A Project Report On

ANALYSIS OF VENTURE CAPITAL

Submitted by:

ASHISH KUMAR JHA

M.M.S. IV Finance Roll No: 09 Batch 2004-2006

Project Guide

Prof. PANKAJ TRIVEDI

In partial fulfillment of the requirements for the degree of

Masters of Management Studies Mumbai University

K. J. Somaiya Institute of Management Studies & Research

VidyaVihar (E), Mumbai 400077.

INDEX 1) Executive Summary 2) What is Venture Capital? 3) Why Venture Capital is Needed? 4) Venture Capital & Stages of Development 5) Types of Venture Capital Organisations 6) Steps for Obtaining Venture Capital Finance 7) Venture Capital Practices & Procedure 8) Venture Capital in India 9) Regulatory Environment for VC in India 10) Opportunities in Biotech Sector 11) Conclusion 12) ANNEXURES & Case Study 13) Bibliography 60-69 69-71 71-75 76-95 96 6-14 14-18 19-23 24-40 40-49 49-60 1-2 3-5

EXECUTIVE SUMMARY

The venture capital industry in India is still at a nascent stage. With a view to promote innovation, enterprise and conversion of scientific technology and knowledge based ideas into commercial production, it is very important to promote venture capital activity in India. Indias recent success story in the area of information technology has shown that there is a tremendous potential for growth of knowledge based industries. This potential is not only confined to information technology but is equally relevant in several areas such as bio-technology, pharmaceuticals and drugs, agriculture, food processing, telecommunications, services, etc. Given the inherent strength by way of its skilled and cost competitive manpower, technology, research and entrepreneurship, with proper environment and policy support, India can achieve rapid economic growth and competitive global strength in a sustainable manner.

A flourishing venture capital industry in India will fill the gap between the capital requirements of technology and knowledge based startup enterprises and funding available from traditional institutional lenders such as banks. The

gap exists because such startups are necessarily based on intangible assets such as human capital and on a technologyenabled mission, often with the hope of changing the world. Very often, they use technology developed in university and government research laboratories that would otherwise not be converted to commercial use. However, from the viewpoint of a traditional banker, they have neither physical assets nor a low-risk business plan. Not surprisingly,

companies such as Apple, Exodus, Hotmail and Yahoo, to mention a few of the many successful multinational venturecapital funded companies, initially failed to get capital as startups when they approached traditional lenders. However, they were able to obtain finance from independently managed venture capital funds that focus on equity or equitylinked investments in privately held, high-growth companies. Along with this finance came smart advice, hand-on

management support and other skills that helped the entrepreneurial vision to be converted to marketable products.

Beginning with a consideration of the wide role of venture capital to encompass not just information technology, but all high-growth technology and knowledge-based enterprises, the endeavor should be to facilitate the growth of a vibrant venture capital industry in India. The report examines (1) the concept of Venture Capital (2) its comparison with other methods of financing (3) Types of Venture Capitalists & how they finance at different stages of development of business (4) Venture Capital Process (5) Indian Venture Capital Industry Scenario (6) Regulatory Issues and (7) A case study.

WHAT IS VENTURE CAPITAL? Venture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an important source of equity for start-up companies.

Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.

Venture capitalists generally: Finance new and rapidly growing companies Purchase equity securities Assist in the development of new products or services Add value to the company through active participation Take higher risks with the expectation of higher rewards Have a long-term orientation.

When considering an investment, venture capitalists carefully screen the technical and business merits of the proposed company. Venture capitalists only invest in a small percentage of the businesses they review and have a long-term perspective. They also actively work with the company's management, especially with contacts and strategy formulation

The term "venture capital" is grammatically multifaceted. Venture capital involves a process, the making and managing (and ultimately selling) of investments. In addition, the phrase is sometimes used as an adjective applied to players in the game; that is, "venture-backed companies," meaning the portfolio opportunities in which the venture-capital partnerships or "funds" invest. The phrase becomes a noun when it describes the capital provided by individuals, families, and firms, which entities, along with the partnership managers, are called venture capitalists.

In terms of the people involved, venture capital is an intense business. The symbiotic relationship between the venture capitalist and his investment (assuming he is the "lead investor," meaning the investor most closely identified with the

opportunity) is such that each professional can carry a portfolio of no more than a handful of companies. The investors are usually experienced professionals with formal academic training in business and finance and on-the-job training as apprentices at a venture fund or financial institution. Their universe is still relatively small; they and their advisers tend to be on a first-name basis, veterans of a deal or two together. And the work is hard, particularly since on-site visits impose an enormous travel burden.

The venture-capital process, before it was so labeled, has existed for centuries; antedating American Research & Development, it is as old as commercial society itself. Henry Ford was financed by Alexander Malcolmson, and Captain Eddie Rickenbacker was able to organize Eastern Airlines in the 1930s with backing from the Rockefellers. However, the era of professionally managed venture capitalpools of money contributed by unrelated investors and organized into separate legal entities, managed by experts according to stated objectives, set forth in a contract between managers and investors, describing a structured activity, an activity that conforms to definite (albeit changing) patterns and rulesis a process that dates from the organization of AR&D.

In sum, the term venture capital can be applied in a number of ways: to investments, people, or activities. With full appreciation for the multiple uses of the term, the thrust and emphasis of this report is on venture capital of the type which is compatible with the above explanation. First, venture capital is an activity involving the investment of funds. It ordinarily involves investments in illiquid securities, which carry higher degrees of risk (and commensurately higher possibilities of reward) than so-called traditional investments in the publicly traded securities of mature firms. The venture-capital investor ordinarily expects that his participation in the investment (or the participation of one of the investors in the group which he has joined, designated usually as the "lead investor") will add value, meaning that the investors will be able to provide advice and counsel designed to improve the chances of the investment's ultimate success. The investment is made with an extended time horizon, required by the fact that the securities are illiquid. Since the most celebrated rewards in the past have generally accrued to investments involving advances in science and technology to exploit new markets, traditional venture-capital investment is often thought of as synonymous with hightech start-ups. However, as stated earlier, that is not an accurate outer boundary, even in the start-up phase. For example, the technology of one of the great venture-capital winnersFederal Expressis as old as the Pony Express, and it would take a great stretch of the imagination to perceive of fast-food chains such as McDonald's as involving additions to our store of scientific learning. But, whether high or low tech, the traditional venture capitalist thrives when the companies in which he invests have an advantage over potential competition in a defined segment of the market, often referred to as a "niche." The product or service is as differentiated as possible, not a "commodity."

Exploitation of scientific and technological breakdowns has, historically, been a principal way (but not the only way) for emerging companies to differentiate themselves from their more mature and better-financed competitors.

WHY VENTURE CAPITAL NEEDED?

Financing Options In General The possibility of raising a substantial part of project finances in India through both equity and debt instruments are among the key advantages of investing in India. The Indian banking system has shown remarkable growth over the last two decades. The rapid growth and increasing complexity of the financial markets, especially the capital market have brought about measures for further development and improvement in the working of these markets. Banks and development financial institutions led by ICICI, IDBI and IFCI were providers of term loans for funding projects. The options were limited to conventional businesses, i.e. manufacturing centric. Services sector was ignored because of the "collateral" issue. Equity was raised from the capital markets using the IPO route. The bull markets of the 90s, fuelled by Harshad Mehta and the FIIs, ensured that adventure capital was easily available. Manufacturing companies exploited this to the full. The services sector was ignored, like software, media, etc. Lack of understanding of these sectors was also responsible for the same. If we look back to 1991 or even 1992, the situation as regards financial outlay available to Indian software companies was poor. Most software companies found it extremely difficult to source seed capital, working capital or even venture capital. Most software companies started off undercapitalized, and had to rely on loans or overdraft facilities to provide working capital. This approach forced them to generate revenue in the short term, rather than investing in product development.

Thus there are various traditional institutions which invest in industry for gains. These institutions, in India, are the national level financial institutions like IFCI, ICICI, and IDBI; state level financial institutions like State Financial Corporations (SFCs), and investment corporations, investment institutions like LIC and GIC, mutual funds and commercial banks. Besides, corporate sector units and individuals also provide investment capital to industry.

Venture Capital Finance In venture capital financing the venture capital firm takes keen interest in the business performance of the investee firm. At times, depending upon the circumstances and the initial contract or understanding, the venture capitalist actively involves himself in some activities of the investee firm, such as management, production process, marketing or accounting. He might provide personnel to train the investees staff in different aspects of operations or depute his own

managers to supervise and manage different activities of the investee firm. Thus, the venture capitalist acts as copartner in the investees business, sharing success and failures, the gains and losses, proportionate to the equity investment.

Thus, venture capital financing is very different from lending and borrowing, developmental financing or stock market investing. Venture capital financing, by providing equity funding for an enterprise functioning in an economic environment not otherwise conducive to business development or lacking incentive or motivation to harness the existing business opportunities for economic growth, fills a void left by the traditional financing institutions.

Venture capital financing, generally implying long-term investment in high risk industrial projects with high risk reward possibilities, may be at any stage of implementation of the project or its production cycle, viz. to start up an economic activity or an industrial or commercial project or to improve a process or a product in an enterprise associated with both risk and reward. The expectation of high gain motivates the investor to invest in risky ventures which generally utilize new technology with equal probability of failure and success. The investor makes higher capital gains through appreciation in the value of such investments if the new technology proves successful. The venture capitalist has a continuing involvement in the business of the investee firm, although he does not interfere in the management.

The mechanics of project appraisal with the usual debt ratios and economic rates of return do not apply to Venture capital financing. Also, there is usually no profit motive on the part of the institutions in funding industrial projects.

VENTURE CAPITAL AND OTHER FUNDS 1) Venture capital and conventional development capital Venture capital differs from conventional development capital in that the latter is not provided for new technology or a new entrepreneurial venture. It is in the form of loan capital in majority of the cases. As investor of funds, a development finance institution is interested in safeguarding its interests. It does not interfere in the management of the assisted company except to ensure flow of information and proper management information system (MIS), regular board meetings, and adherence to statutory requirements for effective management control. Development finance is security oriented and liquidity prone. The general criteria for investment are: proven track record of the company and its promoters, successful management, sufficient cash generation to provide for returns and so on. Fixed payments in the form of installments of principal and interest have to be made to a development finance institution. A venture

capital company has different considerations while making investment decisions. It wants to promote new technology, a new product and enterprise, and is interested in the overall management of the project on account of the high risk involved in the venture till its completion or entry into production and the availability of proper exit route for liquidating the investments. Venture capita, seed capital and risk capital are understood as synonymous terms. As such it is difficult to make a distinction between the three. Generally, however, venture capital financing involves several stages and seed capital is one such stage.

2) Venture capital and seed capital Seed capital is the life-blood of emerging companies, especially those active in technology areas. Without an adequate supply of capital and a lot of support technical, market-oriented and moral from outside sources, potentially exciting products stand a slim chance of getting off the ground, let alone developing into substantial businesses. The provision of seed capital is a highly specialized business. As venture capital funds become large, and the average size of investment continues to increase, fewer venture capital organizations are prepared to invest the small sums and large amount of time needed to help prove a concept or launch of new product.

Seed capital is a relatively small amount of capital provided to an inventor or entrepreneur, generally to prove a concept. It may involve product development but rarely involves initial marketing. Typically, it is used to fund the building of a prototype product or completion of a business plan. It usually takes the form of equity, or potential equity.

The attraction of seed investing is that it can produce spectacular returns. The entry price is low, and the percentage of total equity that can be obtained is often quite high although the stake will usually lessen following further rounds of financing. The risks associated with seed investing, on the other hand, can be high, although many specialist providers of seed capital argue that they are no higher than those associated with other types of venture capital investment, provided that the fund managers have the appropriate skills.

The principal disadvantages of operating at the seed capital end of the venture business are the relatively long lead times and the high management costs involved. The two factors are interrelated. Returns from seed capital investment typically do not start to come through for 7 to 10 years. In the early years of a seed funds life, management is heavily involved in the working with investors to help build their businesses.

The difference between venture and seed capital arises primarily on account of application of funds, and the terms and conditions applicable to each of them. A study of the practice followed by all-India financial institutions shows that seed and risk capital are being provided basically to cover promoters contribution to a project. They differ from each other with reference to the nature of help and stress on adoption of new technology. In seed capital the emphasis is on providing interest-free finance to encourage professionals to become promoters of industrial projects.

Differences between seed capital scheme and venture capital scheme Basis Beneficiaries Size of assistance Appraisal process Estimated returns Flexibility Seed capital scheme Incentive or aid Very small entrepreneurs Restricted to Rs. 1.5 million Normal 20 percent Nil Venture capital scheme Commercial viability Medium and large entrepreneurs are also covered Usually upto 40 percent of

promoters equity Skilled and specialized 30 percent IRR Highly flexible. Can be extended as equity. Support loans in various

Value addition Exit option Funding source Syndications Tax concessions Success rate

Nil Usually as sell-back to promoter Owner funds/ general sources Not done Nil Not good

stages Multiple ways Several, including offer to public. Outside borrowing/contribution allowed Possible Full exemption on long-term capital gains and dividend incomes Very satisfactory

Differences between Venture Capitalist and Conventional Financier Sr. no. 1 Venture Capitalist He is a risk taker like the entrepreneur. Conventional financier He is a risk avoider as protection of funds is the prime responsibility of 2 He acquires equity, a share of ownership and with it a share of risk. He does not eliminate risk but manages it through indepth monitoring, assisting and directing his investee companies and thorough portfolio diversification. He the financier. His objective is to eliminate risk by loaning money against collateral and ensuring debt repayment capacity.

considers himself as a partner of the entrepreneur. He specializes in management services of which finance is a part. He understands the whole scope of business, from team-

He specializes in financial services and has nothing to do with

4 5 6

building through to operations. He has extensive operating experience and provides entrepreneurs full hands on support He channels funds into the lowest tier of the market i.e. the emerging enterprise. Venture capital injects an element of vitality and innovation into the business community.

management and clients Such experience is not required at all. He avoids such situations of risk. The conventional financier is not equipped to provide support which new enterprises demand alongside

He assists the flow of new investment opportunities by encouraging entrepreneurs, developing entrepreneurial

investments. He only assists in investments.

8 9

infrastructure by establishing different types of venture funds. Provides promoters capital gap Provides second-stage financing for full achievement of investee companys potential/realizing of business

Not always so Not always so

10 11

opportunities. Provides finance for turning around sick, potentially sick, but viable units Encourages entrepreneurial initiatives and innovations which accelerate business development and the pace of national economic growth.

Not always so Also helps achieve business

development and economic growth.

VENTURE FINANCING AND STAGES OF DEVELOPMENT OF AN ENTERPRISE

While the above table sets out the characteristics which distinguish venture capital from other conventional financing schemes, the most distinct feature of venture capital financing is its stage wise financing system. Conventional financing is made available in the form of debt to cover the cost of project till its completion. Venture capital is made available through equity participation to finance a project in its developmental stages which are spread to encompass the entire period of completion and growth of the project. Some Venture Capital funds specialise in certain sectors of activity (e.g. biotechnology, information technology...). Others may only intervene in certain stages in the development of your project/company. Generally, the following investment stages are distinguished:

Seed finance, provided to research, assess and develop an initial concept before a business has reached the start-up phase.

Start-up finance, provided to companies for product development and initial marketing. Companies may be in the process of being set up or may have been in business for a short time, but have not sold their product commercially.

Other early stage financing , to companies that have completed the product development stage and require further funds to initiate commercial manufacturing and sales. They will not yet be generating a profit.

Expansion (or Development) finance, provided for the growth and expansion of a company which is breaking even or trading profitably. Capital may be used to finance increased production capacity, market or product development and/or to provide additional working capital.

Mezzanine (Bridge) finance, made available to a company in the period of transition from being privately owned to being publicly quoted.

Management Buy-out finance, provided to enable current operating management and investors to acquire an existing product line or business.

Management Buy-in finance, provided to enable a manager or group of managers from outside the company to buy into the company with the support of Venture Capital investors.

Stages The size

of of

Development investment is closely

and related

Size to the

of stage

Investment of investment.

On the whole, early-stage investments require less capital than an expansion or MBO stage. Venture capitalists spend the same amount of time and effort assessing and assisting an early-stage company as they do a later-stage company. In fact, the earlier-stage companies usually require greater assistance than later-stage companies. Therefore, many venture capital firms prefer to invest in later-stage deals that fit their investment criteria.

There are a number of venture capital firms that specialize in investing in particular stages such as early stage, expansion or MBOs and MBIs. While each venture capitalist will have their own investment range, as a guide, in USA venture capitalists invest between $1 million and $10 million (or larger).

Industry

Sectors

Some venture capital firms have funds that specialize in particular industry sectors such as bioscience, information technology or manufacturing. Many firms will actively avoid

investing in sectors such as property, mining and farming.

THE ADVANTAGES OF VENTURE CAPITAL Venture capital has a number of advantages over other forms of finance, such as:

Finance - The venture capitalist injects long-term equity finance, which provides a solid capital base for future growth. The venture capitalist may also be capable of providing additional rounds of funding should it be required to finance growth.

Business Partner - The venture capitalist is a business partner, sharing the risks and rewards. Venture capitalists are rewarded by business success and the capital gain.

Mentoring - The venture capitalist is able to provide strategic, operational and financial advice to the company based on past experience with other companies in similar situations.

Alliances - The venture capitalist also has a network of contacts in many areas that can add value to the company, such as in recruiting key personnel, providing contacts in international markets, introductions to strategic partners and, if needed, co-investments with other venture capital firms when additional rounds of financing are required.

Facilitation of Exit - The venture capitalist is experienced in the process of preparing a company for an initial public offering (IPO) and facilitating in trade sales.

The different stages of venture capital financing are summarized in the table. Description of stage Period involved while funds are blocked up (years) 1) early stage investment i) seed capital ii) second round 2) Later stage investment i) Developmental ii) iii) Finance Replacement Finance Buy-outs 7-10 5-10 1-3 1-3 1-3 extreme Very high Medium Low Low Manufacturing research based Business Commitment Expansion Finance Planned Exit New Management and Degree of risk Finance for the activity involved

iv) Turnarounds

3-5

Medium to High

Rescue Finance

TYPES OF VENTURE CAPITAL ORGANIZATIONS Although venture capital is sometimes provided by individuals and by investment institutions, the main providers are clearly specialist venture capital organizations. A key feature of the venture capital industry is the bridge that it creates between investors and companies i.e. between supply and demand for risk capital.

There are five broad types of venture capital organizations: i) ii) iii) iv) v) independents captives semi-captives government departments and agencies venture capital trusts

They differ in how they raise funds to invest in ventures, and who control their investment decisions.

1) Independents Independent venture capital organizations raise their funds from more than one source, mainly institutional investors. No single shareholder or investor has a dominant position in the ownership of the fund. The funds are managed independently, and management is free to choose from the money should be invested. Wholly independent funds can be set up in one of the two ways. i) a group of experienced venture capitalists could seek backing from several investment institutions that put the money into a fund that venture capitalists manage on their behalf. ii) A group of financial institutions could agree to set up a fund, and recruit a management team to make the investments. The fund managers then decide how to invest the money in business ventures. Investors in the fund are paid returns out of the proceeds from investing in business ventures, i.e. dividends on shares, interest on loans and the cash proceeds from the eventual sale or redemption of the investments.

Funds Investors Cash Returns

Venture Capital Organisations

Investments Companies Dividends

Cash from Sale of Investments

Sale of Investments (After several years)

Independent firms have several other features.

Usually they are close ended, having a specified initial capital base. For example, Rs. 20 Million Fund might be established. After the initial fund-raising, no further money will be sought for the fund, and management will invest in business ventures until all the money in the fund is used.

Primarily they are Equity-oriented, and seek long term capital gain rather than a regular flow of annual dividend income.

Often they are established with a maximum life, typically 10 years. At the end of this time, the fund is liquidated, and the proceeds distributed (in cash or as unsold securities sold by the fund) to the fund investors and managers in pre-arranged proportion. Management can, if it wishes, set up a new fund to attract Venture Capital.

2) Captives Captive Venture Organisation obtains its fund from a parent organization, usually a financial institution. The funds are managed on behalf of the parent organization. The management team is appointed by and is accountable to the parent that expects the fund to provide a suitable return. Captive funds are often more concerned than independents about an annual running yield, i.e. dividend income, from their investments. Capital gain is nevertheless an important element of the overall return.

3) Semi-Captives A semi-captive venture capital organization invests funds on behalf of a parent but also manages independently funds obtained from other sources. A merchant bank or other investment institution could set up a fund and appoint a management team, and then invite a number of other investment institutions to join the fund.

4) Advisory Services Instead of investing funds under its management, a venture capitalist also could act as advisor to other fund managers or venture capital investors. FUNDING OF VENTURE CAPITAL ORGANISATIONS

Government

Parent Company

Institutional Investors

Other Investors

Government Organisations

Captives

SemiCaptives

Independents

Venture Capital Funds

Business Angels

Businesses

How

Does

the

Professional

Venture

Capital

Industry

Work?

Venture capital firms typically source most of their funding from large investment institutions such as superannuation funds and banks. These institutions invest in a venture capital fund for a period of up to ten years. To compensate for the long-term commitment and lack of security and liquidity, investment institutions expect to receive very high returns on their investment. Therefore, venture capitalists invest in companies with high growth potential or in companies which have the ability to quickly repay a high level of debt - as in the case of a leveraged management buyout. Venture capitalists typically exit the investment through the company listing on the stock exchange, selling to a trade buyer or through a management buyout. Although the venture capitalist may receive some return through dividends, their primary return on investment comes from capital gain when they eventually sell their shares in the company, typically three to seven years after the investment. Venture capitalists are therefore in the business of promoting growth in the companies they invest in and managing the associated risk to protect and enhance their investors' capital.

How

should

one

select

the

Venture

Capitalist

Investor?

Before selecting a venture capitalist, the entrepreneur should study the particular investment preferences set down by

the venture capital firm. Once a short list of potential venture capitalists has been drawn up, it is often a good idea to contact the venture capital firm and request a copy of their publications, which will clarify the type of investments they favor. An investment in an unlisted company has a long-term horizon, typically four to six years. It is important to select venture capitalists with whom it is possible to have a good working relationship. Often businesses do not meet their cash flow forecasts and require additional funds, so an investor's ability to invest further funds if required is also important. Finally, when choosing a venture capitalist, the entrepreneur should consider not just the amount and terms of investment, but also the additional value that the venture capitalist can bring to the company. These skills may include industry knowledge, fundraising, financial and strategic planning, recruitment of key personnel, mergers and acquisitions, and access to international markets and technology.

STEPS FOR ENTERPRENEURS SEEKING VC FINANCE:

What Venture Capital Firms Look For

One way of explaining the different ways in which banks and venture capital firms evaluate a small business seeking funds, put simply, is: Banks look at its immediate future, but are most heavily influenced by its past. Venture capitalists look to its longer run future. To be sure, venture capital firms and individuals are interested in many of the same factors that influence bankers in their analysis of loan applications from smaller companies. All financial people want to know the results and ratios of past operations, the amount and intended use of the needed funds, and the earnings and financial condition of future projections. But venture capitalists look much more closely at the features of the product and the size of the market than do commercial banks. Banks are creditors. They're interested in the product/market position of the company to the extent they look for assurance that this service or product can provide steady sales and generate sufficient cash flow to repay the loan. They look at projections to be certain that owner/managers have done their homework.

Venture capital firms are owners. They hold stock in the company, adding their invested capital to its equity base. Therefore, they examine existing or planned products or services and the potential markets for them with extreme care. They invest only in firms they believe can rapidly increase sales and generate substantial profits. The reason is that venture capital firms invest for long-term capital, not for interest income. A common estimate is that they look for three to five times their investment in five or seven years. Of course venture capitalists don't realize capital gains on all their investments. Certainly they don't make capital gains of 300 percent to 500 percent except on a very limited portion of

their total investments. But their intent is to find venture projects with this appreciation potential to make up for investments that aren't successful.

Most venture capital firms set rigorous policies for the following.

1) Size of the Venture Proposal. Most venture capital firms are interested in investment projects requiring an investment of $250,000 to $1,500,000. Projects requiring under $250,000 are of limited interest because of the high cost of investigation and administration; however, some venture firms will consider smaller proposals, if the investment is intriguing enough. The typical venture capital firm receives over 1,000 proposals a year. Probably 90 percent of these will be rejected quickly because they don't fit the established geographical, technical, or market area policies of the firm -- or because they have been poorly prepared.

The remaining 10 percent are investigated with care. These investigations are expensive. Firms may hire consultants to evaluate the product, particularly when it's the result of innovation or is technologically complex. The market size and competitive position of the company are analyzed by contacts with present and potential customers, suppliers, and others. Production costs are reviewed. The financial condition of the company is confirmed by an auditor. The legal form and registration of the business are checked. Most importantly, the character and competence of the management are evaluated by the venture capital firm, normally via a thorough background check.

These preliminary investigations may cost a venture firm between $2,000 and $3,000 per company investigated. They result in perhaps 10 to 15 proposals of interest. Then, second investigations, more thorough and more expensive than the first, reduce the number of proposals under consideration to only three or four. Eventually the firm invests in one or two of these.

2) Maturity of the Firm Making the Proposal. Most venture capital firms' investment interest is limited to projects proposed by companies with some operating history, even though they may not yet have shown a profit. Companies that can expand into a new product line or a new market with additional funds are particularly interesting. The venture capital firm can provide funds to enable such companies to grow in a spurt rather than gradually as they would on retained earnings.

Companies that are just starting or that have serious financial difficulties may interest some venture capitalists, if the potential for significant gain over the long run can be identified and assessed. If the venture firm has already extended its portfolio to a large risk concentration, they may be reluctant to invest in these areas because of increased risk of loss. However, although most venture capital firms will not consider a great many proposals from start-up companies, there are a small number of venture firms that will do only "start-up" financing. The small firm that has a well thought-out plan and can demonstrate that its management group has an outstanding record (even if it is with other companies) has a decided edge in acquiring this kind of seed capital.

3) Management of the Proposing Firm. Most venture capital firms concentrate primarily on the competence and character of the proposing firm's management. They feel that even mediocre products can be successfully manufactured, promoted, and distributed by an experienced, energetic management group. They look for a group that is able to work together easily and productively, especially under conditions of stress from temporary reversals and competitive problems. They know that even excellent products can be ruined by poor management. Many venture capital firms really invest in management capability, not in product or market potential. Obviously, analysis of managerial skill is difficult. A partner or senior executive of a venture capital firm normally spends at least a week at the offices of a company being considered, talking with and observing the management, to estimate their competence and character.

Venture capital firms usually require that the company under consideration have a complete management group. Each of the important functional areas -- product design, marketing, production, finance, and control -- must be under the direction of a trained, experienced member of the group. Responsibilities must be clearly assigned. And, in addition to a thorough understanding of the industry, each member of the management team must be firmly committed to the company and its future.

4) The "Something Special" in the Plan. Next in importance to the excellence of the proposing firm's management group, most venture capital firms seek a distinctive element in the strategy or product/market/process combination of the firm. This distinctive element may be a new feature of the product or process or a particular skill or technical competence of the management. But it must exist. It must provide a competitive advantage.

ELEMENTS OF A VENTURE PROPOSAL/PLAN

Purpose and Objectives -- a summary of the what and why of the project. Proposed Financing -- the amount of money you'll need from the beginning to the maturity of the project proposed, how the proceeds will be used, how you plan to structure the financing, and why the amount designated is required. Marketing -- a description of the market segment you've got or plan to get, the competition, the characteristics of the market, and your plans (with costs) for getting or holding the market segment you're aiming at. History of the Firm -- a summary of significant financial and organizational milestones, description of employees and employee relations, explanations of banking relationships, recounting of major services or products your firm has offered during its existence, and the like. Description of the Product or Service -- a full description of the product (process) or service offered by the firm and the costs associated with it in detail. Financial Statements -- both for the past few years and pro forma projections (balance sheets, income statements, and cash flows) for the next 3-5 years, showing the effect anticipated if the project is undertaken and if the financing is secured. This should include an analysis of key variables affecting financial performance, showing what could happen if the projected level of revenue is not attained. Capitalization -- a list of shareholders, how much is invested to date, and in what form (equity/debt). Biographical Sketches -- the work histories and qualifications of key owners/employees. Principal Suppliers and Customers Problems Anticipated and Other Pertinent Information -- a candid discussion of any contingent liabilities, pending litigation, tax or patent difficulties, and any other contingencies that might affect the project you're proposing. Advantages -- a discussion of what's special about your product, service, and marketing plans or channels that gives your project unique leverage.

PROVISIONS OF THE INVESTMENT PROPOSAL

What happens when, after the exhaustive investigation and analysis, the venture capital firm decides to invest in a company? Most venture firms prepare an equity financing proposal that details the amount of money to be provided, the percentage of common stock to be surrendered in exchange for these funds, the interim financing method to be used, and the protective covenants to be included. This proposal will be discussed with the management of the

company to be financed. The final financing agreement will be negotiated and generally represents a compromise between the management of the company and the partners or senior executives of the venture capital firm. The important elements of this compromise are: ownership, control, annual charges, and final objectives.

1) Ownership. Venture capital financing is not inexpensive for the owners of a small business. The partners of the venture firm buy a portion of the business's equity in exchange for their investment. This percentage of equity varies, of course, and depends upon the amount of money provided, the success and worth of the business, and the anticipated investment return. It can range from perhaps 10 percent in the case of an established, profitable company to as much as 80 percent or 90 percent for beginning or financially troubled firms. Most venture firms, at least initially, don't want a position of more than 30 percent to 40 percent because they want the owner to have the incentive to keep building the business. If additional financing is required to support business growth, the outsiders' stake may exceed 50 percent, but investors realize that small business owner/managers can lose their entrepreneurial zeal under those circumstances. In the final analysis, however, the venture firm, regardless of its percentage of ownership, really wants to leave control in the hands of the company's managers, because it is really investing in that management team in the first place. Most venture firms determine the ratio of funds provided to equity requested by a comparison of the present financial worth of the contributions made by each of the parties to the agreement. The present value of the contribution by the owner of a starting or financially troubled company is obviously rated low. Often it is estimated as just the existing value of his or her idea and the competitive costs of the owner's time. The contribution by the owners of a thriving business is valued much higher. Generally, it is capitalized at a multiple of the current earnings and/or net worth. Financial valuation is not an exact science. The final compromise on the owner's contribution's worth in the equity financing agreement is likely to be much lower than the owner thinks it should be and considerably higher than the partners of the capital firm think it might be. In the ideal situation, of course, the two parties to the agreement are able to do together what neither could do separately: 1) the company is able to grow fast enough with the additional funds to do more than overcome the owner's loss of equity, and 2) the investment grows at a sufficient rate to compensate the venture capitalists for assuming the risk. An equity financing agreement with an outcome in five to seven years which pleases both parties is ideal. Since, of course, the parties can't see this outcome in the present; will not be perfectly satisfied with the compromise reached. It is important, though, for the business owner to look at the future. He or she should carefully consider the impact of the ratio of funds invested to the ownership given up, not only for the present, but for the years to come.

2) Control. Control is a much simpler issue to resolve. Unlike the division of equity over which the parties are bound to disagree, control is an issue in which they have a common (though perhaps unapparent) interest. While it's understandable that the management of a small company will have some anxiety in this area, the partners of a venture firm have little interest in assuming control of the business. They have neither the technical expertise nor the managerial personnel to run a number of small companies in diverse industries. They much prefer to leave operating control to the existing management. The venture capital firm does, however, want to participate in any strategic decisions that might change the basic product/market character of the company and in any major investment decisions that might divert or deplete the financial resources of the company. They will, therefore, generally ask that at least one partner be made a director of the company. Venture capital firms also want to be able to assume control and attempt to rescue their investments, if severe financial, operating, or marketing problems develop. Thus, they will usually include protective covenants in their equity financing agreements to permit them to take control and appoint new officers if financial performance is very poor.

3) Annual Charges. The investment of the venture capital firm may be in the final form of direct stock ownership which does not impose fixed charges. More likely, it will be in an interim form-convertible subordinated debentures or preferred stock. Financings may also be straight loans with options or warrants that can be converted to a future equity position at a preestablished price. The convertible debenture form of financing is like a loan. The debentures can be converted at an established ratio to the common stock of the company within a given period, so that the venture capital firm can prepare to realize their capital gains at their option in the future. These instruments are often subordinated to existing and planned debt to permit the company invested in to obtain additional bank financing. Debentures also provide additional security and control for the venture firm and impose a fixed charge for interest (and sometimes for principal payment, too) upon the company. The owner-manager of a small company seeking equity financing should consider the burden of any fixed annual charges resulting from the financing agreement.

4) Final Objectives.

Venture capital firms generally intend to realize capital gains on their investments by providing for a stock buy-back by the small firm, by arranging a public offering of stock of the company invested in, or by providing for a merger with a larger firm that has publicly traded stock. They usually hope to do this within five to seven years of their initial investment. Most equity financing agreements include provisions guaranteeing that the venture capital firm may

participate in any stock sale or approve any merger, regardless of their percentage of stock ownership. Sometimes the agreement will require that the management work toward an eventual stock sale or merger. Clearly, the owner-manager of a small company seeking equity financing must consider the future impact upon his or her own stock holdings and personal ambition of the venture firm's aims, since taking in a venture capitalist as a partner may be virtually a commitment to sell out or go public.

BUILDING

TEAM

One must realize that one person (however good and experienced) cannot build a company. A company needs a good management team and key employees. Naturally, these key executives need to have significant stock options in the company. The critical positions in the company include heads of departments for finance, marketing, technology delivery, etc.

FINANCIAL PLANNING A startup or a young rapidly growing company must be financed properly. The simple rule to follow is to be aggressive in estimation of expenditure (assume that expenses will be more than planned) and to be very conservative in estimating cash inflows in the company. It is also a good idea to make a monthly or quarterly projection of the Profit and Loss statement to determine when the company sales reach the breakeven level. New companies rarely reach this level in less than six months, so it is imperative that these initial losses are funded through equity capital. As a corollary young companies need to preserve their cash to fire their Profit and Loss and avoid making capital investments in land and buildings during the first 24 to 36 months. The first round financing for a startup must take into account a 18 to 24 month horizon and must include: Capital expenditure/Deposits Research and Development expenses Marketing expenses Operating (Cash) losses Working Capital requirements

The above requirements can be funded through loans and equity. The Indian banking system is startup friendly and it is not difficult to get loans for a startup. Banks will finance around 40% to 60% of the assets and working capital. Most banks will insist on collateral security for the loans from the personal assets of the founders apart from having a lien on the assets they would finance. Banks will not finance soft operating expenses such as marketing expenses, advertising expenses, travel, operating losses and research and development expenses. These expenses have to be funded through

equity capital. Ideally a startup should be almost wholly financed through equity capital till it starts generating breakeven level of sales.

EXIT The preferred exit for the VC would be through a listing on a stock exchange. However should the company not reach the critical mass required to make such a listing, the founders may be either have to locate a strategic investor to take a part or whole of the company to provide an exit not only to the VC's but also the founders and employees. A less preferred option, one that typically occurs only when there is no investing interest in the company, is for the company to buy out the VC's. This naturally assumes that the VC's agree and that the company has the resources to buyback the shares. The company law is being amended to make such buy-back of stock possible. VC's do not work on the principle of buy-back of their stock by the other founders.

THE IMPORTANCE OF FORMAL FINANCIAL PLANNING In case there is any doubt about the implications of the previous sections, it should be noted: It is extremely difficult for any small firm -- especially the starting or struggling company -- to get venture capital. There is one thing, however, that owner-managers of small businesses can do to improve the chances of their venture proposals at least escaping the 90 percent which are, almost immediately rejected. In a word -- plan. Having financial plans demonstrates to venture capital firms that you are a competent manager, that you may have that special managerial edge over other small business owners looking for equity money. You may gain a decided advantage through well-prepared plans and projections that include: cash budgets, pro forma statements, and capital investment analysis and capital source studies.

Cash budgets should be projected for one year and prepared monthly. They should combine expected sales revenues, cash receipts, material, labor and overhead expenses, and cash disbursements on a monthly basis. This permits anticipation of fluctuations in the level of cash and planning for short term borrowing and investment.

Pro forma statements should be prepared for planning up to 3 years ahead. They should include both income statements and balance sheets. Again, these should be prepared quarterly to combine expected sales revenues; production, marketing, and administrative expenses; profits; product, market, or process investments; and supplier, bank, or investment company borrowings. Pro forma statements permit you to anticipate the financial results of your operations and to plan intermediate term borrowings and investments. Capital investment analyses and capital source studies should be prepared for planning up to 5 years ahead. The investment analyses should compare rates of return for

product, market, or process investment, while the source alternatives should compare the cost and availability of debt and equity and the expected level of retained earnings, which together will support the selected investments. These analyses and source studies should be prepared quarterly so you may anticipate the financial consequences of changes in your company's strategy. They will allow you to plan long term borrowings, equity placements, and major investments.

APPROACHING THE VENTURE CAPITALIST Venture capitalists typically invest in the equity capital of the companies. Venture capitalists are highly selective, investing in only 1% to 2% of all the business proposals they look at. The criteria used by VCs to evaluate business proposals include:

Quality and experience of management team Elegance of the solution (product/service of the company) Size and trends in the market for the companys product Competition Entry barriers to the business Investment horizon Entry and exit valuation

The right venture capitalists can add tremendous value to a company. Venture Capitalists rarely invest in companies that do not reach revenues of at least Rs. 30 crores to Rs. 40 crores in the software business and around Rs. 100 crores in the manufacturing business. They are also looking for unfair advantages enjoyed by the company through ntellectual property rights, proprietary knowledge base and a high-quality management team. For estimation of returns, VCs work on the number of times the money invested rather than the simple IRR (Internal Rate of Returna method of alculating investment yield over time assuming a set of income, expense and property value conditions). The benchmark for investment is at least five times the money in around 4 to 5 years. These hurdles could be higher for seed stage investments.

Once a short list of appropriate venture capitalists has been selected, an approach can be made. The venture capital firm will ask prospective investor companies for information concerning the product or service, the market analysis, how the company operates, the investment required and how it is to be used, financial projections and, importantly questions

about the management team.

In reality, all of the above questions should be answered in the business plan. Assuming the venture capitalist expresses interest in the investment opportunity, a good business plan is a prerequisite.

What does the Investment Process entail ? The investment process begins with the venture capitalist conducting an initial review of the proposal to determine if it fits with the firm's investment criteria. If so, a meeting will be arranged with the entrepreneur/management team to discuss the business plan.

Preliminary Screening The initial meeting provides an opportunity for the venture capitalist to meet the entrepreneur and key members of the management team to review the business plan and conduct initial due diligence on the project. It is an important time for the management team to demonstrate their understanding of their business and ability to achieve the strategies outlined in the plan. The venture capitalist will look carefully at the team's skills and backgrounds.

Negotiating Investment This involves an agreement between the venture capitalist and management of the terms of the memorandum of understanding. The venture capitalist will then study the viability of the market to estimate its potential. Often they use market forecasts that have been independently prepared by industry experts who specialize in estimating the size and growth rates of markets and market segments.

The venture capitalist also studies the industry carefully to obtain information about competitors, entry barriers, the potential to exploit substantial niches, product life cycles, distribution channels and possible export potential. The due diligence continues with reports from accountants and other consultants.

Approvals and Investment Completed The process involves exhaustive due diligence and disclosure of all relevant business information. Final terms can then be negotiated and an investment proposal submitted to the board of directors. If approved, legal documents are prepared.

A shareholders' agreement is prepared containing the rights and obligations of each party. This could include, for example, veto rights by the investor on remuneration and loans to executives, acquisition or sale of assets, audit, listing of the company, rights of co-sale and warranties relating to the accuracy of information enclosed.

The investment process can take up to three months, and sometimes longer. It is important, therefore, not to expect a speedy response. It is advisable to plan the business financial needs early on to allow appropriate time to secure the required funding

PRACTICES AND PROCEDURE

Venture Capital funds buy shares or convertible bonds in the company. They do not invest in order to receive an immediate dividend, but to allow the company to expand and ultimately increase the value of their investment. Hence, they are interested in innovative SMEs with very rapid growth rates.

VENTURE CAPITAL PROCESS

The venture capital investment process has variances/features that are context specific and vary from industry, timing and region. However, activities in a venture capital fund follow a typical sequence. The typical stages in an investment cycle are as below: Generating a deal flow Due diligence Investment valuation Pricing and structuring the deal Value Addition and monitoring Exit

Generating A Deal Flow In generating a deal flow, the venture capital investor creates a pipeline of deals or investment opportunities that he would consider for investing in. This is achieved primarily through plugging into an appropriate network. The most popular network obviously is the network of venture capital funds/investors. It is also common for venture capitals to develop working relationships with R&D institutions, academia, etc, which could potentially lead to business

opportunities. Understandably the composition of the network would depend on the investment focus of the venture capital funds/company. Thus venture capital funds focusing on early stage technology based deals would develop a network of R&D centers working in those areas. The network is crucial to the success of the venture capital investor. It is almost imperative for the venture capital investor to receive a large number of investment proposals from which he can select a few good investment candidates finally. Successful venture capital investors in the USA examine hundreds of business plans in order to make three or four investments in a year. It is important to note the difference between the profile of the investment opportunities that a venture capital would examine and those pursued by a conventional credit oriented agency or an investment institution. By definition, the venture capital investor focuses on opportunities with a high degree of innovation. The deal flow composition and the technique of generating a deal flow can vary from country to country. In India, different venture capital funds/companies have their own methods varying from promotional seminars with R&D institutions and industry associations to direct advertising campaigns targeted at various segments. A clear pattern between the investment focus of a fund and the constitution of the deal generation network is discernible even in the Indian context. Due Diligence Due diligence is the industry jargon for all the activities that are associated with evaluating an investment proposal. It includes carrying out reference checks on the proposal related aspects such as management team, products, technology and market. The important feature to note is that venture capital due diligence focuses on the qualitative aspects of an investment opportunity. It is also not unusual for venture capital fund/companies to set up an investment screen. The screen is a set of qualitative (sometimes quantitative criteria such as revenue are also used) criteria that help venture capital funds/companies to quickly decide on whether an investment opportunity warrants further diligence. Screens can be sometimes elaborate and rigorous and sometimes specific and brief. The nature of screen criteria is also a function of investment focus of the firm at that point. Venture capital investors rely extensively on reference checks with leading lights in the specific areas of concern being addressed in the due diligence. A venture capitalist tries to maximize the upside potential of any project. He tries to structure his investment in such a manner that he can get the benefit of the upside potential i.e. he would like to exit at a time when he can get maximum return on his investment in the project. Hence his due diligence appraisal has to keep this fact in mind. New Financing Sometimes, companies may have experienced operational problems during their early stages of growth or due to bad management. These could result in losses or cash flow drains on the company. Sometimes financing from venture capital may end up being used to finance these losses. They avoid this through due diligence and scrutiny of the business plan.

Inter-Company Transactions When investments are made in a company that is part of a group, inter-company transactions must be analyzed. Investment Valuation The investment valuation process is an exercise aimed at arriving at an acceptable price for the deal. Typically in countries where free pricing regimes exist, the valuation process goes through the following steps: Evaluate future revenue and profitability Forecast likely future value of the firm based on experienced market capitalization or expected acquisition proceeds depending upon the anticipated exit from the investment. Target an ownership position in the investee firm so as to achieve desired appreciation on the proposed investment. The appreciation desired should yield a hurdle rate of return on a Discounted Cash Flow basis. Symbolically the valuation exercise may be represented as follows: NPV = [(Cash)/(Post)] x [(PAT x PER)] x k, where NPV = Net Present Value of the cash flows relating to the investment comprising outflow by way of investment and inflows by way of interest/dividends (if any) and realization on exit. The rate of return used for discounting is the hurdle rate of return set by the venture capital investor. Post = Pre + Cash Cash represents the amount of cash being brought into the particular round of financing by the venture capital investor. Pre is the pre-money valuation of the firm estimated by the investor. While technically it is measured by the intrinsic value of the firm at the time of raising capital. It is more often a matter of negotiation driven by the ownership of the company that the venture capital investor desires and the ownership that founders/management team is prepared to give away for the required amount of capital PAT is the forecast Profit after tax in a year and often agreed upon by the founders and the investors (as opposed to being arrived at unilaterally). It would also be the net of preferred dividends, if any. PER is the Price-Earning multiple that could be expected of a comparable firm in the industry. It is not always possible to find such a comparable fit in venture capital situations. That necessitates, therefore, a significant degree of judgement on the part of the venture capital to arrive at alternate PER scenarios. k is the present value interest factor (corresponding to a discount rate r) for the investment horizon.

It is quite apparent that PER time PAT represents the value of the firm at that time and the complete expression really represents the investors share of the value of the investee firm. The following example illustrates this framework:

Example: Best Mousetrap Limited (BML) has developed a prototype that needs to be commercialized. BML needs cash of Rs2mn to establish production facilities and set up a marketing program. BML expects the company will go public in the third year and have revenues of Rs70mn and a PAT margin of 10% on sales. Assume, for the sake of convenience that there would be no further addition to the equity capital of the company. Prudent Fund Managers (PFM) propose to lead a syndicate of like minded investors with a hurdle rate of return of 75% (discounted) over a five year period based on BMLs sales and profitability expectations. Firms with comparable sales and profitability and risk profiles trade at 12 times earnings on the stock exchange. The following would be the sequence of computations: In order to get a 75% return p.a. the initial investment of Rs2 million must yield an accumulation of 2 x (1.75)5 = Rs32.8mn on disinvestment in year 5. BMLs market capitalization in five years is likely to be Rs (70 x 0.1 x 12) million = Rs84mn. Percentage ownership in BML that is required to yield the desired accumulation will be (32.8/84) x 100 = 39%. Therefore the post money valuation of BML At the time of raising capital will be equal to Rs(2/0.39) million = Rs5.1 million which implies that a pre-money valuation of Rs3.1 million for BML.

Quite obviously, valuation is one of the most critical activities in the investment process. It would not be improper to say that the success for a fund will be determined by its ability to value/price the investments correctly. Sometimes the valuation process is broadly based on thumb rule metrics such as multiple of revenue. Though such methods would appear rough and ready, they are often based on fairly well established industry averages of operating profitability and assets/capital turnover ratios. Such valuation as outlined above is possible only where complete freedom of pricing is available. In the Indian context, where until recently, the pricing of equity issues were heavily regulated, unfortunately valuation was heavily constrained.

Structuring A Deal Structuring refers to putting together the financial aspects of the deal and negotiating with the entrepreneurs to accept a venture capitals proposal and finally closing the deal. To do a good job in structuring, one needs to be knowledgeable in areas of accounting, cash flow, finance, legal and taxation. Also the structure should take into consideration the various commercial issues (i.e. what the entrepreneur wants and what the venture capital would require protecting the investment). Documentation refers to the legal aspects of the paperwork in putting the deal together. The instruments to be used in structuring deals are many and varied. The objective in selecting the instrument would be to maximize (or

optimize) venture capitals returns/protection and yet satisfies the entrepreneurs requirements. The instruments could be as follows: Instrument Loan Issues clean vs. secured Interest bearing vs. non interest bearing convertible vs. one with features (warrants) 1st Charge, 2nd Charge, loan vs. loan stock Maturity redeemable (conditions under Company Act)

Preference shares

participating par value nominal shares Warrants exercise price, expiry period Common shares new or vendor shares par value partially-paid shares Options exercise price, expiry period, call, put In India, straight equity and convertibles are popular and commonly used. Nowadays, warrants are issued as a tool to bring down pricing. In structuring a deal, it is important to listen to what the entrepreneur wants, but the venture capital comes up with his own solution. Even for the proposed investment amount, the venture capital decides whether or not the amount requested, is appropriate and consistent with the risk level of the investment. The risks should be analyzed, taking into consideration the stage at which the company is in and other factors relating to the project. (e.g. exit problems, etc). Promoter Shares As venture capital is to finance growth, venture capital investment should ideally be used for financing expansion projects (e.g. new plant, capital equipment, additional working capital). On the other hand, entrepreneurs may want to sell away part of their interests in order to lock-in a profit for their work in building up the company. In such a case, the structuring may include some vendor shares, with the bulk of financing going into buying new shares to finance growth. Handling Directors And Shareholders Loans Frequently, a company has existing directors and shareholders loans prior to inviting venture capitalists to invest. As the money from venture capital is put into the company to finance growth, it is preferable to structure the deal to require these loans to be repaid back to the shareholders/directors only upon IPOs/exits and at some mutually agreed period (e.g. 1 or 2 years after investment). This will increase the financial commitment of the entrepreneur and the shareholders of the project. A typical proposal may include a combination of several different instruments listed above. Under normal circumstances, entrepreneurs would prefer venture capitals to invest in equity as this would be the lowest risk option for the company. However from the venture capitals point of view, the safest instrument, but with the least

return, would be a secured loan. Hence, ultimately, what you end up with would be some instruments in between which are sold to the entrepreneur. Monitoring And Follow Up The role of the venture capitalist does not stop after the investment is made in the project. The skills of the venture capitalist are most required once the investment is made. The venture capitalist gives ongoing advice to the promoters and monitors the project continuously. It is to be understood that the providers of venture capital are not just financiers or subscribers to the equity of the project they fund. They function as a dual capacity, as a financial partner and strategic advisor. Venture capitalists monitor and evaluate projects regularly. They keep a hand on the pulse of the project. They are actively involved in the management of the of the investee unit and provide expert business counsel, to ensure its survival and growth. Deviations or causes of worry may alert them to potential problems and they can suggest remedial actions or measures to avoid these problems. As professional in this unique method of financing, they may have innovative solutions to maximize the chances of success of the project. After all, the ultimate aim of the venture capitalist is the same as that of the promoters the long term profitability and viability of the investee company. Exit At present many investments of venture capitalists in India remain on paper as they do not have any means of exit. Appropriate changes have to be made to the existing systems in order that venture capitalists find it easier to realize their investments after holding on to them for a certain period of time. This factor is even more critical to smaller and mid sized companies, which are unable to get listed on any stock exchange, as they do not meet the minimum requirements for such listings. Stock exchanges could consider how they could assist in this matter for listing of companies keeping in mind the requirement of the venture capital industry

VENTURE CAPITAL IN INDIA

Most of the success stories of the popular Indian entrepreneurs like the Ambanis and Tatas had little to do with a professionally backed up investment at an early stage. In fact, till very recently, for an entrepreneur starting off on his own personal savings or loans raised through personal contacts/financial institutions.

Traditionally, the role of venture capital was an extension of the developmental financial institutions like IDBI, ICICI, SIDBI and State Finance Corporations (SFCs). The first origins of modern Venture Capital in India can be traced to the setting up of a Technology Development Fund (TDF) in the year 1987-88, through the levy of a cess on all technology

import payments. TDF was meant to provide financial assistance to innovative and high-risk technological programs through the Industrial Development Bank of India. This measure was followed up in November 1988, by the issue of guidelines by the (then) Controller of Capital Issues (CCI). These stipulated the framework for the establishment and operation of funds/companies that could avail of the fiscal benefits extended to them.

Size of Venture Capital Industry in India According to Indian Venture Capital Association (IVCA) yearbook, in the year 2001, India ranked as the third most active venture capital market in the Asia Pacific region (excluding Japan).

Venture Capital Funds invested $ 907.58 million (i.e. about Rs 4,500 crore) in Indian companies in 2001, down 21.8 per cent from $ 1,160.2 million (i.e. about Rs 5,750 crore) in 2000. However, it may be noted that, the world over, the Venture Capital Industry registered a decline of about 50 per cent during this period. The number of Indian companies receiving investment declined 62.6 per cent to 101 in 2001 from 270 in 2000. 65.4 per cent of companies that raised venture capital in 2001 were in information technology and communications. Overall, India saw a shift to later stage investing with expansion stage funds, accounting for 60 per cent of the disbursements in 2001, compared to 44.3 per cent in 2000. According to the available data, 43 domestic venture capital funds registered with SEBI have about 400 investors, who are largely corporate, qualified institutional buyers (QIBs) and high net worth individuals. As such, these investors in venture capital funds (as is the case in other countries) are highly sophisticated and well informed. Therefore, SEBI acts more as a facilitator with minimal regulation instead of being concerned with protecting the interest of investors as far as the venture capital industry is concerned. According to provisional data available, SEBI registered VCFs and FVCIs have made a total investment of about Rs. 2,000 crore i.e. $ 430 million approximately, in Indian Companies as on March 2003. Thus, investment made by SEBI registered VCFs is much less compared to data compiled by IVCA. This also shows that major part of the VCF industry is not registered with SEBI. It may be mentioned here that any person or group of persons can invest in new entities; private equity funds can also finance such projects. Foreign investors can also invest in India through the Foreign Investment Promotion Board (FIPB) route. FIPB does not categorize the data as private equity or venture capital. Hence, consolidated data on venture capital activity is not available .

There are a number of funds, which are currently operational in India and involved in funding start-up ventures. Most of them are not true venture funds, as they do not fund start-ups. What they do is provide mezzanine or bridge funding and are better known as private equity players. However, there is a strong optimistic undertone in the air. With the Indian knowledge industry finally showing signs of readiness towards competing globally and awareness of venture capitalists among entrepreneurs higher than ever before, the stage seems all set for an overdrive.

The Indian Venture Capital Association (IVCA), is the nodal center for all venture activity in the country. The association was set up in 1992 and over the last few years, has built up an impressive database. According to the IVCA, the pool of funds available for investment to its 20 members in 1997 was Rs25.6bn. Out of this, Rs10 bn had been invested in 691 projects.

Certain venture capital funds are Industry specific (i.e. they fund enterprises only in certain industries such as pharmaceuticals, infotech or food processing) whereas others may have a much wider spectrum. Again, certain funds may have a geographic focus like Uttar Pradesh, Maharashtra, Kerala, etc whereas others may fund across different territories. The funds may be either close-ended schemes (with a fixed period of maturity) or open-ended.

Venture funds in India can be classified on the basis of

Genesis Financial Institutions Led By ICICI Ventures, RCTC, ILFS, etc. Private venture funds like Indus, etc. Regional funds like Warburg Pincus, JF Electra (mostly operating out of Hong Kong). Regional funds dedicated to India like Draper, Walden, etc. Offshore funds like Barings, TCW, HSBC, etc. Corporate ventures like Intel.

To this list we can add Angels like Sivan Securities, Atul Choksey (ex Asian Paints) and others. Merchant bankers and NBFCs who specialized in "bought out" deals also fund companies. Most merchant bankers led by Enam Securities now invest in IT companies.

Investment Philosophy Early stage funding is avoided by most funds apart from ICICI ventures, Draper, SIDBI and Angels. Funding growth or mezzanine funding till pre IPO is the segment where most players operate. In this context, most funds in India are private equity investors.

Size Of Investment The size of investment is generally less than US$1mn, US$1-5mn, US$5-10mn, and greater than US$10mn. As most funds are of a private equity kind, size of investments has been increasing. IT companies generally require funds of about Rs30-40mn in an early stage which fall outside funding limits of most funds and that is why the government is promoting schemes to fund start ups in general, and in IT in particular.

Value Addition The venture funds can have a totally "hands on" approach towards their investment like Draper or "hands off" like Chase. ICICI Ventures falls in the limited exposure category. In general, venture funds who fund seed or start ups have a closer interaction with the companies and advice on strategy, etc while the private equity funds treat their exposure like any other listed investment. This is partially justified, as they tend to invest in more mature stories. However, in addition to the organized sector, there are a number of players operating in India whose activity is not monitored by the association. Add together the infusion of funds by overseas funds, private individuals, angel investors and a host of financial intermediaries and the total pool of Indian Venture Capital today, stands at Rs50bn, according to industry estimates!

The primary markets in the country have remained depressed for quite some time now. In the last two years, there have been just 74 initial public offerings (IPOs) at the stock exchanges, leading to an investment of just Rs14.24bn. Thats less than 12% of the money raised in the previous two years. That makes the conservative estimate of Rs36bn invested in companies through the Venture Capital/Private Equity route all the more significant. Some of the companies that have received funding through this route include:

Mastek, one of the oldest software houses in India Geometric Software, a producer of software solutions for the CAD/CAM market Ruksun Software, Pune-based software consultancy SQL Star, Hyderabad based training and software development company

Microland, networking hardware and services company based in Bangalore Satyam Infoway, the first private ISP in India Hinditron, makers of embedded software PowerTel Boca, distributor of telecomputing products for the Indian market Rediff on the Net, Indian website featuring electronic shopping, news, chat, etc Entevo, security and enterprise resource management software products Planetasia.com, Microlands subsidiary, one of Indias leading portals Torrent Networking, pioneer of Gigabit-scaled IP routers for inter/intra nets Selectica, provider of interactive software selection Yantra, ITLInfosys US subsidiary, solutions for supply chain management

Though the infotech companies are among the most favored by venture capitalists, companies from other sectors also feature equally in their portfolios. The healthcare sector with pharmaceutical, medical appliances and biotechnology industries also get much attention in India. With the deregulation of the telecom sector, telecommunications industries like Zip Telecom and media companies like UTV and Television Eighteen have joined the list of favorites. So far, these trends have been in keeping with the global course.

However, recent developments have shown that India is maturing into a more developed marketplace, unconventional investments in a gamut of industries have sprung up all over the country. This includes:

Indus League Clothing, a company set up by eight former employees of readymade garments giant Madura, who set up shop on their own to develop a unique virtual organization that will license global apparel brands and sell them, without owning any manufacturing units. They dream to build a network of 2,500 outlets in three years and to be among the top three readymade brands.

Shoppers Stop, Mumbais premier departmental store innovates with retailing and decides to go global. This deal is facing some problems in getting regulatory approvals.

Airfreight, the courier-company which has been growing at a rapid pace and needed funds for heavy investments in technology, networking and aircrafts.

Pizza Corner, a Chennai based pizza delivery company that is set to take on global giants like Pizza Hut and Dominos Pizza with its innovative servicing strategy.

Car designer Dilip Chhabria, who plans to turn his studio, where he remodels and overhauls cars into fancy designer pieces of automation, into a company with a turnover of Rs1.5bn (up from Rs40mn today).

Factors those are critical for the success of the VC industry in India: The regulatory, tax and legal environment should play an enabling role . This also underscores the facilitating and promotional role of regulation. Internationally, venture funds have evolved in an atmosphere of structural flexibility, fiscal neutrality and operational adaptability. We need to provide regulatory simplicity and structural flexibility on the same lines. There is also the need for a level playing field between domestic and offshore venture capital investors. This has already been done for the mutual fund industry in India.

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. should be possible through IPOs and mergers/acquisitions on a global basis and not just within India. Such exit

There is also the need for identifying and increasing the domestic pool of funds for venture capital investment. In US, apart from high net worth individuals and angel investors, pension funds, insurance funds, mutual funds etc provide a very big source of money. The share of corporate funding is also increasing and it was as high as 25.9% in the year 1998 as compared to 2% in 1995. Corporations are also setting up their own venture capital funds. Similar avenues need to be identified in India also.

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. We need our enterprises to become global and create their own success stories. Therefore, automatic, transparent and flexible norms need to be created for such investments by domestic firms and enterprises.

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.

Infrastructure development also needs to be prioritized using government support and private management. This involves creation of technology as well as knowledge incubators for supporting innovation and ideas. R &D also needs to be promoted by government as well as other organisations.

REGULATORY ENVIRONMENT FOR VC INDUSTRY IN INDIA At present, the Venture Capital activity in India comes under the purview of different sets of regulations namely : (i) The SEBI (Venture Capital Funds) Regulation, 1996[Regulations] lays down the overall regulatory framework for registration and operations of venture capital funds in India. (ii) Overseas venture capital investments are subject to the Government of India Guidelines for Overseas Venture Capital Investment in India dated September 20, 1995. (iii) 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. 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.

The multiple set of Guidelines and other requirements have created inconsistencies and detract from the overall objectives of development of Venture Capital industry in India. All the three set of regulations prescribe different investment criteria for VCFs as under : SEBI regulations permit investment by venture capital funds in equity or equity related instruments of unlisted companies and also in financially weak and sick industries whose shares are listed or unlisted. The Government of

India Guidelines and the Income Tax Rules restrict the investment by venture capital funds only in the equity of unlisted companies. SEBI Regulations provide that at least 80% of the funds should be invested in venture capital companies and no other limits are prescribed. The Income Tax Rule until now provided that VCF shall invest only upto 40% of the paid-up capital of VCU and also not beyond 20% of the corpus of the VCF. The Government of India guidelines also prescribe similar restriction. Now the Income Tax Rules have been amended and provides that VCF shall invest only upto 25% of the corpus of the venture capital fund in a single company. SEBI Regulations do not provide for any sectoral restrictions for investment except investment in companies engaged in financial services. The Government of India Guidelines also do not provide for any sectoral restriction, however, there are sectoral restrictions under the Income Tax Guidelines which provide that a VCF can make investment only in companies engaged in the business of software, information technology, production of basic drugs in pharmaceutical sector, bio-technology, agriculture and allied sector and such other sectors as notified by the Central Government in India and for production or manufacture of articles or substance for which patent has been granted by National Research Laboratory or any other scientific research institution approved by the Department of Science and Technology, if the VCF intends to claim Income Tax exemption. Infact, erstwhile Section 10(23F) of Income Tax Act was much wider in its scope and permitted VCFs to invest in VCUs engaged in various manufacture and production activities also. It was only after SEBI recommended to CBDT that at least in certain sectors as specified in SEBIs recommendations, the need for dual registration / approval of VCF should be dispensed with, CBDT instead of dispensing with the dual requirement, restricted investment to these sectors only. This has further curtailed the investment flexibility.

The Income Tax Act provides tax exemptions to the VCFs under Section 10(23FA) subject to compliance with Income Tax Rules. The Income Tax Rules inter alia provide that to avail the exemption under Section 10(23FA), VCFs need to make an application to the Director of Income Tax (Exemptions) for approval. One of the conditions of approval is that the fund should be registered with SEBI. Rule 2D also lays down conditions for investments and section 10(23FA) lays down sectors in which VCF can make investment in order to avail tax exemptions. Once a VCF is registered with SEBI, there should be no separate requirement of approval under the Income Tax Act for availing tax exemptions. This is already in practice in the case of mutual funds. SEBI regulations provides flexibility in selection of investment to the VCF, however, in the event of subscription to the fund by an overseas investor or the fund choosing to seek income tax exemptions, the investment flexibility is curtailed to a great extent. It is worth mentioning that one of the condition for grant of approval under the Income Tax Rules for

seeking exemption under the Income Tax Act is that the fund should be registered with SEBI which make it obligatory on the venture capital fund not only to follow Income Tax Rules but also the SEBI Regulations. Further, a VCF has to seek separate registration under the SEBI Act and approval under the Rules of Income Tax apart from seeking approval from FIPB / RBI in the event of subscription to the fund by an overseas investor.

Need was felt for the consolidation of all these into single set of regulations to provide for uniformity and remove any ambiguity in any interpretation. Based on Chandrashekhar Committees recommendations, SEBI was made the nodal regulatory for VCFs that provides a uniform, single window regulatory framework. SEBI also notified regulations for Foreign Venture Capital Investors.

In the above background, following recommendations were proposed by K B Chandrasekhar Committee on Venture Capital: (a) Since SEBI is responsible for registration and regulation of venture capital funds, the need is to harmonise and consolidate multiple regulatory requirements within the framework of SEBI regulations to provide for uniform, hassle free, single window clearance with SEBI as a nodal regulator.

(b)

In view of the (a) above, Government of India may consider repealing the Government of India MoF(DEA) Guidelines for Overseas Venture Capital Investment in India dated September 20, 1995

(c)

The Foreign Venture Capital Investor (FVCI) should registered under the SEBI Regulations under the pattern of FIIs.

(d)

For SEBI registered VCF, requirement of separate rules under the Income Tax Act should be dispensed with on the pattern of mutual funds.

ISSUE OF TAX PASS THROUGH FOR VENTURE CAPITAL FUNDS

Internationally, VCFs being dedicated pools of capital, operate in fiscal neutrality and are treated as pass through vehicles. In any case, the investors of VCFs and VCUs are subject to income tax. Through a series of changes in the Tax Laws, a distinct fiscal frame work has already been created over the last decade, for taxation of Mutual Funds. The fiscal regime for mutual funds quite simply eliminated the tax at the pool level while maintaining taxation at the

investor level. Thereby it avoided double taxation of the same stream of income of an unincorporated pool and concomitantly maintained single tax at investor level. The objective behind is to provide fiscal neutrality as the income is taxed in the hands of final recipient and intermediary body is considered a pass through entity. Drawing the same analogy, a Venture Capital Fund is also a pool of funds of investors and income of the fund should be taxed in the hands of the investor and the fund should be considered a pass through entity and exempt under the income tax. Under the present regime, income of a VCF is taxable at fund level, (except for the exemption provided under section 10(23 FA) of the Income tax act for the income by the way of dividend and capital gains) and also taxable in the hands of investors when distributed by VCF. Pre-empting dual level (pool, as well as investor level) taxation has been a hallmark of Indian Income Tax Legislation for decades. It is therefore recommended that the present Section 10(23FA) be reenacted such that it provides complete exemption from income tax at fund level on the basis of SEBI Registration (like in the case of mutual funds). Exempting the VCF from income tax does not necessarily cause the loss of revenue as these are pass through entities and income distributed by VCF would be taxed in the hand of investors. Further, such pass through income would not just include dividends only, but also capital gains and interest income. In most of the cases, the bulk of income pass through would be in the nature of capital gains which attract tax in contrast to the income passed through as dividend. This would therefore increase the country's tax base without any negative effect on the revenues.

In addition, venture capital activities aid to the growth of industrial activity, which would indirectly add to the tax payers base. Global experience shows that venture funded enterprises have created more wealth and consequent tax revenues. It is certainly believed that in India also, with the active venture capital funding, there would be a very large number of successful enterprises which would add to the national wealth creation including the tax revenues. Recommendations proposed by K B Chandrasekhar Committee on this issue In the above background, following recommendations are proposed : 1) The existing section 10(23FA) of Income Tax Act needs to be re-enacted to provide for automatic income tax exemption to VCFs registered with SEBI (like in the case of mutual funds) which will eliminate the taxation at the pool level while maintaining the same at investor level. The new Income tax Section 10(23FA) would then read as under: Any income of a registered venture capital fund under the Securities and Exchange Board of India Act 1992 or Regulations made there under. Consequently, no separate rules as in 2D would be needed.

Other Regulatory Initiatives by SEBI

To promote the Venture Capital Financing

Industry , SEBI set up an advisory committee on VC under the

Chairmanship of Dr. Ashok Lahiri, Chief Economic Advisor, Ministry of Finance, Government of India, for advising SEBI in matters relating to the development and regulation of venture capital funds industry in India. This committee removed some earlier restrictions and recommended measures like permitting VCFs to invest in real estate, removing lock-in period for shares of listed venture capital undertakings and reducing the proportion of funds raised that have to be invested in unlisted companies from 75% to 66.67% and so on. The regulations were also amended in 2000 leaving no complaints from the industry.

The committee deliberated on following three issues related to VCF. 1) 2) 3) Operational issues Tax related issues Foreign Exchange related issues

Currently VCFs and VCFIs registered with SEI cannot invest more than 25% of the funds in shares at the time of IPO or in debt instruments of a company in which the VCF has already invested by way of equity. Further, due to lock-in period of one year they can not exit immediately on listing of shares.

This acts as an deterrent factor, as it does not give an opportunity to VCFs to acquire shares I the focus areas of the fund and obtain early liquidity and returns to investors in the VCFs. Hence, the committee recommended removing such restriction.

As per SEBI regulations, a VCF/FVCI is required to invest at least 75% of the investible funds in unlisted equity shares or equity linked instruments. This restricts the registered VCFs from investing in listed companies.

The committee recommended a reduction on the minimum investment in unlisted companies from 75% to 66.67%. The remaining 33.33% ( or less depending on how much is invested ) may be invested in listed securities. The argument for was that because of risky nature of investment and time lag between investment and payback, this measure will help VCFs to protect their NAV during the initial period.

The industry also sought freedom to invest in instruments that give them flexibility to invest in some kind of hybrid instruments, which are optionally convertible into equity, may be permitted for investment within the 66.67% portion of the investible funds, allocated for investment in unlisted companies. There are instances in which VCFs/FVCIs need to resort to innovative financing structures by creating Special Purpose Vehicles (SPV) in the form of trusts or holding companies that will issue shares on underlying business. The SPVs has its own separate legal identity, it can raise capital in its name, own assets and create charge over them. This protects the shareholders from liabilities arising from the contracts entered into by the business earlier. Further, VCFs are not currently permitted to invest in the non-banking financial service sector. The committee recommended that given the risky nature of the business in this sector, VCFs may be allowed to invest in NBFCs engaged in equipment leasing and hire purchase. The committee also recommended that real estate investments by VCFs and FCVIs

Other suggestions of the committee : 2) VCFs to be allowed to invest in offshore Venture Capital Undertakings and also allows them to have global management exposure. RBI may periodically specify the overall limit for such investment, which may be monitored by SEBI. 3) Appointment of a custodian by each FVCI to facilitate the maintenance of records and to ensure a smooth transition when the VCUs shares get listed. 4) Issue clarification through CBDT circular on the tax issues related to Exit Routes to VCFs which may take any of the following forms : IPO, Merger and Acquisition or a management buy-out. Wholly owned Indian subsidiaries of FVCIs which are registered with SEBI may be exempted from minimum capitalization requirements.

OPPORTUNITIES IN BIOTECH SECTOR & VENTURE CAPITAL

According to a study conducted by vcindia.com, a knowledge vertical of dickenson

intellinetics, more than 40 VC/PE firms are looking at the biotech sector as promising. 40% of these firms are overseas VC/PE firms actively seeking investments in India. What is more surprising is that it is not only the US based firms that our keeping a close watch on the development of this sector but VC players across the globe are looking to fund biotech projects in India, for example UK based private equity firms like Coller Capital and Alta Partners or

Abundance Venture Capital which is based out of Malaysia and Pitango Ventures from Israel, says Manoj Saha of vcindia.com.

Data from TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide, indicates two foreign private equity fund investments in Indian biotech companies during recent months. International Finance Corporation (IFC), the private equity arm of the World Bank, invested $6 million in Bharat Biotech in June 2004.

In July 2003, US-based Batterymarch Financial Management had invested $1.3 million in Transgene Biotek. More of such transactions are in the pipeline for 2005-06. No other country in the world today has the unique set of advantages that India offers for large-scale practice of biotechnology. It has one of the largest coastlines anywhere and at least seven distinct climatic zones and one of the largest and most varied sets of marine organisms anywhere. The ambient temperature in most parts of the country is just what living organisms need for their activities that result in a biotechnological product. This curtails immensely the cost of cooling or heating which becomes obligatory for the practice of biotechnology in most parts of the Western world. There are places on the Indian coast where there is uninterrupted sunshine for some 340 days in the year so that one can grow marine organisms in open raceways.

India has an enviable infrastructure and a large pool of trained manpower, with experience in most of the areas of biotechnology. Its labor and infrastructure costs are, perhaps, lower than anywhere else where biotechnology can be done and is being done, with the possible exception of China. It has large tracts of land available for growing the desired plants required for agriculture-based biotechnology and experience of building world-class institutions in virtually every sector of human endeavor from outstanding basic research to efficient industrial production.

CONCLUSION The world we live in is changing in dramatic ways and at a rate never before seen in history. The only constant of our lives today is change. These changes are affecting countries, societies and businesses in profoundly impactful ways. The Internet and telecom revolutions are well-known. In our country, the rapid and meteoric growth of the cell phone business is but a small manifestation of the change that has impacted life styles, business and personal interaction. The changes in turn are being fueled by the following three huge trends: i) Globalization: the growing integration of the economies of the world has significant impact on the economy of any individual nation. As the Indian economy grows, it will have to be increasingly a part of

the global economy. Whether its in the area of media, technology, manufacturing or retail theres no choice but to be a part with global linkages, perspectives and practices. ii) Knowledge and Intellectual Property: the role played by human brain has never before been the most important. Of all the factors of production, knowledge and intellectual property are the most critical in this increasingly complex, inter-linked, fats growing world. Every physical good and every service being delivered today at the global level has a knowledge component also that was not present a few years ago. This dependence on knowledge and intellectual property as critical factor of production is only increasing. iii) Technology: the deployment of technology to solve simple but critical problems is only now being recognized by the economies of the world. No longer is technology viewed as something to be kept in an air-conditioned room to brought out on an auspicious occasion. Technology is a fundamental enabler of the creation and dissemination of knowledge and intellectual property based goods and services which in turn are the natural outcomes of an increasingly globally competitive world. India is in the midst of an exciting unprecedented growth phase which by all account should make it amongst the top 10 economic powers in the coming decades. Entrepreneurship is the engine that will drive Indian society forward by creating businesses that will create jobs and lasting economic wealth in the society. A significant success factor of successful, sustainable, scale-based entrepreneurial business is the availability of Venture capital

VC is an alternative asset class. It is different from traditional private equity, though in India the two are often clubbed together. VC as is well known is high risk capital that typically is invested in ventures that usually cannot access any other source of capital (e.g. Debt from banks and financial institutions since these ventures dont have collaterals whether they be physical assets or strong cash flows and the like). VC therefore seeks ventures with high returns which in turn implies investing in fast growing businesses that generate value very disproportionate to the book value. This is in large part due to the intellectual property created through the innovative use of technology. The Intellectual property can be both in core technology and in technology-enabled processes, management systems and business models. VCs typically do not employ complex financial engineering practices, do not participate in secondary offerings, Private Investments in Public Equity, undertake buy-outs, restructurings, or invest in debt or convertible instruments. They also do not invest in very well developed companies (this is where VC overlaps private equity) nor do they invest huge sums of money in traditional businesses with well developed matrix for valuation.

If we assume that the three tends of globalization, emergence of knowledge-based industries, and deployment of technology for effecting business and social change, let us look at the impact these trends will likely have on venture capital in India: First, VC in India will have to become globalized. This means that local VC participants will have to forge links and relationships with international players and vice versa. International players are already present in India and to compete with them without access to the same deep pockets, international linkages, local pools of capital have to be created to compete against international players. Today, theres no local source of capital available for investing in any meaningful manner. Banks, pension funds, insurance funds and the like will have to learn to become more sophisticated in their deployment of the many thousands of crores of rupees at their command. They will have to learn to invest their cash hoards across asset classes as is done by institutions in the developed world. Treasury departments of corporations will have to also similarly learn to diversify and manage their risks through smart, sophisticated portfolio allocations to alternative asset classes like VC. Companies realize that they need to stay abreast of new and exciting developments and will invest in funds or companies as a way of getting their knowledge repositories constantly replenished. The VC funds will have to be managed by fund managers who have an international mindset, have domain/sectoral experience, and who are backed by strong research and analysis teams. The VCs will have to be those who are risk managers rather than those who are risk avoiders. The mindset has to be that of a sophisticated investor and not that of a financier. In the knowledge driven economies of the future, the sophisticated investor has to also display understanding of the business and sector that he/ she is investing in. for example, we will see venture capitalists who have background in say, bio-tech or pharma or manufacturing play a critical role in investing in these sectors. Going forward, there will be several private independent funds run by industry and investment professionals. Regulatory changes have to be brought about to make this happen. Local capital funds should have the flexibility of investing/holding overseas securities. Corporate laws should be amended to make it easy to create and exit private companies without onerous reporting requirements. Capital structures should have more flexibility for these young small private companies. Exit mechanisms have to be made easier. For example, an OTC exchange for small cap companies to be listed can be created. To ensure liquidity, market makers and underwriters can be encouraged to play a role to foster growth in the sector. Mergers and acquisitions have to be encouraged as a means of creating liquidity events and generating shareholder value.

The above list is more of a wish list rather than hard prediction. Indian economy is showing all the signs of sustained growth. There are large pockets of the economy that are ripe for VC investing e.g. In IT, telecom, retail franchises, manufacturing, food processing. With the right mix of regulatory changes, fund managers and local capital it is possible to see a burgeoning VC business in India. Over the next several years, a robust eco-system required to foster and engender entrepreneurship will emerge. And entrepreneurship is critical to Indias growth as many millions join the workforce in the coming years.

ANNEXURE 1

Case study of SIDBI Venture Capital Limited (SVCL) SIDBI Venture Capital Limited (SVCL) is a wholly owned subsidiary of SIDBI, incorporated in July 1999 to act as an umbrella organisation to oversee the Venture Capital operation of SIDBI. SVCL will manage the various Venture Capital Funds launched/ being launched by SIDBI. Current fund managed by SVCL is:

National Venture Fund for Software and Information Technology (NFSIT) read more

The National Venture Fund for Software and Information Technology Industry (NFSIT) has been set up by Small Industries Development Bank of India (SIDBI) in association with Ministry of Information Technology (MIT), Govt. of India . At the national level a Rs. 1000 million (US$ 22.22 million) National Venture Capital Fund for Software and IT industry (NFSIT) has been set up by SIDBI and is being managed by SIDBI Venture Capital Ltd.

SIDBI has contributed Rs. 500 million (US$ 11.11 million). Ministry of Information Technology, Government of India Rs. 300 million (US$ 6.67 million). Rs. 200 million (US$ 4.44 million) by IDBI.

The basic idea of mooting this national fund is that:

The focus of the fund primarily be in small scale units in the growing IT industry and related businesses such as networking, multimedia, data communication and value added telecommunication services.

A portion of the Fund could be earmarked for incubation projects which are of high risk in nature and development of products, evaluation of which would require high degree of expertise including international linkages.

It will help in arranging strategic alliances with overseas IT units including those setup by Non-Resident Indians (NRIs).

The Investment objective of the fund will be to meet the total fund requirements of the IT units to enable them to achieve rapid growth rates and maintain their competitive edge in the international markets.

Investment may spread across the focus sector in the area of new projects, expansion and diversification and product development efforts.

Other features

It is a close ended 10 year fund with an initial corpus of Rs. 1000 million/ US$ 22.22 million SIDBI, Ministry of Information Technology (MIT), Govt. Of India and IDBI are the initial contributors to the fund

The main objective of the fund is to meet the total fund requirements of the software and IT companies, particularly Small Enterprises, to enable them to achieve rapid growth rates and maintain their competitive edge in domestic and international markets

The fund would endeavor to develop international networking and enable assisted units to attract coinvestment from international venture capitalists in subsequent rounds of financing

The fund may also consider funding innovative incubation projects and development of products in the IT sector.

Promoters

Small Industries Development Bank of India (SIDBI) was established in April 1990 as a wholly owned subsidiary of Industrial Development Bank of India (IDBI), under an Act of Indian Parliament to serve as the principal financial institution for promotion, financing and development of industry in the small scale sector and co-coordinating the

functions of other institutions engaged in similar activities. As a result of an amendment to the SIDBI Act, SIDBI has since been made as an independent financial institution to cater to the wider range of SSI requirements.

SIDBIs Assistance to the small scale sector is channelised basically through 3 routes viz. :-

o o o

Indirect Assistance Direct Assistance Development and Support Services

SIDBI offers various schemes of assistance, designed to meet every need of small scale industries, under one roof.

The unsecured bonds of SIDBI have been rated AAA by leading domestic rating agencies viz. The Credit Rating Information Services of India Ltd. (CRISIL) and Credit Analysis and Research Ltd. (CARE).

SIDBI is ranked 23rd in terms of Assets and 24th in terms of Capital among the top 50 Development Banks in the World (Source: The Banker, London, June 2000)

SIDBI is placing strong emphasis on technology development and absorption both for modernisation purposes and also for creating new enterprises and strengthening existing enterprises in high tech areas such as information technology.

SIDBI and Venture Capital Financing

SIDBIs Venture Capital Fund constituted in October 1992. It is utilised for direct investment in small scale units and contribution to Venture Capital Funds for onward lending to/investment in small scale units.

Promoted 15 State / All India Level Venture Funds. 10 Funds are IT dedicated and the balance 5 are General Funds.

Promoted National level Fund NFSIT. SIDBI has so far made an aggregate commitment of Rs.1.5 billion (US$ 33.33 million). Further, SIDBI has also taken the initiative in setting up of two Innovation and Incubation Centers in Indian Institute of Technology, Kanpur and Birla Institute of Technology, Mesra

SME GROWTH FUND

Venture Funds are recognized globally as the most suitable form of providing risk capital to innovative and high technology businesses. In order to meet the venture capital needs of SME units and enable them to achieve rapid growth by taking advantage of opportunities in the emerging sectors, SIDBI Venture Capital Ltd. has set up SME GROWTH FUND. The fund has a targeted corpus of Rs.500 crore with a life of 8 years.

SME GROWTH FUND is registered with Securities and Exchange Board of India (SEBI) as a Venture Capital Fund and has been structured as a unit scheme to make primarily equity or equity-related investments in the growth oriented businesses having significant business activity in India. The Fund seeks to achieve attractive risk-adjusted returns for its contributors through long-term capital appreciation.

INVESTMENT FOCUS

SME GROWTH Funds focus is to invest in unlisted entities in the small and medium enterprises in manufacturing as well as services sector as also businesses providing infrastructure or other support to SMEs. The Fund may also invest very selectively in listed entities, to take advantage of attractive opportunities in growing companies.

The Fund will typically invest in companies at early stage as well as in second round financing for those with a track record of proven technology or business model and opportunities for growth and earnings.

SME GROWTH FUND will focus at wide range of growth sectors, such as life sciences, retailing, light engineering, food processing, information technology, infrastructure related services, healthcare, logistics and distribution, etc.

MODE OF INVESTMENT

SME GROWTH FUND provides financial assistance primarily by way of equity or equity-linked capital investment. It shall also endeavor to provide mentoring support and other value addition to enable the funded companies to achieve rapid growth and achieve / maintain their competitive edge in domestic and international markets.

The Fund will seek a strategic stake in the funded companies with board representation and other rights as venture capital investor.

INVESTMENT CRITERIA

SME GROWTH FUND is looking for investment in projects offering potential for attractive growth and earnings. Key criteria for project selection are

Strong and committed core team: The Fund will look for businesses managed by a team with a demonstrated performance track record, commitment and energy.

Growth potential: The Fund will like to invest in promising businesses having potential for sustainable high growth.

Long-term competitive advantage: The Fund will prefer to invest in innovative business operations with a sustainable competitive advantage.

Viable business plan: The venture should have a viable business plan which offers above average profitability leading to attractive return on investment.

A Clear exit plan: The Fund, being of limited life, will seek to invest in ventures offering a strategy for clear exit within a reasonable time period. The exit could be by way of IPO, offer for sale, merger and acquisition or sale to a strategic or a financial investor.

SIDBI's Venture Fund

The objective of SIDBI's Venture Fund is to provide a window to entrepreneurs with ventures which have special characteristics to be innovative but at the same time may not qualify for assistance through the conventional route of term financing. SSI units involving new and untried processes and technologies which have scope for commercial application with characteristics of high risk and high return may be considered.

SVCL Relationship

Besides financial assistance SVCLs role is to

Help the entrepreneur to manage his business more effectively and achieve rapid growth in internationally competitive environment

Use SIDBIs close functional linkages with domestic and international venture capital funds/ companies, Govt. agencies, financial institutions, commercial banks, foreign institutional investors, merchant bankers, consultancy agencies, management institutes, R&D organisations, software technology parks etc. to provide strategic support to assisted companies of this fund

Provide Indian Small enterprises not only with fund support but also information and market access

Technology networking and hand holding required to add value to assisted units so as to enable them to become global companies and aim at future listing on the NASDAQ and other foreign stock exchanges

General Investment Criteria

Key requirements for the project selection are:

A strong management team which has commitment, demonstrated track record and a high degree of integrity Long term competitive advantage Potential for above average profitability leading to attractive returns on investments Subscription to equity/ equity type instruments Unlisted companies preferably in small scale Exit should be established

Business Plan

A good business plan will expedite our decision making. Intending entrepreneurs/ promoters having projects meeting the funds investment criteria may contact SVCL at Mumbai with a Business Plan which shall include:

Executive summary giving brief details of the project and levels of financing required* Resume and references on the promoters and management team*

Details of subsidiary/ associate companies of the chief promoters. Details of credit facilities, if any, enjoyed by the associate companies from any bank/ FI*

Detailed shareholding pattern of the company (existing and proposed) with brief write up on the extent of interest of each of the major shareholder/ promoter in the company*

Human resource and requirement in future. Details of ESOP scheme, if any Details of performance of the company during the preceding 3 years (where applicable) covering financial performance, nature/ type of operation, projects completed, products developed, competitive strengths etc.*

Details of technical tie-up/ collaborations* Technological strengths vis--vis competitors. Quality systems adopted and milestones achieved in obtaining Quality Certifications Marketing Strategy* Key clients, major orders executed for them* Details of ratings (if any) of major foreign clients. Other relevant information on the clients like DUN number etc. may be given

Details of overseas site offices, representative offices, subsidiary/ associate companies set up abroad for marketing/ offshore development*

Cost of venture and proposed means of finance* Present status of the proposed project* Financial projections with underlying assumption* Implementation schedule Risk Analysis Clearly laid out exit plan Contact persons at your company, with e-mail address and website, if any.

Companies as NFSIT/ SVCL associates :

We invest in unlisted companies engaged in high end Software/ IT business with a focus on small-scale units including units graduating to medium scale. The Company should have high growth potential so that it can scale up sufficiently to make an IPO within 5 years of investment.

Stage at which NFSIT/ SVCL invest

SVCL is focusing on all stages on investment. The Company at the time of investment should be unlisted.

Geographic focus to NFSIT/ SVCL

NFSIT/ SVCL proposes to make investment on an all India basis. NFSIT is a domestic fund and the investee Company must be incorporated in India. Part of the investment can be utilised for investment in opening overseas branch offices/ subsidiaries provided the investment is beneficial to the parent Company in India.

Project evaluation process followed by NFSIT/ SVCL

The Process of evaluation of the proposal involves scrutiny of a business plan, detailed due diligence including visit to existing facilities/ operation site, reference check, feedback form clients etc. All proposals are reviewed by an Investment Committee (IC), which also involves a presentation by the promoters. Once the investment is recommended by IC, the proposal is put up to the Board of SVCL for final approval.

The instruments of finance by which VC investment is made

Investment is made by way of equity and equity type instruments. Financial structuring is done on a case to case basis keeping in view factors like risk perception, growth potential, equity base and market condition. SVCL also co-invests with other VC funds. NFSIT does not take a majority stake in a Company and at present restricts its equity stake to 40% of the equity base of the Company.

NFSIT/ SVCL's role after an investment is made

SVCL provides "smart money" to entrepreneurs. Apart from finance, SVCL provides networking and management support as well with the objective to make the company grow rapidly. SVCL also assists investee companies to attract investment from other venture capitalists in subsequent rounds o f financing.

ANNEXURE 2 Profiles Member 2i Capital (India) Pvt. Ltd. Total Size NA of Fund Types of Financing 1. 2. Early/Stage/Growth Development/ Expansion IVCA Investment Preference 1. Less than 10 Million Industry Focus 1. IT 2. Computer Software 3. Computer Hardware 4. IT Enabled Services 5. Biotech 1. IT 2. Computer Software 3. Computer Hardware 1. IT 2. Computer Hardware 3. Computer Software 4. IT Enabled Services 1. IT 2. Computer Hardware 3. Computer Software 4. IT Enabled Services 5. Biotech 6. Industries with promising growth potential 1. Biotech 2. Computer Hardware 3. Computer Software 4. IT 5. IT Enabled Outsourcing Services 1. Computer Hardware 2. Computer Software 3. IT 4. IT Enabled Outsourcing Services 1. Computer Hardware 2. Computer Software 3. IT 4. IT Enabled Services 5. Media/Retail members:

Acer Technology Ventures Advisory (India) Pvt. Ltd. Baring Private Equity Partners (India) Limited

Rs. 260 Million

1. Early Stage/Growth 2. Development/ Expansion 1. Development/ Expansion 2. MBO 1. Start Up 2. Early Stage/Growth 3. Development/ Expansion .

1. Less than 10 Million 1. Above 200 Million

Rs. Million

2000

Canbank Venture Capital Fund Ltd.

CVCF I Rs.164.25 Million CVCF II Rs.105 Million CVCF III - Rs. 300 Million Rs. Million 126.7

1. 10-25 Million 2. 25-50 Million

Chrys Capital Fund II, LLC

1. Start Up 2. Early Stage/Growth 3. Development/ Expansion 4. Mezzanine 1. Development/ Expansion

1. 2-5 Million 2. 5-10 Million

ChrysCapital Fund I, LLC

Rs. Million

63.9

1. 2-5 Million 2. 5-10 Million

Frontline Ventures

Rs. 50 Million

1. Early Stage/Growth 2. Development/ Expansion 3. Mezzanine

1. 50-100 Million 2. 100-200 Million

HSBC Pvt. Equity Management Ltd. India Liaison Off. ICF Ventures

US $ 59.60 MILLION Rs. 750 Million 1. Start UP 2. Early Stage/Growth 3. Development/ Expansion 1. Million 50-100 1. IT 2. Computer Hardware 3. Computer Software 4. Biotech 5. Consumer 6. Media 1. IT 2. Computer Hardware 3. Computer Software 4. IT Enabled Services 5. Biotech 6. Pharma

IFCI Venture Capital Funds Ltd.

Rs. 80 Million

1. Seed 2. Start Up 3. Early Stage/Growth 4. Development/ Expansion 5. Mezzanine

1. 10-25 Million

IL&FS Venture Corporation Ltd.

Rs. Million

2270

1. Seed 2. Start Up 3. Early Stage/Growth 4. Development/ Expansion 5. Mezzanine 6. MBO

1. Million

50-100

1. IT 2. Computer Hardware 3. Computer Software 4. IT Enabled Services 5. Telecommunications 6. Biotech 7. Life Sciences 8. Retail 9. Auto Ancillary 10. Engineering 1. IT 2. Computer Hardware 3. Computer Software 4. IT Enabled Services 5. Biotech 6. Media/Entertainment 7. Distribution/Logistics 8. Communications 9. Life Sciences (including Pharmaceuticals) 10. Companies changing their business paradigm 1. IT / Software / Hardware 2. Hi Tech Printing 3. Construction 4. Textile 1. IT 2. Computer Software 3. Computer Hardware 4. ITES 1. IT 2. Computer Hardware 3. Computer Software 4. IT Enabled Services 1. IT / SOFTWARE / HARDWARE 1. IT / Software / Hardware 2. ITES 3. Bio Tech 4. Tourism 1. IT / Software / Hardware 2. ITES 1. Computer 2. Computer 3. IT Hardware Software

IndAsia Fund Advisors Pvt. Ltd.

Rs. 534 Million

1. Start Up 2. Early Stage/Growth 3. Development/ Expansion 4. MBO

1. 100-200 Million 2. Above 200 Million

Industrial Venture Capital Ltd.

7 CR (USD)

1. 2. Startup 3. Mezzanine

Seed

10 TO 25 (USD)

Infinity Technology Investments Pvt. Ltd.

Rs.1500 Million

1. Seed 2. Start Up 3. Early Stage/Growth 2000 1. Start Up 2. Early Stage/Growth

1. Less than 10 Million

Jumpstartup Fund Advisors Pvt. Ltd.

Rs. Million

1. 10-25 Million

Karnataka Information Technology Venture Capital Fund Kerala Venture Capital Fund

15 CR (USD) 20 CR (USD)

1. Dev / Expansion 2. Mezzanine 1. Start Up 2. Early State / Growth 3. Dev / Exp. 1. Early Stage / Growth 2. Dev / Expansion 1. Early Stage/Growth

25-150 (USD) 25-150 (USD)

LACS LACS

Rajasthan Assest Management Co. Pvt. Ltd. Sicom Capital Management Ltd.

16 CR (USD) Rs. 240 Million

10 TO 25 (USD) 1. 10-25 Million

SIDBI Venture Capital Limited

Rs. Million

1000

1. Early Stage/Growth 2. Development/ Expansion 1. Seed 2. Start Up 3. Early Stage/Growth 4. Development/ Expansion

1. Million

50-100

1. IT 2. Computer Hardware 3. Computer Software 4. IT Enabled Services 1. IT 2. Computer Hardware 3. Computer Software 4. IT Enabled Services 5. Biotech

Walden International

Rs. Million

2100

1. Above 200 Million

Waygate Capital

1. Mezzanine 2. MBO

1. 100-200 Million

1. IT 2. Computer Hardware 3. Computer Software 4. IT Enabled Services 5. Media/Entertainment

ANNEXURE 3

PRIVATE EQUITY IN ASIA 2003

An estimated $17.5 billion of private equity and venture capital was invested in the Asia Pacific region in 2003-a whopping 92% increase on 2002

Japan led the region accounting for $7.3bn of the value of deals completed, followed by Korea with $3.3bn and Australia with $2.8bn

In contrast, only $3.32 billion of new funds were raised in 2003 (up only 10% on 2002 levels) The pool of private equity capital under management rose to $97.6 billion in 2003 up from $88.6bn in 2002 Start-up and early stage investment is estimated at $ 0.6 bn and $1.4 billion was invested in expansion stage companies in 2003

Telecommunication section had the highest percentage of invested capital with $3.7bn or 21% followed by financial services with $2.3bn or 18.3%

ANNEXURE 4

INDIA VENTURE CAPITAL INVESTMENT TRENDS

1,400 1,200 1,000 800 600 400 200 20 96 80 97 98 99 0 250 500

1,160 937 774 590 900

ANNEXURE 5

'00

'01

'02

'03

'04

VC ACTIVITY IN ASIAN REGION 2003

4 Country Japan South Korea Australia China India Indonesia Singapore Bangladesh Philippines Hong Kong Taiwan
Source : AVCJ

Amt. Invested ($MN) $ 7,297.71 $ 3,152.94 $ 2,174.70 $ 1,279.83 $ 774.01 $ 653.45 $ 501.81 $ 472.70 $ 149.30 $ 131.16 $ 37.98

Number of Companies 77 21 71 44 42 5 16 2 4 7 3

ANNEXURE 5

Requirements under SEBI (Foreign Venture Capital Investors) Regulations, 2000:

The following are the eligibility criteria for grant of a certificate of registration as per regulation 4 of SEBI (Foreign Venture Capital Investor) Regulations 2000.

(a) The applicants track record, professional competence, financial soundness, fairness and integrity.

experience, general reputation of

(b) Whether the applicant has been granted necessary approval by the Reserve Bank of India for making investments in India;

(c) Whether the applicant is an investment company, investment trust, investment partnership, pension fund, mutual fund, endowment fund, university fund, charitable institution or any other entity incorporated outside India; or

(d) Whether the applicant is an asset management company, investment manager or investment management company or any other investment vehicle incorporated outside India;

(e) Whether the applicant is authorised to invest in venture capital fund or carry on activity as a foreign venture capital investor;

(f) Whether the applicant is regulated by an appropriate foreign regulatory authority or is an income tax payer; or submits a certificate from its banker of its or its promoters track record where the applicant is neither a regulated entity nor an income tax payer.

(g) The applicant has not been refused a certificate by the Board.

(h) Whether the applicant is a fit and proper person.

Main requirements under SEBI (Venture Capital Funds) Regulations, 1996:

The following are the eligibility criteria for grant of a certificate of registration as per regulation 4 of SEBI (Venture Capital Funds) Regulations 1996.

For the purpose of grant of a certificate of registration, the applicant has to fulfil the following, namely:-

(a) If the application is made by a company, -

(i)

memorandum of association has as its main objective, the carrying on of the activity of a venture capital fund;

(ii)

it is prohibited by its memorandum and articles of association from making an invitation to the public to subscribe to its securities;

(iii)

its director or principal officer or employee is not involved in any litigation connected with the securities market which may have an adverse bearing on the business of the applicant;

(iv)

its director, principal officer or employee has not at any time been

convicted of any offence involving moral turpitude or any economic

offence.

(v)

it is a fit and proper person.

(b) if the application is made by a trust, -

(i)

the instrument of trust is in the form of a deed and has been duly registered under the provisions of the Indian Registration Act, 1908 (16 of 1908);

(ii) (iii)

the main object of the trust is to carry on the activity of a venture capital fund; the directors of its trustee company, if any, or any trustee is not involved in any litigation connected with the securities market which may have an adverse bearing on the business of the applicant;

(iv)

the directors of its trustee company, if any, or a trustee has not at any time, been convicted of any offence involving moral turpitude or of any economic offence;

(v)

the applicant is a fit and proper person.

(c) if the application is made by a body corporate (i) it is set up or established under the laws of the Central or State Legislature.

(ii) the applicant is permitted to carry on the activities of a venture capital fund. (iii) the applicant is a fit and proper person.

(iv)
(v)

the directors or the trustees, as the case may be, of such body corporate have not been convicted of any offence involving moral turpitude or of any economic offence.

(v)

the directors or the trustees, as the case may be, of such body corporate, if any, is not involved in any litigation connected with the securities market which may have an adverse bearing on the business of the applicant.

(d) the applicant has not been refused a certificate by the Board or its certificate has not been suspended under regulation 30 or cancelled under regulation 31.

BIBLIOGRAPHY

References

Books 1) 2) Website Links 1) http://fecolumnists.expressindia.com/full_column.php?content_id=54427 2) http://indiafocus.indiainfo.com/business/vc/ 3) http://www.vcindia.com/press.htm 4) http://www.help-finance.com/download.htm 5) http://www.altassets.net/default.asp 6) http://vcexperts.com/vce/ 7) http://www.corante.com/venture/ 8) http://www.ventureeconomics.com/ 9) http://www.sebi.gov.in 10) http://www.vcline.com/ 11) http://indiavca.org 12) http://www.indiavca.org/archives.htm 13) http://www.sebi.gov.in/Index.jsp?contentDisp=Department&dep_id=3 14) http://www.sidbiventure.co.in/svc-01r.htm Venture Capital Financing in India, J.C. Verma, 1997 Corporate Finance-Venture Capital & Buyouts, Brian Coyle, 2000