Vc.docx

PRAHLADRAI DALMIA LIONS COLLEGE COMMERCE & ECONOMICS

CHAPTER 1. INTRODUCTION OF VENTURE CAPITAL Venture Capital: Venture capital is a type of financing provided to privately-held businesses by investors in exchange for partial ownership of the company. Venture capitalists (VCs) are more often firms, such as Kleiner Perkins or Sequoia. But individuals who are VCs are more generally known as “angel investors,” because they often get involved earlier and take a smaller stake. VCs identify promising new technology, products, or concepts, and then provide the funding needed to move the project forward. As payment for their investment, they typically take an equity, or ownership, stake. While the impression may be that VC funding is pretty typical, in fact, historically, fewer than 1% of companies have landed VC money. It’s the exception, not the rule

Definition: Start up companies with a potential to grow need a certain amount of investment. Wealthy investors like to invest their capital in such businesses with a long-term growth perspective. This capital is known as venture capital and the investors are called venture capitalists.

Description: Such investments are risky as they are illiquid, but are capable of giving lcapitalists depend upon the growth of the company. Venture capitalists have the power to influence major decisions of the companies they are investing in as it is their money at stake.

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CHAPTER 2. OBJECTIVE OF STUDY 1) Understand the concept of venture capital. Venture Capital funding is different from traditional sources of financing. Venture capitalists finance innovation and ideas which have potential for high growth but with inherent uncertainties. This makes it a high-risk, high return investment.

2) Study venture capital industry in India. Scientific, technology and knowledge based ideas properly supported by venture capital can be propelled into a powerful engine of economic growth and wealth creation in a sustainable manner. In various developed and developing economies venture capital has played a significant developmental role.

3) Study venture capital industry in global scenario. Venture capital has played a very important role in U.K., Australia and Hong Kong also in development of technology growth of exports and employment.

4) Find out opportunities that encourage & threats those hinder venture capital industry in India. 5) To know the impact of political & economical factors on venture capital investment.

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CHAPTER 3. RESEARCH METHODOLOGY

In India neither venture capital theory has been developed nor are there many comprehensive books on the subject. Even the number of research papers available is very limited. The research design used is descriptive in nature. (The attempt has been made to collect maximum facts and figures available on the availability of venture capital in India, nature of assistance granted, future projected demand for this financing, analysis of the problems faced by the entrepreneurs in getting venture capital, analysis of the venture capitalists and social and environmental impact on the existing framework.) The research is based on secondary data collected from the published material. The data was also collected from the publications and press releases of venture capital associations in India. Scanning the business papers filled the gaps in information. The Economic times, Financial Express and Business Standards were scanned for any article or news item related to venture capital. Sufficient amount of data about the venture capital has been derived from this project.

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CHAPTER 4 . LIMITATION AND SCOPE OF PROJECT Limitations: A study of this type cannot be without limitations. It has been observed that venture capitals are very secretive about their performance as well as about their investments. This attitude has been a major hurdle in data collection. However venture capital funds/companies that are members of Indian venture capital association are included in the study. Financial analysis has been restricted by and large to members of IVCA.

Scope: The scope of the research includes all type of venture capital firms whether setup as a company or a trust fund. Venture capital companies and funds irrespective of the fact that they are registered with SEBI of India or not are part of this study. Angel investors have been kept out of the study as it was not feasible to collect authenticated information about them.

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CHAPTER 5. HOW IT WORKS ?

The venture capital industry has four main players: entrepreneurs who need funding; investors who want high returns; investment bankers who need companies to sell; and the venture capitalists who make money for themselves by making a market for the other three. VC firms also protect themselves from risk by converting with other firms. Typically, there will be a “lead” investor and several “followers.” It is the exception, not the rule, for one VC to finance an individual company entirely. Rather, venture firms prefer to have two or three groups involved in most stages of financing. Such relationships provide further portfolio diversification that is, the ability to invest in more deals per dollar of invested capital. They also decrease the workload of the VC partners by getting others involved in assessing the risks during the due diligence period and in managing the deal. And the presence of several VC firms adds credibility. In fact, some observers have suggested that the truly smart fund will always be a follower of the top-tier firms.

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CHAPTER 6. CONCEPT OF VENTURE CAPITAL The term venture capital comprises of two words that is, “Venture” and “Capital”. Venture is a course of processing, the outcome of which is uncertain but to which is attended the risk or danger of “loss”. “Capital” means recourses to start an enterprise. To connote the risk and adventure of such a fund, the generic name Venture Capital was coined. Venture capital is considered as financing of high and new technology based enterprises. It is said that Venture capital involves investment in new or relatively untried technology, initiated by relatively new and professionally or technically qualified entrepreneurs with inadequate funds. The conventional financiers, unlike Venture capitals, mainly finance proven technologies and established markets. However, high technology need not be pre-requisite for venture capital. Venture capital has also been described as ‘unsecured risk financing’. The relatively high risk of venture capital is compensated by the possibility of high returns usually through substantial capital gains in the medium term. Venture capital in broader sense is not solely an injection of funds into a new firm, it is also an input of skills needed to set up the firm, design its marketing strategy, organize and manage it. Thus it is a long term association with successive stages of company’s development under highly risk investment conditions, with distinctive type of financing appropriate to each stage of development. Investors join the entrepreneurs as copartners and support the project with finance and business skills to exploit the market opportunities. Venture capital is not a passive finance. It may be at any stage of business/production cycle, that is, start up, expansion or to improve a product or process, which are associated with both risk and reward. The Venture capital makes higher capital gains through appreciation in the value of such investments when the new technology succeeds. Thus the primary return sought by the investor is essentially capital gain rather than steady interest income or dividend yield. The most flexible definition of Venture capital is“The support by investors of entrepreneurial talent with finance and business skills to exploit market opportunities and thus obtain capital gains.” Venture capital commonly describes not only the provision of start up finance or ‘seed corn’ capital but also development capital for later stages of business. A long term commitment of funds is involved in the form of equity investments, with the aim of eventual capital gains rather than income and active involvement in the management of customer’s business.

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CHAPTER 7. FEATURES OF VENTURE CAPITAL

1. High Risk By definition the Venture capital financing is highly risky and chances of failure are high as it provides long term start up capital to high risk-high reward ventures. Venture capital assumes four types of risks, these are:    

Management risk Market risk Product risk Operation risk

- Inability of management teams to work together. - Product may fail in the market. - Product may not be commercially viable. - Operations may not be cost effective resulting in increased cost decreased gross margins.

2. High Tech As opportunities in the low technology area tend to be few of lower order, and hi-tech projects generally offer higher returns than projects in more traditional areas, venture capital investments are made in high tech. areas using new technologies or producing innovative goods by using new technology. Not just high technology, any high risk ventures where the entrepreneur has conviction but little capital gets venture finance. Venture capital is available for expansion of existing business or diversification to a high risk area. Thus technology financing had never been the primary objective but incidental to venture capital.

3. Equity Participation & Capital Gains Investments are generally in equity and quasi equity participation through direct purchase of shares, options, convertible debentures where the debt holder has the option to convert the loan instruments into stock of the borrower or a debt with warrants to equity investment. The funds in the form of equity help to raise term loans that are cheaper source of funds. In the early stage of business, because dividends can be delayed, equity investment implies that investors bear the risk of venture and would earn a return commensurate with success in the form of capital gains.

4. Participation In Management Venture capital provides value addition by managerial support, monitoring and follow up assistance. It monitors physical and financial progress as well as market development initiative. It helps by identifying key resource person. They want one seat on the company’s board of directors and involvement, for better or worse, in the major decision affecting the direction of company. This is a unique philosophy of “hands on management” where Venture capitalist acts as complementary to the entrepreneurs. Based upon the experience other companies, a venture capitalist advise the promoters on project planning, monitoring, financial management, including working capital and public issue. Venture capital investor cannot interfere in day

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today management of the enterprise but keeps a close contact with the promoters or entrepreneurs to protect his investment.

5. Length of Investment Venture capitalist help companies grow, but they eventually seek to exit the investment in three to seven years. An early stage investment may take seven to ten years to mature, while most of the later stage investment takes only a few years. The process of having significant returns takes several years and calls on the capacity and talent of venture capitalist and entrepreneurs to reach fruition.

6. Illiquid Investment Venture capital investments are illiquid, that is, not subject to repayment on demand or following a repayment schedule. Investors seek return ultimately by means of capital gains when the investment is sold at market place. The investment is realized only on enlistment of security or it is lost if enterprise is liquidated for unsuccessful working. It may take several years before the first investment starts to locked for seven to ten years. Venture capitalist understands this illiquidity and factors this in his investment decisions.

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CHAPTER 8. DIFFERENCE BETWEEN VENTURE CAPITAL & OTHER FUNDS 1. Venture Capital Vs Development Funds Venture capital differs from Development funds as latter means putting up of industries without much consideration of use of new technology or new entrepreneurial venture but having a focus on underdeveloped areas (locations). In majority of cases it is in the form of loan capital and proportion of equity is very thin. Development finance is security oriented and liquidity prone. The criteria for investment are proven track record of company and its promoters, and sufficient cash generation to provide for returns (principal and interest). The development bank safeguards its interest through collateral. They have no say in working of the enterprise except safeguarding their interest by having a nominee director. They do not play any active role in the enterprise except ensuring flow of information and proper management information system, regular board meetings, adherence to statutory requirements for effective management control where as Venture capitalist remain interested if the overall management of the project o account of high risk involved I the project till its completion, entering into production and making available proper exit route for liquidation of the investment. As against this fixed payments in the form of installment of principal and interest are to be made to development banks.

2. Venture Capital Vs Seed Capital & Risk Capital It is difficult to make a distinction between venture capital, seed capital, and risk capital as the latter two form part of broader meaning of Venture capital. Difference between them arises on account of application of funds and terms and conditions applicable. The seed capital and risk funds in India are being provided basically to arrange promoter’s contribution to the project. The objective is to provide finance and encourage professionals to become promoters of industrial projects. The seed capital is provided to conventional projects on the consideration of low risk and security and use conventional techniques for appraisal. Seed capital is normally in the form of low interest deferred loan as against equity investment by Venture capital. Unlike Venture capital, Seed capital providers neither provide any value addition nor participate in the management of the project. Unlike Venture capital Seed capital provider is satisfied with low risk-normal returns and lacks any flexibility in its approach. Risk capital is also provided to established companies for adapting new technologies. Herein the approach is not business oriented but developmental. As a result on one hand the success rate of units assisted by Seed capital/Risk Finance has been lower than those provided with venture capital. On the other hand the return to the seed/risk capital financier had been very low as compared to venture capitalist.

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Seed Capital Scheme

Venture capital Scheme

Basis

Income or aid

Commercial viability

Beneficiaries

Very small entrepreneurs

Medium and entrepreneurs are covered

Size of assistance

Rs. 15 Lac (Max)

Up to 40 percent promoters’ equity

Appraisal process

Normal

Skilled and specialized

Estimates returns

20 percent

30 percent plus

Flexibility

Nil

Highly flexible

Value addition

Nil

Multiple ways

Exit option

Sell back to promoters

Several ,including Public offer

Funding sources

Owner funds

Outside allowed

Syndication

Not done

Possible

Tax concession

Nil

Exempted

Success rate

Not good

Very satisfactory

large also of

contribution

Difference between Seed Capital Scheme and Venture capital Scheme

3. Venture Capital Vs Bought Out Deals The important difference between the Venture capital and bought out deals is that bought-outs are not based upon high risk- high reward principal. Further unlike Venture capital they do not provide equity finance at different stages of the enterprise. However both have a common expectation of capital gains yet their objectives and intents are totally different.

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CHAPTER 9. VENTURE CAPITAL SPECTRUM The growth of an enterprise follows a life cycle as shown in the diagram below. The requirements of funds vary with the life cycle stage of the enterprise. Even before a business plan is prepared the entrepreneur invests his time and resources in surveying the market, finding and understanding the target customers and their needs. At the seed stage the entrepreneur continue to fund the venture with his own or family funds. At this stage the funds are needed to solicit the consultant’s services in formulation of business plans, meeting potential customers and technology partners. Next the funds would be required for development of the product/process and producing prototypes, hiring key people and building up the managerial team. This is followed by funds for assembling the manufacturing and marketing facilities in that order. Finally the funds are needed to expand the business and attaint the critical mass for profit generation. Venture capitalists cater to the needs of the entrepreneurs at different stages of their enterprises. Depending upon the stage they finance, venture capitalists are called angel investors, venture capitalist or private equity supplier/investor.

 Venture Capital Spectrum Venture capital was started as early stage financing of relatively small but rapidly growing companies. However various reasons forced venture capitalists to be more and more involved in expansion financing to support the development of existing portfolio companies. With increasing demand of capital from newer business, Venture capitalists began to operate across a broader spectrum of investment interest. This diversity of opportunities enabled Venture capitalists to balance their activities in term of time involvement, risk acceptance and reward potential, while providing on going assistance to developing business. Different venture capital firms have different attributes and aptitudes for different types of Venture capital investments. Hence there are different stages of entry for different Venture capitalists and they can identify and differentiate between types of Venture capital investments, each appropriate for the given stage of the investee company, These are:-

1.

Early Stage Finance

  

Seed Capital Start up Capital Early/First Stage Capital



Later/Third Stage Capital

2.

Later Stage Finance

    

Expansion/Development Stage Capital Replacement Finance Management Buy Out and Buy ins Turnarounds Mezzanine/Bridge Finance

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Not all business firms pass through each of these stages in a sequential manner. For instance seed capital is normally not required by service based ventures. It applies largely to manufacturing or research based activities. Similarly second round finance does not always follow early stage finance. If the business grows successfully it is likely to develop sufficient cash to fund its own growth, so does not require venture capital for growth. The table below shows risk perception and time orientation for different stages of venture capital financing.

Financing Stage

Period (funds Risk perception locked in years)

Activity to be financed

Early stage finance 7-10 Seed

Extreme

For supporting a concept or idea or R & D for product development

Start up

5-9

Very high

Initializing operations developing prototypes

First stage

3-7

High

Start commercial production and marketing

Second stage

3-5

Sufficiently high

Expand market & growing working capital need

Later stage finance

1-3

Medium

Market expansion, acquisition & product development for profit making company

Buy out-in

1-3

Medium

Acquisition financing

Turnaround

3-5

Medium to high

Turning around company

Mezzanine

1-3

Low

Facilitating public issue

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Venture Capital- Financing Stages 1. Seed Capital It is an idea or concept as opposed to a business. European Venture capital association defines seed capital as “The financing of the initial product development or capital provided to an entrepreneur to prove the feasibility of a project and to qualify for start up capital”. The characteristics of the seed capital may be enumerated as follows:    

Absence of ready product market Absence of complete management team Product/ process still in R & D stage Initial period / licensing stage of technology transfer

Broadly speaking seed capital investment may take 7 to 10 years to achieve realization. It is the earliest and therefore riskiest stage of Venture capital investment. The new technology and innovations being attempted have equal chance of success and failure. Such projects, particularly hi-tech, projects sink a lot of cash and need a strong financial support for their adaptation, commencement and eventual success. However, while the earliest stage of financing is fraught with risk, it also provides greater potential for realizing significant gains in long term. Typically seed enterprises lack asset base or track record to obtain finance from conventional sources and are largely dependent upon entrepreneur’s personal resources. Seed capital is provided after being satisfied that the entrepreneur has used up his own resources and carried out his idea to a stage of acceptance and has initiated research. The asset underlying the seed capital is often technology or an idea as opposed to human assets (a good management team) so often sought by venture capitalists. Volume of Investment Activity It has been observed that Venture capitalist seldom make seed capital investment and these are relatively small by comparison to other forms of venture finance. The absence of interest in providing a significant amount of seed capital can be attributed to the following three factors: a) Seed capital projects by their very nature require a relatively small amount of capital. The success or failure of an individual seed capital investment will have little impact on the performance of all but the smallest venture capitalist’s portfolio. Larger venture capitalists avoid seed capital investments. This is because the small investments are seen to be cost inefficient in terms of time required to analyze, structure and manage them. b) The time horizon to realization for most seed capital investments is typically 7-10 years which is longer than all but most long-term oriented investors will desire. c) The risk of product and technology obsolescence increases as the time to realization is extended. These types of obsolescence are particularly likely to occur with high technology investments particularly in the fields related to Information Technology.

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2. Start up Capital It is stage 2 in the venture capital cycle and is distinguishable from seed capital investments. An entrepreneur often needs finance when the business is just starting. The start up stage involves starting a new business. Here in the entrepreneur has moved closer towards establishment of a going concern. Here in the business concept has been fully investigated and the business risk now becomes that of turning the concept into product. Start up capital is defined as: “Capital needed to finance the product development, initial marketing and establishment of product facility. “

The characteristics of start-up capital are:i. Establishment of company or business. The company is either being organized or is established recently. New business activity could be based on experts, experience or a spin-off from R & D. ii. Establishment of most but not all the members of the team. The skills and fitness to the job and situation of the entrepreneur’s team is an important factor for start up finance. iii. Development of business plan or idea. The business plan should be fully developed yet the acceptability of the product by the market is uncertain. The company has not yet started trading. In the start up preposition venture capitalists’ investment criteria shifts from idea to people involved in the venture and the market opportunity. Before committing any finance at this stage, Venture capitalist however, assesses the managerial ability and the capacity of the entrepreneur, besides the skills, suitability and competence of the managerial team are also evaluated. If required they supply managerial skills and supervision for implementation. The time horizon for start up capital will be typically 6 or 8 years. Failure rate for start up is 2 out of 3. Start up needs funds by way of both first round investment and subsequent follow-up investments. The risk tends t be lower relative to seed capital situation. The risk is controlled by initially investing a smaller amount of capital in start-ups. The decision on additional financing is based upon the successful performance of the company. However, the term to realization of a start up investment remains longer than the term of finance normally provided by the majority of financial institutions. Longer time scale for using exit route demands continued watch on start up projects. Volume of Investment Activity Despite potential for specular returns most venture firms avoid investing in start-ups. One reason for the paucity of start up financing may be high discount rate that venture capitalist applies to venture proposals at this level of risk and maturity. They often prefer to spread their risk by sharing the financing. Thus syndicates of investor’s often participate in start up finance.

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3. Early Stage Finance It is also called first stage capital is provided to entrepreneur who has a proven product, to start commercial production and marketing, not covering market expansion, de-risking and acquisition costs. At this stage the company passed into early success stage of its life cycle. A proven management team is put into this stage, a product is established and an identifiable market is being targeted. British Venture Capital Association has vividly defined early stage finance as: “Finance provided to companies that have completed the product development stage and require further funds to initiate commercial manufacturing and sales but may not be generating profits.” The characteristics of early stage finance may be:    

Little or no sales revenue. Cash flow and profit still negative. A small but enthusiastic management team which consists of people with technical and specialist background and with little experience in the management of growing business. Short term prospective for dramatic growth in revenue and profits.

The early stage finance usually takes 4 to 6 years time horizon to realization. Early stage finance is the earliest in which two of the fundamentals of business are in place i.e. fully assembled management team and a marketable product. A company needs this round of finance because of any of the following reasons:  

Project overruns on product development. Initial loss after start up phase.

The firm needs additional equity funds, which are not available from other sources thus prompting venture capitalist that, have financed the start up stage to provide further financing. The management risk is shifted from factors internal to the firm (lack of management, lack of product etc.) to factors external to the firm (competitive pressures, in sufficient will of financial institutions to provide adequate capital, risk of product obsolescence etc.) At this stage, capital needs, both fixed and working capital needs are greatest. Further, since firms do not have foundation of a trading record, finance will be difficult to obtain and so Venture capital particularly equity investment without associated debt burden is key to survival of the business. The following risks are normally associated to firms at this stage: a) The early stage firms may have drawn the attention of and incurred the challenge of a larger competition.

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b) There is a risk of product obsolescence. This is more so when the firm is involved in hightech business like computer, information technology etc.

4. Second Stage Finance. It is the capital provided for marketing and meeting the growing working capital needs of an enterprise that has commenced the production but does not have positive cash flows sufficient to take care of its growing needs. Second stage finance, the second trench of Early State Finance is also referred to as follow on finance and can be defined as the provision of capital to the firm which has previously been in receipt of external capital but whose financial needs have subsequently exploded. This may be second or even third injection of capital. The characteristics of a second stage finance are:    

A developed product on the market A full management team in place Sales revenue being generated from one or more products There are losses in the firm or at best there may be a break even but the surplus generated is insufficient to meet the firm’s needs.

Second round financing typically comes in after start up and early stage funding and so have shorter time to maturity, generally ranging from 3 to 7 years. This stage of financing has both positive and negative reasons. Negative reasons include:    

Cost overruns in market development. Failure of new product to live up to sales forecast. Need to re-position products through a new marketing campaign. Need to re-define the product in the market place once the product deficiency is revealed.

Positive reasons include:  

Sales appear to be exceeding forecasts and the enterprise needs to acquire assets to gear up for production volumes greater than forecasts. High growth enterprises expand faster than their working capital permit, thus needing additional finance. Aim is to provide working capital for initial expansion of an enterprise to meet needs of increasing stocks and receivables.

It is additional injection of funds and is an acceptable part of venture capital. Often provision for such additional finance can be included in the original financing package as an option, subject to certain management performance targets.

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5. Later Stage Finance It is called third stage capital is provided to an enterprise that has established commercial production and basic marketing set-up, typically for market expansion, acquisition, product development etc. It is provided for market expansion of the enterprise. The enterprises eligible for this round of finance have following characteristics.   

Established business, having already passed the risky early stage. Expanding high yield, capital growth and good profitability. Reputed market position and an established formal organization structure.

“Funds are utilized for further plant expansion, marketing, working capital or development of improved products.” Third stage financing is a mix of equity with debt or subordinate debt. As it is half way between equity and debt in US it is called “mezzanine” finance. It is also called last round of finance in run up to the trade sale or public offer. Venture capitalist s prefer later stage investment vis a vis early stage investments, as the rate of failure in later stage financing is low. It is because firms at this stage have a past performance data, track record of management, established procedures of financial control. The time horizon for realization is shorter, ranging from 3 to 5 years. This helps the venture capitalists to balance their own portfolio of investment as it provides a running yield to venture capitalists. Further the loan component in third stage finance provides tax advantage and superior return to the investors. There are four sub divisions of later stage finance.    

Expansion / Development Finance Replacement Finance Buyout Financing Turnaround Finance

Expansion / Development Finance An enterprise established in a given market increases its profits exponentially by achieving the economies of scale. This expansion can be achieved either through an organic growth, that is by expanding production capacity and setting up proper distribution system or by way of acquisitions. Anyhow, expansion needs finance and venture capitalists support both organic growth as well as acquisitions for expansion. At this stage the real market feedback is used to analyze competition. It may be found that the entrepreneur needs to develop his managerial team for handling growth and managing a larger business. Realization horizon for expansion / development investment is one to three years. It is favored by venture capitalist as it offers higher rewards in shorter period with lower risk. Funds are needed for new or larger factories and warehouses, production capacities, developing

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improved or new products, developing new markets or entering exports by enterprise with established business that has already achieved break even and has started making profits.

Replacement Finance It means substituting one shareholder for another, rather than raising new capital resulting in the change of ownership pattern. Venture capitalist purchase shares from the entrepreneurs and their associates enabling them to reduce their shareholding in unlisted companies. They also buy ordinary shares from non-promoters and convert them to preference shares with fixed dividend coupon. Later, on sale of the company or its listing on stock exchange, these are re-converted to ordinary shares. Thus Venture capitalist makes a capital gain in a period of 1 to 5 years.

Buy - out / Buy - in Financing It is a recent development and a new form of investment by venture capitalist. The funds provided to the current operating management to acquire or purchase a significant share holding in the business they manage are called management buyout. Management Buy-in refers to the funds provided to enable a manager or a group of managers from outside the company to buy into it. It is the most popular form of venture capital amongst later stage financing. It is less risky as venture capitalist in invests in solid, ongoing and more mature business. The funds are provided for acquiring and revitalizing an existing product line or division of a major business. MBO (Management buyout) has low risk as enterprise to be bought have existed for some time besides having positive cash flow to provide regular returns to the venture capitalist, who structure their investment by judicious combination of debt and equity. Of late there has been a gradual shift away from start up and early finance to wards MBO opportunities. This shift is because of lower risk than start up investments.

Turnaround Finance It is rare form later stage finance which most of the venture capitalist avoid because of higher degree of risk. When an established enterprise becomes sick, it needs finance as well as management assistance foe a major restructuring to revitalize growth of profits. Unquoted company at an early stage of development often has higher debt than equity; its cash flows are slowing down due to lack of managerial skill and inability to exploit the market potential. The sick companies at the later stages of development do not normally have high debt burden but lack competent staff at various levels. Such enterprises are compelled to relinquish control to new management. The venture capitalist has to carry out the recovery process using hands on management in 2 to 5 years. The risk profile and anticipated rewards are akin to early stage investment

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Bridge Finance It is the pre-public offering or pre-merger/acquisition finance to a company. It is the last round of financing before the planned exit. Venture capitalist help in building a stable and experienced management team that will help the company in its initial public offer. Most of the time bridge finance helps improves the valuation of the company. Bridge finance often has a realization period of 6 months to one year and hence the risk involved is low. The bridge finance is paid back from the proceeds of the public issue.

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CHAPTER 10. VENTURE CAPITAL INVESTMENT PROCESS Venture capital investment process is different from normal project financing. In order to understand the investment process a review of the available literature on venture capital finance is carried out. Tyebjee and Bruno in 1984 gave a model of venture capital investment activity which with some variations is commonly used presently. As per this model this activity is a five step process as follows: 1. Deal Organization 2. Screening 3. Evaluation or due Diligence 4. Deal Structuring 5. Post Investment Activity and Exit

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Deal origination: In generating a deal flow, the VC investor creates a pipeline of deals or investment opportunities that he would consider for investing in. Deal may originate in various ways. referral system, active search system, and intermediaries. Referral system is an important source of deals. Deals may be referred to VCFs by their parent organisaions, trade partners, industry associations, friends etc. Another deal flow is active search through networks, trade fairs, conferences, seminars, foreign visits etc. Intermediaries is used by venture capitalists in developed countries like USA, is certain intermediaries who match VCFs and the potential entrepreneurs.

Screening: VCFs, before going for an in-depth analysis, carry out initial screening of all projects on the basis of some broad criteria. For example, the screening process may limit projects to areas in which the venture capitalist is familiar in terms of technology, or product, or market scope. The size of investment, geographical location and stage of financing could also be used as the broad screening criteria.

Due Diligence: Due diligence is the industry jargon for all the activities that are associated with evaluating an investment proposal. The venture capitalists evaluate the quality of entrepreneur before appraising the characteristics of the product, market or technology. Most venture capitalists ask for a business plan to make an assessment of the possible risk and return on the venture. Business plan contains detailed information about the proposed venture. The evaluation of ventures by VCFs in India includes; Preliminary evaluation: The applicant required to provide a brief profile of the proposed venture to establish prima facie eligibility. Detailed evaluation: Once the preliminary evaluation is over, the proposal is evaluated in greater detail. VCFs in India expect the entrepreneur to have:- Integrity, long-term vision, urge to grow, managerial skills, commercial orientation. VCFs in India also make the risk analysis of the proposed projects which includes: Product risk, Market risk, Technological risk and Entrepreneurial risk. The final decision is taken in terms of the expected risk-return trade-off as shown in Figure.

Deal Structuring: In this process, the venture capitalist and the venture company negotiate the terms of the deals, that is, the amount, form and price of the investment. This process is termed as deal structuring. The agreement also include the venture capitalist's right to control the venture company and to change its management if needed, buyback arrangements, acquisition, making initial public offerings (IPOs), etc. Earned out arrangements specify the entrepreneur's equity share and the objectives to be achieved. VENTURE CAPITAL

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Post Investment Activities: Once the deal has been structured and agreement finalised, the venture capitalist generally assumes the role of a partner and collaborator. He also gets involved in shaping of the direction of the venture. The degree of the venture capitalist's involvement depends on his policy. It may not, however, be desirable for a venture capitalist to get involved in the day-to-day operation of the venture. If a financial or managerial crisis occurs, the venture capitalist may intervene, and even install a new management team.

Exit: Venture capitalists generally want to cash-out their gains in five to ten years after the initial investment. They play a positive role in directing the company towards particular exit routes. A venture may exit in one of the following ways: There are four ways for a venture capitalist to exit its investment:    

Initial Public Offer (IPO) Acquisition by another company Re-purchase of venture capitalist’s share by the investee company Purchase of venture capitalist’s share by a third party.

Promoter’s Buy-back The most popular disinvestments route in India is promoter’s buy-back. This route is suited to Indian conditions because it keeps the ownership and control of the promoter intact. The obvious limitation, however, is that in a majority of cases the market value of the shares of the venture firm would have appreciated so much after some years that the promoter would not be in a financial position to buy them back. In India, the promoters are invariably given the first option to buy back equity of their enterprises. For example, RCTC participates in the assisted firm’s equity with suitable agreement for the promoter to repurchase it. Similarly, Canfina-VCF offers an opportunity to the promoters to buy back the shares of the assisted firm within an agreed period at a predetermined price. If the promoter fails to buy back the shares within the stipulated period, Canfina-VCF would have the discretion to divest them in any manner it deemed appropriate. SBI capital Markets ensures through examining the personal assets of the promoters and their associates, which buy back, would be a feasible option. GVFL would make disinvestments, in consultation with the promoter, usually after the project has settled down, to a profitable level and the entrepreneur is in a position to avail of finance under conventional schemes of assistance from banks or other financial institutions.

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Initial Public Offers (IPOs) The benefits of disinvestments via the public issue route are, improved marketability and liquidity, better prospects for capital gains and widely known status of the venture as well as market control through public share participation. This option has certain limitations in the Indian context. The promotion of the public issue would be difficult and expensive since the first generation entrepreneurs are not known in the capital markets. Further, difficulties will be caused if the entrepreneur’s business is perceived to be an unattractive investment proposition by investors. Also, the emphasis by the Indian investors on short-term profits and dividends may tend to make the market price unattractive. Yet another difficulty in India until recently was that the Controller of Capital Issues (CCI) guidelines for determining the premium on shares took into account the book value and the cumulative average EPS till the date of the new issue. This formula failed to give due weight age to the expected stream of earning of the venture firm. Thus, the formula would underestimate the premium. The Government has now abolished the Capital Issues Control Act, 1947 and consequently, the office of the controller of Capital Issues. The existing companies are now free to fix the premium on their shares. The initial public issue for disinvestments of VCFs’ holding can involve high transaction costs because of the inefficiency of the secondary market in a country like India. Also, this option has become far less feasible for small ventures on account of the higher listing requirement of the stock exchanges. In February 1989, the Government of India raised the minimum capital for listing on the stock exchanges from Rs 10 million to Rs 30 million and the minimum public offer from Rs 6 million to Rs 18 million.

Sale on the OTC Market An active secondary capital market provides the necessary impetus to the success of the venture capital. VCFs should be able to sell their holdings, and investors should be able to trade shares conveniently and freely. In the USA, there exist well-developed OTC markets where dealers trade in shares on telephone/terminal and not on an exchange floor. This mechanism enables new, small companies which are not otherwise eligible to be listed on the stock exchange, to enlist on the OTC markets and provides liquidity to investors. The National Association of Securities Dealers Automated Quotation System (NASDAQ) in the USA daily quotes over 8000 stock prices of companies backed by venture capital. The OTC Exchange in India was established in June 1992. The Government of India had approved the creation for the Exchange under the Securities Contracts (Regulations) Act in 1989. It has been promoted jointly by UTI, ICICI, SBI Capital Markets, Can bank Financial Services, GIC, LIC and IDBI. Since this list of market-makers (who will decide daily prices and appoint dealers for trading) includes most of the public sector venture financiers, it should pick up fast, and it should be possible for investors to trade in the securities of new small and medium size enterprises. The other disinvestments mechanisms such as the management buyouts or sale to other venture funds are not considered to be appropriate by VCFs in India.

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The growth of an enterprise follows a life cycle as shown in the diagram below. The requirements of funds vary with the life cycle stage of the enterprise. Even before a business plan is prepared the entrepreneur invests his time and resources in surveying the market, finding and understanding the target customers and their needs. At the seed stage the entrepreneur continue to fund the venture with his own or family funds. At this stage the funds are needed to solicit the consultant’s services in formulation of business plans, meeting potential customers and technology partners. Next the funds would be required for development of the product/process and producing prototypes, hiring key people and building up the managerial team. This is followed by funds for assembling the manufacturing and marketing facilities in that order. Finally the funds are needed to expand the business and attaint the critical mass for profit generation. Venture capitalists cater to the needs of the entrepreneurs at different stages of their enterprises. Depending upon the stage they finance, venture capitalists are called angel investors, venture capitalist or private equity supplier/investor.

The players There are following groups of players: 1. 2.    3. 4.

Angels and angel clubs Venture Capital funds Small Medium Large Corporate venture funds Financial service venture groups

 Angels and angel clubs Angels are wealthy individuals who invest directly into companies. They can form angel clubs to coordinate and bundle their activities. Besides the money, angels often provide their personal knowledge, experience and contacts to support their investees. With average deals sizes from USD 100,000 to USD 500,000 they finance companies in their early stages. Examples for angel clubs are · Media Club, Dinner Club ,· Angel's Forum.

 Small and Upstart Venture Capital Funds These are smaller Venture Capital Companies that mostly provide seed and start-up capital. The so called "Boutique firms" are often specialised in certain industries or market segments. Their capitalization is about USD 20 to USD 50 million (is this deals size or total money under management or money under management per fund?). As for the small and medium Venture Capital funds strong competition will clear the marketplace. There will be mergers and acquisitions leading to a concentration of capital. Funds specialised in different business areas will form strategic partnerships. Only the more successful funds will be able to attract new money. Examples are: Artemis Comaford, Abbell Venture Fund, Acacia Venture Partners.

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 Medium Venture Funds The medium venture funds finance all stages after seed stage and operate in all business segments. They provide money for deals up to USD 250 million. Single funds have up to USD 5 billion under management. An example is Accel Partners

 Large Venture Funds As the medium funds, large funds operate in all business sectors and provide all types of capital for companies after seed stage. They often operate internationally and finance deals up to USD 500 million The large funds will try to improve their position by mergers and acquisitions with other funds to improve size, reputation and their financial muscle. In addition they will to diversify. Possible areas to enter are other financial services by means of M&As with financial services corporations and the consulting business. For the latter one the funds have a rich resource of expertise and contacts in house. In a declining market for their core activity and with lots of tumbling companies out there is no reason why Venture Capital funds should offer advice and consulting only to their investees. Examples are:   

AIG American International Group Cap Vest Man 3i

 Corporate Venture Funds These Venture Capital funds are set up and owned by technology companies. Their aim is to widen the parent company's technology base in an win-win-situation for both, the investor and the investee. In general, corporate funds invest in growing or maturing companies, often when the investee wishes to make additional investments in echnology or product development. The average deals size is between USD 2 million and USD 5 million. The large funds will try to improve their position by mergers and acquisitions with other funds to improve size, reputation and their financial muscle. In addition they will to diversify. Possible areas to enter are other financial services by means of M&As with financial services corporations and the consulting business. For the latter one the funds have a rich resource of expertise and contacts in house. In a declining market for their core activity and with lots of tumbling companies out there is no reason why Venture Capital funds should offer advice and consulting only to their investees. Examples are:    

Oracle Adobe Dell Kyocera

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As an example, Adobe systems launched a $40m venture fund in 1994 to invest in companies strategic to its core business, such as Cascade Systems Inc and Lantana Research Corporation.- has been successfully boosting demand for its core products, so that Adobe recently launched a second $40m fund.

 Financial funds A solution for financial funds could be a shift to a higher securisation of Venture Capital activities. That means that the parent companies shift the risk to their customers by creating new products such as stakes in an Venture Capital fund. However, the success of such products will depend on the overall climate and expectations in the economy. As long as the sownturn continues without any sign of recovery customers might prefer less risky alternatives.

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CHAPTER 11. KEY SUCCESS FACTOR FOR VENTURE CAPITAL INDUSTRY IN INDIA Knowledge become the key factor for a competitive advantage for company. Venture Capital firms need more expert knowledge in various fields. The various key success factor for venture capital industry are as follow:

 Knowledge about Government changing policies: Investment, management and exit should provide flexibility to suit the business requirements and should also be driven by global trends. Venture capital investments have typically come from high net worth individuals who have risk taking capacity. Since high risk is involved in venture financing, venture investors globally seek investment and exit on very flexible terms which provides them with certain levels of protection. Such exit should be possible through IPOs and mergers/acquisitions on a global basis and not just within India. In this context the judgement of the judiciary raising doubts on treatment of tax on capital gains made by firms registered in Mauritius gains significance - changing policies with a retrospective effect is undoubtedly acting as a dampener to fresh fund raising by Venture capital firms.

 Quick Response time : The company have flat organization structure results in quicker decision making. The entrepreneur is relieved of the trauma that one normally goes through in an interface with a funding institution or a development agency. They follow a clearly defined decision making process that works with clock like precision, which means that if they agree on a funding schedule entrepreneur can count on them to stick it.

 Knowledge about Global Environment: With increasing global integration and mobility of capital it is important that Indian venture capital firms as well as venture financed enterprises be able to have opportunities for investment abroad. This would not only enhance their ability to generate better returns but also add to their experience and expertise to function successfully in a global environment.

 Good Human Resource : Venture capital should become an institutionalized industry financed and managed by successful entrepreneurs, professional and sophisticated investors. Globally, venture capitalist are not merely finance providers but are also closely involved with the investee enterprises and provide expertise by way of management and marketing support. This industry has developed its own ethos and culture. Venture capital has only one common aspect that cuts across geography i.e. it is risk capital invested by experts in the field. It is important that venture capital in India be allowed to develop via professional and institutional management.

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 Balance between three factors: Venture Capital backed companies can provide high returns. However, despite of success stories like Apple, FedEx of Microsoft, a lot of these deals fail. It is said that only one out of ten companies succeed. That's why every deal has an element of potential profit and an element of risk, depending on the deals size. To be successful, a Venture Capital Company must manage the balance between these three factors.

Financial markets and the industries to invest in

Knowledge Risk management skills and contacts to investors

Possible investees and external expertise frame work for key success factor

Knowledge is key, to get the balance in this "Magic Triangle". With knowledge we mean knowledge about the financial markets and the industries to invest in, risk management skills and contacts to investors, possible investees and external expertise. High profits, achievable by larger deals, are not only important for the financial performance of the Venture Capital company. As a good track record they are also a vital argument to attract funds which are the basis for larger deals. However, larger deals imply higher risks of losses. Many Venture Capital companies try to share and limit their risks. Solutions could be alliances and careful portfolio management. There are Venture Capital firms that refuse to invest in estart-up's because they perceive it as too risky to follow today's type.

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CHAPTER 12. GE NINE – CELL INDUSTRY ATTRACTIVENESS – COMPETITIVE STRENGTH MATRIX Industry attractiveness:

Industrial Attractiveness

Importance weight

Rating

Score

Growth Rate

0.20

7

1.4

Intensity of competition

0.20

6

1.2

Regulatory policies

0.10

4

0.40

Domestic economic factor

0.20

8

1.6

Industrial profitability

0.20

7

1.4

Product innovation

0.10

4

0.4

Total

1.00

6.4

industry attractiveness

Business strength :

Business Strength

Importance APIDC IVCF UTI ICICI AVISHKAR weight (Rank/score) (Rank/score) (Rank/score) (Rank/score) (Rank/score)

Quick response 0.20 time

7/1.4

4/0.8

5/1.00

8/1.6

7/1.4

0.15 International Affiliation & network

6/0.90

5/0.75

5/0.75

7/1.05

6/0.90

Entrepreneurial 0.20 Edge

7/1.4

5/1.00

4/0.8

6/1.20

7/1.40

Intellectual Assets

0.25

6/1.5

6/1.5

6/1.5

7/1.75

6/1.50

Management support

0.20

6/1.2

7/1.4

4/0.8

7/1.4

6/1.20

Total

1.00

6.40

5.45

4.85

7.00

6.40

Business strength

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Implication : The First Zone consists of the three cells in the upper left corner. The ICICI venture capital firms falls in this zone that it is in a favorable position with relatively attractive growth opportunities. This indicates to invest in this service. The Second Zone consists of the three diagonal cells from the lower left to the upper right. The APIDC, Aviskar, VCF, UTI fall in this phase. A position in this zone is viewed as having medium attractiveness. Management must therefore exercise caution when making additional investments in this service. The suggested strategy is to seek to maintain share rather than growing or reducing share. The ICICI venture capital fund will try to go in upward line and try to increase their strength and must allocate their source on his strength like affiliation & network Management support and Intellectual assets. For this company make Strategic Business Unit(SBU) for each deal. Company can make network with other global companies . So it is useful when company make deal in Merger& Acquisition deals and company must have knowledge about global culture. Due to large network it may become useful in generation a flow of deals The company must hire experienced professional person. Because it can become competitive advantage for company in Venture Capital Industry. The company can increase its strength by providing better post investment services like strategic planning, better portfolio management services and helpful in financing from other companies.

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CHAPTER 13. OPPORTUNITIES AND THREATS: OPPORTUNITIES : Initiatives taken by the Government in formulating policies to encourage investors and entrepreneurs The emerging scenario of global competitiveness has put an immense pressure on the industrial sector to improve the quality level with minimization of cost of products by making use of latest technological skills. The implication is to obtain adequate financing along with the necessary hi-tech equipments to produce an innovative product which can succeed and grow in the present market condition. Unfortunately, our country lacks on both fronts. The necessary capital can be obtained from the venture capital firms who expect an above average rate of return on the investment. Government of India understands this. Also, The Government of India in an attempt to bring the nation at par and above the developed nations has been promoting venture capital financing to new, innovative concepts & ideas, liberalizing taxation norms providing tax incentives to venture firms, giving an opportunity for the creation of local pools of capital and holding training sessions for the emerging VC investors. In the year 2000, the finance ministry announced the liberalization of tax treatment for venture capital funds to promote them & to increase job creation. This is expected to give a strong boost to the non resident Indians located in the Silicon Valley and elsewhere to invest some of their capital, knowledge and enterprise in these ventures.  SME GROWTH

No. deals V/S No. of SMEs 450

128.44 387

400

123.42

350

125

299

300

120

118.59

250

115

113.95

200

146

150 100

130

110

109.49 56

71

105

50 0

100 2003

2004

2005 No. of deals

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No. of SMEs

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VC, to be able to contribute to developing entrepreneurship in India, needs to concentrate its investment in small and medium enterprises. A “Package for Promotion of Micro and Small Enterprises” was announced in February 2007. This includes measures addressing concerns of credit, fiscal support, cluster-based development, infrastructure, technology, and marketing. Capacity building of MSME Associations and support to women entrepreneurs are the other important features of this package. SMEs have been allowed to manage their direct/indirect exposure to foreign exchange risk by booking/canceling/roll over of forward contracts without prior permission of RBI. To boost the micro and small enterprise sector, the bank has decided to refinance an amount of 7000 crore to the Small Industries Development Bank of India, which will be available up to March 31, 2010. The Central Bank said that it is also working on a similar refinance facility for the National Housing Bank (NHB) of an amount of Rs 4, 000 crore. The Indian economy is growing at 8-9% so the there is a development of all sector like manufacturing, services sector. So there is a great opportunities for Venture Capital firms. Because mostly invest their money in this sectors.

India amongst leading entrepreneurial Hotbeds globally City competencies emerging 1. Bangalore  All IP-led companies; IT and IT-enabled services 2. Delhi (NCR)  Software services, IT enabled services, Telecom 3. Mumbai  Software services, IT enabled services, Media, Computer Graphics, Animation, Banking 4. Other emerging Centers  Chennai, Hyderabad, and Pune

Emerging sectors for investments As the venture industry continues to accelerate, a number of trends that cross geographies can be seen. The industry is becoming even more globalized .As a result, innovation in clean tech, IT, and healthcare, pharmaceutical are having a global impact. This changing landscape is driving new approaches in how large corporations are interacting with the venture community.

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Clean technology. Global climate changes, high oil prices, accelerated growth in emerging markets, energy security concerns and the finite nature of resources are some of the key drivers of the growing global demand for clean technologies in energy and water. In addition ,the increased willingness of consumers and governments to pay for and use green technologies ,combined with the positive exit environment of the last years ,has provided venture capitalists with the confidence to invest in emerging companies around the globe. According to the research from Dow Jones Venture One and Ernst &Young .US $1.28 billion was invested in 140financing rounds in 2006 in China , Europe Israel and United States that compares to US $ 664.1 million invested in 103 financing rounds in 2005,showing the capital investment in the field has nearly doubled over the past year. It is expected that investment in clean technologies will continue to increase not only in developed markets but also in the developing markets, mainly in India and China.

Biotechnology Over last few years, the story of the US biotech industry has been one of the remarkable success. There are signs that this success story is now repeated in other parts of world, with maturing pipelines, record breaking financing totals, strong deal activity and impressive financial results. Industry is grew 31% for second year in raw in 2007. Exemption of import duty on key R&D, Contract manufacturing/clinical trial equipment and duty credit for R&D and consumer goods. BIOTECH IDUSTRY REVENUES 2500

Revenue(US$ million)

2078 2000

1587 1500 1000 500 0 2005-2006

2006-2007

Year

Source : ://http://indiabudget.nic.in , Economic survey 2007-08 ,chapter

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Pharmaceutical

Source : ://http://indiabudget.nic.in , Economic survey 2007-08 ,chapter 8 export and import of pharmaceuticals

Export(Rs.)

EXPORT OF PHARMACEUTICAL/DRUGS 16000 14000 12000 10000 8000 6000 4000 2000 0

14380 10821 9263 6779

2002-03

7445

2003-04

2004-05

2005-06

2006-07

Years

Export of pharmaceuticals  



The industry's growth rate is likely to touch 19 per cent from the current 13 per cent, according to a projection released by the Confederation of Indian Industries (CII), on September 1, 2008. According to a McKinsey study, the Indian pharmaceutical industry is projected to grow to US$ 25 billion by 2010 whereas the domestic market is likely to more than triple to US$ 20 billion by 2015 from the current US$ 6 billion to become one of the leading pharmaceutical markets in the next decade. The Indian pharmaceutical industry has shown robust growth in terms of infrastructure development, technology base creation and a wide range of products with a determination to flourish in the rapidly changing environment, thereby establishing its

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global presence. The Indian pharmaceutical industry has increased its competitive intensity owing to pricing pressures and striving consistently to innovate. ICICI, Abbell Venture Fund.  

Venture-controlled Ranbaxy Fine Chemicals (RFCL) has acquired the US-based speciality chemicals major Mallinckrodt Baker in a deal estimated at US$ 340 million. SO there is great opportunity for venture capital industry to invest their money in this sector. Nowadays, India will become a global pharma hub exporting by exporting domestically produced generic products

IT/ITes Industry IT/ITeS Sector revenue

15.9

2006-2007

13.2

2005-2006

Year

31.9

10.2

2004-2005

8.3

2003-2004

6.3

2002-2003

0

5

24.2 18.3

13.3

9.8 10

15

20

25

30

35

US$ billion

Export

Domestic market

IT/ITes Industry revenue Source: http://www.ibef.org/sector/informationtechnolgy.aspx The Department of Information Technology is setting up Nano Electronic Centres at the Indian Institute of Technology, Mumbai and the Indian Institute of Science, Bangalore. with an outlay of about Rs. 100 crore to carry out R&D activities in nano-electronics devices and materials. In 2006-07, the performance of the Information Technology Enabled Services– Business Process Outsourcing (ITES-BPO) industry was marked by double-digit revenue growth, steady expansion into newer service lines and increased geographic penetration and an unprecedented rise in investments by multinational corporations (MNCs).

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The Special Incentive Package Scheme (SIPS) to encourage investments for setting up semiconductor fabrication and other micro- and nano-technology manufacturing industries was announced in March2007. The incentives admissible would be 20 per cent of the capital expenditure during the first 10 years for units located in Special Economic Zones (SEZs) and 25 per cent for units located outside SEZs. ELECTRONIC INDUSTRY

PRODUCTION OF ELECTRONIC INDUSTRY 300000

AMOUNT

250000

245600

200000

190300 152420

150000 100000

118290 97000

50000 0 2002-03

2003-04

2004-05

2005-06

2006-07

Source : ://http://indiabudget.nic.in , Economic survey 2007-08 ,chapter 8 Electronic industry production  There is a high growth of software and solutions related to the consumer Internet, software as a service (SAAS), open source, software-cum-services and telecommunications (both wireless and wire-line) products and related services. There is a great opportunity for venture capital industry to invest in this electronic production industry.  In 11th five year plan investment estimate in telecommunication sector are 65.1 US$bn.  The industry has seen the following trends in growth rate in April-June 2008 (estimated) over same period in 2007 : Transformers – 4.1%  Motors & Starters – -14.58%  Boilers – 35%

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Threats : 

Venture Capital Market in India Getting Overheated.

The Venture Capital market in India seems to be getting as hot as the country’s famous summers. However, this potential over-exuberance may lead to some stormy days ahead, based on sobering research compiled by global research and analytics services firm, Evalueserve. Evalueserve research shows an interesting phenomenon is beginning to emerge. Over 44 US-based Venture capital firms are now seeking to invest heavily in start-ups and early-stage companies in India. These firms have raised, or are in the process of raising, an average of US $100 million each. Indeed, if these 40-plus firms are successful in raising money, they would garner approximately $4.4 billion to be invested during the next 4 to 5 years. Taking Indian Purchasing Power Parity (PPP) into consideration, this would be equivalent to $22 billion worth of investment in the US. Since about $1.75 billion (or approximately 40% of $4.4 billion) has been already raised, even if only $2.2 billion is raised by December 2006, Evalueserve cautions that there will be a glut of Venture Capital money for early stage investments in India. This will be especially true if the VCs continue to invest only in currently favorite sectors such as IT, BPO, software and hardware products, telecom, and consumer Internet. Given that a typical start-up in India would require $9 million during the first three years (i.e., $3 million per year) and even assuming that the start-up survives for three years, investing $2.2 billion during 2007-2010 would imply investing in 150 to 180 start-ups every year during this period, which simply does not seem practical if the VCs continue to focus only on their current favorite sectors.  Unproductive workforce: A global survey by McKinsey & Company revealed that Indian business leaders are much more optimistic about the future than their international peers. So Indian employees are tardy in their job so it will effect reversly on the economic condition of the country. Because they are unproductive to the economy of the country.  Exit route barriers : Due to crashdown of market by 51% fromjanuary to novembor 2008. It create a problem for venture capital firms. Because Nobody is trying to come up with IPO and IPO is the exist route dor Venture Capital.  Taxes on emerging sector : As per Union Budget 2007 and its broad guidelines, Government proposed to limit pass-through status to venture capital funds (VCFs) making investment in nine areas. These nine areas are biotechnology, information technology, nanotechnology, seed research and development, R&D for pharma sectors, dairy industry, poultry industry and production of biofuels. Pass-through status means that the incomes earned by funds are taxable now.

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CHAPTER 14. NEED AND RELEVANCE OF VENTURE CAPITAL IN INDIA In USA given its highly progressive industrial environment and entrepreneurial culture it is normal for an entrepreneur or inventor of a new product /process to set up company to produce and market the product by obtaining finance through the sale of company shares to Venture Capital Funds which are readily willing to share the risk in return for future gains . In India risk financing of this type has yet to pick up in any significant way. There are large number of financial institutions which provide conventional finance to business firms. This sort of traditional financing primarily caters to projects based on proven established processes and technology with minimum investment risk .it is security oriented and asset based. It involves fixed and uniform payment of interest and principal and it follows fixed form of financing e.g. debt equity ratio, promoters contribution security margin etc. The existing financial institutions are conservative in their approach A number of people in India feel that financial institutions are not only conservative but they also have bias for foreign technology and they do not trust the abilities of entrepreneurs.

.

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CHAPTER 15. STAGES OF INVESTMENT There are 5 Investments stages widely used by the industry to invest. These stages are defined as under:

1) Seed Stage: Financing provided to new companies for use in product development and initial marketing constitutes Seed Stage. Eligible companies may be in the process of being setup or may have been in business for a short time or may not have sold their product commercially. This is the fmancing provided to companies when the Initial Concept of the business is being formed.

2) Startup : Financing Provided to new companies, for manufacturing and commercializing the developed products, represent Startup. The companies may be in their initial stages of development and finance may be extended for creation of new infrastructure and meeting the Working Capital Margin.

3) Other Early Stage: Financing provided to companies that have completed the commercial scale implementation and may require further funds to meet initial cash and further working capital is treated as Other Early Stage. The companies may have expended their capital and would require additional funds and may not yet be generating profit.

4) Later Stage: Financing Capital provided for the growth and expansion of established companies. Funds may be used to finance increase in production capacity, market or product development and/ or provide additional working capital. This would include product diversification, forward/backward integration, besides creation of additional capacity. Capital could be provided for companies that are breaking even or profitable or in turnaround situations.

5) Turnaround: Financing Capital provided for companies that are in operational or financial difficulties where the additional funds would help in Turnaround Situations. Earlier VC funds use to invest in Seed and Startup stages and very rarely in Turnaround Stages, but off late the trend is changing and Venture Capitalist funds are a part of every stage and are also actively participating in Turnaround Stages through buyouts and takeovers.

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CHAPTER 16. PROCESS OF VENTURE CAPITAL. The Following are the process of venture Capital:      

Deal Origination Screening Evaluation Deal Negotiation Post Investment Activity Exit Plan.

The above-mentioned steps are explained in details below;

1) Deal origination: Origination of a deal is the primary step in venture capital financing. It is not possible to make an investment without a deal therefore a stream of deal is necessary however the source of origination of such deals may be various. One of the most common sources of such origination is referral system. In referral system deals are referred to the venture capitalist by their business partners, parent organisations, friends etc.

2) Screening: Screening is the process by which the venture capitalist scrutinises all the projects in which he could invest. The projects are categorised under certain criterion such as market scope, technology or product, size of investment, geographical location, stage of financing etc. For the process of screening the entrepreneurs are asked to either provide a brief profile of their venture or invited for face-to-face discussion for seeking certain clarifications.

3) Evaluation: The proposal is evaluated after the screening and a detailed study is done. Some of the documents which are studied in details are projected profile, track record of the entrepreneur, future turnover, etc. The process of evaluation is a thorough process which not only evaluates the project capacity but also the capacity of the entrepreneurs to meet such claims. Certain qualities in the entrepreneur such as entrepreneurial skills, technical competence, manufacturing and marketing abilities and experience are put into consideration during evaluation. After putting into consideration all the factors, thorough risk management is done which is then followed by deal negotiation.

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4) Deal negotiation: After the venture capitalist finds the project beneficial he gets into deal negotiation. Deal negotiation is a process by which the terms and conditions of the deal are so formulated so as to make it mutually beneficial. The both the parties put forward their demands and a way in between is sought to settle the demands. Some of the factors which are negotiated are amount of investment, percentage of profit held by both the parties, rights of the venture capitalist and entrepreneur etc.

5) Post investment activity: Once the deal is finalised, the venture capitalist becomes a part of the venture and takes up certain rights and duties. The capitalist however does not take part in the day to day procedures of the firm; it only becomes involved during the situation of financial risk. The venture capitalists participate in the enterprise by a representation in the Board of Directors and ensure that the enterprise is acting as per the plan.

6) Exit plan: The last stage of venture capital investment is to make the exit plan based on the nature of investment, extent and type of financial stake etc. The exit plan is made to make minimal losses and maximum profits. The venture capitalist may exit through IPOs, acquisition by another company, purchase of the venture capitalists share by the promoter or an outsider.

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CHAPTER 17. ADVANTAGES AND DISADVANTAGES OF VENTURE CAPITAL FINANCING The advantages and disadvantages of venture capital financing are various. Some of the advantages and disadvantages are given below.  The autonomy and control of the founder is lost as the investor becomes a part owner.  The process is lengthy and complex as it involves a lot of risk.  The object and profit return capacity of the investment is uncertain.  The investments made based on long term goals thus the profits are returned late.  Although the investment is time taking and uncertain, the wealth and expertise it brings to the investor is huge.  The sum of equity finance that can be provided is huge.  The entrepreneur is at a safer position as the business does not run on the obligation to repay money as the investor is well aware of the uncertainty of the project.

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CHAPTER 18. SUGGESTIONS AND RECOMMENDATIONS 1. Venture investing is by definition risky. Increased risks due to the environment correspondingly decrease the likelihood of success. In nations with unpredictable regulations, corrupt governments and unstable currencies, the probability of success is decreased and such situations are beyond the control of both the entrepreneur and the venture capitalist. These environmental risks discourage the practice of venture capital. 2. The task of offering suggestions for improving the infrastructure of the venture capital industry, and its role in industrial development of the country, is rendered difficult on account of the infancy of the industry and the vast problems it faces. 3. From the experience of venture capital activities in the developed countries and discussion with the officials of venture capital funds and venture capital entrepreneurs and detailed survey of venture capital undertakings 4. An entrepreneurial tradition must be broad-based and less family based. This calls for imparting education and training in entrepreneurship. 5. Up-to-date information source for startup entrepreneurs in the form of source books web portals and one stop shops and widen dissemination of all relevant information should be created.

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CHAPTER 19. CONCLUSION The study provides that the maturity if the still nascent Indian Venture Capital market is imminent. Venture Capitalists in Indian have notice of newer avenues and regions to expand. VCs have moved beyond IT service but are cautious in exploring the right business model, for finding opportunities that generate better returns for their investors. In terms of impediments to expansion, few concerning factors to VCs include; unfavorable political and regulatory environment compared to other countries, difficulty in achieving successful exists and administrative delays in documentation and approval. In spite of few non attracting factors, Indian opportunities are no doubt promising which is evident by the large number of new entrants in past years as well in coming days. Nonetheless the market is challenging for successful investment. Therefore Venture capitalists responses are upbeat about the attractiveness of the India as a place to do the business.

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BIBLIOGRAPHY & WEBLIOGRAPHY BOOKS :    

Taneja Satish, “Venture Capital In India”, Galgotia Publishing Company, 2002, pg 1 – 44. Chary T Satyanarayana, “Venture Capital – Concepts & Applications”, Macmillian India Ltd, 2005, pg 19 – 22. Pandey I M, “Venture Capital – The Indian Experience”, Prentice Hall of India Pvt Ltd, 1999, pg 95 – 97. Thompson Arthur, Strickland A J, Gamble John E, Jain Arun K, “Crafting & Executing Strategy – The Quest for Competitive Advantage”, Tata McGraw Hill, 14th edition, 2006, pg 44 – 80.

MAGAZINE : 

Sharma Kapil, An Analysis of Venture Capital Industry in India, ICFAI Reader, April 2007, pg 37 – 43.

REPORT :    

Trends of Venture Capital in India, survey Report by Deloitte, 2007. Global Trends of Venture Capital, survey report by Deloitte, 2007. Acceleration – Global Venture Capital Insights Report by Ernst & Young, 2007 Economic survey 2007-08, Chepter-8

WEBSITE: 

www.ivca.org

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www.indiavca.org.

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www.vcindia.com

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www.ventureintelligence.in

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www.nvca.org

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www.economictimes.indiatimes.com

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www.100ventures.com



www.google.com.

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