Venture Capital.pdf

“VENTURE CAPITAL”

PROJECT SUBMITTED TO

UNIVERSITY OF MUMBAI

SUBMITTED BY

RITU MEHTA

UNDER THE GUIDANCE OF PROF. NILESH RUGHANI MITHIBAI COLLEGE. VILE PARLE(WEST).MUMBAI

OCTOBER 2018

Venture Capital

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PROJECT TITLE:-

“VENTURE CAPITAL”

Venture Capital

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DECLARATION

I, the undersigned, student of MITHIBAI COLLEGE of MASTERS OF COMMERCE(ADVANCED ACCOUNTANCY) Second year hereby declare that I have completed this Project of “Venture Capital” in the academic year 2018-21019.

The information submitted in this project is true and original to the best of my knowledge.

Ritu Mehta

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CERTIFICATE This is to certify that Miss Ritu Mehta has successfully completed the project work as partial fulfillments of the requirement for the Masters of Commerce (Advanced Accountancy) in the academic year 20182019.

Signature of Project Head Head

Mr. Nilesh Rughani

Date:

College Seal

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ACKNOWLEDGEMENT

One of the pleasant aspects of preparing a project report is the opportunity to thank to those who have contributed to make the project completion possible.

I am extremely thankful to Mr. Nilesh Rughani. Whose active interest in the project and insights helped us formulate, redefine and implement our approach towards the project.

We are also thankful to all those seen and unseen hands & heads, which have been of direct or indirect, help in the completion of this project.

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Table of contents Sr. No.

1.

Main page

1

Declaration

2

Certification

3

Acknowledgment

4

Introduction

8-39

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Concept Of Venture Capital

9

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Features Of Venture Capital

11

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Venture Capital Spectrum/Stages

14

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Venture Capital Investment Process

27

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Methods Of Venture Financing

31

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Difference Between Venture Capital And Other Funds(Private Equity)

33

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Players Venture Capital Industry

36

3.

4.

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Particular

Analysis I- Global Scenario Of Venture Capital Industry

40-57

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Overview

41

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Current Industry Trends

42

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Growth Of Venture Capital In Global

45

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2017 Global Venture Capital Industry Survey

47

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China, India And Israel Will Be Most Attractive Growth Of Venture Capital

50

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Primary Reasons For Venture Capital Investors Expanding Globally

51

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Investing Globally By Investing Locally

55

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Impediments To Global Investing

57

Analysis II- Venture Capital In India

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         

Venture Capital Industry Life Cycle In India

59

Growth Of Venture Capital In India

60

2017 Venture Capital Investment In India

65

Need For Growth Of Venture Capital In India

67

Regulatory And Legal Framework

69

Major Regulatory Framework For Venture Capital Industry

70

Key Success Factor For Venture Capital Industry In India

71

Industrial Attractiveness

74

Domestic Economic Factors

76

Problems Of Venture Capital Financing In India

80

5.

Summary

84-84

6.

Recommendations

85-92

7.

Conclusion

93

8.

Bibliography & Webliography

94

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INTRODUCTION

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 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 prerequisite 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 return usually through substantial capital gains in 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 risky investment condition with distinctive type of financing appropriate to each stage of development. Investors join the entrepreneurs as co-partners and support the project with finance and business skill to exploit the market opportunities. Venture capital is not a passive finance. It may be at any stage of business/ production cycle, that is startup, expansion or to improve a product or process, which are associated with both risk and reward. The Venture capital gains through appreciation in the value of such investment when the new technology Venture Capital

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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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 FEATURES OF VENTURE CAPITAL  High Risk  High Tech  Equity Participation & Capital Gains  Participation In Management  Length Of Investment  Illiquid Investment

 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. Ventures capital assumes four type of risks, these are: o Management risk

-Inability of management teams to work together.

o Market risk

-Product may fail in the market.

o Product risk

-Product may not be commercially viable.

o Operation risk

-Operation may not be cost effective resulting in

increased cost decreased gross margin.  High Tech As opportunities in the low technology area tend to be few of lower order, and hitech projects generally offer higher returns than projects in more traditional area, 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 Venture Capital

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existing business or diversification to a high risk area. Thus technology financing had never been the primary objective but incidental to venture capital.  Equity Participation & Capital Gains Investments are generally in equity and quasi equity participation through direct purchase of share, 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.  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 w

orse, in the major decision affecting the direction of company. This is a

unique philosophy of “hand on management” where Venture capitalist acts as complementary to the entrepreneurs. Based upon the experience other companies, a venture capitalist advice the promoters on project planning, monitoring, financial management, including working capital and public issue. Venture capital investor cannot interfere in day today management of the enterprise but keeps a close contact with the promoters or entrepreneurs to protect his investment.

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 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.  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 gain 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 too locked for seven to ten years. Venture capitalist understands this illiquidity and factors this in his investment decision.

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 THE VENTURE CAPITAL SPECTRUM/STAGES 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 fund or family funds. At this stage the fund 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 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 ongoing assistance to developing business.

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Introduction stage Growth Stage Later Stage

Seed Capital

Early Stage

Second Stage

Startup Capital

Venture Capital Spectrum/Stage 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 Venture Capital

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 Replacement Finance  Management Buy Out and Buy Ins  Turnarounds  Mezzanine/Bridge Finance The table below shows risk perception and time orientation for different stages of venture capital financing. Financing Stage

Period (funds

Risk

Activity to be financed

locked in years) perception Early stage finance

7-10

Extreme

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

Start up

5-9

Very high

Initializing operations or developing prototypes

First stage

3-7

High

Start commercial production and marketing

Second stage

Later stage finance

3-5

1-3

Sufficiently

Expand market & growing

high

working capital need

Medium

Market expansion, acquisition & product development for profit making company

Buy out-in

1-3

Medium

Acquisition financing

Turnaround

1-3

Medium to high Turning around a sick company

Mezzanine

1-3

Low

Facilitating public issue

Venture Capital- Financing Stages Venture Capital

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 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: o Absence of ready product market o Absence of complete management team o Product/process still in R & D stage o Initial period/licensing stage of technology transfer Broadly speaking seed capital investment may take 7 to 10 year 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 taem0 so often sought by venture capitalists. Venture Capital

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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 capital investments. This is because the small investments are seen to be cost inefficient in terms of time required to analyze structure manage them. b) The time horizon to realization for most seed capital investment 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 I extended. These types of obsolescence are particularly likely to occur with high technology investments particularly in the fields related to Information Technology.

 Start Up Capital It is stage second 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.” Venture Capital

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The characteristics of start-up capital are:a) 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. b) 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. c) 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 skill 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 to 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

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Despite potential for secular returns most venture firms avoid investing in startups. 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.

 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. Venture Capital

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

 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 Venture Capital

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positive cash flows sufficient to take care of its growing needs. Second stage finance, the second trench of Early Stage 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 breakeven 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 Venture Capital

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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 packages as an option, subject to certain management performance targets.

 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 capitalists 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 Venture Capital

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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 profit 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 improved or new products, developing new

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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 share from the entrepreneurs and their associates enabling them to reduce their shareholding in unlisted companies. They also buy 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 resent 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 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

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gradual shift away from start up and early finance towards 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 for 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. 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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 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 model of venture capital investment activity 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

Investors Screening

VC MGT Fund Selection Investment process Structuring Prospective Investee  Deal Origination: Venture Capital

Monitoring

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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 organizations, 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 basic 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.  Deal Structuring: In this process, the venture capitalist and the venture company negotiate the terms of the deals, that are the amount form and price of the investment. This Venture Capital

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process is termed as deal structuring. The agreement also include the venture capitalists right to control the venture company and to change its management if needed, buyback arrangement specify the entrepreneurs equity share and the objectives share and the objectives to be achieved.  Post Investment Activities: Once the deal has been structured and agreement finalized, 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 capitalists 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 exist 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 capitalists share by the investee company  Purchase of venture capitalists share by a third party 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 Venture Capital

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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 entrepreneurs business is perceived to be an unattractive investment proposition by investors. Also, the emphasis by the Indian investors on shortterm profits and dividends may tend to make the market price unattractive. 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 share 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.

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 METHODS OF VENTURE FINANCING Venture Capital is typically available in three forms in India, they are:  Equity: All VCFs in India provide equity but generally their contribution does not exceed 49% of the total equity capital. Thus, the effective control and majority ownership of the firm remains with the entrepreneur. They buy shares of an enterprise with an intention to ultimately sell them off to make capital gains.  Conditional Loan: it is repayable in the form of a royalty after the venture is able to generate sales. No interest is paid on such loans. In India, VCFs change royalty ranging between 2% to 15%; actual rate depends on other factors of the venture such as gestation period, cost flow patterns, riskiness and other factors of the enterprise.  Income Note: it is a hybrid security which combines the features of both conventional loan and conditional loan. The entrepreneur has to pay both interest and royalty on sales, but at substantially low rates.  Participating Debenture: such security carries charges in 3 phases. In the start up phase, before the venture attains operations to a minimum level, no interest is charged, after this, low rate of interest is charged, up to a particular level of operation. Once the venture is commercial, a high rate of interest is required to be paid.  Quasi Equity: quasi equity instruments are converted into equity at a later date. Convertible instruments are normally converted into equity at the book value or at certain multiple of EPS, i.e. at a premium to par value at a later date. The premium automatically rewards the promoter for their initiative and hand work. Since it is performance related, it motivates the promoter to work harder so as to minimize dilution of their control on the company. The different quasi equity instruments are follows: Venture Capital

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o Cumulative convertible preference shares. o Partially convertible debentures. o Fully convertible debentures.  Other Financing methods: a few venture capitalists, particularly in the private sector, have started introducing innovative financial securities like participating debentures, introduced by TCFC is an example.

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 DIFFERENCE BETWEEN VENTURE CAPITAL AND OTHER FUNDS (PRIVATE EQUITY)  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 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 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 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.  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. Venture Capital

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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 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-normal returns and lacks any flexibility in its approach. Risk capital is also provided to established companies for adapting for 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. Seed Capital Scheme

Venture Capital Scheme

Basic

Income or aid

Commercial viability

Beneficiaries

Very small entrepreneurs

Medium and large entrepreneurs are also covered

Size of assistance

Rs. 15 lac(Max)

Up to 40 percent of promoters’ equity

Appraisal process

Normal

Skilled and Specialized

Estimates returns

20 percent

30 percent plus

Flexibility

Nil

Highly flexible

Venture Capital

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Value addition

Nil

Multiple ways

Exit option

Sell back to promoters

Several, including public offer

Funding sources

Owner funds

Outside contribution allowed

Syndication

Not done

Possible

Tax concession

Nil

Exempted

Success rate

Not good

Very satisfactory

Difference between Seed Capital Scheme and Venture Capital Scheme

 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.

Venture Capital

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

PLAYERS IN VENTURE CAPITAL INDUSTRY

Idea

Business concept Angle

Expansion

Established the company

Break Even-point

Investing In technology

Small Venture Fund

Troubleshooting

IPO

Corporate investors

Turnaround

Medium venture funds

Big Venture Funds + Financial Funds Players in Venture Capital Industry

There are following group of players:  Angels and angel clubs  Venture capital funds o Small o Medium o Large  Corporate Venture funds  Financial service venture groups

Venture Capital

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 Angels and angel clubs Angels are wealthy individuals who invest directly into companies. They can form angel clubs to coordinate and bundle their activities. Beside the money, angels often provide their personal knowledge, experience and contacts to support their investees. With average deals sizes from USD100, 000 to USD 500,000 they finance companies in their early stages. Examples for angel clubs are –Media Club, Dinner Club, and Angel’s forum  Small and Upstart Capital Funds These are smaller Venture Capital Companies that mostly provide seed and startup capital. The so called “Boutique firms” are often specialized 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 small and medium Venture capital funds strong competition will clear the market place. There will be mergers and acquisitions leading to a concentration of capital. Funds specialized in different business areas will form strategic partnerships. Only the more successful funds will be able to attract new money. Examples are: o Artemis Comaford o Abbell Venture Fund o Acacia Venture Partners  Medium Venture Funds The medium venture funds finance all stages after seed 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 Venture Capital

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 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: o AIG American International Group o Cap Vest man o 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-winsituation 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 technology 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 Venture Capital

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funds have a rich resource of expertise and contents 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: o Oracle o Adobe o Dell o Kyocera 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 a Venture Capital fund. However, the success of such products will depend on the overall climate and expectations in the economy. As long as the sown turn continues without any sign of recovery customers might prefer less risky alternatives.

Venture Capital

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GLOBAL SCENARIO OF VENTURE CAPITAL INDUSTRY

Venture Capital

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

OVERVIEW

The global economic downturn has many venture capitalists altering strategies, including reducing investment levels in the short term, according to the 2017 Global Venture Capital Survey by Deloitte Touche Tohmatsu and the National Venture Capital Association. Fifty-one percent of the survey respondents are decreasing the number of companies in which they plan to invest and just 13 percent are increasing this activity. The 2017 Global Venture Capital survey, which measured the opinions of more than 750 venture capitalists worldwide, also shines headlights into the postrecession landscape. The cleantech sector is poised to become the leading investment category and the globalization of the venture capital industry will intensify the latter posing significant competitive questions for the United States and opportunities for emerging markets such as China. “While the recession has slowed the pace of venture investing in the short term, it may very well have expedited the global evolution of the industry in the long run,” said Mark Jensen, national managing partner of Deloitte LLP’s Venture Capital Services. “In recent years, many entrepreneurs who have been educated in the United States have returned home to start companies in their home countries. The playing field continues to level out in terms of new innovation hot spots, broader access to capital and growing regional ecosystems that foster risk taking and capital formation.”

Venture Capital

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 CURRENT INDUSTRY TRENDS  Round Class Distribution The distribution of financing rounds by round class in mature markets is typically 30-40% in the early stage rounds, 20-25% in second round, and 35-40% in later rounds. In emerging market like China, the round distribution is very different as 68% in early stage and 25% in second round. In mature countries, the investments are made at early start up or product development phase.  Industry Shifts It is perhaps no surprise that contraction is mostly concentrated in information technology and the business, consumer and retail industries, give the huge number of companies financed in the technology and Internet boom of 19992000, and the subsequent down turn. The healthcare pool, driven by investment in biopharmaceuticals and medical devices, has actually grown to some degree in the different geographies. In United States, the healthcare pool has grown consistently over the last several years, both in terms of number of companies and cumulative dollars invested. Key observations on the pool of private companies by industry:o The information and technology pool has declined by just 6% since 2012; particularly due to increasing Interest in WEB 2.0 innovations. o Since 2013, the cumulative investment has declined in similar amounts. o The business, consumer and retail category has faced the steepest declines across the board. In US the number had fallen 54% since 2012 and 54% in Europe since 2013. In Israel; it dropped 67% since 2014.

Venture Capital

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o The number of healthcare companies has grown in U.S. since 2012 by 27% and the capital risen 30% in last five years. Capital investment to the pool of healthcare of companies dropped by 95 in Europe since 2013 and 9% in Israel since 2014. o Clean technology is a small but increasing element of the pool. There were 262 clean technology companies with a cumulative invested venture capital of U.S. $38 billion in 2017.  Mega Trends Several global mega trends will likely have an impact on venture capital in the next decade:o Beyond the BRICs: - A new wave of fast growing economies is joining the global growth leaders like Brazil, China, India And Russia. The beginning of venture capital activity has been seen in others countries such as Indonesia, Korea, Turkey and Vietnam. o The new multinationals: - A new breed of global company is emerging from developing countries and redefining industries through low-cost advantage, modern infrastructure, and vast customer databases in their home countries. These companies are potential acquirers of developed market companies at all stages of growth. o Globalization of capital: - Changes in economic and financial landscape are creating significant regional shifts in IPO activity. These changes have also sparked global consolidation alliances among stock exchanges. o Transformation of the CFO’s role and function: - With the globalization and increasingly complex regulatory environment, CFOs have a wider range of responsibilities and finance function has been transformed to face broader mandates. Venture Capital

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o Clean Technology: - Clean technology is poised to become the first break through sector of 21st century. Encompassing energy, air and water treatment, industrial efficiency improvements, new material and waste management etc. are playing very vital role globally because of which VC investors are enjoying rewards.

Venture Capital

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 GROWTH OF VENTURE CAPITAL IN GLOBAL

Growth of venture capital in global Clean technology venture investments in North America, Europe, China and India totaled US$5.6 billion in 557 deals. However, as these figures are preliminary, the firms expect the final figures could be up by as much as 10%. "Utilities continue to bring their capital and access to credit to the cleantech sector and are playing a key role in getting more projects off the ground. In 2017 we saw a surge in utility Power Purchase Agreement (PPA) announcements with Solar Thermal and Solar PV accounting for 80% of the total PPAs, while Wind saw increased capacity announcements in the second half of the year aided by the extension of the production tax credit," said Scott Smith, U.S. Clean Tech leader for Deloitte. "Additional project financing came from large corporations whose Venture Capital

Page No: 45

direct investments in cleantech increased by 14% in the second half of 2017 compared to the same period in 2015. Leading global utilities and non-utilities are likely to continue to see cleantech projects as an attractive investment from an economical and regulatory perspective." Venture investment was down 33% in 2017, compared to US$8.5 billion in 2016, yet investment in cleantech declined less than other sectors, despite the economic recession. The largest deal in all sectors was Solyndra’s US$198 million to expand its CIGS thin film production. The company has since filed for an IPO.

Venture Capital

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 2017 GLOBAL VENTURE CAPITAL INDUSTRY SURVEY The 2017 Global Venture Capital Survey was sponsored by the Global Deloitte Telecom, Media & Technology (DTT TMT) industry group, in conjunction with the following venture capital associations throughout the world:  Brazilian Association of Private Equity & Venture Capital (ABVCAP)  British Private Equity & Venture Capital Association (BVCA)  Canada’s Venture Capital & Private Equity Association (CVCA)  European Private Equity & Venture Capital Association (EVCA)  Emerging Markets Private Equity Association (EMPEA)  Indian Venture Capital Association (IVCA)  Israel Venture Association (IVA)  Latin American Venture Capital Association (LAVCA)  Malaysian Venture Capital and Private Equity Association (MVCA)  National Venture Capital Association (NVCA)  Singapore Venture Capital & Private Equity Association (SVCA)  Taiwan Private Equity & Venture Capital Association (TVCA)  Zero2IPO The survey conducted with venture capitalists (VCs) in the Americas, Asia pacific (AP), Europe and Israel. There were 725 responses from general partners of venture capital firm with assets under management ranging from less than $100 million to greater than $1 billion. Multiple responses from the same firm were allowed, as the survey was a general measurement of the state of global investing from all general partners, not attitudes of specific firm. If respondents did not answer a question, the count for the question was adjusted accordingly. Venture Capital

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The highest number of respondents—35 percent—claimed assets under management totaling between $100 million and $499 million. Another 34 percent had managed assets that were less than $100 million, 17 percent had managed assets greater than $1 billion, and 14 percent had between $500 million and $1 billion in assets under management.

40%

Assets under Management

35% 35%

30% 25% 20%

18%

17%

16%

14%

15% 10% 5% 0%

$1-$49 million

$50-$99 million $100-$499 million $500-$1 billion

>$1 billion

Geographically, the breakdown of responses continues to be fairly representative of both the size and location of firms in the venture capital industry around the world. Forty-four percent of the respondents were from the United States, 21 percent from European countries (excluding the UK), 16 percent from Asia Pacific countries, 10 percent from the Americas (excluding the U.S.), 7 percent from the UK, and 2 percent Location ofeondents 7%

16%

from Israel. AP Europe

Israel 21% 44%

The Americas U.S. UK

10%

Venture Capital

2%

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Firm type 28%

Venture Capitl Private Equity and Venture Capital 72%

Seventy-two percent of the respondents had a primary investment focus on venture capital while 28 percent were primarily focused on private equity and venture capital. And, this year, 52 percent of venture capitalists noted that they are investing outside of their home country. Given the severity of the current global recession, this year's survey focused on issues surrounding its impact on venture capitalists. The survey questions asked how the global recession is affecting strategy; how future investments are being planned, both by sector and region; what the anticipated size of the next fund will be and who VCs think their limited partners will be. We also wanted to know what countries they believe have the most to gain and lose in this new economy, as well as what they feel the role of government should be in fostering innovation. This year's report looks broadly at the results in a global context, but an appendix is included that breaks out survey responses by geographic regions—the U.S., the Americas (excluding the U.S.) Europe (excluding the UK), UK, AP and Israel. If you are interested in responses of investors in a specific region, we encourage you to check the appendix for those charts.

Venture Capital

Page No: 49

 CHINA, INDIA AND ISRAEL WILL BE MOST ATTRACTIVE GROWTH OF VENTURE CAPITAL While overall investment levels are expected to be lower, the KPMG survey found that 2017 funding will be targeted toward key geographic regions and industry segments. In addition, the KPMG survey found that venture investors do not see the IPO market improving for at least a year, and only a small portion of portfolios are poised for exit in 2017. While overall investment levels are expected to be lower, the KPMG survey found that 2017 funding will be targeted toward key geographic regions and industry segments. Respondents indicated that China, India and Israel will be the most attractive regions for venture capital, while cleantech, life sciences, mobile and digital entertainment will remain the hot industries. ‘While overall funding will decrease, venture capitalists will continue to invest in those areas they feel will provide the best return on investment,’ said Brian Hughes, KPMG partner based in Philadelphia and co-leader of its venture capital practice. ‘Not surprisingly, they continue to be bullish on emerging markets and industry sectors, such as cleantech, that project near term growth.’ In polling 270 venture capitalists, corporate buyers and entrepreneurs, KPMG found that 73 per cent of respondents expect their firm’s revenue to stay the same or increase in 2017. In fact, 52 per cent expect revenue growth to increase, including 37 percent who predict revenue growth in excess of 10 percent. Only 26 per cent see declining revenues in the year ahead. The outlook on sustained revenue growth is the silver lining to a tough year that has seen the fewest venture capital portfolio companies go public since 1977. In fact, the KPMG survey found that venture capitalists expect the negative IPO Venture Capital

Page No: 50

trend to continue in 2017, with 88 per cent of respondents expecting IPO activity to stay the same or to decline further. Additionally, 82 per cent of venture capitalists surveyed indicated that they do not anticipate recovery in the IPO market for at least 12 months. The outlook on IPO activity has clearly impacted venture capital exit opportunities, and 80 per cent of respondents said less than 20 per cent of their portfolio is poised for exit in 2017. The decline in IPO opportunities coupled with the expected, continued regression in valuations of venture-backed companies, may influence the venture capital community to see acquisitions as liquidity and exit opportunities. When asked about valuation of venture backed companies, 84 per cent of respondents predicted decreasing valuations, while only six percent see an increase. With valuations declining, 58 percent of respondents see M&A increasing next year. ‘There is no question that economic and market conditions have made the current environment difficult for venture capitalists,’ said Packy Kelly, KPMG partner based in Silicon Valley and co-leader of its venture capital practice. ‘These conditions may lead investment firms to focus on the health of existing portfolio companies and slow the pace of investment. But the commercialization of products in the clean tech sector probably contributes to a large degree to the expected growth in revenue of emerging companies. According to the KPMG survey, the outlook on investment levels and deal volume for 2017 mirrors the views on IPO activity. In fact, 74 per cent of respondents expect overall venture investment to decrease and 82 per cent see a decline in deal volume. While it is uncertain when venture investment will trend back up, 50 per cent of venture capitalists surveyed do not expect that up-tick to occur until the second half of 2017, while 32 per cent predict it will not happen until 2018 or beyond. Only 18 per cent predict the turnaround in venture funding will start in the first two quarters of 2017. Venture Capital

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While overall investment levels are expected to be lower, the KPMG survey found that 2017 funding will be targeted toward key geographic regions and industry segments. Respondents indicated that China, India and Israel will be the most attractive regions for venture capital, while clean tech, life sciences, mobile and digital entertainment will remain the hot industries. ‘While overall funding will decrease, venture capitalists will continue to invest in those areas they feel will provide the best return on investment,’ said Brian Hughes, KPMG partner based in Philadelphia and co-leader of its venture capital practice. ‘Not surprisingly, they continue to be bullish on emerging markets and industry sectors, such as cleantech, that project near term growth.” Another indication of the current market conditions’ negative impact on the venture community can be seen in attitudes toward start-up investing. Ninetyseven per cent of venture capitalists surveyed said the credit crisis will have an adverse effect on the availability of venture financing to start-up companies, and 73 per cent said it will be harder to get debt or lease financing.

Venture Capital

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 PRIMARY REASONS FOR VENTURE CAPITAL INVESTORS EXPANDING GLOBALLY Among the primary reasons VCs around the world are interested in investing globally is to take advantage of higher quality deal flow- particularly in the United States, China, parts of Europe, and Israel. This is especially true for nonU.S. firms. A second reason is the emergence of an entrepreneurial environment, again and notably in China, but also India. Among U.S. firms, this latter rationale is the most significant motivation for investing globally. Other motivators include access to quality entrepreneurs, diversification of industry and geographic risk and access to foreign markets.

40 34

35 30

US

non US

28

25 20

global

31

22 19 16

15

12 12 12

17 14

14 11

16 12 9

10

5 6

5 5

2

3

0

Primary reasons why investors expanding globally venture Venture Capital

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Above chart reveals that 19% U.S. respondents are expand globally for generating high quality deal flow. And 31% believe that expand globally for getting benefit of emergence of entrepreneurial environment. Whit 17% respondents of non U.S are expanding globally for diversification of industry and geographic risk. All respondents are least concerned about low cost of locations.

Venture Capital

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

INVESTING GLOBALLY BY INVESTING LOCALLY

One way to build a comfort zone for global investing and to take advantage of opportunities abroad is to invest locally in companies with operations outside their home country, as opposed to investing directly in foreign countries. This year, there was a significant increase in the number of respondents who indicated that a sizeable number of their portfolio companies have a considerable amount of operations outside the country in which they are headquartered. A significant number, 88 percent of U.S. respondents and 82 percent of non-U.S. respondents, indicated that at least some portion of their portfolio has significant operations outside of the country of headquarters. Again, moderation is evident as more than half of those indicated that less than 25 percent of their portfolio had significant foreign operations. Nonetheless, these numbers have increased significantly from prior years and reflect an increased trend in this method of investment. 35

32 32 32 30

30 25 25

21 20

18

17

15

15

18 15

12

12 9

10

5 5

2

3

2

0 0%

1-10%

11-25% Global

26-50% U.S.

51-75%

76-100%

Non- U.S.

Percentage of venture capital firms portfolio companies that give significant operation outside the country Globally and among U.S. respondents, China has become the primary choice for Venture Capital

Page No: 55

relocating manufacturing operations, while India is the primary choice For R&D operations. Engineering operations tend to land in India as well, but China is also a popular location. For back office activities, again the choice is India. However, for non-U.S. respondents, the United States is the primary choice for R&D and engineering while European respondents preferred Central and Eastern Europe for manufacturing R&D and Engineering. One reason why this approach is taking off is that investors are concerned about intellectual property and liquidity events and in general they feel a need to be closer to top management. This also reflects a new reality from day one companies that reflect a larger global entrepreneurial sector. This strategy allows the portfolio companies (and investors) to take advantage of cost saving and access o talent in foreign markets while protecting intellectual property. There are however concerns that such a trend could result in the U.S. losing its R&D edge.

Venture Capital

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 IMPEDIMENTS TO GLOBAL INVESTING For all the benefits of overseas investing, VC firms encounter a variety of risks and challenges abroad. Both U.S. firms and non-U.S. firms perceive the U.S as the country where the cost of complying with regulation is too high. In fact, the percentage of nonU.S. respondents who indicated this as a concern leaped from 28% last year to 41% this year. Globally, 4% more, 44% saw this issue as a concern. 46% of U.S. respondents believe the cost of complying with corporate governance is too high.

Top markets where the cost of complying with corporate governance regulation too high From the above chart we can see that most of the respondents believe that U.S. has high cost of complying with Corporate Governance regulation and China, India, Israel and Canada cost of complying with corporate governance regulation too high.

Venture Capital

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VENTURE CAPITAL IN INDIA

Venture Capital

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 VENTURE CAPITAL INDUSTRY LIFE CYCLE IN INDIA From the industry life cycle we can know in which stage venture capital are standing. On the basis of this management can make future strategies of their business.

Introduction

2000

2001

2002

Growth

2003

2004

2005

2006

2007

2008

2009

The growth of venture capital in India has four separate phases:  Phase I- formation of TDICI in 80’s and regional funds as GVFL & APIDC in early 90s. The first phase was the initial phase in which the concept of venture capital got wider acceptance. The first period did not really experience any substantial growth of venture capitals. The 1980’s were marked by an increasing disillusionment with the trajectory of the economic system and a belief that liberalization was needed. The liberalization process started in 1985 in a limited way. The concept of venture capital received official recognition in 1988 with the announcement of the venture capital guidelines.

Venture Capital

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During 1988 to 1992 about 9 venture capital institutions came up in India. Though the venture capital funds should operate as open entities, Government of India controlled them rigidly. One of the major forces that induced Government of India to start venture funding was the World Bank. The initial funding has been provided by World Bank. The most important feature of the 1988 rules was that venture capital funds received the benefit of a relatively low capital gains tax rate which was lower than the corporate rate. The 1988 guidelines stipulated venture capital funding firms should meet the following criteria: o Technology involved should be new, relatively untried, very closely held, in the process of being taken from pilot to commercial stage or incorporate some significant improvement over the existing ones in India. o Promoters/entrepreneurs using the technology should be relatively new, professionally or technically qualified, with inadequate resources to finance the project. Between 1988 and 1994 about 11venture capital funds became operational either through reorganizing the business or through new entities.  Phase II- Entry of Foreign Venture Capital Funds (VCF) between 19951999 The second phase of venture capital growth attracted many foreign institutional investors. During this period overseas and private domestic venture capitalists began investing in VCF. The new regulations in 1996 helped in this. Though the changes proposed in 1996 had a salutary effect, the development of venture capital continued to be inhibited because of the regulatory regime and restricted the FDI environment. To facilitate the growth of venture funds, SEBI appointed a committee to recommend the changes needed in the venture capital funding context. This coincided with the IT boom as well as the success of Silicon Valley Venture Capital

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startups. In other words, venture capital growth and IT growth co-evolved in India.  Phase III-(2000 onwards)- Venture capital becomes risk averse and activity declines: Not surprisingly, the investing in India came “crashing down” when NASDAQ lost 60% of its value during the second quarter of 2000 and public markets (including those in India) also declined substantially. Consequently, during 20012003, the venture capitals started investing less money and in money and in more mature companies in an effort to minimize the risks. This decline broadly continued until 2003.  Phase IV- (2004 onward)- Global venture capitals firms actively investing in India Since India’s economy has been growing at 7%-8% a year, and since some sectors, including the services sector and the high end manufacturing sector, have been growing at 12%-14% a year investors renewed their interest and started investing again in 2004 the number of deals and the total dollars invested in India has been increasing substantially.

Venture Capital

Page No: 61

 GROWTH OF VENTURE CAPITAL IN INDIA

Growth of Venture Capital in India The venture capital is growing 43% CAGR. However, in spite of the venture capital scenario improving, several specific Venture Capital funds are setting up shop in India, with the year 2015 having been a landmark year for venture capital in India. The no of deals are increasing year by year. The no of deal in 2013 only 56 and now in 2013 it touch the 387 deals. The introduction stage of venture capital industry in India is completed in 2013 after that growing stage of India venture capital industry is starrted. Tere are 160 venture capital firms/funds in India. In 2014 it is only but in 2015 the number of venture capital firms are 146. The reason is good position of capital market. But in 2016 no of venture capital firms increase by only 14 the reason is crashdown of capital market by 51%. The no of venture capital funds are increasing year by year 2008

2009

2010

2011

2012

2013

2014

2015

2016

81

77

78

81

86

89

105

146

160

Venture Capital

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Venture capital growth and industrial clustering have a strong positive correlation. Foreign diect investment, starting of R&D centres, availability of venture capital and growth of entreneurial firms are getting concentrated into five clusters. The cost of mnitoring and the cost of skill acquisition are lower in clusters, especially for innovation. Entry costs are also lower in clusters. Cerating enetrepreneursship and stimulating innovation in clusters have to become a major concern of public policy makers. This is essential becouse only when the cultural context is conductive for risk management venture capital will take-of. Clusters support innovation and facilitates risk bearing. Venture capital prefer clusters because the information costs are lower. Policies for promoting dispersion of industries are becoming redundant after the economic liberalization. The venture capital firm invest their money in most developning sectors like health care, IT-ITes, Telecom, Bio-technology, Media & Entretainment, shipping & ligistics etc.

Venture Capital

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Total investment 1284

988

685 1101 3979 1628

478

1638

615 1839

IT & ITES

BFSI

Healtcare & Lifesciences

Media & Entertinment

Telecom

Manufacturing

Eng & constrution

Energy

Shipping & Logistics

Others

Total sector wise venture capital investment Now venture capital is nascent stage in India. Now due to growth of sector, the venture capital industry is also growing. The top most players in the industries are ICICI venture capital fund, IT&FS venture capital fund, Canbank.

Venture Capital

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 2017 VENTURE CAPITAL INVESTMENT IN INDIA Venture Capital firms invested $475 million in 92 deals during 2017, down from the $836 million invested across 153 deals in the previous year, according to a study by Venture Intelligence and Global-India Venture Capital Association. Venture capital firms, however, began to increase the pace of their investments in Indian companies in the October-December quarter, making 42 investments worth $265 million, compared to 23 investments worth $102 million in the comparative period a year earlier, the study said. "The strong recovery in investment activity in the last quarter of 2017, as well the rising interest among global investors towards emerging markets like India, is quite encouraging for the growth of the sector," Sudhir Sethi, director of the Global-India Venture Capital Association, said in a statement. "During 2018, we expect significant follow-on investments into companies that raised Series a round (first round) in the past two to three years as well as a rise in exit activity as the global economic recovery gathers pace," he added. The information technology and IT-enabled services industry retained its status as the favorite among venture capital investors during 2017, but the industry's share declined to about 43% of total investments from about 55% in 2016. Other industries that attracted significant investor attention during the period included financial services, healthcare and life sciences, and alternative energy. Within IT and IT-enabled services, online services companies retained their status as the favorite sector, accounting for about 39% of the investments during 2017.

Venture Capital

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Investment in Area 10% 15% 50%

25%

South India (47% in the total value) North India (12% in the total value)

Western India (29% in the total value) East India (12% in the total value)

Companies based in south India accounted for 50% of all venture capital investments (47% by value) during 2017. Their peers in western India accounted for 25% of the pie (29% by value) while companies in north India accounted for 15% of the investments (12% by value). Among cities, companies headquartered in Bangalore and Mumbai were the favorites among venture capital investors during 2017, with the former attracting 29 investments and the latter 15. The Delhi National Capital Region accounted for 11 investments, followed by Hyderabad with 9 investments.

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 NEED FOR GROWTH OF VENTURE CAPITAL IN INDIA People in developing countries are poor in part because they have far less capital than people in industrial countries. Because of this shortage, workers have little in the way of specialized machinery and equipment, and firms lack money to obtain more equipment. As a result, productivity of workers in developing countries is low compared with that of workers in industrial countries. Financialresource flows from industrial to developing countries are an obvious means to overcome this inequality. But financial resources are not enough. Some developing countries have natural resources such as oil or minerals that, when sold on world markets, have provided large amounts of money. In many cases the money has failed to stimulate sustained economic growth or increased productivity and income for the average person. In part, failure to use capital productively results from the way these resources flow. In some countries the government gets the money, which it uses to perpetuate itself through military spending or through increased consumption spending. In other cases, resources flow to wealthy individuals who use them to maintain high levels of conspicuous consumption. India is still developing country. In India, a revolution is ushering in a new economy, wherein entrepreneurs mind set is taking a shift from risk adverse business to investment in new ideas which involve high risk. The conventional industrial finance in India is not of much help to these new emerging enterprises. Therefore there is a need of financing mechanism that will fit with the requirement of entrepreneurs and thus it needs venture capital industry to grow in India.

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Few reasons for which active Venture Capital Industry is important for India include:  Innovation: Needs risk capital in a largely regulated, conservation, legacy financial system  Job Creation: large pool of skilled graduates in the first and second tier cities 

Patient capital: Not flighty, unlike FIIs

 Creating new Industry Clusters: Media, Retail, Call Centers and back office processing, trickling down to organized effort of support services like Office services, Catering, Transportation.

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 REGULATORY AND LEGAL FRAMEWORK At present, the Venture Capital activity in India comes under the purview of different sets of regulations namely:  The SEBI (Venture Capital Funds) Regulation, 1996[Regulations] lays down the overall regulatory framework for registration and operations of venture capital funds in India.  The Indian Trust Act, 1882 or the company Act, 1956 depending on whether the fund is set up as a trust or a company.  The foreign investment Promotion Board (FIPB) and the RBI in case of an offshore fund. These funds have to secure the permission of the FIPB while setting up in India and need a clearance from the RBI for any repatriation of income.  The Central Board of Direct Taxation (CBDT) governs the issues pertaining to income tax on the proceed from VC funding activity. The long term capital gain tax is at around 10% in India and the relevant clauses to VC may be found in Section 10(sub section 23)  Overseas venture capital investments are subject to the Government of India Guidelines for Overseas Venture Capital Investment in India dated September 20, 1995.  For tax exemptions purposes venture capital funds also needs to comply with the Income Tax Rules made under Section 10(23FA) of the Income Tax Act.

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 MAJOR REGULATORY FRAMEWORKS FOR VENTURE CAPITAL INDUSTRY VC & FVCI

SEBI

RBI

 SEBI (VCF) Reg. 1996  FEMA, 1999  SEBI(FVCI) Reg.2000  Transfer or issue of security by a  SCR Act.1956 person resident  SEBI(SAST) Reg.1997 outside India  SEBI(DIP)Guidelines,2000 regulation 2000  SEBI Act,1992

FIPB

 FDI policy  Investment approvals  Press Notes

TAX

 IT Act, 1961  DTAA  Singapore  Mauritius  Others

Major Regulatory frameworks for venture capital industry In addition to the above, offshore funds also require FIPB/RBI approval for investment in domestic funds as well as in Venture Capital Undertakings (VCU). Domestic funds with offshore contributions also require RBI approval for the pricing of securities to be purchased in VCU likewise, at the time of disinvestment, RBI approval is required for the pricing of the securities.

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 KEY SUCCESS FACTOR FOR VENTURE CAPITAL INDUSTRY IN INDIA Knowledge becomes the key factor for a competitive advantage for company. Venture Capital firms need more expert knowledge in various fields. The various key success factors for venture capital industry are as follow:  Knowledge about Govt. 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 judgment 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 companies 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.

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 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.  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.

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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 e-start-up because they perceive it as too risky to follow today's type.

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 INDUSTRIAL ATTRACTIVENESS  Market growth rate CAGR OF VC

VALUE OF DEALS

16000

14234

14000 12000 10000

43%

8000 6000 4000

1160

2000 0

2000

2007

CAGR of venture capital industry From the above graph we can say that Venture capital industry is growing at the CAGR of 43%. And the value of deals in 2009 was 1160 which increased to 14234 in the year of 2016. This shows substantial increase in the number of deals. This attracts the new entrepreneur to enter in the industry.  Intensity of competition:

Number of venture capital firms in India Here the number of venture capital firms is increasing year by year. In 2011 it is only 77 now it has been increased to 160 in the year of 2016. The reason behind that is there is over all growth in the GDP and also substantial growth position in sectors like biotechnology, IT-ES, retailing, telecom etc. due to this more players are eager to establish their foothold in the industry.  Regulatory policy

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Minimum contribution and fund size: the minimum investment in a Venture Capital Fund from any investor will not be less than Rs. 5 lacs and the minimum corpus of the fund before the fund can start activities shall be at least Rs. 5 crores. And the foreign players can easily enter in the venture capital industry of India. An offshore venture capital company may contribute 100% of the capital of domestic venture capital fund. There are other hurdles to enter in the industry so there is favorable condition for them to enter in to venture capital industry in India.

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 DOMESTIC ECONOMIC FACTORS:  GDP growth rate

GDP V/S VC Growth rate There was a positive relationship there was between GDP growth rates. But in 2015 the growth of Venture Capital was decline to 89.79% from 240.91% in 2014 but here the value of deal was increasing. In 2016 the growth rate is 9% and project the next year GDP 8% to 9%. So here we can conclude that there is good growth prospect for the venture capital players to enter in the horizon of India.

Inflation V/S Venture capital growth rate The inflation rate is decreased to 4.5 in 2013 from 7.4 in 2012. At same time the growth of Venture Capital is also declining to 33.33% in 2013 from 251.06% in 2012. From the above chart we can conclude that inflation and Venture Capital has positive relationship. Now in June 2016 the inflation rate was 11.9 and the NO. Of deal in first two quarter in 2016 was 170 and value of deal was 6390 US$mn and in third quarter of 2016 there was only four deals. And in October the inflation touch the 13.01%. Due to increase in inflation rate the people will go to spend more. Thus, their savings will decrease. So more money will come into the market and demand of the products will increase continuously. Now due to growth of any sector will attract new entrepreneur to enter in the industry. For that they must need funds. So there is a great opportunity for venture capital industry to attract this new entrepreneur. SMALL SCALE INDUSTRIES

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Growth of small and medium scale industries Venture Capital, 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 2015. This includes measures addressing concerns of credit, fiscal support, clusterbased 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/rollover 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, 2020. 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.

 EXPORT AND IMPORT Value of export import The value of Import and export are increasing year by year. In 2012-13 the value of import and export are 52.7 and 61.4 US $bn respectively and in 2015-16 the value of import and export are 155.7 and 185.7 US $bn. It means industry needs more money for import and export. So it is an opportunity for venture capital. On the other side when company going to export the company must have good contact with other country’s company. So for that venture capital industry is

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useful because they have good contact and affiliation network with other country’s company. Industry Profitability: The venture capital firms invest their money in most emerging sectors like biotechnology, IT-ES, retailing, infrastructure which gives higher return but also they all involved risk in substantial amount. Possible result of venture capital investments No. of companies out of 10

Annual rate of

investments

return

Failure

4

0%

Viable

3

15%

Solid

2

50%

Superstars

1

100%

Blended average

24.5

Success ratio of venture capital deals From the above table we can see the success ratio of the venture capital investment. 40% of the investments are getting failure and only 10% of them are able to give 100% return. And the average return by the venture capitalists is only 24.5% which is not extra ordinary. This type of returns can be found in many other investment options. So there isn’t any special reason to invest in venture capital.  Product innovation:

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Venture capital firms are coming with new ideas of investment to attract the buyers to their firms. For this purpose they are introducing new types of funds and schemes. For example, IFCI Venture Capital Funds Limited (IVCF) has launched three new funds in emerging sectors of the economy namely: i) India Automotive Component Manufacturers Private Equity Fund –1-Domestic (IACM-1-D) with a target corpus of Euro 60 million equivalent to Rs.396 crores. This Fund will be dedicated for investment mainly in Indian Automotive Component companies and in other related/ emerging sectors. ii) India Enterprise Development Fund (IEDF), a Venture Capital fund set up with target corpus of Rs.250 crores to invest in knowledge based projects in key sectors of Indian economy with outstanding growth prospects. iii) Green India Venture Fund (GIVF), a Venture Capital fund setup with a target corpus of Euro 50 million (approx. Rs.330 crores) with the objective to invest in commercially viable Clean Development Mechanism (CDM), energy efficient and other commercially viable projects with an aim to reduce negative ecological impact, efficient usage of resources such as energy, power etc and other related sectors/projects. The summary of the Funds: Launching of new funds by IFCI Funds

IACM –1

GIVF

IEDF

Objective

To invest in Indian

The objective of

To invest in

companies engaged

GIVF would be to

knowledge based

in, amongst others,

invest in companies projects with

Venture Capital

the automotive parts setting up Clean

relatively high entry

and components

barriers, critical

Development

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manufacturing sector Mechanism (CDM) applications, in order to generate

projects and other

prospects for high

high returns for its

commercially viable growth and global

investors.

projects/ business.

scalability in diversified and/ or emerging sectors.

Size

Euro 60 million (INR Euro 50 million 396 Cr)

INR 250 Cr

(INR 330 Cr) with green shoe option

Nature of Fund PE Fund

VC Fund

VC Fund

Tenure

10 years with two

10 years with two

8 yrs. With two

prolongation option of prolongation options prolongation options 1 year each

of 1 year each

of 1 year each.

Expected returns 20% p.a.

20% p.a.

20% p.a.

Size of

Rs. 2 to 30 Cr

Rs. 2 to 25 Cr

2% of the total

2% of the total

Rs. 6 to 40 Cr

investment Management fee 2% of the total

subscription amount subscription amount subscription amount Launching of new funds by IFCI The SICOM venture capital firm introduce SME opportunity fund for small scale industries.

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 PROBLEMS OF VENTURE CAPITAL FINANCING IN INDIA: VCF is in its nascent stages in India. 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. The financing firms expect a sound, experienced, mature and capable management team of the company being financed. Since the innovative project involves a higher risk, there is an expectation of higher returns from the project. The payback period is also generally high (5 - 7 years). The various problems/ queries can be outlined as follows: o Requirement of an experienced management team. o Requirement of an above average rate of return on investment. o Longer payback period. o Uncertainty regarding the success of the product in the market. o Questions regarding the infrastructure details of production like plant location, accessibility, relationship with the suppliers and creditors, transportation facilities, labor availability etc. o The category of potential customers and hence the packaging and pricing details of the product. o The size of the market. o Major competitors and their market share. o Skills and Training required and the cost of training. Venture Capital

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o Financial considerations like return on capital employed (ROCE), cost of the project, the Internal Rate of Return (IRR) of the project, total amount of funds required, ratio of owners investment (personnel funds of the entrepreneur), borrowed capital, mortgage loans etc. in the capital employed.

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SUMMARY Venture capital is a growing business of recent origin in the area of industrial financing in India. The various financial institution set-ups in India to promote industries have done commendable work. However, these institutions do not come up to benefit risky ventures when they are undertaken by new or relatively unknown entrepreneurs. They contend to give debt finance, mostly in the form of term loans to the promoters and their functioning has been more akin to that of commercial banks. Starting and growing a business always require capital. There are a number of alternative methods to fund growth. These include the owner or proprietor’s own capital, arranging debt finance, or seeking an equity partner, as is the case with private equity and venture capital. Venture capital is a means of equity financing for rapidly-growing private companies. Finance may be required for the start-up, development/expansion or purchase of a company. Venture Capital firms invest funds on a professional basis, often focusing on a limited sector of specialization (eg. IT, Infrastructure, Health/Life Sciences, Clean Technology, etc.). Indian Venture capital and Private Equity Association(IVCA) is a member based national organization that represents venture capital and private equity firms, promotes the industry within India and throughout the world and encourages investment in high growth companies. IVCA member comprise venture capital firms, institutional investors, banks, incubators, angel groups, corporate advisors, accountants, lawyers, government

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bodies, academic institutions and other service providers to the venture capital and private equity industry. Members represent most of the active venture capital providers and private equity firms in India. These firms provide capital for seed ventures, early stage companies, later stage expansion, and growth finance for management buyouts/buy-ins of established companies. Venture capitalists have been catalytic in bringing forth technological innovation in USA. A similar act can also be performed in India. As venture capital has good scope in India for three reasons: First: The abundance of talent is available in the country. The low cost high quality Indian workforce that has helped the computer users worldwide in Y2K project is demonstrated asset. Second: A good number of successful Indian entrepreneurs in Silicon Valley should have a demonstration effect for venture capitalists to invest in Indian talent at home. Third: The opening up of Indian economy and its integration with the world economy is providing a wide variety of niche market for Indian entrepreneurs to grow and prove themselves.

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RECOMMENDATIONS:  Multiplicity of regulations – need for harmonization and nodal Regulator: Presently there are three set of Regulations dealing with venture capital activity i.e. SEBI (Venture Capital Regulations) 1996, Guidelines for Overseas Venture Capital Investments issued by Department of Economic Affairs in the MOF in the year 1995 and CBDT Guidelines for Venture Capital Companies in 1995 which was modified in 1999. The need is to consolidate and substitute all these with one single regulation of SEBI to provide for uniformity, hassle free single window clearance. There is already a pattern available in this regard; the mutual funds have only one set of regulations and once a mutual fund is registered with SEBI, the tax exemption by CBDT and inflow of funds from abroad is available automatically.

Similarly, in the case of FIIs, tax benefits and foreign

inflows/outflows are automatically available once these entities are registered with SEBI. Therefore, SEBI should be the nodal regulator for VCFs to provide uniform, hassle free, single window regulatory framework. On the pattern of FIIs, Foreign Venture Capital Investors (FVCIs) also need to be registered with SEBI.

 Tax passes through for Venture Capital Funds: VCFs are a dedicated pool of capital and therefore operate in fiscal neutrality and are treated as pass through vehicles. In any case, the investors of VCFs are subjected to tax. Similarly, the investee companies pay taxes on their earnings. There is a well established successful precedent in the case of Mutual Funds which once registered with SEBI are automatically entitled to tax exemption at pool level. It is an established principle that taxation should be only at one level Venture Capital

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and therefore taxation at the level of VCFs as well as investors amount to double taxation. Since like mutual funds VCF is also a pool of capital of investors, it needs to be treated as a tax pass through. Once registered with SEBI, it should be entitled to automatic tax pass through at the pool level while maintaining taxation at the investor level without any other requirement under Income Tax Act.

 Mobilization of Global and Domestic resources:  Foreign Venture Capital Investors (FVCIs): Presently, FIIs registered with SEBI can freely invest and disinvest without taking FIPB/RBI approvals. This has brought positive investments of more than US $10 billion. At present, foreign venture capital investors can make direct investment in venture capital undertakings or through a domestic venture capital fund by taking FIPB / RBI approvals. This investment being long term and in the nature of risk finance for start-up enterprises, needs to be encouraged. Therefore, at least on par with FIIs, FVCIs should be registered with SEBI and having once registered, they should have the same facility of hassle free investments and disinvestments without any requirement for approval from FIPB / RBI. This is in line with the present policy of automatic approvals followed by the Government. Further, generally foreign investors invest through the Mauritius-route and do not pay tax in India under a tax treaty. FVCIs therefore should be provided tax exemption. This provision will put all FVCIs, whether investing through the Mauritius route or not, on the same footing. This will help the development of a vibrant India-based venture capital industry with the advantage of best international practices, thus enabling a jump-starting of the process of innovation. The hassle free entry of such FVCIs on the pattern of FIIs is even more necessary because of the following factors:

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o Venture capital is a high risk area. In out of 10 projects, 8 either fail or yield negligible returns. It is therefore in the interest of the country that FVCIs bear such a risk. o For venture capital activity, high capitalization of venture capital companies is essential to withstand the losses in 80% of the projects. In India, we do not have such strong companies. o The FVCIs are also more experienced in providing the needed managerial expertise and other supports.  Augmenting the Domestic Pool of Resources: The present pool of funds available for venture capital is very limited and is predominantly contributed by foreign funds to the extent of 80 percent. The pool of domestic venture capital needs to be augmented by increasing the list of sophisticated institutional investors permitted to invest in venture capital funds. This should include banks, mutual funds and insurance companies’ up to prudential limits.

Later, as expertise grows and the venture capital industry

matures, other institutional investors, such as pension funds, should also be permitted. The venture capital funding is high-risk investment and should be restricted to sophisticated investors. However, investing in venture capital funds can be a valuable return-enhancing tool for such investors while the increase in risk at the portfolio level would be minimal.

Internationally, over 50% of

venture capital comes from pension funds, banks, mutual funds, insurance funds and charitable institutions.

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 Flexibility in Investment and Exit:  Allowing multiple flexible structures: Eligibility for registration as venture capital funds should be neutral to firm structure. The government should consider creating new structures, such as limited partnerships, limited liability partnerships and limited liability corporations. At present, venture capital funds can be structured as trusts or companies in order to be eligible for registration with SEBI.

Internationally,

limited partnerships, Limited Liability Partnership and limited liability corporations

have

provided

the

necessary

flexibility

in

risk-sharing,

compensation arrangements amongst investors and tax pass through. Therefore, these structures are commonly used and widely accepted globally specially in USA. Hence, it is necessary to provide for alternative eligible structures.  Flexibility in the matter of investment ceiling and sectoral restrictions: 70% of a venture capital fund’s investible funds must be invested in unlisted equity or equity-linked instruments, while the rest may be invested in other instruments.

Though sectoral restrictions for investment by VCFs are not

consistent with the very concept of venture funding, certain restrictions could be put by specifying a negative list which could include areas such as finance companies, real estate, gold-finance, activities not legally permitted and any other sectors which could be notified by SEBI in consultation with the Government. Investments by VCFs in associated companies should also not be permitted. Further, not more than 25% of a fund’s corpus may be invested in a single firm. The investment ceiling has been recommended in order to increase focus on equity or equity-linked instruments of unlisted startup companies.

As the

venture capital industry matures, investors in venture capital funds will set their own prudential restrictions. Venture Capital

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 Changes in buy back requirements for unlisted securities: A venture capital fund incorporated as a company/ venture capital undertaking should be allowed to buy back up to 100% of its paid up capital out of the sale proceeds of investments and assets and not necessarily out of its free reserves and share premium account or proceeds of fresh issue. Such purchases will be exempt from the SEBI takeover code. A venture-financed undertaking will be allowed to make an issue of capital within 6 months of buying back its own shares instead of 24 months as at present. Further, negotiated deals may be permitted in unlisted securities where one of the parties to the transaction is VCF.  Relaxation in IPO norms: The IPO norms of 3 year track record or the project being funded by the banks or financial institutions should be relaxed to include the companies funded by the registered VCFs also. The issuer company may float IPO without having three years track record if the project cost to the extent of 10% is funded by the registered VCF. Venture capital holding however shall be subject to lock in period of one year. Further, when shares are acquired by VCF in a preferential allotment after listing or as part of firm allotment in an IPO, the same shall be subject to lock in for a period of one year. Those companies which are funded by Venture capitalists and their securities are listed on the stock exchanges outside the country; these companies should be permitted to list their shares on the Indian stock exchanges. Relaxation in Takeover Code: The venture capital fund while exercising its call or put option as per the terms of agreement should be exempt from applicability of takeover code and 1969 circular under section 16 of SC(R) A issued by the Government of India.

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Issue of Shares with Differential Right with regard to voting and dividend: In order to facilitate investment by VCF in new enterprises, the Companies Act may be amended so as to permit issue of shares by unlisted public companies with a differential right in regard to voting and dividend. Such flexibility already exists under the Indian Companies Act in the case of private companies which are not subsidiaries of public limited companies. QIB Market for unlisted securities: A market for trading in unlisted securities by QIBs is developed. NOC Requirement: In the case of transfer of securities by FVCI to any other person, the RBI requirement of obtaining NOC from joint venture partner or other shareholders should be dispensed with. RBI Pricing Norms: At present, investment/disinvestment by FVCI is subject to approval of pricing by RBI which curtails operational flexibility and needs to be dispensed with. 

Global integration and opportunities:

 Incentives for Employees: The limits for overseas investment by Indian Resident Employees under the Employee Stock Option Scheme in a foreign company should be raised from present ceilings of US$10,000 over 5 years, and US$50,000 over 5 years for employees of software companies in their ADRs/GDRs, to a common ceiling of US$100,000 over 5 years.

Foreign employees of an Indian company may invest

in the Indian company to a ceiling of US$100,000 over 5 years. Venture Capital

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 Incentives for Shareholders: The shareholders of an Indian company that has venture capital funding and is desirous of swapping its shares with that of a foreign company should be permitted to do so. Similarly, if an Indian company having venture funding and is desirous of issuing an ADR/GDR, venture capital shareholders (holding saleable stock) of the domestic company and desirous of disinvesting their shares through the ADR/GDR should be permitted to do so. Internationally, 70% of successful startups are acquired through a stock-swap transaction rather than being purchased for cash or going public through an IPO.

Such flexibility

should be available for Indian startups as well. Similarly, shareholders can take advantage of the higher valuations in overseas markets while divesting their holdings.  Global investment opportunity for Domestic Venture Capital Funds (DVCF): DVCFs should be permitted to invest higher of 25% of the fund’s corpus or US $10 million or to the extent of foreign contribution in the fund’s corpus in unlisted equity or equity-linked investments of a foreign company.

Such

investments will fall within the overall ceiling of 70% of the fund’s corpus. This will allow DVCFs to invest in synergistic startups offshore and also provide them with global management exposure.

 Infrastructure and R&D : Infrastructure development needs to be prioritized using government support and private management of capital through programmers similar to the Small Business Investment Companies in the United States, promoting incubators and increasing university and research laboratory linkages with venture-financed Venture Capital

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startup firms. This would spur technological innovation and faster conversion of research into commercial products.

 Self Regulatory Organization (SRO): A strong SRO should be encouraged for evolution of standard practices, code of conduct, creating awareness by dissemination of information about the industry. Implementation of these recommendations would lead to creation of an enabling regulatory and institutional environment to facilitate faster growth of venture capital industry in the country. Apart from increasing the domestic pool of venture capital, around US$ 10 billion are expected to be brought in by offshore investors over 3/5 years on conservative estimates. This would in turn lead to increase in the value of products and services adding up to US$100 billion to GDP by 2015. Venture supported enterprises would convert into quality IPOs providing over all benefit and protection to the investors. Additionally, judging from the global experience, this will result into substantial and sustainable employment generation of around 3 million jobs in skilled sector alone over next five years. Spin off effect of such activity would create other support services and further employment. This can put India on a path of rapid economic growth and a position of strength in global economy.

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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 AND WEBLIOGRAPHY

 BOOKS:  Taneja Satish, “Venture Capital in India”.  Chary T Satyanarayana, “Venture Capital – Concepts & Applications ”  MAGAZINE:  Sharma Kapil, an Analysis of Venture Capital Industry in India.  REPORT:  Trends of Venture Capital in India, survey Report by Deloitte, 2017.  Global Trends of Venture Capital, survey report by Deloitte, 2017.  Economic survey 2016-17,  WEBSITE:  www.ivca.org  www.indiavca.org.  www.vcindia.com  www.ventureintelligence.in  www.nvca.org  www.economictimes.indiatimes.com  www.100ventures.com  www.google.com  www.deloitte.com

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