t al i stgi v esongoi ngadv i cet ot hepr omot er sandmoni t or st he pr oj ectcont i nuousl y . I ti st obeunder st oodt hatt hepr ov i der sofv ent ur ecapi t alar enotj ustf i nanci er sor subscr i ber st ot heequi t yoft hepr oj ectt heyf und.Theyf unct i onasadualcapaci t y , asa f i nanci al par t nerandst r at egi cadv i sor . Vent ur ecapi t al i st smoni t orandev al uat epr oj ect sr egul ar l y .Theykeepahandont he pul seoft hepr oj ect .Theyar eact i v el yi nv ol v edi nt hemanagementoft heoft hei nv est ee 45

VENTURECAPI TALI NI NDI A uni tandpr ov i deexper tbusi nesscounsel ,t oensur ei t ssur v i v alandgr owt h.Dev i at i ons orcausesofwor r ymayal er tt hem t opot ent i alpr obl emsandt heycansuggestr emedi al act i onsormeasur est oav oi dt hesepr obl ems.Aspr of essi onali nt hi suni quemet hodof f i nanci ng,t heymayhav ei nnov at i v esol ut i onst omaxi mi zet hechancesofsuccessof t hepr oj ect .Af t eral l , t heul t i mat eai m oft hev ent ur ecapi t al i sti st hesameast hatoft he pr omot er s–t hel ongt er m pr of i t abi l i t yandv i abi l i t yoft hei nv est eecompany .

VI ]Exi t Oneoft hemostcr uci ali ssuesi st heexi tf r om t hei nv est ment .Af t eral l , t her et ur nt ot he v ent ur ecapi t al i stcanber eal i zedonl yatt het i meofexi t .Exi tf r om t hei nv est mentv ar i es f r om t hei nv est mentt oi nv est mentandf r om v ent ur ecapi t alt ov ent ur ecapi t al .Ther e ar esev er alexi tr out es,buy buckbyt hepr omot er s,sal et oanot herv ent ur ecapi t al i stor sal eatt het i meofI ni t i al Publ i cOf f er i ng, t onameaf ew.I nal l casesspeci al i st swi l l wor k outt hemet hodofexi tanddeci deonwhati smostpr of i t abl eandsui t abl et obot ht he v ent ur ecapi t al i standt hei nv est eeuni tandt hepr omot er soft hepr oj ect . Atpr esentmanyi nv est ment sofv ent ur ecapi t al i st si nI ndi ar emai nonpaperast heydo nothav eanymeansofexi t .Appr opr i at echangeshav et obemadet ot heexi st i ng sy st emsi nor dert hatv ent ur ecapi t al i st sf i ndi teasi ert or eal i zet hei ri nv est ment saf t er hol di ngont ot hem f oracer t ai nper i odoft i me.Thi sf act ori sev enmor ecr i t i calt o smal l erandmi dsi zedcompani es, whi char eunabl et ogetl i st edonanyst ockexchange, ast heydonotmeett hemi ni mum r equi r ement sf orsuchl i st i ngs.St ockex changes coul dconsi derhowt heycoul dassi sti nt hi smat t erf orl i st i ngofcompani eskeepi ngi n mi ndt her equi r ementoft hev ent ur ecapi t al i ndust r y .

46

VENTURECAPI TALI NI NDI A

CHAPTER10 ACCESSI NG 47

VENTURECAPI TALI NI NDI A

VENTURECAPI TAL UNDERTAKI NG

48

VENTURECAPI TALI NI NDI A Vent ur ef unds,bot hdomest i candof f shor e,hav ebeenar oundi nI ndi af orsomey ear s now.Howev eri ti sonl yi nt hepast12t o18mont hs,t heyhav ecomei nt ot hel i mel i ght . Ther ej ect i onr at i oi sv er yhi gh,about10i n100getbey ondpr eev al uat i onst age,andI getf unded.

Vent ur ecapi t alf undsar ebr oadl yoft woki nds–gener al i st sorspeci al i st s.I ti scr i t i cal f ort hecompanyt oaccesst her i ghtt y peoff und, i . e.whocanaddv al ue.Thi sbacki ngi s i nv al uabl easf ocused/speci al i zedf undsopendoor s, assi sti nf ut ur er oundsandhel pi n st r at egy .Hence, i ti si mpor t antt ochooset her i ghtv ent ur ecapi t al i st . Thest andar dpar amet er susedbyv ent ur ecapi t al i st sar ev er ysi mi l art oanyi nv est ment deci si on.Theonl ydi f f er encebei ngexi t .I fonebuy sal i st edsecur i t y ,onecanexi tata pr i cebutwi t hanunl i st edsecur i t y ,exi tbecomesdi f f i cul t .Thekeyf act or swhi cht hey l ookf ori n TheManagement Mostbusi nesses ar e peopl e dr i v en,wi t h success orf ai l ur e dependi ng on t he per f or manceoft het eam.I ti si mpor t antt odi st i ngui sht heent r epr eneurf r om t he pr of essi onalmanagementt eam.Thev al ueoft hei dea,t hev i si on,put t i ngt het eam t oget her , get t i ngt hef undi ngi npl acear eamongstot her s, somekeyaspect soft her ol e oft heent r epr eneur .Vent ur ecapi t al i st swi l li nsi stonapr of essi onalt eam comi ngi n, i ncl udi ng a CEO t o execut et he i dea.Oneman ar mi es ar e passe.I nt egr i t y and commi t mentar eat t r i but essoughtf or .

Thev ent ur ecapi t al i stcanpr ov i det hest r at egi cv i si on,butt het eam execut esi t .Asa 49

VENTURECAPI TALI NI NDI A f amousSi l i conVal l eysay i nggoes" Successi sex ecut i on, st r at egyi sadr eam" .

TheI dea Thei deaandi t spot ent i alf orcommer ci al i zat i onar ecr i t i cal .Vent ur ef undsl ookf ora scal abl emodel ,atacount r yorar egi onall ev el .Ot her wi set heent i r egamewoul dbe r educedt oamanpowerormachi nemul t i pl i cat i onexer ci se.Forexampl e, i ti sv er yeasy f orHi ndust anLev ert odoubl esal esofLi r i l-asoapwi t houti ncr ement alcapex,whi l e Guj ar atAmbuj aneedst ospendatl eastRs4bnbef or ei tcani ncr easesal esby1mnt on. Di st i nct i v ecompet i t i v eadv ant agesmustexi sti nt hef or m ofscal e,t echnol ogy ,br ands, di st r i but i on, et cwhi chwi l l makei tdi f f i cul tf orcompet i t i ont oent er . Val uat i on Al l i nv est mentdeci si onsar esensi t i v et ot hi s.Anol dst ockmar ketsay i ng" Ev er yst ocki s abuyatapr i ceandv i cev er sa" .Mostdeal sf ai lbecauseofv al uat i onex pect at i on mi smat ch.I nI ndi a, whi l ecal cul at i ngr et ur ns, v ent ur ecapi t alf undswi l lt akei nt oaccount i ssuesl i ker upeedepr eci at i on,pol i t i cali nst abi l i t y ,whi chaddst ot her i skpr emi a,t hus suppr essi ngv al uat i ons.Li nkedt ov al uat i oni st hest ake,whi cht hef undt akes.I nI ndi a, ent r epr eneur sar est i l luncomf or t abl ewi t ht hev ent ur ecapi t al" t aki ngcont r ol "i naseed st agepr oj ect . Exi t Wi t houtexi t , gai nscannotbebooked.Exi tmaybei nt hef or m ofast r at egi csal eor / and 50

VENTURECAPI TALI NI NDI A I PO.Taxat i oni ssuescomeupatt het i me.Anyf undwoul ddi scussal lexi topt i ons bef or ecl osi ngadeal .Somet i mes,t hef undi nsi st sonabuybackcl auset oensur ean exi t .

Por t f ol i oBal anci ng Mostv ent ur ef undst r yandachi ev epor t f ol i obal anci ngast heyi nv esti ndi f f er entst ages oft hecompanyl i f ecy cl e.Forexampl e,av ent ur ecapi t alhasi nv est edi napor t f ol i oof compani espr edomi nant l yatseedst age, t heywi l lf ocusonexpansi onst agepr oj ect sf or f ut ur ei nv est ment st obal ancet hei nv est mentpor t f ol i o.Thi swoul denabl et hem t ohav e aphasedexi t . I nsummar y , v ent ur ecapi t al f undsgot hr oughacer t ai nduedi l i gencet of i nal i zet hedeal . Thi s i ncl udes ev al uat i on of t he management t eam, st r at egy , execut i on and commer ci al i zat i onpl ans.Thi si ssuppl ement edbyl egalandaccount i ngduedi l i gence, t y pi cal l ycar r i edoutbyanext er nalagency .I nI ndi a,t heent i r epr ocesst akesabout6 mont hs.Ent r epr eneur sar eadv i sedt okeept hati nmi ndbef or el ooki ngt or ai sef unds. Theact ualcashi nf l owmi ghtgetdel ay edbecauseofr egul at or yi ssues.I ti si nt er est i ng t onot et hati nUSA, att i mesangel swr i t echecksacr osst het abl e.

51

VENTURECAPI TALI NI NDI A

CHAPTER11 ACCESSI NG VENTURECAPI TAL FUND 52

VENTURECAPI TALI NI NDI A

TheBusi nessPl an Thef i r stst ept owar dsaccessi ngv ent ur ecapi t alf undi ngi st hepr epar at i onoft he busi nesspl an.Thebusi nesspl anshoul dbeabl et opr ov i dei nf or mat i onr egar di ngt he pr omot er s,amountoff undi ngneededandt het i meper i odf orwhi chi ti sneededand howt hi sf undi ngi sgoi ngt obepai dbackt ot heVC.Toanswert heabov ef undament al quer i esofav ent ur ecapi t al f i r mt hebusi nesspl ani st obest r uct ur edwi t ht henecessar y i nf or mat i on.

Busi nessPl anCov er age

Execut i v esummar y  Abr i efdescr i pt i onoft hecompanyandt het y peofbusi ness  Asummar yoft hebusi nessnat ur e  Adescr i pt i onoft heexper i enceandexper t i seoft hemanagementt eam  Asummar yoft hepr oduct / ser v i ceandcompet i t i on  Asummar yoff i nanci al hi st or yandpr oj ect i ons  Fundsr equi r edandequi t yof f er edt ot hei nv est or s  Adescr i pt i onofuseofpr oceeds  Thet i mi ngofr et ur nsoni nv est mentandexi tr out esof f er edt ot hei nv est or

Busi nessbackgr ound  Abr i efhi st or yandnat ur eoft hebusi ness  Thei ndust r ydet ai l soft hebusi nessi nv ol v edi n 53

VENTURECAPI TALI NI NDI A  Asummar yoft hef ut ur eoft hebusi ness

Pr oduct/Ser v i ce 

Adescr i pt i onoft hepr oductorser v i ce



Theuni quenessoft hepr oduct



Thepr esentst at usoft hepr oduct , t hati saconcept , pr ot ot y peorpr oductr eadyf or

mar ket

Mar ketanal y si s 

Thesi zeoft hepot ent i al mar ketandmar ketni chebei ngpur sued



Apr oj ect i onoft het r endsandf ut ur esi zeoft hemar ketpl ace



Theest i mat edmar ketshar e



Adescr i pt i onoft hecompet i t i on



Themar ket i ngchannel



Asummar yoft hepot ent i al cust omer s



Thepossi bi l i t yofr el at edornewmar ket st hatcanbedev el oped

Sal esandmar ket i ngst r at egy 

Thespeci f i cmar ket i ngt echni quespl annedt obeused



Thepr i ci ngpl ansandcompar i sonswi t hpr i ci ngadopt edbycompet i t or s



Thepl annedsal esf or ceandsel l i ngst r at egi esf orv ar i ousaccount sandmar ket s



The speci f i c appr oaches f orcapi t al i zi ng on each mar ket i ng channeland

compar i sonwi t hot herpr act i ceswi t hi nt hei ndust r y 

Det ai l sofadv er t i si ngandpr omot i onal pl ans 54

VENTURECAPI TALI NI NDI A 

Adescr i pt i onofcust omerser v i ce-whi chmar ket swi l lbe cov er edbydi r ectsal es

f or ce, whi chbydi st r i but or s, r epr esent at i v eorr esel l er s

Pr oduct i onoper at i ons 

Adescr i pt i onoft hepr oduct i onpr ocess



Det ai l soft hepr oduct i oncost s,i ncl udi ngl abourf or ce,equi pment ,t echnol ogy

i nv ol v ed, ext entofsubcont r actorout sour ci ng, suppl i er

Management 

Anor gani zat i onchar tshowi ngt hecor por at est r uct ur e



Asummar yoft heboar dofdi r ect or sandkeyempl oy eesanddet ai l soft hei rski l l s

andexper i ence. Al i stoft her emuner at i onf oral l l ev el sofst af f 

Apr oposedpl anofhowt or et ai nkeyst af f

Ri skf act or s Adescr i pt i onoft hemaj orpr obl emsandr i sksr el at i ngt ot hei ndust r y , t hecompany andt hepr oduct smar ket

Fundsr equest ed 

Adescr i pt i onoft het y peoff i nanci ng,suchasequi t yonl yoracombi nat i onof

equi t yandl oan, andst ockopt i onst ot hei nv est or 

Thecapi t al st r uct ur eandowner shi pbef or eandaf t ert hef i nanci ng

Ret ur noni nv est mentandexi t 55

VENTURECAPI TALI NI NDI A 

Det ai l soft het i mi ngandexpect edr et ur noft hei nv est ment



Asummar yoft heexi tst r at egi es,suchasi ni t i alpubl i cof f er i ng,sal et oat hi r d

par t yormanagementbuy out

Useofpr oceeds Speci f yhowt hecapi t alwi l lbespent ,i . e. ;whatamountofcapi t alwi l lgot owhi ch i t ems.

Fi nanci al summar i es 

Asummar yoft hecompany ’ sf i nanci alhi st or yandpr oj ect i onsoft hr eet of i v e

y earper i od 

Det ai l s oft he pr i nci palaccount i ng pol i ci es oft he companyand t he maj or

assumpt i onsmadeaboutt hepr oj ect i ons

Appendi ces 

Resumesofkeymanagementandempl oy ees



Det ai l edf i nanci al f or ecastandassumpt i ons



Mar ketr esear chr epor t



Companyl i t er at ur eandbr ochur esandpi ct ur esoft hepr oduct

Agoodbusi nesspl anshowsi nv est or st hequal i t yanddept hofacompany ’ scor por at e l eader shi pandi ndi cat esmanagement ’ sabi l i t yt or eachst at edgoal s.Thesef act or sl i e att hehear toft hedeci si onofav ent ur ecapi t al i stt oi nv esti nt hecompany ’ sf ut ur e.

Sel ect i onofVent ur ecapi t al f und Af t ert hebusi nesspl ani scompl et ed, t henextst epi st osel ectt hev ent ur ecapi t alf und, 56

VENTURECAPI TALI NI NDI A whi chi ssui t abl et oy ourpr oposal .Theent r epr eneurshoul df i r stascer t ai nast ot he i nv est mentst r at egyoft heVCwi t hr egar dst ot hesect ori nwhi cht heVCi si nt er est edas wel last hest ageatwhi chhechoosest of undt hepr oj ect .Basedont hi si nf or mat i ont he ent r epr eneurshoul dshor t l i stt hesui t abl eVCswhomat chhi sr equi r ementandt hen appr oacht hem

Fi nanci ngf r om v ent ur ecapi t alf undsi sav ai l abl eatv ar i ousst agesanddi f f er entVCs pr ov i def undi ngi nsomeoral l oft hest ages.

57

VENTURECAPI TALI NI NDI A

CHAPTER12 EXI TROUTES

58

VENTURECAPI TALI NI NDI A Af t ert heuni thasset t l eddownt oapr of i t abl ewor ki ngandt heent er pr i sei si n aposi t i ont or ai sef undst hr oughconv ent i onal r esour cesl i kecapi t al mar ket , f i nanci al i nst i t ut i onorcommer ci al banks, t hev ent ur ecapi t al i stl i qui dat et hei r i nv est mentandmakeanexi tf r om t hei nv est eecompany .

Theul t i mat eobj ect i v eofaVent ur eCapi t al i sti st or eal i zef r om hi si nv est ment bysel l i ngof ft hesameatasubst ant i alcapi t algai n.I nf ectatt het i meof maki ngt hei ri nv est ment , t hev ent ur ecapi t al i stpl ant hei rpot ent i al exi t .

Thei nv est eecompanyhast opr epar eandmakesui t abl eadj ust ment si ni t s capi t alst r uct ur eatt het i meofr eal i zat i on byt hev ent ur ecapi t al i st .The conv er t i bl epr ef er enceshar esandconv er t i bl el oansmustbeconv er t edt o or di nar yequi t ybef or et heexi tbyt hev ent ur ecapi t al i st .I ncaseofnonconv er t i bl epr ef er enceshar esandl oansbyt hev ent ur ecapi t al i stt hesear et o ber edeemed.Atexi tt hespeci alr i ght sgr ant edt ot hev ent ur ecapi t al i stcease t ooper at eandv ent ur ecapi t alf i r msnor mal l ywi t hdr aw t hei rnomi neesf r om t heboar doft hei nv est eecompany .

Thev ent ur ecapi t al i stf i r mshav eamot t o‘ exi tatt hemaxi mum possi bl epr of i t oratami ni mum possi bl el oss’–i ncaseofaf ai l edi nv est ment .Theexi tcan bev ol unt ar yori nv ol unt ar y .Li qui dat i onorr ecei v er shi pofaf ai l edv ent ur ei sa caseofi nv ol unt ar yexi t .Thev ol unt ar yexi tcanhav ef oural t enat i v er out esf or di si nv est ment : 

Buybackofshar esbypr omot er sorcompany .



Sal eofst ock( shar es) 59

VENTURECAPI TALI NI NDI A 

Sel l i ngt oanewi nv est or



St r at egi c/Tr adesal e

BUYBACK/SHARESREPURCHASE

Buybackorshar esr epur chasehast hef ol l owi ngf or ms: 

Thei nv est eecompanyhast obuy backi t sownshar esf orcashf r om i t s v ent ur ecapi t al i stusi ngi t si nt er nal accr ual s



Thepr omot er sandt hei rgr oupbuy sbackt heequi t yst akeofv ent ur e capi t al i st .



Theempl oy ees’st ockt r ust sar ef or medwhi ch,i nt ur n,buyt heshar e hol di ngoft hev ent ur ecapi t al i sti nt hecompany . Ther out ei ssui t edt ot heI ndi ancondi t i onsbecausei tkeepst heowner shi p and cont r oloft hepr omot er si nt act .I ndi an ent r epr eneur sar eof t en v er y t ouchyaboutowner shi pandcont r oloft hei rbusi ness.Hencei nI ndi a,f i r sta buybackopt i oni snor mal l ygi v ent ot hepr omot er sort ot hecompanyand onl yont hei rr ef usalt heot herdi si nv est ment sr out esar el ookedi nt o.The exactpr i cei smut ual l ynegot i at edbet weent heent r epr eneurandt hev ent ur e capi t al i st .Thepr i cei sdet er mi nedconsi der i ngt hebookv al ueofshar es, f ut ur eear ni ngpot ent i aloft hev ent ur e,Pr i ce/ Ear ni ngr at i oofsi mi l arl i st ed compani es. Thecompani eswer enotal l owedt obuybackt hei rshar esi nI ndi a;howev er , wi t hef f ectf r om t heamendmenti nt hecompani esact( 1999)t hecompani es candosonow.

60

VENTURECAPI TALI NI NDI A SALEOFSHARESONTHESTOCKEXCHANGE

Thev ent ur ecapi t al i stcanexi tbyget t i ngt hecompanyl i st edont hest ock exchangeandsel l i nghi sequi t yi nt hepr i mar yorsecondar ymar ketusi ngany oft hef ol l owi ngt hr eemet hods: 

Sal eofshar esonst ockexchangeaf t erl i st i ngshar es. Vent ur ecapi t al i st sgener al l yi nv estatt hest ar tupst ageandpr oposet o di si nv estt hei rhol di ngaf t ert hecompanybr i ngsoutanI POf orr ai si ngf unds f orexpansi on.Thi sl i st i ngonst ockexchangepr ov i desanexi tr out ef r om i nv est ment .



I ni t i al Publ i cOf f er( I PO) /Of f erf orsal e Whent heexi st i ngent r epr eneur soptoutofbuyback,t hev ent ur ecapi t al i st s optf ordi si nv est i ngt hei rst ockst hr oughpubl i cof f er i ng.



Di si nv est ment sonOTC Anact i v ecapi t almar ketsuppor t st hev ent ur ecapi t alact i v i t i es.I tenabl est he v ent ur ecapi t al i st st ogetasui t abl ev al uat i onf ort hei ri nv est ment .Besi dest he r egul arst ockexchangeawel ldev el opedOTCmar ketwher edeal er scant r ade i nshar es.TheOTC mar ketenabl est henew andsmal l ercompani esnot el i gi bl ef orl i st i ng on a r egul arst ock exchange t o be l i st ed atan OTC exchangeandt huspr ov i del i qui di t yt ot hei nv est or s. Aspert her ecommendat i onsofanumberofcommi t t ees,anOTCexchange wasr equi r ed i nI ndi a.Asa r esul t‘ Ov erThe Count erExchange ofI ndi a ( OTCEI ) ’ wassetup.

SELLI NGTOANI NVESTOR` 61

VENTURECAPI TALI NI NDI A

Manyat i mesf ort hei rexi tv ent ur ecapi t al i stand/ ort hepr omot er sl ocat ea new i nv est or ,acor por at ebodyoranot herv ent ur ecapi t alf i r m.Thenew i nv est or sar enor mal l yt hosewhof i ndsomesor tofsy ner gybet weent he i nv est eecompanyandt hei rexi st i ngoper at i onssucht hatt her el at i onshi pi s usef ult obot ht hecompani es.Thi sr out ei sal sousedwhent hepr omot er s wantt ogetr i doft hev ent ur ecapi t al i st . Somev ent ur ecapi t al i st s,asapol i cyconcent r at et hei ract i v i t i est ost ar t ups andear l yst agei nv est ment s.Suchv ent ur ecapi t alf undsexi tpav i ngwayf or t hev ent ur ecapi t alf undspeci al i zi ngi nt hel at erst agei nv est mentorbuyout deal s.Of t enagr owi ngv ent ur eneedssecondst agef i nanci ng,i ft heexi st i ng v ent ur ecapi t al i stasapol i cydoesnotcommi tf undsf ort hesecondst agei t nor mal l yl ocat esanot herv ent ur ecapi t al i stt hatf i ndst hei nv est mentat t r act i v e enought oent er .

CORPORATE/TRADESALE

Thev ent ur ecapi t alf i r m andt heent r epr eneurt oget hersel lt heent er pr i set oa t hi r dpar t ymost l yacor por at eent i t y .Her ei nt hepr omot er sal soexi tf r om t he v ent ur eal ongwi t ht hev ent ur ecapi t al i st . Thi si scal l edacor por at e, st r at egi cor t r adesal e.Ther easonsf ort hi ssal ecanbev ar i ed,di f f i cul t yi nr unni ngt he busi nesspr of i t abi l i t yoraper cei v edcompet i t i onf r om mor eest abl i shedbi g busi nesshouseshav i nghuger esour cesandbusi nesssy ner gy . Ont heot herhand,wher eoper at i onsofanex i st i ngv ent ur ear emodest ,a hi gherexi tv al uat i onmaybeachi ev edi nt hemar ketr at hert hanbyat r adesal e, 62

VENTURECAPI TALI NI NDI A ast hemar keti nv est or sar eusual l ysway edbyt heappealoft hesect ori n whi cht hev ent ur eoper at esr at hert hant hequal i t yofi t sspeci f i cbusi ness oper at i ons.

Modal i t i es

Themodal i t i esoft het r adesal edi f f erf r om caset ocasedependi ngupont he nat ur eofoper at i ons, i t ssi ze, t her equi r ement soft hebuy er , et c.Thesal ecan bei ncash, agai nstt heshar esoft heacqui r i ngcompanyort hecombi nat i onof t het wo.Theequi t yowner sgett heshar esoft hebuy ercompanyi nl i euoft he shar esbei nsol dbyt hem.Suchsal eshav et headv ant aget hatt hesel l erdoes nothav et opayanyt axast het r ansact i oni nv ol v esonl yexchangeofshar es. Att i mes,i ti st hr oughamanagementbuy -outorbuy i n,whi chi nt ur nmaybe f i nancedpar t i al l ybyanot herv ent ur ecapi t alf und.I ti si mpor t antt onot et hat i nI ndi ai ft hei nv est eecompanyi sal i st edcompanyatt het i meoft r adesal e, t hent hepr ov i si onsofl i st i ngagr eementar eat t r act edbesi dest hepr ov i si ons oft heSEBIr egul at i onsofmer gerandacqui si t i onsar eal soappl i cabl e.

ManagementBuy Out s

Vent ur e capi t albuy out s ar e bot h a successf uli nv est mentst r at egy f or v ent ur ecapi t ali nv est mentaswel lasanef f i ci entexi tr out e.Buy outf i nanced byanot herv ent ur ecapi t al i stpr i mar i l ybypr ov i di ngdebti sknownasl ev er aged

buy out . Buy out wi t hout par t i ci pat i on by anot her i nv est or i s cal l ed managementbuy out .Her ei nt hecur r entmanagementgr ouppur chasest he 63

VENTURECAPI TALI NI NDI A st akeoft hev ent ur ecapi t al i st .Thest ockopt i onsandsweatequi t yhav emade managementbuy outpossi bl ei nI ndi a. Managementbuy out sar ei mpor t anti nv ent ur ecapi t almar ketf orv ar i ous r easons: 

MBO’ spr ov i deanoppor t uni t yt omanager st obecomeent r epr eneur s.



Vent ur ecapi t ali nv est menti nbuy outhasal oweri nv est mentr i skt han ear l yst agei nv est ment .



MBO’ shel psmal l erent er pr i sest oadaptt ot echnol ogi cal changes.

Buy i ni ssi mi l art obuy outbuti nv ol v esnewmanagementf r om out si deand i mpr ov ementi nt heoper at i onsoft hev ent ur e.I ncomi ngnewmanagementi s of t en unf ami l i arwi t ht he oper at i ons oft he v ent ur e hence t he acqui r i ng companymayf eelt hatt hecont i nui t yoft heexi st i ngent r epr eneurwi l lbe benef i ci alf ort hebusi ness;t heser v i cesoft heor i gi nalent r epr eneurar e r et ai ned.Thi shel psi ni mpl ement i ngt her emai ni ngpar t soft heor i gi nali deas andal sopr ov i descont i nui t yt ot hev ent ur e.

PREREQUI SI TEFORTHEEFFI CI ENTEXI TMECHANI SM 

Legal f r amewor k



Smoot hpr ocedur esf orsal e/t r ansf erofent er pr i ses



Ef f i ci entst ockmar ket



Mechani sm f orl i st i ngandt r adi ngofequi t yofsmal l ercompani es.

64

VENTURECAPI TALI NI NDI A

CHAPTER13 REGULATORY FRAMEWORKFOR

65

VENTURECAPI TALI NI NDI A

VENTURECAPI TAL I NI NDI A I nhi sbudgetspeechf or198889, t hef i nancemi ni st erdecl ar edt hataschemewi l l be f or mul at edunderwhi chVent ur esCapi t al Compani es/Fundswi l l beenabl edt oi nv esti n newcompani esandbeel i gi bl ef ort heconcessi onal t r eat mentofcapi t al gai nsav ai l abl e t ononcor por at eent i t i es.Suchcompani eswi l l hav et ocompl ywi t ht hef ol l owi ng gui del i nes.

Themi ni mum si zeofav ent ur ecapi t al companywoul dbeRs. 10cr or e.I fi tdesi r est o r ai sef undf r om t hepubl i ct hepr omot er ’ sshar eshal l bel esst han10percent . Vent ur ecapi t al assi st anceshoul dgomai nl yt oent er pr i seswher et her i skel ementi s compar at i v el yhi ghduet ot het echnol ogyi nv ol v edbei ngr el at i v el ynew, unt r i edorv er y cl osel yhel d, and/ ort heent r epr eneurbei ngr el at i v el ynewandnotaf f l uentt hough ot her wi sequal i f i edandt hesi zebei ngmodest .Theassi st ancesshoul dbemai nl yf or equi t ysuppor tt houghl oansuppor tt osuppl ementt hi smayal sobegi v en.

Thus, v ent ur ecapi t al assi st ancewi l l begi v ent ot hoseent r epr eneur swhi chsat i sf yt he 66

VENTURECAPI TALI NI NDI A f ol l owi ngpar amet er s: Tot al i nv est mentnott oexceedRs. 10cr or es. Neworr el at i v el yunt r i edorv er ycl osel yhel dorbei ngt akenf r om pi l ott ocommer ci al st at eorwhi chi ncor por at esomesi gni f i canti mpr ov ementov ert heexi st i ngonesi nI ndi a.

Rel at i v el ynew, pr of essi onal l yort echni cal l yqual i f i edwi t hi nadequat er esour cesor banki ngt of i nancet hepr oj ect . Av ent ur ecapi t al i sr equi r edt oi nv estatl east75percentofi t sf undsi nv ent ur ecapi t al act i v i t y .Av ent ur ecapi t al i sf i r m canr ai sef undst hr oughpubi ci ssuesand/ orpr i v at e pl acementt of i nanceVCF/ VCCs.For ei gnequi t yupt o25percentmul t i l at er al / i nt er nat i onal f i nanci al or gani zat i ons, dev el opmentf i nancei nst i t ut es, r eput edmut ual f unds, et c. , woul dbeper mi t t edpr ov i det hesear emanagementneut r al andar ef or medi um t ol ongt er mi nv est ment s.

Av ent ur ecapi t al f undwi l l bemanagedbypr of essi onal suchasbanker s, manager sand admi ni st r at i onandper sonswi t hadequat eexper i enceofi ndust r y , f i nance, account set c.

Thechangedf i nanci al andf i scal env i r onmentdur i ngpostl i ber al i zat i onper i odhol dout br i ghtf ut ur eofv ent ur ecapi t al i nI ndi a.Wi t hf al l i ngt axr at esequi t ybecomesat t r act i v e, andpr omot er swantt oputi nmaxi mum f unds.I nnewcompani est oday .Thedebt equi t yr at i oi sgener al l y2: 1.Thepr omot erhast ocompul sor i l ycont r i but e25per centof t hepr oj ect scost , notj ustt heequi t y .Howev erbecausei ndust r yi smor ecompet i t i v e t odaypr omot er sar ewi l l i ngt ocont r i but easmuchas40percentoft hepr oj ectcost . Banksandot herf i nancei nst i t ut i onsbei ngr i skav er sewi l l f undanewv ent ur e.

67

VENTURECAPI TALI NI NDI A Undert heci r cumst ancest heseent r epr eneur swi l l bel ef twi t hnoopt i onbutt or esor tt o v ent ur ecapi t al f i r m, t of i l l t hegapi nt hei rcont r i but i ont opr oj ectcost .Thi si sv er yl i kel y t ocont i nueaspr of essi onal st ar tt hei rcont r i but i ont opr oj ectcost .Thi si sv er yl i kel yt o cont i nueaspr of essi onal st ar tt hei rownuni t s, anci l l ar i sat i ont akespl aceandl ar ge compani esbegansour ci ngt hei rr equi r ementr at hert hanmaki ngev er yt hi ngt hemsel v es.

CHAPTER14 SWOTANALYSI SOF 68

VENTURECAPI TALI NI NDI A

I NDI ANVENTURE CAPI TALI NDUSTRY

STRENGHTS

WEAKNESS

 Anef f or ti ni t i at edf r om wi t hi n–Homegr own

 Faddi sh

 I ncr easedawar enessofv ent ur ecapi t al

 Li mi t edexi topt i on

 Mor ecapi t al undermanagementbyVCFs

 Uncer t ai nt i es

I ndust r ycr ossedl ear ni ngcur v e.  Mor eexper i encedVent ur eCapi t al i st s, I nt er medi ar i es, andEnt r epr eneur s.

 Pol i cyr epat r i at i on, t axat i on  Bur eaucr at i cmeddl i ngandr i gi dof f i ci al at t i t ude

 Gr owi ngnumberoff or ei gnt r ai nedpr of essi onal s.  I ndust r yf r agment edandpol ar i zed Gl obal compet i t i ongr owi ng.

Mi xedV. Ccul t ur e

 Mov i ngt owar dsi nt er nat i onal st andar ds

 Smal l erf undswi t hi l l i qui di nv est ment s

 Of f shor ef undsbr i ngst r ongf or ei gnt i es

 Domest i cf undr ai si ngdi f f i cul t

 Mat ur edt owar dsmar ketsy st em

 Lackoft r anspar ency&cor por at e

 El ect r oni ct r adi ng–t hr oughNSE&BSE.  Val uat i onaddi t i on

gov er nance  Account i ngst andar ds 69

VENTURECAPI TALI NI NDI A  I r r ev er si bl er ef or m

 Poorl egal admi ni st r at i on

 Regul at or yf r amewor kev ol v i ng

 Di f f i cul tduedi l i gence  I nadequat emanagementdept h  Val uat i onexpect at i onsunr eal i st i c  Techni cal andMar ketev al uat i ondi f f i cul t  Negl i gi bl emi nor i t ypr ot ect i onr i ght s  I nadequat ecor por at el aws

OPPORTUNI TI ES Gr owt hcapi t al f orst r ongcompani es

THREATS  Changei ngov er nmentpol i ci eswi t hr espect

andBuy out sofweakcompani esduet ogr owi ngg t o– l obal compet i t i on

1. St r uct ur i ng

Fi nanci al r est r uct ur i nghav eov erl ev er aged

2.Taxat i on

compani est aki ngpl ace.

 Thr eat sf r om wi t hi nExpl osi v eexpansi on

Acqui si t i onofquot edsmal l /medi um cap

andov erExuber anceofi nv est or s

compani es.

 Gr eedf r ov er yhi ghr et ur ns.

Pr emoneyv al uat i onsl ow Vastpot ent i al exi st si nt ur nar ound, MBO, MBI .

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VENTURECAPI TALI NI NDI A

CHAPTER15 I SSUEDFACEDBY VENTURECAPI TAL 71

VENTURECAPI TALI NI NDI A

I NI NDI A

TheI ndi anv ent ur ecapi t ali ndust r y ,att hepr esent ,i satcr ossr oads.Fol l owi ngar et he maj ori ssuesf acedbyt hi si ndust r y .

1.

Li mi t at i ononst r uct ur i ngofVent ur eCapi t alFunds( VCFs) : VCFsi nI ndi aar e

st r uct ur edi nt hef or m ofacompanyort r ustf undandar er equi r edt of ol l owat hr eet i er mechani smi nv est or s,t r ust eecompanyandAMC.Apr opert axef f i ci entv ehi cl ei nt he f or m of‘ Li mi t ed Li abi l i t yPar t ner shi p Act ’ ,whi ch i s popul ari n USA,i s notmade appl i cabl ef orst r uct ur i ngofVCFsi nI ndi a.I nt hi sf or m ofst r uct ur i ng,i nv est or s’l i abi l i t y t owar dst hef undi sl i mi t edt ot heext entofhi scont r i but i oni n t hef undandal so f or mal i t i esi nst r uct ur i ngoff undar esi mpl er . 2.

Pr obl em i nr ai si ngoff unds: I nUSA pr i mar ysour cesoff undsar ei nsur ance

compani es,pensi onsf unds,cor por at ebodi eset c;whi l ei nI ndi andomest i cf i nanci al i nst i t ut i ons,mul t i l at er alagenci esandst at egov er nmentunder t aki ngsar et hemai n sour cesoff undsf orVCFs.Al l owi ngPensi onf unds,I nsur ancecompani est oi nv esti n t heVCFswoul denl ar get hepossi bi l i t yofset t i ngupofdomest i cVCFs.Fur t her , i fMut ual Fundsar eal l owedt oi nv estupt o5per centoft hei rcor pusi nVCFsbySEBI ,i tmayl ead 72

VENTURECAPI TALI NI NDI A t oi ncr easedav ai l abi l i t yoff undf orVCFs. 3.

Lack ofI nv ent i v et oI nv est or s: Pr esent l y ,hi gh networ t hi ndi v i dual s and

cor por at ear enotpr ov i dedwi t hanyi nv est ment si nVCFs.Thepr obl em ofr ai si ngf unds f r om t hese sour ces f ur t herget s aggr av at ed wi t ht he di f f er ent i alt ax t r eat ment appl i cabl et oVCFsandmut ualf unds.Whi l et hei ncomeoft heMut ualf undsi st ot al l y t axexempt edunderSect i on10( 23D)oft heI ncomeTaxActi ncomeofdomest i cVCFs, whi chpr ov i deassi st ancet osmal l , andmedi um ent er pr i sei snott ot al l yexempt edf r om t ax .I nabsenceofanyi nv ent i v e,i ti sext r emel ydi f f i cul tf ordomest i cVCFst or ai se moneyf r om t hi si nv est orgr oupt hathasagoodpot ent i al . 4.

Absenceof‘ angeli nv est or s’ :I nSi l i conVal l ey ,whi chi sanur t ur i nggr oundf or

v ent ur ef undsf i nancedI Tcompani es;i ni t i al /seedst agef i nanci ngi spr ov i dedbyt he angeli nv est or st i l lt hecompanybecomesel i gi bl ef orv ent ur ef undi ng.Ther eaf t er Vent ur e Capi t al i stt hr ough f i nanci alsuppor tand v al ueadded i nput s enabl es t he companyt oachi ev ebet t ergr owt hr at eandf aci l i t at ei t sl i st ngonst ockexchanges. Pr i v at eequi t yi nv est or st y pi cal l yi nv estatexpansi on/l at erst agesofgr owt hoft he companywi t hl ar gei nv est ment s.I ncont r astt ot hi sphenomenon,I ndi ani ndust r yi s mar kedbyanabsenceofangel i nv est or s. 5.

Li mi t at i onsofi nv est menti nst r ument s: Aspert hesect i on10( 23FA)oft he

I ncomeTaxAct ,i ncomef r om i nv est ment sonl yi nequi t yi nst r ument sofv ent ur ecapi t al under t aki ngsi sel i gi bl ef ort axexempt i on;wher easSEBIr egul at i onsal l owi nv est ment s i nt hef or m ofequi t yshar esorequi t yr el at edsecur i t i esi ssuedbycompanywhose shar esar enotl i st edonst ockexchange.AsVCFsnor mal l yst r uct ur et hei nv est ment si n v ent ur ecapi t alunder t aki ngsbywayofequi t yandconv er t i bl ei nst r ument ssuchas Opt i onal l y /Ful l yConv er t i bl eDebent ur es, Redeemabl ePr ef er enceshar eset c. , t heyneed t axbr eaksont hei ncomef r om equi t yl i nkedi nst r ument s. 73

VENTURECAPI TALI NI NDI A 6.

Domest i cVCFsv i sàv i sOf f shor eFunds:Thedomest i cVCFsoper at i onsi nt he

count r y ar e gov er ned by t he r egul at i ons as pr escr i bed by SEBIand i nv est ment r est r i ct i onsaspl acedbyCBDTf orav ai l i ngoft het axbenef i t s.Theypaymaxi mum mar gi nalt ax35per centi nr espectofnonexempti ncomesuchasi nt er estt hr ough Debent ur eset c. ,whi l eof f -shor ef undswhi char est r uct ur edi nt axhav enssuchas Maur i t i us ar e abl et o ov er come t he i nv est mentr est r i ct i on ofSEBIand al so get exempt i onf r om I ncomeTaxunderTaxAv oi danceTr eat i es.Thi sdeni esal ev elpl ay i ng f i el df ort hedomest i ci nv est or sf orcar r y i ngoutt hesi mi l aract i v i t yi nt hecount r y . 7.

Li mi t at i ononi ndust r ysegment s: I nshar pcont r astt oot hercount r i eswher e

t el ecom,ser v i cesandsof t war ebagt hel ar gestshar eofv ent ur ecapi t ali nv est ment s,i n I ndi aot herconv ent i onalsect or sdomi nat ev ent ur ef i nance.Openi ngupofr est r i ct i ons, i nr ecentt i me,oni nv est i ngi nt heser v i cessect or ssuchast el ecommuni cat i onand r el at edser v i ces,pr oj ectconsul t ancy ,desi gnandt est i ngser v i ces,t our i sm et c,woul d i ncr easet hedomai nandgr owt hpossi bi l i t i esofv ent ur ecapi t al . 8.

Anomal ybet weenSEBIr egul at i onsandCBDTr ul es:CBDTt axr ul esr ecogni ze

i nv est menti nf i nanci al l yweakcompani esonl yi ncaseofunl i st edcompani esasv ent ur e i nv est ment wher eas SEBIr egul at i ons r ecogni ze i nv est ment i nf i nanci al l y weak compani es,whi chof f er sanat t r act i v eoppor t uni t yt oVCFs.Thesamemaybeal l owed byCBDTf orav ai l i ngoft axexempt i ononcapi t algai nsatal at erst age.Al soSEBI r egul at i onsdonotr est r i ctsi zeofani nv est menti nacompany .Howev er , asperI ncome t axr ul es,maxi mum i nv est menti nacompanyi sr est r i ct edt ol esst han20 percentof t her ai sedcor pusofVCFandpai dupshar ecapi t al i ncaseofVent ur eCapi t al Company . Fur t her , i nv est menti ncompanyi sal sor est r i ct edupt o40percentofequi t yofI nv est ee Company .VCFsmaypl acet hei nv est mentr est r i ct i onf orVCFsbywayofmaxi mum equi t yst akei nt hecompany ,whi chcoul dbeupt o49percentofequi t yoft heI nv est ee 74

VENTURECAPI TALI NI NDI A Company . 9.

Li mi t at i onsonExi tMechani sm: TheVCFs,whi chhav ei nv est edi nv ar i ous

v ent ur es,hav enotbeenabl et oexi tf r om t hei ri nv est ment sduet ol i mi t ed exi tr out es andal soduet ounsat i sf act or yper f or manceofOTCEI.Thet hr eshol dl i mi tpl acedby v ar i ousst ockexchangesact sasdet er r entf orl i st i ngofcompani eswi t hsmal l erequi t y base.SEBIcanconsi derl ower i ngoft hr eshol dl i mi tf orpubl i c/ l i st i ngf orcompani es backedbyVCFs.Buy backofequi t yshar esbyt hecompanyhasbeenper mi t t edf or unl i st edcompani es, whi chwoul dpr ov i deexi tr out et oi nv est mentofv ent ur ecapi t al i st s. 10. LegalFr amewor k:Lack ofr equi si t el egalf r amewor kr esul t i ng i n adequat e penal t i esi ncaseofsuppr essi onoff act sbyt hepr omot er sr esul t si nl owr et ur nsev en f r om per f or mi ngcompani es.Thi shasbear i ngonequi t yi nv est ment spar t i cul ar l yi n unl i st edcompani es.

CHAPTER16 FUTUREOFVENTURE 75

VENTURECAPI TALI NI NDI A

CAPI TALI NI NDI A

Rapi dl ychangi ngeconomi cenv i r onmentaccel er at edbyt hehi ght echnol ogyexpl osi on, emer gi ngneedsofnewgener at i onofent r epr eneur si nt hepr ocessandi nadequacyof t heexi st i ngv ent ur ecapi t al f unds/ schemesar ei ndi cat i v eoft het r emendousscopef or v ent ur ecapi t al i nI ndi aandpoi nt er st ot heneedf ort hecr eat i onofasoundandbr oadbasedv ent ur ecapi t al mov ementI ndi a. Ther ear emanyent r epr eneur si nI ndi awi t hagoodpr oj ecti deabutnopr ev i ous ent r epr eneur i al t r ackr ecor dt ol ev er aget hei rf i r ms, handl ecust omer sandbanker s. Vent ur ecapi t al canopenanewwi ndowf orsuchent r epr eneur sandhel pt hem t ol aunch t hei rpr oj ect ssuccessf ul l y .

Wi t hr api di nt er nat i onal mar choft echnol ogy , demandf ornewert echnol ogyand pr oduct si nI ndi ahasgoneupt r emendousl y .t hepaceofdev el opmentofnewand i ndi genoust echnol ogyi nt hecount r yhasbeensl acki nv i ewoft hef actt hatsev er al pr ocessdev el opedi nl abor at or i esar enotcommer ci al i zedbecauseofunwi l l i ngnessof peopl et ot akeent r epr eneur i al r i sks, i . e.r i skt hei rf undsasal sounder got heor deal of mar ket i ngt hepr oduct sandpr ocess.I nsuchasi t uat i on, v ent ur ef i nanci ngassumes 76

VENTURECAPI TALI NI NDI A mor esi gni f i cance.I tcanactnotonl yactasaf i nanci al cat al y stbutal sopr ov i dest r ong i mpet usf orent r epr eneur st odev el oppr oduct si nv ol v i ngnewert echnol ogi esand commer ci al i zet hem.Thi swi l l gi v eaf i l l i pt ot hedev el opmentofnewt echnol ogyand woul dgoal ongwayi nbr oadeni ngt hei ndust r i al base, cr eat i onofj obs, pr ov i deat hr ust t oexpor t sandhel pi nt heov er al l enr i chmentoft heeconomy .

I naddi t i on, v ent ur ecapi t al wi l l beneededur gent l yt osol v et heser i ouspr obl emsof si cknesswhi chhaspl aguedmanyI ndi anI ndust r i es.Ther ear el ar genumberofsi ck compani eswhi chof f eroppor t uni t i esf ort ur nar ound, ei t hert hr oughachangei nt he pr oductl i neoruseofexi st i ngf aci l i t i esi nadi f f er entwayori nanyot hermanner .What i sneededi st hesuppl yofequi t yt oper sonswhohav ef er t i l ei deas, necessar yexper t i se andcompet enceandwhocanbr i ngabouti mpr ov ement si nsomeuni t s.

Anot hert y peofsi t uat i oncommonl yf oundi nourcount r yi swher et hel ocal gr oupanda mul t i nat i onal companymayber eadyt oent eri nt oaj oi ntv ent ur ebutt hef or merdoes nothav esuf f i ci entf undst oputupi t sshar eoft heequi t yandt hel at t eri sr est r i ct edt oa cer t ai nper cent age.Fort heper sonal r easonsorbecauseofcompet i t i on, t hel ocal gr oup maynotbekeent oi nv i t eanyonei ni t si ndust r yoranymaj orpr i v at ei nv est ort o cont r i but eequi t yandmaypr ef erav ent ur ecapi t al company , asal essi nt i mat el y i nv ol v edandt empor ar yshar ehol der .Vent ur ecapi t al i st scanal sol endt hei rexper t i se andst andi ngt ot heent r epr eneur s.

Al ar genumberofsmal l eruni t sser v i ngasanci l l ar i est omaj ori ndust r i al gr oupsneed capi t al , exper t i seandcont act sofv ent ur ecapi t al i stf orupgr adat i onoft hei rt echnol ogy i nt unewi t ht hedemandsf r om t hemaj ori ndust r i al uni t s.I ti sgener al l yf oundt hatsmal l 77

VENTURECAPI TALI NI NDI A suppl i er sar ef acedwi t hachoi ceofgoi ngoutofbusi ness, l osi ngt hei rmaj orcl i ent , bei ngacqui r edbyt hecl i entorobt ai ni ngatanex or bi t antr at ef r om asour ceout si det he i ndust r y .Vent ur ecapi t al i stcanhel pt heseuni t sandsav et hem f r om t hecr i si s.

I nser v i cesect or , whi chhasI mmensegr owt hpr ospect si nI ndi a, v ent ur ecapi t al i st scan pl aysi gni f i cantr ol ei nt appi ngi t spot ent i al i t yt ot hef ul l .Fori nst ance, v ent ur ecapi t al i st s canpr ov i decapi t al andexper t i set oor gani zat i onssel l i ngant i que, r emodel edj ewel l er y , bui l der sofr esor thot el s, babyandheal t hcar emar ket , r et i r ementhomesandsmal l houses.

I nv i ewoft heabov e, i twi l l bedesi r abl et oest abl i shasepar at enat i onal v ent ur ecapi t al f undt owwhi cht hef i nanci al i nst i t ut i onsandbankscancont r i but e.I nscopeandcont ent suchanat i onal v ent ur ecapi t al f undshoul dcov er : ( i )al l t heaspect sofv ent ur ecapi t al f i nanci ngi nal l t het hr eest agesofconcept ual , dev el opment al anexpl oi t at i onphasesi nt hepr ocessofcommer ci al i zat i onoft he t echnol ogi cal i nnov at i onand ( i i )asmayoft her i skst agesdev el opment , manuf act ur i ng, mar ket i ng, managementand gr owt haspossi bl eunderI ndi anCondi t i ons.Thef undshoul dof f eracompr ehensi v e packageoft echni cal , commer ci al , manager i al andf i nanci al assi st anceandser v i cest o bui l di ngent r epr eneur sandbeaposi t i ont oof f eri nnov at i v esol ut i onst ot hev ar i ed pr obl emsf acedbyt hem i nbusi nesspr omot i on, t r ansf erandi nnov at i on.Tot hi send, t he pr oposednat i onal v ent ur ecapi t al f undshoul dhav eati t scommandmul t i di sci pl i nar y t echni cal exper t i se.Themaj ort hr ustoft hi sf undshoul dbeont hepr omot i onofv i abl e newbusi nessi nI ndi at ot akeadv ant ageoft heoncomi nghi ght echnol ogyr ev ol ut i on andset t i ngupofhi ghgr owt hi ndust r i essoast ot aket heI ndi aneconomyt o 78

VENTURECAPI TALI NI NDI A commandi nghei ght s.

79

VENTURECAPI TALI NI NDI A

CHAPTER17 CONCLUSI ON

I ti sessent i alt hatVent ur eCapi t alFundi ngagenci espl ayamaj orr ol ei n pr ov i di ngcapi t alt oi ndust r i alent er pr i sesespeci al l yt heSME’ si ft heI ndi an economyhast ogr ow r api dl y .Ther ei sast r ongcasef orVent ur eCapi t al Fundi ngf orSME’ s.Judgi ngf r om t hesuccessi nt heI T,Bi ot echnol ogy ,Ret ai l andPhar masect or st heVCFagenci escanexpl or epossi bi l i t i esoff undi ng SME’ si nmanuf act ur i ngandot hersect or sal so. Thegov er nmenthasbr oughti nsui t abl er egul at i onst hr ought heRBI , SEBIand ot heri nst i t ut i onst of aci l i t at eVent ur eCapi t alFundi ng.VCFagenci esshoul d 80

VENTURECAPI TALI NI NDI A aggr essi v el ypr omot ef undi ngandnur t ur epr omi si ngSME’ s ThePSB’ sandFI ’ si nI ndi awhower er el uct antt of or ayi nt ov ent ur ecapi t al f undi nghav enow r eal i sedi t spot ent i alandar ewi l l i ngt opar t nerI ndi anVCF agenci esbypr ov i di ngf unds. VCFagenci esshoul dnotonl yengagei nf undi ngbutal sopr ov i demanager i al gui danceandsuppor tt oSME’ st ocompet ei nt hepr esentgl obalenv i r onment andenabl et hem t oachi ev et ur nov er sandpr of i t s,whi chwi l lul t i mat el yr esul t i nt heent er pr i segoi ngpubl i ci nt heshor t estper i od. Vent ur eCapi t alsuppor t edent er pr i sescanconv er ti nt oqual i t yi ni t i alpubl i c of f er i ngs( I POs) , r esul t i ngi ncapi t alf r om pensi onf undsandi nv est or sf l owi ng i nt oVC f unds.I twi l lal sopr ov i depr ot ect i ont oi nv est or s,especi al l ysmal l i nv est or s.Fur t heri twi l lr esul ti nsubst ant i alandsust ai nabl eempl oy ment gener at i onbycr eat i ngr el at edanci l l ar yuni t sandsuppor tser v i ces. Fi nal l y ,r esear chl abor at or i esunderCSI R,def ensel abor at or i es,uni v er si t i es and t echni cali nst i t ut esar ecar r y i ng outal otofsci ent i f i cand t echni cal r esear ch.Asui t abl ev ent ur ecapi t alenv i r onmentcanhel pi ni dent i f y i ngand conv er t i ngsomeoft hi sr esear chi nt ocommer ci alpr oduct i oni nt heSmal land Medi um Scal esect or s. Thus,i ti sappar entt hatv ent ur ecapi t alf undi ngshoul dbeencour agedt o f aci l i t at edev el opmenti nsmal landmedi um ent er pr i sewhi chi nt ur nl eadst o ov er al l gr owt hi nt heI ndi aneconomy .

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VENTURECAPI TALI NI NDI A

CHAPTER18 82

VENTURECAPI TALI NI NDI A

BI BLOGRAPHY

Ref er enceBooks&Magazi nes

Vent ur eCapi t al , TheI ndi anExper i encebyIM TTandey I ssuesFaci ngI ndi anVent ur eCapi t al I ndust r ybyHRaj ur kar Busi nessWor l d I ndi aToday

Newspaper s

83

VENTURECAPI TALI NI NDI A TheTi mesofI ndi a Economi csTi mes I ndi anExpr ess Fi nanci al Expr ess

Websi t es

www. i ndi ai nf ol i ne. com

www. i cf ai pr ess. or g

www. webcr awl er . com

www. namast henr i . com

84