Venture Capital

MRP on “venture capital industry in India”
CHAPTER 1
INTRODUCTION TO
PROJECT
S.V .Institute Of Management, Kadi 1

1.1 Research objective:
 To understand concept of Venture Capital.
 To understand Venture Capital industry in global scenario.
 To study the evolution and need of Venture Capital Industry in India.
 To understand the legal framework formulated by SEBI to encourage Venture

capital activity in Indian Economy.
 To find out opportunity and threats those hinder and encourage Venture Capital
Industry in India.
 To know the impact of political and economical factors on Venture Capital

investment.
1.2 Limitation of project
Limitations:
A study of this type cannot be without limitations. It has been observed that venture
capitals are very secretive about their performance as well as about their investments.
This attitude has been a major hurdle in data collection. However venture capital
funds/companies that are members of Indian venture capital association are included in
the study. Financial analysis has been restricted by and large to members of IVCA.
1.3 Research Design & Instruments
In India neither venture capital theory has been developed nor are there many
comprehensive books on the subject. Even the number of research papers available is
very limited. The research design used is descriptive in nature. (The attempt has been
made to collect maximum facts and figures available on the availability of venture capital
in India, nature of assistance granted, future projected demand for this financing, analysis
of the problems faced by the entrepreneurs in getting venture capital, analysis of the
venture capitalists and social and environmental impact on the existing framework.)
The research is based on secondary data collected from the published material. The data
was also collected from the publications and press releases of venture capital associations
in India.
Scanning the business papers filled the gaps in information. The Economic times,
Financial Express and Business Standards were scanned for any article or news item
related to venture capital. Sufficient amount of data about the venture capital has been
derived from these reports.

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

CHAPTER 2
CONCEPTUAL
FRAMEWORK

2.1 Concept of Venture Capital
The term venture capital comprises of two words that is, “Venture” and “Capital”. Venture
is a course of processing, the outcome of which is uncertain but to which is attended the
risk or danger of “loss”. “Capital” means recourses to start an enterprise. To connote the
risk and adventure of such a fund, the generic name Venture Capital was coined.
Venture capital is considered as financing of high and new technology based enterprises.
It is said that Venture capital involves investment in new or relatively untried technology,
initiated by relatively new and professionally or technically qualified entrepreneurs with
inadequate funds. The conventional financiers, unlike Venture capitals, mainly finance
proven technologies and established markets. However, high technology need not be pre-
requisite for venture capital.
Venture capital has also been described as ‘unsecured risk financing’. The relatively high
risk of venture capital is compensated by the possibility of high returns usually through
substantial capital gains in the medium term. Venture capital in broader sense is not solely
an injection of funds into a new firm, it is also an input of skills needed to set up the firm,
design its marketing strategy, organize and manage it. Thus it is a long term association
with successive stages of company’s development under highly risk investment
conditions, with distinctive type of financing appropriate to each stage of development.
Investors join the entrepreneurs as co-partners and support the project with finance and
business skills to exploit the market opportunities.
Venture capital is not a passive finance. It may be at any stage of business/production

cycle, that is, start up, expansion or to improve a product or process, which are associated
with both risk and reward. The Venture capital makes higher capital gains through
appreciation in the value of such investments when the new technology succeeds. Thus
the primary return sought by the investor is essentially capital gain rather than steady
interest income or dividend yield.
The most flexible definition of Venture capital is-
“The support by investors of entrepreneurial talent with finance and

business skills to exploit market opportunities and thus obtain capital gains.”
Venture capital commonly describes not only the provision of start up finance or ‘seed
corn’ capital but also development capital for later stages of business. A long term
commitment of funds is involved in the form of equity investments, with the aim of
eventual capital gains rather than income and active involvement in the management of
customer’s business.
2.2 Features of Venture Capital

2.2.1 High Risk
By definition the Venture capital financing is highly risky and chances of failure are high
as it provides long term start up capital to high risk-high reward ventures. Venture capital
assumes four types of risks, these are:
 Management risk - Inability of management teams to work together.
 Market risk - Product may fail in the market.
 Product risk - Product may not be commercially viable.
 Operation risk - Operations may not be cost effective resulting in

increased cost decreased gross margins.
2.2.2 High Tech
As opportunities in the low technology area tend to be few of lower order, and hi-tech
projects generally offer higher returns than projects in more traditional areas, venture
capital investments are made in high tech. areas using new technologies or producing
innovative goods by using new technology. Not just high technology, any high risk
ventures where the entrepreneur has conviction but little capital gets venture finance.
Venture capital is available for expansion of existing business or diversification to a high
risk area. Thus technology financing had never been the primary objective but incidental
to venture capital.
2.2.3 Equity Participation & Capital Gains
Investments are generally in equity and quasi equity participation through direct purchase
of shares, options, convertible debentures where the debt holder has the option to convert
the loan instruments into stock of the borrower or a debt with warrants to equity
investment. The funds in the form of equity help to raise term loans that are cheaper
source of funds. In the early stage of business, because dividends can be delayed, equity
investment implies that investors bear the risk of venture and would earn a return
commensurate with success in the form of capital gains.
2.2.4 Participation In Management
Venture capital provides value addition by managerial support, monitoring and follow up
assistance. It monitors physical and financial progress as well as market development
initiative. It helps by identifying key resource person. They want one seat on the
company’s board of directors and involvement, for better or worse, in the major decision
affecting the direction of company. This is a unique philosophy of “hands on
management” where Venture capitalist acts as complementary to the entrepreneurs. Based
upon the experience other companies, a venture capitalist advise the promoters on project
planning, monitoring, financial management, including working capital and public issue.

Venture capital investor cannot interfere in day today management of the enterprise but
keeps a close contact with the promoters or entrepreneurs to protect his investment.
2.2.5 Length of Investment
Venture capitalist help companies grow, but they eventually seek to exit the investment in
three to seven years. An early stage investment may take seven to ten years to mature,
while most of the later stage investment takes only a few years. The process of having
significant returns takes several years and calls on the capacity and talent of venture
capitalist and entrepreneurs to reach fruition.
2.2.6 Illiquid Investment
Venture capital investments are illiquid, that is, not subject to repayment on demand or
following a repayment schedule. Investors seek return ultimately by means of capital
gains when the investment is sold at market place. The investment is realized only on
enlistment of security or it is lost if enterprise is liquidated for unsuccessful working. It
may take several years before the first investment starts to locked for seven to ten years.
Venture capitalist understands this illiquidity and factors this in his investment decisions.
2.3 Difference between Venture Capital & Other Funds
2.3.1 Venture Capital Vs Development Funds
Venture capital differs from Development funds as latter means putting up of industries
without much consideration of use of new technology or new entrepreneurial venture but
having a focus on underdeveloped areas (locations). In majority of cases it is in the form
of loan capital and proportion of equity is very thin. Development finance is security
oriented and liquidity prone. The criteria for investment are proven track record of
company and its promoters, and sufficient cash generation to provide for returns
(principal and interest). The development bank safeguards its interest through collateral.
They have no say in working of the enterprise except safeguarding their interest by
having a nominee director. They do not play any active role in the enterprise except
ensuring flow of information and proper management information system, regular board
meetings, adherence to statutory requirements for effective management control where as
Venture capitalist remain interested if the overall management of the project o account of
high risk involved I the project till its completion, entering into production and making
available proper exit route for liquidation of the investment. As against this fixed
payments in the form of installment of principal and interest are to be made to
development banks.
2.3.2 Venture Capital Vs Seed Capital & Risk Capital
It is difficult to make a distinction between venture capital, seed capital, and risk capital
as the latter two form part of broader meaning of Venture capital. Difference between
them arises on account of application of funds and terms and conditions applicable. The
seed capital and risk funds in India are being provided basically to arrange promoter’s
contribution to the project. The objective is to provide finance and encourage

professionals to become promoters of industrial projects. The seed capital is provided to

conventional projects on the consideration of low risk and security and use conventional
techniques for appraisal. Seed capital is normally in the form of low interest deferred loan
as against equity investment by Venture capital. Unlike Venture capital, Seed capital
providers neither provide any value addition nor participate in the management of the
project. Unlike Venture capital Seed capital provider is satisfied with low risk-normal
returns and lacks any flexibility in its approach.
Risk capital is also provided to established companies for adapting new technologies.
Herein the approach is not business oriented but developmental. As a result on one hand
the success rate of units assisted by Seed capital/Risk
Finance has been lower than those provided with venture capital. On the other hand the
return to the seed/risk capital financier had been very low as compared to venture
capitalist.
Seed Capital Scheme Venture capital Scheme

Basis Income or aid Commercial viability
Beneficiaries Very small entrepreneurs Medium and large
entrepreneurs are also
covered
Size of assistance Rs. 15 Lac (Max) Up to 40 percent of
promoters’ equity
Appraisal process Normal Skilled and specialized
Estimates returns 20 percent 30 percent plus
Flexibility Nil Highly flexible
Value addition Nil Multiple ways
Exit option Sell back to promoters Several ,including Public
offer
Funding sources Owner funds Outside contribution
allowed
Syndication Not done Possible
Tax concession Nil Exempted
Success rate Not good Very satisfactory
Table 2.1: Difference between Seed Capital Scheme and Venture capital Scheme
2.3.3 Venture Capital Vs Bought Out Deals
The important difference between the Venture capital and bought out deals is that bought-
outs are not based upon high risk- high reward principal. Further unlike Venture capital
they do not provide equity finance at different stages of the enterprise. However both
have a common expectation of capital gains yet their objectives and intents are totally
different.

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

IPO
Expansion
Product
Development
Start up
Business
Plan
Concept Time
Venture Private Public Public Equity for

Seed Capital
Family Angel Capital Equity Equity Restructuring
Personal
Partners Investor Buyouts
Figure 2.1: Venture Capital Spectrum
Venture capital was started as early stage financing of relatively small but rapidly growing
companies. However various reasons forced venture capitalists to be more and more
involved in expansion financing to support the development of existing portfolio
companies. With increasing demand of capital from newer business, Venture capitalists

began to operate across a broader spectrum of investment interest. This diversity of

opportunities enabled Venture capitalists to balance their activities in term of time
involvement, risk acceptance and reward potential, while providing on going assistance to
developing business.
Different venture capital firms have different attributes and aptitudes for different types of
Venture capital investments. Hence there are different stages of entry for different Venture
capitalists and they can identify and differentiate between types of Venture capital
investments, each appropriate for the given stage of the investee company, These are:-
1. Early Stage Finance
 Seed Capital
 Start up Capital
 Early/First Stage Capital
 Later/Third Stage Capital
2. Later Stage Finance

 Expansion/Development Stage Capital
 Replacement Finance
 Management Buy Out and Buy ins
 Turnarounds
 Mezzanine/Bridge Finance
Not all business firms pass through each of these stages in a sequential manner. For
instance seed capital is normally not required by service based ventures. It applies largely
to manufacturing or research based activities. Similarly second round finance does not
always follow early stage finance. If the business grows successfully it is likely to
develop sufficient cash to fund its own growth, so does not require venture capital for
growth.
The table below shows risk perception and time orientation for different stages of venture
capital financing.
Financing Stage Period (funds Risk perception Activity to be financed

locked in years)
Early stage finance 7-10 Extreme For supporting a concept or
Seed idea or R & D for product
development
Start up 5-9 Very high Initializing operations or
developing prototypes
First stage 3-7 High Start commercial production
and marketing
Second stage 3-5 Sufficiently Expand market & growing
high working capital need
Later stage finance 1-3 Medium Market expansion,
acquisition & product
development for profit

making company
Buy out-in 1-3 Medium Acquisition financing
Turnaround 3-5 Medium to high Turning around a sick

company
Mezzanine 1-3 Low Facilitating public issue
Table 2.2: Venture Capital- Financing Stages
2.4.1 Seed Capital
It is an idea or concept as opposed to a business. European Venture capital association

defines seed capital as “The financing of the initial product development or capital
provided to an entrepreneur to prove the feasibility of a project and to qualify for start up
capital”.
The characteristics of the seed capital may be enumerated as follows:
 Absence of ready product market

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

b) The time horizon to realization for most seed capital investments is typically 7-10 years
which is longer than all but most long-term oriented investors will desire.
c) The risk of product and technology obsolescence increases as the time to realization is
extended. These types of obsolescence are particularly likely to occur with high
technology investments particularly in the fields related to Information Technology.
2.4.2 Start up Capital
It is stage 2 in the venture capital cycle and is distinguishable from seed capital
investments. An entrepreneur often needs finance when the business is just starting. The
start up stage involves starting a new business. Here in the entrepreneur has moved closer
towards establishment of a going concern. Here in the business concept has been fully
investigated and the business risk now becomes that of turning the concept into product.
Start up capital is defined as: “Capital needed to finance the product development, initial
marketing and establishment of product facility. “
The characteristics of start-up capital are:-
i. Establishment of company or business. The company is either being organized or is

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

Volume of Investment Activity
Despite potential for specular returns most venture firms avoid investing in start-ups. One
reason for the paucity of start up financing may be high discount rate that venture
capitalist applies to venture proposals at this level of risk and maturity. They often prefer
to spread their risk by sharing the financing. Thus syndicates of investor’s often
participate in start up finance.
2.4.3 Early Stage Finance
It is also called first stage capital is provided to entrepreneur who has a proven product, to
start commercial production and marketing, not covering market expansion, de-risking
and acquisition costs.
At this stage the company passed into early success stage of its life cycle. A proven
management team is put into this stage, a product is established and an identifiable market
is being targeted.
British Venture Capital Association has vividly defined early stage finance as: “Finance
provided to companies that have completed the product development stage and require
further funds to initiate commercial manufacturing and sales but may not be generating
profits.”
The characteristics of early stage finance may be: -
 Little or no sales revenue.

 Cash flow and profit still negative.
 A small but enthusiastic management team which consists of people with technical
and specialist background and with little experience in the management of growing
business.
 Short term prospective for dramatic growth in revenue and profits.
The early stage finance usually takes 4 to 6 years time horizon to realization. Early stage
finance is the earliest in which two of the fundamentals of business are in place i.e. fully
assembled management team and a marketable product. A company needs this round of
finance because of any of the following reasons: -
 Project overruns on product development.

 Initial loss after start up phase.
The firm needs additional equity funds, which are not available from other sources thus
prompting venture capitalist that, have financed the start up stage to provide further
financing. The management risk is shifted from factors internal to the firm (lack of
management, lack of product etc.) to factors external to the firm (competitive pressures,
in sufficient will of financial institutions to provide adequate capital, risk of product
obsolescence etc.)
At this stage, capital needs, both fixed and working capital needs are greatest. Further,
since firms do not have foundation of a trading record, finance will be difficult to obtain

and so Venture capital particularly equity investment without associated debt burden is
key to survival of the business.
The following risks are normally associated to firms at this stage: -
a) The early stage firms may have drawn the attention of and
incurred the challenge of a larger competition.
b) There is a risk of product obsolescence. This is more so when

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

 A full management team in place
 Sales revenue being generated from one or more products
 There are losses in the firm or at best there may be a break even but the surplus
generated is insufficient to meet the firm’s needs.
Second round financing typically comes in after start up and early stage funding and so
have shorter time to maturity, generally ranging from 3 to 7 years. This stage of financing
has both positive and negative reasons.
Negative reasons include:
I Cost overruns in market development.

II Failure of new product to live up to sales forecast.
III Need to re-position products through a new marketing
campaign.
IV Need to re-define the product in the market place once the
product deficiency is revealed.
Positive reasons include:
I Sales appear to be exceeding forecasts and the enterprise needs to acquire assets to
gear up for production volumes greater than forecasts.
II High growth enterprises expand faster than their working capital permit, thus
needing additional finance. Aim is to provide working capital for initial expansion of
an enterprise to meet needs of increasing stocks and receivables.

It is additional injection of funds and is an acceptable part of venture capital. Often

provision for such additional finance can be included in the original financing package as
an option, subject to certain management performance targets.
2.4.5 Later Stage Finance
It is called third stage capital is provided to an enterprise that has established commercial
production and basic marketing set-up, typically for market expansion, acquisition,
product development etc. It is provided for market expansion of the enterprise. The
enterprises eligible for this round of finance have following characteristics.
I. Established business, having already passed the risky early stage.

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

 Replacement Finance
 Buyout Financing
 Turnaround Finance
Expansion / Development Finance
An enterprise established in a given market increases its profits exponentially by

achieving the economies of scale. This expansion can be achieved either through an
organic growth, that is by expanding production capacity and setting up proper
distribution system or by way of acquisitions. Anyhow, expansion needs finance and
venture capitalists support both organic growth as well as acquisitions for expansion.
At this stage the real market feedback is used to analyze competition. It may be found that
the entrepreneur needs to develop his managerial team for handling growth and managing
a larger business.
Realization horizon for expansion / development investment is one to three years. It is

favored by venture capitalist as it offers higher rewards in shorter period with lower risk.

Funds are needed for new or larger factories and warehouses, production capacities,
developing improved or new products, developing new markets or entering exports by
enterprise with established business that has already achieved break even and has started
making profits.
Replacement Finance
It means substituting one shareholder for another, rather than raising new capital resulting
in the change of ownership pattern. Venture capitalist purchase shares from the
entrepreneurs and their associates enabling them to reduce their shareholding in unlisted
companies. They also buy ordinary shares from non-promoters and convert them to
preference shares with fixed dividend coupon. Later, on sale of the company or its listing
on stock exchange, these are re-converted to ordinary shares. Thus Venture capitalist
makes a capital gain in a period of 1 to 5 years.
Buy - out / Buy - in Financing
It is a recent development and a new form of investment by venture capitalist. The funds
provided to the current operating management to acquire or purchase a significant share
holding in the business they manage are called management buyout.
Management Buy-in refers to the funds provided to enable a manager or a group of

managers from outside the company to buy into it.
It is the most popular form of venture capital amongst later stage financing. It is less risky
as venture capitalist in invests in solid, ongoing and more mature business. The funds are
provided for acquiring and revitalizing an existing product line or division of a major
business. MBO (Management buyout) has low risk as enterprise to be bought have
existed for some time besides having positive cash flow to provide regular returns to the
venture capitalist, who structure their investment by judicious combination of debt and
equity. Of late there has been a gradual shift away from start up and early finance to
wards MBO opportunities. This shift is because of lower risk than start up investments.
Turnaround Finance
It is rare form later stage finance which most of the venture capitalist avoid because of
higher degree of risk. When an established enterprise becomes sick, it needs finance as
well as management assistance foe a major restructuring to revitalize growth of profits.
Unquoted company at an early stage of development often has higher debt than equity; its
cash flows are slowing down due to lack of managerial skill and inability to exploit the
market potential. The sick companies at the later stages of development do not normally
have high debt burden but lack competent staff at various levels. Such enterprises are
compelled to relinquish control to new management. The venture capitalist has to carry
out the recovery process using hands on management in 2 to 5 years. The risk profile and
anticipated rewards are akin to early stage investment.

Bridge Finance
It is the pre-public offering or pre-merger/acquisition finance to a company. It is the last

round of financing before the planned exit. Venture capitalist help in building a stable and
experienced management team that will help the company in its initial public offer. Most
of the time bridge finance helps improves the valuation of the company. Bridge finance
often has a realization period of 6 months to one year and hence the risk involved is low.
The bridge finance is paid back from the proceeds of the public issue.
2.5 Venture Capital Investment Process
Venture capital investment process is different from normal project financing. In order to
understand the investment process a review of the available literature on venture capital
finance is carried out. Tyebjee and Bruno in 1984 gave a model of venture capital
investment activity which with some variations is commonly used presently.
As per this model this activity is a five step process as follows:
1. Deal Organization
2. Screening
3. Evaluation or due Diligence
4. Deal Structuring
5. Post Investment Activity and Exit

Figure 2.2: Venture Capital Investment Process

Deal origination:
In generating a deal flow, the VC investor creates a pipeline of deals or investment

opportunities that he would consider for investing in. Deal may originate in various ways.
referral system, active search system, and intermediaries. Referral system is an important
source of deals. Deals may be referred to VCFs by their parent organisaions, trade
partners, industry associations, friends etc. Another deal flow is active search through
networks, trade fairs, conferences, seminars, foreign visits etc. Intermediaries is used by
venture capitalists in developed countries like USA, is certain intermediaries who match
VCFs and the potential entrepreneurs.
Screening:
VCFs, before going for an in-depth analysis, carry out initial screening of all projects on
the basis of some broad criteria. For example, the screening process may limit projects to
areas in which the venture capitalist is familiar in terms of technology, or product, or
market scope. The size of investment, geographical location and stage of financing could
also be used as the broad screening criteria.
Due Diligence:
Due diligence is the industry jargon for all the activities that are associated with
evaluating an investment proposal. The venture capitalists evaluate the quality of
entrepreneur before appraising the characteristics of the product, market or technology.
Most venture capitalists ask for a business plan to make an assessment of the possible risk
and return on the venture. Business plan contains detailed information about the proposed
venture. The evaluation of ventures by VCFs in India includes;
Preliminary evaluation: The applicant required to provide a brief profile of the proposed
venture to establish prima facie eligibility.
Detailed evaluation: Once the preliminary evaluation is over, the proposal is evaluated in
greater detail. VCFs in India expect the entrepreneur to have:- Integrity, long-term vision,
urge to grow, managerial skills, commercial orientation.
VCFs in India also make the risk analysis of the proposed projects which includes:
Product risk, Market risk, Technological risk and Entrepreneurial risk. The final decision
is taken in terms of the expected risk-return trade-off as shown in Figure.
Deal Structuring:
In this process, the venture capitalist and the venture company negotiate the terms of the
deals, that is, the amount, form and price of the investment. This process is termed as deal
structuring. The agreement also include the venture capitalist's right to control the venture
company and to change its management if needed, buyback arrangements, acquisition,
making initial public offerings (IPOs), etc. Earned out arrangements specify the
entrepreneur's equity share and the objectives to be achieved.

Post Investment Activities:
Once the deal has been structured and agreement finalised, the venture capitalist generally
assumes the role of a partner and collaborator. He also gets involved in shaping of the
direction of the venture. The degree of the venture capitalist's involvement depends on his
policy. It may not, however, be desirable for a venture capitalist to get involved in the
day-to-day operation of the venture. If a financial or managerial crisis occurs, the venture
capitalist may intervene, and even install a new management team.
Exit:
Venture capitalists generally want to cash-out their gains in five to ten years after the
initial investment. They play a positive role in directing the company towards particular
exit routes. A venture may exit in one of the following ways:
There are four ways for a venture capitalist to exit its investment:
 Initial Public Offer (IPO)

 Acquisition by another company
 Re-purchase of venture capitalist’s share by the investee company
 Purchase of venture capitalist’s share by a third party
Promoter’s Buy-back
The most popular disinvestments route in India is promoter’s buy-back. This route is
suited to Indian conditions because it keeps the ownership and control of the promoter
intact. The obvious limitation, however, is that in a majority of cases the market value of
the shares of the venture firm would have appreciated so much after some years that the
promoter would not be in a financial position to buy them back.
In India, the promoters are invariably given the first option to buy back equity of their
enterprises. For example, RCTC participates in the assisted firm’s equity with suitable
agreement for the promoter to repurchase it. Similarly, Canfina-VCF offers an
opportunity to the promoters to buy back the shares of the assisted firm within an agreed
period at a predetermined price. If the promoter fails to buy back the shares within the
stipulated period, Canfina-VCF would have the discretion to divest them in any manner it
deemed appropriate. SBI capital Markets ensures through examining the personal assets
of the promoters and their associates, which buy back, would be a feasible option. GVFL
would make disinvestments, in consultation with the promoter, usually after the project
has settled down, to a profitable level and the entrepreneur is in a position to avail of
finance under conventional schemes of assistance from banks or other financial
institutions.
Initial Public Offers (IPOs)
The benefits of disinvestments via the public issue route are, improved marketability and
liquidity, better prospects for capital gains and widely known status of the venture as well
as market control through public share participation. This option has certain limitations in
the Indian context. The promotion of the public issue would be difficult and expensive
since the first generation entrepreneurs are not known in the capital markets. Further,

difficulties will be caused if the entrepreneur’s business is perceived to be an unattractive

investment proposition by investors. Also, the emphasis by the Indian investors on short-
term profits and dividends may tend to make the market price unattractive. Yet another
difficulty in India until recently was that the Controller of Capital Issues (CCI) guidelines
for determining the premium on shares took into account the book value and the
cumulative average EPS till the date of the new issue. This formula failed to give due
weight age to the expected stream of earning of the venture firm. Thus, the formula would
underestimate the premium. The Government has now abolished the Capital Issues
Control Act, 1947 and consequently, the office of the controller of Capital Issues. The
existing companies are now free to fix the premium on their shares. The initial public
issue for disinvestments of VCFs’ holding can involve high transaction costs because of
the inefficiency of the secondary market in a country like India. Also, this option has
become far less feasible for small ventures on account of the higher listing requirement of
the stock exchanges. In February 1989, the Government of India raised the minimum
capital for listing on the stock exchanges from Rs 10 million to Rs 30 million and the
minimum public offer from Rs 6 million to Rs 18 million.
Sale on the OTC Market
An active secondary capital market provides the necessary impetus to the success of the
venture capital. VCFs should be able to sell their holdings, and investors should be able to
trade shares conveniently and freely. In the USA, there exist well-developed OTC
markets where dealers trade in shares on telephone/terminal and not on an exchange floor.
This mechanism enables new, small companies which are not otherwise eligible to be
listed on the stock exchange, to enlist on the OTC markets and provides liquidity to
investors. The National Association of Securities Dealers Automated Quotation System
(NASDAQ) in the USA daily quotes over 8000 stock prices of companies backed by
venture capital.
The OTC Exchange in India was established in June 1992. The Government of India had
approved the creation for the Exchange under the Securities Contracts (Regulations) Act
in 1989. It has been promoted jointly by UTI, ICICI, SBI Capital Markets, Can bank
Financial Services, GIC, LIC and IDBI. Since this list of market-makers (who will decide
daily prices and appoint dealers for trading) includes most of the public sector venture
financiers, it should pick up fast, and it should be possible for investors to trade in the
securities of new small and medium size enterprises.
The other disinvestments mechanisms such as the management buyouts or sale to other
venture funds are not considered to be appropriate by VCFs in India.
The growth of an enterprise follows a life cycle as shown in the diagram below. The
requirements of funds vary with the life cycle stage of the enterprise. Even before a
business plan is prepared the entrepreneur invests his time and resources in surveying the
market, finding and understanding the target customers and their needs. At the seed stage
the entrepreneur continue to fund the venture with his own or family funds. At this stage
the funds are needed to solicit the consultant’s services in formulation of business plans,
meeting potential customers and technology partners. Next the funds would be required
for development of the product/process and producing prototypes, hiring key people and
building up the managerial team. This is followed by funds for assembling the
manufacturing and marketing facilities in that order. Finally the funds are needed to

expand the business and attaint the critical mass for profit generation. Venture capitalists
cater to the needs of the entrepreneurs at different stages of their enterprises. Depending
upon the stage they finance, venture capitalists are called angel investors, venture
capitalist or private equity supplier/investor.
The players:
Idea Established Expansion Troubleshooting

The company
Business Break Investing IPO Turnaround

Concept Even-point In
technology Medium
Angels venture
Small funds
Corporate
venture
investors
funds
Big venture funds + Financial funds
Figure: 2.3 players in venture capital industry
2.6 The players

There are following groups of players:
· Angels and angel clubs

· Venture Capital funds
- Small
- Medium
- Large
· Corporate venture funds
· Financial service venture groups

 Angels and angel clubs
Angels are wealthy individuals who invest directly into companies. They can form
angel clubs to coordinate and bundle their activities. Besides the money, angels
often provide their personal knowledge, experience and contacts to support their
investees. With average deals sizes from USD 100,000 to USD 500,000 they
finance companies in their early stages. Examples for angel clubs are · Media
Club, Dinner Club ,· Angel's Forum
 Small and Upstart Venture Capital Funds
These are smaller Venture Capital Companies that mostly provide seed and start-up
capital. The so called "Boutique firms" are often specialised in certain industries or
market segments. Their capitalization is about USD 20 to USD 50 million (is this
deals size or total money under management or money under management per
fund?). As for the small and medium Venture Capital funds strong competition
will clear the marketplace. There will be mergers and acquisitions leading to a
concentration of capital. Funds specialised in different business areas will form
strategic partnerships. Only the more successful funds will be able to attract new
money. Examples are:
· Artemis Comaford
· Abbell Venture Fund
· Acacia Venture Partners
 Medium Venture Funds

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

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

Examples are:
· AIG American International Group
· Cap Vest Man
· 3i
 Corporate Venture Funds

These Venture Capital funds are set up and owned by technology companies. Their
aim is to widen the parent company's technology base in an win-win-situation for
both, the investor and the investee. In general, corporate funds invest in growing or
maturing companies, often when the investee wishes to make additional
investments in echnology or product development. The average deals size is
between USD 2 million and USD 5 million. The large funds will try to improve
their position by mergers and acquisitions with other funds to improve size,
reputation and their financial muscle. In addition they will to diversify. Possible
areas to enter are other financial services by means of M&As with financial
services corporations and the consulting business. For the latter one the funds have
a rich resource of expertise and contacts in house. In a declining market for their
core activity and with lots of tumbling companies out there is no reason why
Venture Capital funds should offer advice and consulting only to their investees.
Examples are:
· Oracle
· Adobe
· Dell
· Kyocera
As an example, Adobe systems launched a $40m venture fund in 1994 to invest in

companies strategic to its core business, such as Cascade Systems Inc and Lantana
Research Corporation.- has been successfully boosting demand for its core
products, so that Adobe recently launched a second $40m fund.
 Financial funds:
A solution for financial funds could be a shift to a higher securisation of Venture

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

CHAPTER 3
GLOBAL SCENARIO OF
VENTURE CAPITAL
INDUSTRY

3.1 Overview
Over the last 18 months, the venture capital industry around the globe has
experienced a welcome acceleration in the mature investment hotbeds – United
States, Europe and Israel – and in the emerging venture capital hotbeds China and
India. Global venture capital investment last year reached US $ 35.2 billion, the
highest level since 2001, and is maintaining a robust pace in year 2007. The
acceleration has been bolstered by the increasing globalization of both venture
capital funds and venture backed companies and a substantial investor focus on
emerging sectors.
As the dotcom market of the late 1990 has gathered the momentum, venture capital
stood at the nexus of hype and hope. In 2000 , they poured nearly $95 billion into
mostly young , untested companies , some no more than ideas, expecting to reap
rich rewards by later selling of these outfits to public .But the bubble burst the
market for the new stock issues tanked --- and by 2003 , venture capital funding
had dwindled to $19 billion.
The VC showed the signs of stabilizing as the industry were bolstered by the
2005’s strong 4th quarter, the financing exceeded the $ 21.5 billion invested in
venture-backed companies in 2004, reaching $22.1billion .While that was far
below 2000’s peak, it represents a more sustainable pace of funding for both
entrepreneurs and investors. In another sign of the industry firming, pension funds,
foundations, and other investors are again getting interested to invest their money
in venture funds, which provided seed money for young companies to grow on.
3.2 History & Evolution
Prior to World War Two, the source of capital for entrepreneurs everywhere was
either the government, government-sponsored institutions meant to invest in such
ventures, or informal investors (today, termed "angels") that usually had some
prior relationship to the entrepreneur. In general, throughout history private banks,
quite reasonably, have been unwilling to lend money to a newly established firm,
because of the high risk and lack of collateral. After World War Two, in the U.S. a
set of intermediaries emerged who specialized in investing in fledgling firms
having the potential for extremely rapid growth.
From its earliest beginnings on the U.S. East Coast, venture capital gradually
expanded and became an increasingly professionalized institution. During this
period, the locus of the venture capital industry shifted from New York and Boston
on the East Coast to Silicon Valley on the West Coast. By the mid 1980s, the ideal-
typical venture capital firm was based in Silicon Valley and invested largely in
electronics with lesser sums devoted to biomedical technologies. Until the present,
in addition to Silicon Valley, the two other major concentrations have been Boston
and New York City.

In both Europe and Asia, there are significant concentrations of venture capital in
London, Israel, Hong Kong, Taiwan, and Tokyo. In the U.S., the government has
played a role in the development of venture capital, though, for the most part, it
was indirect. The indirect role, i.e., the general policies that also benefited the
development of the venture capital industry, was probably the most significant.
Some of the most important of these were:
 The U.S. government generally practiced sound monetary and fiscal policies
ensuring relatively low inflation with a stable financial environment and
currency.
 U.S. tax policy, though it evolved, has been favorable to capital gains, and a
number of decreases in capital gains taxes may have had some positive effect
on the availability of venture capital.
 With the exception of a short period in the 1970s, U.S. pension funds have been
allowed to invest prudent amounts in venture capital funds.
 The NASDAQ stock market, which has been the exit strategy of choice for
venture capitalists, was strictly regulated and characterized by increasing
openness thus limiting investor's fears of fraud and deception.
This created a general macroeconomic environment of transparency and

predictability, reducing risks for investors. Put differently, environmental risks
stemming from government action were minimized -- a sharp contrast to most
developing nations.
Another important policy has been a willingness to invest heavily and continuously
in university research. This investment funded generations of graduate students in
the sciences and engineering. From this research has come trained personnel and
innovations; some of who formed firms that have been funded by venture
capitalists. U.S. universities particularly, MIT, Stanford, and UC Berkeley played a
particularly salient role.
The most important direct U.S. government involvement in encouraging the

growth of venture capital was the passage of the Small Business Investment Act of
1958 authorizing the formation of small business investment corporations (SBICs).
This legislation created a vehicle for funding small firms of all types. The
legislation was complicated, but for the development of venture capital the
following features were most significant:
 It permitted individuals to form SBICs with private funds as paid-in capital and
then they could borrow money on a two – to – one ratio initially up to
$300,000, i.e., they could use up to $300,000 of SBA-guaranteed money for
their investment of $150,000 in private capital.

 There were also tax and other benefits, such as income and a capital gains pass-
through and the allowance of a carried interest as compensation.
The SBIC program became one that many other nations either learned from or
emulated. The SBIC program also provided a vehicle for banks to circumvent the
Depression-Era laws prohibiting commercial banks from owning more than 5
percent of industrial firms. The banks' SBIC subsidiaries allowed them to acquire
equity in small firms. This made even more capital available to fledgling firms,
and was a significant source of capital in the 1960s and 1970s. The final
investment format permitted SBICs to raise money in the public market. For the
most part, these public SBICs failed and/or were liquidated by the mid 1970s.
After the mid 1970s, with the exception of the bank SBICs, the SBIC program was
no longer significant for the venture capital industry
The SBIC program experienced serious problems from its inception. One problem
was that as a government agency it was very bureaucratic having many rules and
regulations that were constantly changing. Despite the corruption, something
valuable also occurred. Namely, and especially, in Silicon Valley, a number of
individuals used their SBICs to leverage their personal capital, and some were so
successful that they were able to reimburse the program and raise institutional
money to become formal venture capitalists. The SBIC program accelerated their
capital accumulation, and as important, government regulations made these new
venture capitalists professionalize their investment activity, which had been
informal prior to entering the program. Now-illustrious firms such as Sutter Hill
Ventures, Institutional Venture Partners, Bank of America Ventures, and Menlo
Ventures began as SBICs
The historical record also indicates that government action can harm venture
capital. The most salient example came in 1973 when the U.S. Congress, in
response to widespread corruption in pension funds, changed Federal pension fund
regulations. In their haste to prohibit pension fund abuses, Congress passed the
Employment Retirement Income Security Act (ERISA) making pension fund
managers criminally liable for losses incurred in high-risk investments. This was
interpreted to include venture capital funds; as a result pension managers shunned
venture capital nearly destroying the entire industry.
This was only reversed after active lobbying by the newly created National
Venture Capital Association (NVCA). In 1977, it succeeded in starting a gradual
loosening process that was completed in 1982. The new interpretation of these
pension fund guidelines contributed to first a trickle then a flood of new money
into venture capital funds. The most successful case of the export of Silicon
Valley-style venture capital practice is Israel where the government played an
important role in encouraging the growth of venture capital.

The government has a relatively good economic record; there is a minimum of

corruption, massive investment in military and, particularly, electronics research,
and the excellent higher educational system. The importance of the relationships
between Israelis and Jewish individuals in U.S. high-technology industry and the
creation of the Israeli venture capital system should not be underestimated.
For example, the well-known U.S. venture capitalist, Fred Adler, began investing
in Israeli startups in the early 1970s, and in 1985 was involved in forming the first
Israeli venture capital fund. Still, the creation of an Israeli venture capital industry
would wait until the 1990s, when the government funded an organization, Yozma,
to encourage venture capital in Israel.
Yozma received $100 million from the Israeli government. It invested $8 million in
ten funds that were required to raise another $12 million each from "a significant
foreign partner," presumably an overseas venture capital firm. Yozma also retained
$20 million to invest itself. These “sibling” funds were the backbone of a now
vibrant community that invested in excess of $1 billion in Israel in 1999
(Pricewaterhouse 2000). In the U.S., venture capital emerged through an organic
trial-and-error process, and the role of the government was limited and
contradictory. In Israel the government played a vital role in a supportive
environment in which private-sector venture capital had already emerged.
The role of government differs. In the U.S. the most important role of the
government was indirect, in Israel it was largely positive in assisting the growth of
venture capital, in India the role of the government has had to be proactive in
removing barriers (Dossani and Kenney 2001).
In every nation, the state has played some role in the development of venture
capital. Venture capital is a very sensitive institutional form due to the high-risk
nature of its investments, so the state must be careful to ensure its policies do not
adversely affect its venture capitalists. Put differently, capricious governmental
action injects extra risk into the investment equation. However, judicious, well-
planned government policies to create incentives for private sector involvement
have in the appropriate lead to the establishment of what became an independent
self-sustaining venture capital industry.
3.3 Current Industry Trends
Round Class Distribution
The distribution of financing rounds by round class in mature markets is typically

30-40% in the early stage rounds, 20-25% in second round, and 35-40% in later
rounds. In emerging market like China, the round distribution is very different as
68% in early stage round and 25% in second round. In mature countries, the
investments are made at early start up or product development phase.

Industry shifts
It is perhaps no surprise that the contraction is mostly concentrated in information

technology and the business, consumer and retail industries, give the huge number
of companies financed in the technology and Internet boom of 1999-2000, and the
subsequent downturn. The healthcare pool, driven by investment in
biopharmaceuticals and medical devices, has actually grown to some degree in the
different geographies .In United States, the healthcare pool has grown consistently
over the last several years, both in terms of number of companies and cumulative
dollars invested.
Key observations on the pool of private companies by industry:-
 The information and technology pool has declined by just 6% since 2002;
particularly due to increasing Interest in WEB 2.0 innovations.
 Since 2003, the IT pool has decreased by 27% in Europe and since 2004 17%
in Israel. Cumulative investment has declined in similar amounts.
 The business, consumer and retail category has faced the steepest declines
across the board. In US the number had fallen 54% since 2002 and 54% in
Europe since 2003 .In Israel; it dropped 67% since 2004.
 The number of healthcare companies has grown in U.S. since 2002 by 27% and
the capital risen 30% in last five years. Capital investment to the pool of
healthcare companies in Europe and Israel has also climbed, although the
number of companies dropped by 9%in Europe since 2003 and 9% in Israel
since 2004.
 Clean technology is a small but increasing element of the pool. There were 262
clean technology companies with a cumulative invested venture capital of US
$38 billion in 2007.
Mega trends
Several global mega trends will likely have an impact on venture capital in the
next decade:-
 Beyond the BRICs: - A new wave of fast growing economies is joining the
global growth leaders like Brazil, China, India, and Russia. The beginning of
venture capital activity has been seen in others countries such as Indonesia,
Korea, Turkey and Vietnam.
 The new multinationals: - A new breed of global company is emerging from

developing countries and redefining industries through low-cost advantage,
modern infrastructure, and vast customer databases in their home countries.

These companies are potential acquirers of developed market companies at all

stages of growth.
 Globalization of capital:- Changes in economic and financial landscape are

creating a significant regional shifts in IPO activity. These changes have also
sparked global consolidation alliances among stock exchanges.
 Transformation of the CFO’s role and function:- With the globalization and
increasingly complex regulatory environment, CFOs have a wider range of
responsibilities and finance function has been transformed to face broader
mandates.
 Clean Technology: - Clean technology is poised to become the first break

through sector of 21st century. Encompassing energy, air and water treatment,
industrial efficiency improvements, new material and waste management etc
are playing very vital role globally because of which VC investors are enjoying
rewards.

3.4 GLOBAL TREND IN VENTURE CAPITAL INDUSTRY
The 2007 Global Venture Capital Survey was sponsored by Deloitte & Touche LLP
in conjunction with the National Venture Capital Association and other venture
capital associations* throughout the world. It was administered in April and May
2007 to venture capitalists (VCs) in the Americas, Asia Pacific, Europe, the Middle
East, and Africa.
There were 528 responses from general partners, with 45 percent of respondents
from the United States and 31 percent from Europe. A complete geographic
breakdown of respondents is as follows:
Figure: 3.1 Primary focused location for investment (APAC) respondents
The breadth of assets under management by these respondents was varied. The
highest number of respondents—42 percent—had managed assets totaling less
than $100 million; 35 percent managed assets between $100 million and $499
million; 12 percent managed assets between $500 million to $1 billion; and 11
percent more than $1 billion in assets under management
There are 13 % respondents from APAC in which China, India, Japan, South
Korea, other Asia. 45% respondents from Middle East include Israel and other area
of Middle East.
Global VC investment increasing, but growth is slow and cautious.
We may live in a global economy, but the venture capital community is not broadly
embracing global investment. Rather, roughly half of the venture community has
made a commitment to a global investment strategy and those firms are

implementing that strategy slowly and cautiously. The intentions for growth of
foreign investment, as demonstrated by this year’s survey data, are modest at best.
% OF VENTURE CAPITALISTCURRENTLY INVESTING
OUTSIDE HOME COUNTRY(U.S. RESPONDENTS)
46
54
YES NO
Figure: 3.2 Percentage of venture capitalist currently investing outside home country
(U.S. respondents)
Figure: 3.3 Percentage of venture capitalist currently investing outside home country
(Non U.S. respondents)
Among U.S. investors, 54 percent indicated that they would be expanding their
investment focus outside of their home country or region in the next five years.
Adequate deal flow in their home country was the reason indicated most for not
wanting to expand globally.
Some venture investors are certainly taking advantage of opportunities outside

their home countries, actual growth in terms of percentage of venture investors
investing globally is occurring much more slowly than is commonly believed. And,
for a lot of firms, they’re not diving deep into investing in other countries, but

dipping a toe in with one or two deals. This cautious approach allows the venture
firms to further assess the investment environment, evaluate how their strategy
may need to be adjusted and how critical challenges, such as tax and intellectual
property issues impact overall performance.
3.5 Current strategies

Among those VCs who are currently investing abroad, 48 percent of them have
developed strategic alliances with a foreign-based firm and 51 percent invest only
with other investors who have a local presence. This underscores the need in
venture capital to be physically close to the portfolio companies in order to work
with management. Firms also indicated that to succeed, they need to understand
local culture, and to do so they must have a local presence in their target countries
to take advantage of in-country expertise. To this end, they also are hiring
investment staff with expertise in target countries (41 percent) and requiring their
partners to travel more (58 percent).
Current business practises used by venture capitalist to manage foreign investment

focus
global US Non US
70 63
58 58
60 55
50 51 52
48
50 44
40 40 41 41
40 34 36
33 33
29
30
20 14
11 12
7 7 8 6 8 6
10
0
strategic invest only acquire require require relocate HQ open new hire im vest in
alliances w ith other foreign partners to partners to of portfolio offices in investm ent local
w ith foreign investors based firm s travel m ore transfer to co.to be foreign staff w ith portfolio co.
firm s that have a foreign near our location expertise in w ith
local location firm target significant
presence countries operations
outside
country
Figure: 3.4 Current business practices used by venture capitalist to manage foreign investment
Focus
3.6 China, India, Israel and Canada are primary target countries for

U.S. venture capitalists
There continues to be a consensus among U.S. venture capitalists regarding where

the most opportunities exists globally. Most of the U.S. firms who have invested
globally are making investments in China, India, Israel, and Canada. However,
even in these countries, the majority of U.S. respondents are essentially dabbling,
making only one to two investments thus far.
FOREIGN INVESTMENT CURRENTLY HELD BY FIRMS
12%
1-2 investment
4%
3-5 investment
8%
6-10 investment
53%
11-15
investment
23% 16+ investment
Figure: 3.5 Foreign investment currently held by firms
Allocations by U.S. and non-U.S. firms alike for the most part represent less than 5
percent of capital invested overseas in fewer than three to five deals. Survey results
indicate that there will not be significant change during the next five years.
RESPONSE FROM U.S. RESPONDENTS

Primary locations where investors would like

to expand investment focus (U.S.
respondents)
5%
7% china
4% India
34%
6% canda
UK & Ireland
Israel
9%
other Asia
other Europe
11% others
24%
Figure: 3.6 Primary focused location for investment (U.S) respondents
Here from the above chart we can see that the highest percent of respondents are
interested in China for setting up their businesses. India is the second choice for
the global investors.
RESPONSE FROM (APAC) RESPONDENTS

PRIMARY LOCATION WHERE INVESTOR WOULD LIKE

TO EXPAND INVESTMENT FOCUS (APAC)
RESPONDENTS
3
CHINA
3 3
9 OTHER ASIA
37 U.S.
INDIA
18
MIDDLE EAST
SOUTH KOREA
27 JAPAN
Figure: 3.7 Primary focused location for investment (APAC) respondents
While China, India, Israel, and Canada are by far the most seductive target markets
for investment by U.S. firms, venture capitalists in non-US countries have a
different focus. By far the greatest contrast is among European respondents, who
indicated a strong preference for investing in other parts of Europe (67 percent)
and the United States (17 percent), with the remainder focused on Asia. Asian
respondents had a similar level of interest in the United States (18 percent), but
looked primarily inward to other Asian countries (78 percent), with the remainder
focused on the Middle East. This data shows that while non-U.S. investors are
interested in making deals outside of their home countries, there’s still a desire to
remain somewhat close to home and do business with cultures close to theirs. Most
of APAC respondents like to investment china and other Asia. There is 3% ready to
invest in South Korea, Japan and South Korea.
Resources are critical for international investing
The survey findings indicate that global investing will broaden among U.S. VC firms at a
slow pace for the foreseeable future. Of those VCs who indicated they currently have
capital deployed abroad, more than half of U.S. respondents (54 percent) expect to
expand their global investment focus over the next five years, and 61 percent of non-U.S.
firms also see a future in investing outside of their home country. Not surprising, larger
VC firms are most likely to be investing outside the United States and plan to increase
their overseas investment. In fact, 85 percent of U.S. firms and 92 percent of non-U.S.
firms with capital management over $1 billion indicated plans to increase their foreign
investments. Interestingly, among mid-size firms, 47 percent of the VCs with $100 to
$499 million capital under management are investing outside the U.S. This underscores

that global investing requires additional resources and a sophisticated infrastructure in

order to manage a global investment strategy. That said, the study also shows that a
significant percentage of mid-size firms recognize that opportunities exist outside their
home country and are building their franchise in a way that will enable them to
take advantage of those opportunities.
% OF VENTURE CAPITALIST EXPECTING TO EXPAND

INVESTMENT FOCUS OUTSIDE HOME COUNTRY
100 92
86 85
RESPONDENTS(%)
80 65 68 69 65
55 58
60 48 47
40 34
20
0
Less than $100 $100-$499 $500-$1 billion Greater than $1
million million billion
GLOBAL U.S Non U.S.
Figure: 3.8 Percentage of venture capitalist expecting to expand investment focus

Outside home country
3.7 Primary reasons why venture investors expanding globally
Among the primary reasons VCs around the world are interested in investing
globally is to take advantage of higher quality deal flow—particularly in the
United States, China, parts of Europe, and Israel. This is especially true for non-
U.S. firms. A second reason is the emergence of an entrepreneurial environment,
again and notably in China, but also India. Among U.S. firms, this latter rationale
is the most significant motivation for investing globally. Other motivators include
access to quality entrepreneurs, diversification of industry and geographic risk and
access to foreign markets.

PRIMARY REASONS WHY VENTURE INVESTORS global

EXPANDING GLOBALLY US
Non US
40 34
35 31
28
30
25 22
19 17
20 16 14 14 12 16
15 12 12 12 11 9
10 5 5 6 3
5 2
0
lower cost locations

access to quality
diversification of
competition for deal

access to foreign
higher quality deal
geographic risk
entrepreneurialenvi
entrepreneurs
flow in our local

industry and
emergence of
markets
extensive
ronment
market
flow
Figure: 3.9 primary reasons why venture investors expanding globally
Above chart reveals that 19% U.S respondents are expand globally for generating high
quality deal flow. And 31% believe that they expand globally for getting benefit of
emergence of entrepreneurial environment. While 17% respondents of non U.S are
expand globally for diversification of industry and geographic risk. All respondents are
least concerned about low cost of locations.
3.8 Investing globally by investing locally

One way to build a comfort zone for global investing and to take advantage of
opportunities abroad is to invest locally in companies with operations outside their
home country, as opposed to investing directly in foreign countries. This year,
there was a significant increase in the number of respondents who indicated that a
sizeable number of their portfolio companies have a considerable amount of
operations outside the country in which they’re headquartered.
A significant number, 88 percent of U.S. respondents and 82 percent of non-U.S.

respondents, indicated that at least some portion of their portfolio has significant
operations outside of the country of headquarters. Again, moderation is evident as
more than half of those indicated that less than 25 percent of their portfolio had
significant foreign operations. Nonetheless, these numbers have increased
significantly from prior years and reflect an increased trend in this method of
investment

Figure: 3.10 Percentage of venture capital firms portfolio companies that give significant
operation outside the country
Globally and among U.S. respondents, China has become the primary choice for
relocating manufacturing operations, while India is the primary choice for R&D
operations. Engineering operations tend to land in India as well, but China is also a
popular location. For back office activities, again, the choice is India. However, for
non-U.S. respondents, the United States is the primary choice for R&D and
engineering while European respondents preferred Central and Eastern Europe for
manufacturing, R&D, and Engineering.
One reason why this approach is taking off is that investors are concerned about
intellectual property and liquidity events—and, in general, they feel a need to be
closer to top management. This also reflects a new reality—that VCs are now
investing in companies that operate globally from day one— companies that reflect
a larger global entrepreneurial sector. This strategy allows the portfolio companies
(and investors) to take advantage of cost savings and access to talent in foreign
markets while protecting intellectual property. There are, however, concerns that
such a trend could result in the U.S. losing its R&D edge.
3.9 Impediments to global investing

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

TOP MARKETS WHERE THE COST OF COMPLYING WITH CORPORATE

GOVERNANCE REGULATION TOO HIGH
global
US
50 4446
45 41 Non US
40
35
30
25
20
15 89 7 7 95 57 5 55
10
2 4 35 35 2 3 52 33 4 3 25
5
0
countries
U.S.
India
China
Israel
UK & Ireland
France,
canada
Benelux
Switzerland
Nordic
Itally
Germany,
Austria,
Figure: 3.11 Top markets where the cost of complying with corporate governance
regulation too high
From the above chart we can see that most of the respondents believe that U.S. has
high cost of complying with Corporate Governance regulation and china, india
,Israel and Canada cost of complying with corporate governance regulation too
high.

CHAPTER 4
VENTURE CAPITAL
IN INDIA

4.1 Evolution of VC Industry in India
The first major analysis on risk capital for India was reported in 1983. It indicated that
new companies often confront serious barriers to entry into capital market for raising
equity finance which undermines their future prospects of expansion and diversification.
It also indicated that on the whole there is a need to revive the equity cult among the
masses by ensuring competitive return on equity investment. This brought out the
institutional inadequacies with respect to the evolution of venture capital.
In India, the Industrial finance Corporation of India (IFCI) initiated the idea of VC when
it established the Risk Capital Foundation in 1975 to provide seed capital to small and
risky projects. However the concept of VC financing got statutory recognition for the first
time in the fiscal budget for the year 1986-87.
The Venture Capital companies operating at present can be divided into four groups:
• Promoted by All – India Development Financial Institutions
• Promoted by State Level Financial Institutions
• Promoted by Commercial banks
• Private venture Capitalists.
 Promoted by all India development financial institutions
The IDBI started a VC fund in 19876 as per the long term fiscal policy of government of
India, with an initial capital of Rs. 10 cr which raised by imposing a cess of 5% on all
payments made for the import of technology know- how projects requiring funds from
rs.5 lacs to rs 2.5 cr were considered for financing. Promoter’s contribution ranged from
this fund was available at a concessional interest rate of 9% ( during gestation period)
which could be increased at later stages.
The ICICI provided the required impetus to VC activities in India, 1986, it started
providing VC finance in 1998 it promoted, along with the Unit Trust of India (UTI)
Technology Development and Information Company of India (TDICI) as the first VC
company registered under the companies act, 1956. The TDICI may provide financial
assistance to venture capital undertakings which are set up by technocrat entrepreneurs, or
technology information and guidance services.
The risk capital foundation established by the industrial finance corporation of India
(IFCI) in 1975, was converted in 1988 into the Risk Capital and Technology Finance
company (RCTC) as a subsidiary company of the ifci the rctc provides assistance in the
form of conventional loans, interest –free conditional loans on profit and risk sharing
basis or equity participation in extends financial supoort to high technology projects for
technological upgradations. The RCTC has been renamed as IFCI Venture Capital Funds
Ltd.(IVCF)
 Promoted by State Level Financial Institutions
In India, the State Level financial institutions in some states such as Madhya Pradesh,
Gujarat, Uttar Prades, etc., have done an excellent job and have provided VC to a small
scale enterprises. Several successful entrepreneurs have been the beneficiaries of the

liberal funding environment. In 1990, the Gujarat Industrial Investment Corporation,

promoted the Gujarat Venture Financial Ltd.(GVFL) along with other promoters such as
the IDBI, the World Bank, etc. The GVFL provides financial assistance to businesses in
the form of equity, conditional loans or income notes for technologies development and
innovative products. It also provides finance assistance to entrepreneurs.
The government of Andhra Pradesh has also promoted the Andhra Pradesh Industrial
Development Corporation (APIDC) venture capital ltd. To provide VC financing in
Andhra Pradesh.
 Promoted by commercial banks
Canbank Venture Capital Fund, State Bank Venture Capital Fund and Grindlays bank
Venture Capital Fund have been set up by the respective commercial banks to undertake
vc activities.
The State Bank Venture Capital Funds provides financial assistance for bought –out deal
as well as new companies in the form of equity which it disinvests after the
commercialization of the project.
Canbank Venture Capital Fund provides financial assistance for proven but yet to b
commercially exploited technologies. It provides assistance both in the form of equity and
conditional loans.
 Private Venture Capital Funds
Several private sector venture capital funds have been established in India such as the 20 th
Centure Venture Capital Company, Indus Venture Capital Fund, Infrastructure Leasing
and Financial Services Ltd.
Some of the companies that have received funding through this route include:
• Mastek, on of the oldest softwear house in India
• Ruskan software, Pune based software consultancy
• SQL Star, Hyderabad-based training and software development consultancy
• Satyam infoway, the first private ISP in India
• Hinditron, makers of embedded software
• Selectia, provider of interactive software selectior
• Yantra, ITLInfosy’s US subsidiary, solution for supply chain management
• Rediff on the Net, Indian website featuring electronic shopping, news,chat etc.

4.2 INDUSTRY LIFE CYCLE:
From the industry life cyle we can know in which stage we are standing. On the
basis of this management can make future strategies of their business.
INTRODUCTION GROWTH
Figure: 4.1 Industry life cycle
The growth of VC in India has four separate phases:
4.2.1 Phase I - Formation of TDICI in the 80’s and regional funds as GVFL & APIDC in
the early 90s.
The first origins of modern venture capital in India can be traced to the setting up of a
Technology Development Fund in the year 1987-88, through the levy of access on all
technology import payments. Technology Development Fund was started to provide
financial support to innovative and high risk technological programmes through the
Industrial Development Bank of India.
The first phase was the initial phase in which the concept of VC got wider acceptance.
The first period did not really experience any substantial growth of VCs’. The 1980’s
were marked by an increasing disillusionment with the trajectory of the economic system
and a belief that liberalization was needed. The liberalization process started in 1985 in a
limited way. The concept of venture capital received official recognition in 1988 with the
announcement of the venture capital guidelines.
During 1988 to 1992 about 9 venture capital institutions came up in India.

Though the venture capital funds should operate as open entities, Government of India
controlled them rigidly. One of the major forces that induced Government of India to start
venture funding was the World Bank. The initial funding has been provided by World
Bank. The most important feature of the 1988 rules was that venture capital funds
received the benefit of a relatively low capital gains tax rate which was lower than the

corporate rate. The 1988 guidelines stipulated that VC funding firms should meet the
following criteria:
 Technology involved should be new, relatively untried, very closely held, in the
process of being taken from pilot to commercial stage or incorporate some significant
improvement over the existing ones in India
 Promoters / entrepreneurs using the technology should be relatively new,

professionally or technically qualified, with inadequate resources to finance the
project.
Between 1988 and 1994 about 11 VC funds became operational either through
reorganizing the businesses or through new entities.
All these followed the Government of India guidelines for venture capital activities and
have primarily supported technology oriented innovative businesses started by first
generation entrepreneurs. Most of these were operated more like a financing operation.
The main feature of this phase was that the concept got accepted. VCs became operational
in India before the liberalization process started. The context was not fully ripe for the
growth of VCs. Till 1995; the VCs operated like any bank but provided funds without
collateral. The first stage of the venture capital industry in India was plagued by in
experienced management, mandates to invest in certain states and sectors and general
regulatory problems. Many public issues by small and medium companies have shown
that the Indian investor is becoming increasingly wary of investing in the projects of new
and unknown promoters.
The liberation of the economy and toning up of the capital market changed the economic
landscape. The decisions relating to issue of stocks and shares was handled by an office
namely: Controller of Capital Issues (CCI). According to 1988 VC guideline, any
organization requiring to start venture funds have to forward an application to CCI.
Subsequent to the liberalization of the economy in 1991, the office of CCI was abolished
in May 1992 and the powers were vested in Securities and Exchange Board of India. The
Securities and Exchange Board of India Act, 1992 empowers SEBI under section 11(2)
thereof to register and regulate the working of venture capital funds. This was done in
1996, through a government notification. The power to control venture funds has been
given to SEBI only in 1995 and the notification came out in 1996. Till this time, venture
funds were dominated by Indian firms. The new regulations became the harbinger of the
second phase of the VC growth.
4.2.2 Phase II - Entry of Foreign Venture Capital funds (VCF) between 1995 -1999
The second phase of VC growth attracted many foreign institutional investors.During this
period overseas and private domestic venture capitalists began investing in VCF. The new
regulations in 1996 helped in this. Though the changes proposed in 1996 had a salutary
effect, the development of venture capital continued to be inhibited because of the
regulatory regime and restricted the FDI environment. To facilitate the growth of venture
funds, SEBI appointed a committee to recommend the changes needed in the VC funding
context. This coincided with the IT boom as well as the success of Silicon Valley start-
ups. In other words, VC growth and IT growth co-evolved in India

4.2.3 Phase III - (2000 onwards) - VC becomes risk averse and activity declines:
Not surprisingly, the investing in India came “crashing down” when NASDAQ lost 60%
of its value during the second quarter of 2000 and other public markets (including those in
India) also declined substantially. Consequently, during 2001-2003, the VCs started
investing less money and in more mature companies in an effort to minimize the risks.
This decline broadly continued until 2003.
4.2.4 Phase IV – 2004 onwards - Global VCs firms actively investing in India
Since India’s economy has been growing at 7%-8% a year, and since some sectors,
including the services sector and the high-end manufacturing sector, have been growing at
12%-14% a year, investors renewed their interest and started investing again in 2004. The
number of deals and the total dollars invested in India has been increasing substantially.
4.3 Growth of venture capital in India
Growth of VC in India
USD Million No. of Deals
16000 450
14234
14000 387 400
350
12000
299 300
10000 280
250
8000 7500
6390
200
6000 170
146 150
4000 110 71
100
78 2200
56
2000 1160 937 1650 50
591 470
0 0
2000 2001 2002 2003 2004 2005 2006 2007 1st half
of 2008
Value of deals No.of deals
Figure: 4.2 Growth of Venture capital in india
The venture capital is growing 43% CAGR. However, in spite of the venture
capital scenario improving, several specific VC funds are setting up shop in India,
with the year 2006 having been a landmark year for VC funding in India. The total
deal value in 2007 is 14234 USD Million. The NO. of deals are increasing year by
year. The no. of deals in 2006 only 56 and now in 2007 it touch the 387 deals. The
introduction stage of venture capital industry in India is completed in 2003 after
that growing stage of Indian venture capital industry is started.
There are 160 venture capital firms/funds in India. In 2006 it is only but in 2007
the number of venture capital firms are 146. The reason is good position of capital
market. But in 2008 no. of venture capital firms increase by only 14. the reason is
crashdown of capital market by 51% from January to November 2008. The No. of
venture capital funds are increasing year by year.
2000 2001 2002 2003 2004 2005 2006 2007 2008

841 77 78 81 86 89 105 146 160
www.nasscom.org, strategic review 2008 published by (National Association of

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

2007 VC INVESTMENTS BY INDUSTRY TOTAL

US$14.2Bn
1284 988
1638
1839
685
616
3979
1101
478
1628
IT&ITES Manufacturing
BFSI Eng & Construction
Healthcare & lifesciences Energy
Media&Entertinment Shipping&Logistics
Telecom Others
Source : TSJ Venture Intelligence India
Figure: 4.3 Total sector wise venture capital investment-2007
Now venture capital is nascent stage in india. Now due to growth of this sector, the
venture capital industry is also grow. The top most player in the industries are
ICICI venture capital fund, Avishhkar venture capital fund, IL&FS venture capital
fund, Canbank.

4.4 Venture Capital investment Q3, 2008.
Venture Capital firms invested $274 million over 49 deals in India during the three
months ending September 2008. The VC investment activity during the period was
significantly higher compared to the same quarter last year (which had witnessed 36
investments worth $252 million) as well as the immediate previous quarter ($165 million
invested across 28 deals).
The latest numbers take the total VC investments in the first nine months of 2008 to $661
million (across 108 deals) as against the $648 million (across 97 deals) during the
corresponding period in 2007.
4.4.1 Top Investments

The largest investment reported during Q3 2008 was the $18 million raised by online
tutoring services provider TutorVista from existing investors Sequoia Capital India and
LightSpeed Ventures.
Table: 4.1 Top venture capital investments

Top VC Investments
Company Sector Amount Investors
(US$ M)
TutorVista Online Services 18.0 Sequoia Capital India,

(Remote Tutoring) Lightspeed Ventures
Connectiva Communications Tech 17.0 IFC, NEA-IUV, SAP
Systems (Revenue Assurance) Ventures, Others
Online Services (Video 12.0 NEA-IUV, ePlanet Ventures,

Seventymm Rental) Matrix Partners India,DFJ
Equitas Micro Microfinance 12.0 Bellwether, Others
Finance
HaloSource Water Purifiers 11.5 Origo Sino-India, Unilever
Tech Ventures
4.4.2 Investments by Industry

Information Technology and IT-Enabled Services (IT & ITES) industry retained its status
as the favorite among VC investors during Q3 ’08.
VC Investments by Industry
Industry Volume No. of Deals Value Q3’ (US $ M)
Q3 ‘ 08 08 YTD
YTD**
IT & ITES 25 58 147 361
BFSI 5 8 34 54
Engg & Construction 3 4 23 33
Healthcare & Life 6 12 4 52
Sciences
Education 2 3 17 23
Other Services 1 6 15 29
Manufacturing 2 2 13 13
Media 2 5 11 19
Energy 2 6 6 48
Travel & Transport 1 2 4 14
Retail - 1 - 10
Telecom - 1 - 5
Table: 4.2 Venture capital investment by industry
Led by the $12 million investment by Bellwether and others into Chennai-based
microfinance firm Equitas, BFSI emerged as the second largest (in value terms) for VC
investments during the period. Other microfinance firms that attracted investments during
Q3 ’08 included Kolkata-based Arohan Financial Services (which raised funding from
Lok Capital and others) and Guwahati-based Asomi Finance (IFC and Aavishkaar
Goodwell).

INVESTMENT BY INDUSTRY (Q3 ' 08)
5% 4% 2%1%
6%
6%
2% 54%
8%
12%
IT & ITES BFSI
Engg & Construction Healthcare & Life Sciences
Education Other Services
Manufacturing Media
Energy Travel & Transport
Figure: 4.4 investment by industry Q3,2008

4.4.3 Investment by Stage
About 67% of VC investments during Q3 ‘08 were in the early stage segment.
VC Investments by Stage
Stage of Company Volume Value
Development
Q3 '08 YTD Q3 '08 YTD
Early 33 67 172 339
Growth 16 41 102 322
Table: 4.3 Venture investment by stage
STAGE WISE INVESTMENT
33%
67%
EARLY LATER
Figure: 4.5 Stage wise investment
4.5 Need for growth of venture capital in India
In India, a revolution is ushering in a new economy, wherein entrepreneurs mind set is

taking a shift from risk averse business to investment in new ideas which involve high
risk. The conventional industrial finance in India is not of much help to these new
emerging enterprises. Therefore there is a need of financing mechanism that will fit with
the requirement of entrepreneurs and thus it needs venture capital industry to grow in
India.
Few reasons for which active Venture Capital Industry is important for India include:
 Innovation : needs risk capital in a largely regulated,

conservative, legacy financial system
 Job creation: large pool of skilled graduates in the first

and second tier cities

 Patient capital: Not flighty, unlike FIIs
 Creating new industry clusters: Media, Retail, Call Centers and back office
processing, trickling down to organized effort of support services like office services,
catering, transportation
4.6 Regulatory and legal framework
Definition of Venture Capital Fund : The Venture Capital Fund is now defined as a fund
established in the form of a Trust, a company including a body corporate and registered
with SEBI which:
A. Has a dedicated pool of capital;

B. Raised in the manner specified under the regulations; and
C. To invest in venture capital undertakings in accordance with the regulations."
Definition of Venture Capital Undertaking: Venture Capital Undertaking means a

domestic company:-
a. Whose shares are not listed on a recognized stock exchange in India

b. Which is engaged in business including providing services, production or manufacture
of articles or things, or does not include such activities or sectors which are specified
in the negative list by the Board with the approval of the Central Government by
notification in the Official Gazette in this behalf? The negative list includes real
estate, non-banking financial services, gold financing, activities not permitted under
the Industrial Policy of the Government of India.
Minimum contribution and fund size : the minimum investment in a Venture Capital
Fund from any investor will not be less than Rs. 5 lacs and the minimum corpus of the
fund before the fund can start activities shall be at least Rs. 5 crores.
Investment Criteria : The earlier investment criteria has been substituted by a new
investment criteria which has the following requirements :
 Disclosure of investment strategy;

 maximum investment in single venture capital undertaking not to exceed 25% of the
corpus of the fund;
 Investment in the associated companies not permitted;
 At least 75% of the investible funds to be invested in unlisted equity shares or equity
linked instruments.
 Not more than 25% of the investible funds may be invested by way of:
a. Subscription to initial public offer of a venture capital undertaking whose shares

are proposed to be listed subject to lock-in period of one year;
b. Debt or debt instrument of a venture capital undertaking in which the venture
capital fund has already made an investment by way of equity.

It has also been provided that Venture Capital Fund seeking to avail benefit under the
relevant provisions of the Income Tax Act will be required to divest from the investment
within a period of one year from the listing of the Venture Capital Undertaking.
Disclosure and Information to Investors: In order to simplify and expedite the process
of fund raising, the requirement of filing the Placement memorandum with SEBI is
dispensed with and instead the fund will be required to submit a copy of Placement
Memorandum/ copy of contribution agreement entered with the investors along with the
details of the fund raised for information to SEBI. Further, the contents of the Placement
Memorandum are strengthened to provide adequate disclosure and information to
investors. SEBI will also prescribe suitable reporting requirement from the fund on their
investment activity.
QIB status for Venture Capital Funds: The venture capital funds will be eligible to
participate in the IPO through book building route as Qualified Institutional Buyer subject
to compliance with the SEBI (Venture Capital Fund) Regulations.
Relaxation in Takeover Code: The acquisition of shares by the company or any of the
promoters from the Venture Capital Fund under the terms of agreement shall be treated on
the same footing as that of acquisition of shares by promoters/companies from the state
level financial institutions and shall be exempt from making an open offer to other
shareholders.
Investments by Mutual Funds in Venture Capital Funds: In order to increase the

resources for domestic venture capital funds, mutual funds are permitted to invest upto
5% of its corpus in the case of open ended schemes and upto 10% of its corpus in the case
of close ended schemes. Apart from raising the resources for Venture Capital Funds this
would provide an opportunity to small investors to participate in Venture Capital activities
through mutual funds.
Government of India Guidelines: The Government of India (MOF) Guidelines for

Overseas Venture Capital Investment in India dated September 20, 1995 will be repealed
by the MOF on notification of SEBI Venture Capital Fund Regulations.
The following will be the salient features of SEBI (Foreign Venture Capital
Investors) Regulations, 2000 :
Definition of Foreign Venture Capital Investor : Any entity incorporated and

established outside India and proposes to make investment in Venture Capital Fund or
Venture Capital Undertaking and registered with SEBI.
Eligibility Criteria : Entity incorporated and established outside India in the form of
investment company, trust, partnership, pension fund, mutual fund, university fund,
endowment fund, asset management company, investment manager, investment
management company or other investment vehicle incorporated outside India would be
eligible for seeking registration from SEBI. SEBI for the purpose of registration shall
consider 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.

Investment Criteria:
 Disclosure of investment strategy;

 Maximum investment in single venture capital undertaking not to exceed 25% of the
funds committed for investment to India however it can invest its total fund
committed in one venture capital fund;
 Atleast 75% of the investible funds to be invested in unlisted equity shares or equity
linked instruments.
 Not more than 25% of the investible funds may be invested by way of:
a. Subscription to initial public offer of a venture capital undertaking whose shares

are proposed to be listed subject to lock-in period of one year;
b. Debt or debt instrument of a venture capital undertaking in which the venture
capital fund has already made an investment by way of equity.
Hassle Free Entry and Exit: The Foreign Venture Capital Investors proposing to make
venture capital investment under the Regulations would be granted registration by SEBI.
SEBI registered Foreign Venture Capital Investors shall be permitted to make investment
on an automatic route within the overall sectoral ceiling of foreign investment under
Annexure III of Statement of Industrial Policy without any approval from FIPB. Further,
SEBI registered FVCIs shall be granted a general permission from the exchange control
angle for inflow and outflow of funds and no prior approval of RBI would be required for
pricing, however, there would be ex-post reporting requirement for the amount transacted.
Trading in unlisted equity : The Board also approved the proposal to permit OTCEI to
develop a trading window for unlisted securities where Qualified Institutional Buyers
(QIB) would be permitted to participate.
4.7 Methods of Venture Financing
Venture capital is typically available in three forms in India, they are:
Equity: All VCFs in India provide equity but generally their contribution does not exceed
49 percent of the total equity capital. Thus, the effective control and majority ownership
of the firm remains with the entrepreneur. They buy shares of an enterprise with an
intention to ultimately sell them off to make capital gains.
Conditional Loan: It is repayable in the form of a royalty after the venture is able to
generate sales. No interest is paid on such loans. In India, VCFs charge royalty ranging
between 2 to 15 percent; actual rate depends on other factors of the venture such as
gestation period, cost-flow patterns, riskiness and other factors of the enterprise.
Income Note : It is a hybrid security which combines the features of both conventional
loan and conditional loan. The entrepreneur has to pay both interest and royalty on sales,
but at substantially low rates.
Other Financing Methods: A few venture capitalists, particularly in the private sector,
have started introducing innovative financial securities like participating debentures,
introduced by TCFC is an example.

4.8 Key considerations
For investor/venture capitalist
Ideal entrepreneur
A venture capital (VC) who is financing the firm would as the first necessity assess and
gauge the promoters. Because in the case of start-up where the product or the technology
is yet to be tested, the only thing they can trust and their investment on the people behind
it. While investing in a company what a VC is essentially looking for is a partnership and
therefore the first decision making criterion is the character and personality of the
promoters.
However from a venture capitalist’s perspective, the ideal entrepreneur,
1. is qualified in a ‘hot’ area of interest

2. Delivers sales or technical advances such as FDA approval with reasonable
probability
3. Tells a compelling story and is presentable to outside investors,
4. Recognizes the need for speed to an ipo for liquidity,
5. Has a good reputation and can provide references that show competences and skill,
6. Understand the need for a team with a variety of skill and therefore sees why equity
has to be allocated to other people
7. Works diligently toward a goal but maintains flexibility
8. Get along with the investor group
9. Understands the cost of capital and typical deal structures and is not offended by them
10. Is sought after by many VCs
11. Has a realistic expectation about process and outcome.
Besides the ideal entrepreneur, the investor tries to ensure the following for himself.
1 Reasonable reward given in the level of risk.

2 Sufficient influence on the management of the company through board representation.
3 Minimization of taxes.
4 Ease in achieving future liquidity on the investment.
5 Flexibility of structure that will allow room to enable additional investment later,
incentives for future management and retention of stocks if management leaves
6 Balance-sheet attractiveness to suppliers and debt financier
7 Retention of key employees through adequate equity participation
4.9 Venture financing practices and procedures
Entrepreneurs who need VC financing for their enterprises should have sufficient
information to be able to choose a VC company or fund suitable for their requirement and
have a broad understanding of the procedures required to be followed for obtaining
financial assistance at different stages of implementation of their projects.Basically they
need to develop a business plan or prototype to get venture finance.

The business plan is document that conveys a company’s prospects and growth potential,
and thereby sells the business to potential backers. The process is to be managed just as
most other business task is managed. It requires advance preparation, delegation,
refinement, and disciplines do most important business functions.
Companies are increasingly being called on to provide written business plans, financial
backers, especially VCs and other private investors , have long sought business plans
before making investment decisions. In addition, organization and individuals considering
long term relationships with the companies, large customers, suppliers and distributors are
much more inclined to seek written plans.
The business plan process involves gathering accurate and convincing information as well
as carefully outlining the plan before writing. Executives should also determine what kind
of plan they need, ranging from a summary plan full plan or an operating plan.
Once all these considerations have been formulated, the plan is ready for final rewriting
and presentation. Extensive editing is recommended, along with careful attention to
presentation details like the cover and concerns of its likely reader’s .perhaps most
important, the plan should be used to guide the company. Thus it should be reviewed and
updated.
In project appraisal, feasibility of the project is assessed from different angels with stress
on production process and marketability, as the lending institutions are backed by the
security of movable and immovable assets of the borrower and chiefly concerned with the
return of the investment with interest. In venture capital financing the venture capitalist
has a different approach because of equity participation, risk sharing and involvement in
the management of project. Investment by a venture capitalist indifferent stage of
enterprise calls for an analysis of factors related to each stage.
However, the order of preference followed by the venture capitalists in evaluating of

business plan is as under:
1. Analysis of management.
2. Analysis of organization pattern.
3. Analysis of production process.
4. Analysis of marketing & sales.
5. Financial analysis and projections.
6. Analysis of reference information.

CHAPTER 5
COMPREHENSIVE
STUDY OF INDIAN
MARKET

5.1 VENTURE CAPITAL & ALTERNATIVE FINANCING

COMPARISON
.
Private Placement, IPO,
vendor financing, state Venture Capital
funding, strategic alliance,
parent company finance
Angel investment, licensing Bootstrapping(factoring,

self funding, friends, family, trade credit, leasing ), micro
Community bank loans, financing debt, sell
some assets, business credit
card
High
Low
Low High
Level of Risk
Figure: 5.1 venture capital & alternative financing comparison

If we’ are struggling to find success in our quest for venture capital, may be we are
looking in the wrong place. Venture capital is not for everybody. For starters,
venture capitalists tend to be very picky about where they invest. They are looking
for something to dump a lot of money into (usually no less than $1 million) that
will pour even more money right back at them in a short amount of time (typically
3-7 years). We may be planning for a steady growth rate as opposed to the
booming, overnight success that venture capitalists tend to gravitate toward. We
may not be able to turn around as large of a profit as they are looking for in quick
enough time. We may not need the amount of money that they offer or our
business may simply not be big enough.
Simply put, venture capital is not the right fit for our business and there are plenty
of other options available when it comes to finding capital.
5.1.1 Substitute in Early stage
1. Angels
Most venture capital funds will not consider investing in anything under $1 million
to $2 million. Angels, however, are wealthy individuals who will provide capital
for a startup business. These investors have usually earned their money as
entrepreneurs and business managers and can serve as a prime resource for advice
on top of capital. On the other hand, due to typically limited resources, angels
usually have a shorter investment horizon than venture capitalists and tend to have
less tolerance for losses.
2. Private Placement
An investment bank or agent may be able to raise equity for our company by
placing our unregistered securities with accredited investors. However, you should
be aware that the fees and expenses associated with this practice are generally
higher than those that come with venture and angel investors. We will likely
receive little or no business counsel from private investors who also tend to have
little tolerance for losses and under-performance.
3. Initial Public Offering
If we are somehow able to gain access to public equity markets than an initial
public offering (IPO) can be an effective way to raise capital. Keep in mind that,
while the public market’s high valuations, abundant capital and liquidity
characteristics make it attractive, the transaction costs are high and there are
ongoing legal expenses associated with public disclosure requirements.
5.1.2 Later Stage Financing
1. Bootstrap Financing

This method is intended to develop a foundation for your business from scratch.
Financial management is essential to make this work. With bootstrap financing
you’re building a business from nothing, which means there is little to no margin
for error in the finance department. Keep a rigid account of all transactions and
don’t stray from your budget.
A few different methods of bootstrapping include :
Factoring, which generates cash flow through the sale of your accounts receivable
to a “factor” at a discounted price forscash.
Trade Credit is an option if you are able to find a vendor or supplier that will
allow you to order goods on net 30, 60 or 90 day terms. If you can sell the goods
before the bill comes due then you have generated cash flow without spending
anysmoney. Customers can pay you up front our services.
Leasing your equipment instead of purchasing it outright.
2. Fund From Operations
Look for ways to tweak your business in order to reduce the cash flowing out and
increase the cash flowing in. Funding found in business operations come free of
finance charges, can reduce future financing charges and can increase the value of
your business. Month-by-month operating and cash projections will show how
well we have planned, how you can optimize the elements of your business that
generate cash and allow you to plan for new investments and contingencies.
3. Licensing
Sell licenses to technology that is non-essential to our company or grant limited

licensing to essential technology that can be shared. Through outlicensing we can
generate revenue from up-front fees, access fees, royalties or milestone payments.
4. Vendor Financing
Similar to the trade credit related to bootstrap financing, vendors can play a big
role in financing your new business. Establish vendor relationships through our
trade association and strike deals to offer their product and pay for it at a date in
the near future. Selling the product in time is up to us. In hopes of keeping you as a
customer, vendors may also be willing to work out an arrangement if we need to
finance equipment or supplies. Just make sure to look for stability when you
research a vendor’s credentials and reputation before you sign any kind of
agreement. And keep in mind that many major suppliers (GE Small Business
Solutions, IBM Global Financing) own financial companies that can help you.
5. Self Funding

Search between the couch cushions and in old jacket pockets for whatever extra
money you might have lying around and invest it into your business. Obviously
loose change will not be enough for extra business funding, but take a look at your
savings, investment portfolio, retirement funds and employee buyout options from
your previous employer. You won’t have to deal with any creditors or interest and
the return on your investment could be much higher.
However, make sure that you consider the risks involved with using your own
resources. How competitive is the market that you are about to enter into? How
long will it take to pay yourself back? Will you be able to pay yourself back? Can
you afford to lose everything that you are investing if your business were to fail?
It’s important that your projected returns are more than enough to cover the risk
that you will be taking.
6. SBIR and STTR Programs
Coordinated by the SBA, SBIR (Small Business Innovation Research) and STTR
(Small business Technology Transfer) programs offer competitive federal funding
awards to stimulate technological innovation and provide opportunities for small
businesses. You can learn more about these programs at SBIRworld.com.
7. State Funding
If you’re not having any luck finding funding from the federal government take a
look at what your state has to offer. There is a list of links to state development
agencies that offer an array of grants and financial assistance for small
businessessonsAbout.com..
8. Community Banks
These smaller banks may have fewer products than their financial institution
counterparts but they offer a great opportunity to build banking relationships and
are generally more flexible with payment plans and interest rates.
9. Microloans
These types of loans can range from hundreds of dollars to low six-figure amounts.
Although some lenders regard microloans to be a waste of time because the
amount is so low, these can be a real boon for a startup business or one that just
needs to add some extra cash flow.
10. Finance Debt
It may be more expensive in the long run than purchasing, but financing your
equipment, facilities and receivables can free up cash in the short term or reduce
the amount of money that you need to raise.

11. Friends
Ask your friends if they have any extra money that they would like to invest.
Assure them that you will pay them back with interest or offer them stock options
or a share of the profits in return.
12. Family
Maybe you have a rich uncle or a wealthy cousin that would be willing to lend you
some money get your business running or send it to the next level. Again, make it
worth their while by offering interest, stocks or a share of the profits.
13. Form A Strategic Alliance
Aligning your business with a corporation can produce funding from upfront or
access fees to your service, milestone payments and royalties. In addition,
corporate partners may be able to provide research funding, loans and equity
investments.
14. Sell Some Assets
Find an interested party to buy some of your assets (computers, equipment, real
estate, etc…) and then lease them back to you. This provides an instant source of
cash and you will still be able to use whatever assets you need.
15. Business Lines of Credit
If your business has positive cash flow and has proven that it will cover its debts
then you may be eligible for a business line of credit. This type of financing is a
common service offered by most business banks and serves as business capital, up
to an agreed upon amount, that you can access at any time.
16. Personal Credit Cards
Using personal credit cards to finance a business can be risky but, if you take the
right approach, they can also give your business a lift. You should only consider
using this type of financing for acquiring assets and working capital. Never
consider this to be a long-term option. Once your company breaks even or moves
into the black, ditch the credit cards and move toward traditional bank financing or
lease agreements.
17. Business Credit Cards

Business credit cards carry similar risks as personal credit cards but tend to be a
safer alternative. While the activity on this card goes toward your credit report, a
business credit card can help you to build business credit, keep your business
expenses separate from your personal expenses and can make tax season easier to
manage.

5.2 PEST ANALYSIS:

5.2.1 Political factors:
Venture Capital being a very sensitive institutional form due to the high-risk nature
of its investments it was prerequisite for the government to be careful to ensure
that its policies do not adversely affect its venture capitalists. There are number of
rules and regulation for VC and these would broadly come under either of the
following heads:
• The Indian Trust Act, 1882 or the company Act,1956 depending on whether
the fund is set up as a trust or a company.
• The foreign investment Promotion Board (FIPB) and the RBI in case of an
offshore fund. These funds have to secure the permission of the FIPB while
setting up in India and need a clearance from the RBI for any repatriation of
income.
• The Central Board of Direct Taxation(CBDT) governs the issues pertaining
to income tax on the proceed from VC funding activity. The long term
capital gain tax is at around 10% in India and the relevant clauses to VC
may be found in Section 10(sub section 23)
VC & FVCI
SEBI RBI FIPB TAX
• SEBI (VCF) Reg. 1996 • FEMA, 1999 • FDI policy • IT Act, 1961
• SEBI(FVCI) Reg.2000 • Transfer or issue • Investment • DTAA
• SCR Act.1956 of security by a approvals  Singapore
• SEBI(SAST) Reg.1997 person resident • Press Notes  Mauritius
• SEBI(DIP)Guidelines,20 outside India  Others
00 regulation 2000
• SEBI Act,1992
Figure: 5.2 Major Regulatory framework for venture capital industry

 Minimum contribution and fund size : the minimum investment in a

Venture Capital Fund from any investor will not be less than Rs. 5 lacs and
the minimum corpus of the fund before the fund can start activities shall be
at least Rs. 5 crores.
 Short term capital gain: Rate of tax on short term capital gains under
Section 111A & Section 115AD increased to 15 per cent from earlier 10%
 Investment Criteria : The earlier investment criteria has been substituted

by a new investment criteria which has the following requirements :
 Disclosure of investment strategy;

 Maximum investment in single venture capital undertaking not to exceed
25% of the corpus of the fund;
 Investment in the associated companies not permitted;
 At least 75% of the investible funds to be invested in unlisted equity shares
or equity linked instruments.
 Not more than 25% of the investible funds may be invested by way of:
c. Subscription to initial public offer of a venture capital undertaking

whose shares are proposed to be listed subject to lock-in period of
one year;
d. Debt or debt instrument of a venture capital undertaking in which the
venture capital fund has already made an investment by way of
equity.
It has also been provided that Venture Capital Fund seeking to avail benefit under
the relevant provisions of the Income Tax Act will be required to divest from the
investment within a period of one year from the listing of the Venture Capital
Undertaking.
 Disclosure and Information to Investors: In order to simplify and expedite

the process of fund raising, the requirement of filing the Placement
memorandum with SEBI is dispensed with and instead the fund will be
required to submit a copy of Placement Memorandum/ copy of contribution
agreement entered with the investors along with the details of the fund raised
for information to SEBI. Further, the contents of the Placement Memorandum
are strengthened to provide adequate disclosure and information to investors.
SEBI will also prescribe suitable reporting requirement from the fund on their
investment activity.
 QIB status for Venture Capital Funds: The venture capital funds will be
eligible to participate in the IPO through book building route as Qualified
Institutional Buyer subject to compliance with the SEBI (Venture Capital Fund)
Regulations.

 Relaxation in Takeover Code: The acquisition of shares by the company or

any of the promoters from the Venture Capital Fund under the terms of
agreement shall be treated on the same footing as that of acquisition of shares
by promoters/companies from the state level financial institutions and shall be
exempt from making an open offer to other shareholders.
 Investments by Mutual Funds in Venture Capital Funds: In order to
increase the resources for domestic venture capital funds, mutual funds are
permitted to invest upto 5% of its corpus in the case of open ended schemes
and upto 10% of its corpus in the case of close ended schemes. Apart from
raising the resources for Venture Capital Funds this would provide an
opportunity to small investors to participate in Venture Capital activities
through mutual funds.
 Government of India Guidelines: The Government of India (MOF)
Guidelines for Overseas Venture Capital Investment in India dated September
20, 1995 will be repealed by the MOF on notification of SEBI Venture Capital
Fund Regulations.
 GUIDELINES FOR OVERSEAS VENTURE CAPITAL INVESTMENT

IN INDIA
In recognition of growing importance of Venture Capital as one of the sources of

finance for Indian industry, particularly for the smaller unlisted companies, the
Government has announced a policy governing the establishment of domestic
Venture Capital Funds/Companies. An amendment has also been carried out in the
SEBI Act empowering the Securities and Exchange Board of India (SEBI) to
register and regulate Venture Capital Funds (VCFs) and Venture Capital
Companies(VCCs) through specific regulations.
With a view to augment the availability of Venture Capital, the Government has
decided to allow overseas venture capital investments in India subject to suitable
guidelines as outlined below :
a. Offshore investment may invest in approved domestic Venture Capital

Funds/Companies set up under the new policy after obtaining FIPB
approval for the investment. There is no limit to the extent of foreign
contribution to a domestic venture capital company/ fund. An offshore
venture capital company may contribute 100% of the capital of
domestic venture capital fund, and may also set up a domestic asset
management company to manage the Fund.

b. Establishment of an asset management company with foreign investment

to manage such funds would require FIPB approval and would be subject to
the existing norms for foreign investment in non-bank financial services
companies.
c. Once the initial FIPB approval has been obtained, the subsequent
investment b y the domestic venture capital company/fund in Indian
companies will not require FIPB approval. Such investments will be limited
only by the general restriction applicable to venture capital companies viz.-
i. A minimum lock-in period of three years will apply to all such
investments.
ii. VCFs and VCCs shall invest only in unlisted companies and their
investment shall be limited to 40% of the paid up capital of the
company. The ceiling will be subject to relevant equity investment
limits that may be in force from time to time in relation to areas
reserved for the Small Scale Sector.
iii. Investment in any single company by a VCF/VCC shall not exceed
20% of the paid-up corpus of the domestic VCF/VCC.
d. The tax exemption available to domestic VCFs and VCCs under Section
10(23F) of the Income Tax Act, 1961, will also be extended to domestic
VCFs and VCCs which attract overseas venture capital investments
provided these VCFs/VCCs conform to the guidelines applicable for
domestic VCFs/VCCs. However, if the VCF/VCC is willing to forego the
tax exemptions available under Section 10(23F) of the Income Tax Act, it
would be within its rights to invest in any sector.
e. Income paid to offshore investors from Indian VCFs/VCCs will be subject

to tax as per the normal rates applicable to foreign investors.
f. Offshore investors may also invest directly in the equity of unlisted Indian
companies without going through the route of a domestic VCF/VCC.
However, in such cases each investment will be treated as a separate act of
foreign investment and will require separate approval as required under the
general policy for foreign investment proposals.

 Hassle free entry/exit for foreign venture apital firm
SEBI registered Foreign Venture Capital Investors shall be permitted to make

investment on an automatic route within the overall sectorial ceiling of foreign
investment under Annexure III of Statement of Industrial Policy without any
approval from FIPB. Further, SEBI registered FVCIs shall be granted a general
permission from the exchange control angle for inflow and outflow of funds and
no prior approval of RBI would be required for pricing, however, there would be
ex-post reporting requirement for the amount transacted.
 DTAT (Double Tax Avoidance Treaties)
Foreign funds investing in India directly into Indian portfolio companies will not
be affected by the proposed amendment. As most of these funds have been set up
in tax neutral jurisdictions like Mauritius, they will continue to enjoy tax
exemption on capital gains tax under the Double Tax Avoidance Agreements,
effectively getting the equivalent of a “pass through” notwithstanding which sector
they invest in.
 Controller of Capital Issue
The exist route available to the venture capitalist were restricted to the IPO route.
Pricing of the issue was dependent on Controller of Capital Issues (CCI)
regulations before deregulations. Many of the issues were underpriced. Failure of
OTCEOI so small companies could not hope for BSE/NSE listing.
 REALXATION IN IPO NORMS :
The SEBI norms for an IPO by a Venture Capital company / fund be relaxed. The
requirement of three years track record should be waived off for a Venture Capital
company / fund registered with SEBI. This will help the Venture Capital company /
fund to generate resources locally.
.
 SEBI registered VCFs have been permitted to invest in equity and equity
linked instruments of offshore venture capital undertakings, subject to overall
limit of USD 500 million and with prior SEBI approval. Investment can be
made only in those companies which have an Indian connection and the
investment can not exceed 10% of the VCFs investible funds.

 Taxes on emerging sector :
As per Union Budget 2007 and its broad guidelines, Government proposed to limit
pass-through status to venture capital funds (VCFs) making investment in nine
areas. These nine areas are biotechnology, information technology,
nanotechnology, seed research and development, R&D for pharma sectors, dairy
industry, poultry industry and production of bio-fuels. Pass-through status means
that the incomes earned by funds are taxable now.
 Liberalization:
With the advent of liberalization, India has been showing remarkable growth in the
economy in the past 10 - 12 years. The government is promoting growth in
capacity utilization of available and acquired resources and hence entrepreneurship
development, by liberalizing norms regarding venture capital. In the year 2000, the
finance ministry announced the liberalization of tax treatment for venture capital
funds to promote them & to increase job creation. This is expected to give a strong
boost to the non resident Indians located in the Silicon valley and elsewhere to
invest some of their capital, knowledge and enterprise in these ventures.

5.2.2 ECONOMIC FACTORS:

 MERGER & ACQUISITION :
Venture backed liquidity events by year 2001-2008 through M&A
Quarter/Y Total M&A Deals Total Average

ear M&A with Disclosed M&AsDeal
Deals Disclosed M&A Value Size($M)
Values ($M)
2002 318 152 7,916.4 52.1
2003 290 122 7,721.1 63.3
2004 339 186 15,440.6 83.0
2005-1 81 45 4,351.9 96.7
2005-2 81 34 4,725.0 139.0
2005-3 101 48 18,056.0 376.2
2005-4 87 39 2,594.0 66.5
2005 350 166 29,727.0 179.1
2006-1 107 52 5,607.5 107.8
2006-2 105 40 4,018.5 100.5
2006-3 94 42 3,894.8 92.7
2006-4 62 26 5,616.8 216.0
2006 368 160 19,137.6 119.6
2007-1 82 29 4,540.3 156.6
2007-2 87 36 3,972.3 110.3
2007-3 100 52 10,810.0 207.9
2007-4 86 43 9,084.1 211.3
2007 355 160 28,406.7 177.5
2008-1 70 28 3,602.4 128.7
2008-2 50 14 2,397.3 171.2
2008 120 42 5,999.7 142.9
www.thomsonreuters.com
Table: 5.1 Venture backed liquidity events by year 2001-2008 through M&A

VENTURE BACKED LIQUIDITY BY EVENTS

9000 8512.6 180
169
VALUE OF DEALS 8000 160
7000 5999.7 140
No.OF DEALS
6000 120
120
5000 100
4000 80
3000 60
2000 40
1000 20
0 0
FIRST TWO QUARTER OF FIRST TWO QUARTER OF
2007 2008
Value of Deals No. of Deals
Figure: 5.3 Venture backed M & A deals
 MERGERS AND ACQUISITIONS VOLUME DECLINES
In the second quarter of 2008, 50 venture-backed M&A deals were completed, 14

of which had an aggregate deal value of $2.4 billion. M&A volume of 120
transactions in the first half of 2008 was down 28 percent from the first half of
2007 when 169 transactions were completed. The average disclosed deal value for
the quarter was $171.2 million. Due to this V/C is directly affected negatively
because M&A is the exit route for Venture capital industry. The reason behind
decreasing No. of M&A deals is crashdown of SENSEX by 51%

No.of Total Offer Average IPO

IPO's Amount Offer
Amount
Quarter/Year
($M) ($M)
2002 22 2,109.10 95.9
2003 29 2,022.70 69.8
2004 93 11,014.90 118.4
2005-1 10 720.7 72.1
2005-2 10 714.1 71.4
2005-3 19 1,458.10 76.7
2005-4 18 1,592.10 92.2
2005 57 4,485.00 78.7
2006-1 10 540.8 54.1
2006-2 19 2,011.00 105.8
2006-3 8 934.2 116.8
2006-4 20 1,631.10 81.6
2006 57 5,117.10 89.8
2007-1 18 2,190.60 121.7
2007-2 25 4,146.80 165.9
2007-3 12 945.2 78.8
2007-4 31 3,043.80 98.2
2007 86 10,326.30 120.1
2008-1 5 282.7 56.5
2008-2 0 0 n/a
2008 5 282.7 56.5
www.thomsonreuters.com
Table: 5.2 Number of IPOs during 2002-2008

Here the No. of IPO is decreased in first two quarter of 2008 as compared to first
two quarter of previous two years. The no. of IPO in 1st two quarter of 2007 are 43
and in first two quarter of 2008 are only 5 IPO. Because due to crash down of IPO
nobody like to bring IPO. IPO is the exist route for venture capital company. It
comes a barrier for venture capital to exist from a venture capital.
 INFLATION RATE
INFLATION v/s VC GROWTH RATE

8 7.4 300
VC GROWTH RATE
251.06 250
INFLATION RATE
5.8
6 240.91
200
5 4.5
4 150
3.2
3
100
89.79
2
50
1 33.33
0 0
2004 2005 2006 2007
INFLATION RATE VC GROWTH RATE
Source : www.rbi.org.in, Macroeconomic and Monetary Development,

annual statement on monetary policy, First Quarter Review 2008-09
Figure: 5.4 Inflation V/S Venture capital growth rate
IMPACT
In above chart the inflation rate is decreased to 4.5 in 2005 from 7.4 in 2004. At
same time the growth of VC is also declining to 33.33% in 2005 from 251.06% in
2004. From the above chart we can conclude that inflation and VC has positive
relationship. Now in June 2008 the inflation rate was 11.9 and the NO. of deal in
first two quarter in 2008 was 170 and value of deal was 6390 US$mn and in third
quarter of 2008 there was only four deals. And in October the inflation touch the
13.01%. Due to increase in inflation rate the people will going to spend more.
Thus, their savings will decrease. So more money will come into the market and
demand of the products will increase continuously. now due to growth of any
sector will attract new entrepreneur to enter in the industry. For that they must need
funds. So there is a great opportunity for venture capital industry to attract this new
entrepreneur.

 GDP GROWTH RATE
GDP V/S VC GROWTH RATE
12 300
GDP GROWTH RATE(%)
VC GROWTH RATE(%)
251.06 9.4 9.6
10 8.5 240.91 250
7.5
8 200
6 150
4 89.79 100
2 33.33 50
0 0
2004 2005 2006 2007
GDP GROWTH RATE VC GROWTH RATE
Source :CII (Confederation of Indian Industry) July 2008 Presentation
Figure: 5.5 GDP V/S Venture capital growth rate
IMPACT
In above chart there was a positive relation ship there was between GDP growth
rate. But in 2007 the growth of VC was decline to 89.79% from 240.91% in 2006
but here the value of deal was increasing. In 2008 the growth rate is 9% and
project the next year GDP 8% to 9%. So there is a hope, the growth of VC industry
can be increased.
India is the 4th largest economy in terms of PPP. GDP of India is US$ 3787.3
billion in PPP terms.
Taking Indian Purchasing Power Parity (PPP) into consideration, this would be
equivalent to $22 billion worth of investment in the US. Since about $1.75 billion
(or approximately 40% of $4.4 billion) has been already raised, even if only $2.2
billion is raised by December 2006.
Evalueserve cautions that there will be a glut of VC money for earlystage

investments in India. This will be especially true if the VCs continue to invest only
in currently favourite sectors such as IT, BPO, software and hardware products,
telecom, and consumer Internet.

 CONTRIBUTION OF SECTOR IN GDP:
GDP COM POSITION
19%
54%
27%
AGRICULTURE INDUSTRY SERVICES
Source : CII (Confederation of Indian Industry) July 2008, Presentation
Figure: 5.6 Contribution of sector in GDP
In Indian GDP growth rate the contribution of service and manufacturing sectors
are increasing. In 1991 the contribution of service and industry sectors are 41%
and 27% and now in 2008 it is 54% and 27% respectively.
IMPRESSIVE GROWTH IN INDUSTRY SECTOR :
Items 2004-05 2005-06 2006-07 2007-08(AE)

Industry 9.8 10.15 11 8.1
Mining and Quarrying 7.5 4.87 5.7 4.7
Manufacturing 8.7 8.98 12 8.8
Electricitym gas water supply 7.5 4.68 6 6.3
Construction 14.1 16.46 12 9.8

IMPRESSIVE GROWTH IN SERVICES SECTOR :
Items 2005-06 2006-07 2007-08(AE)

Services 10.34 11.9 10.7
Trade, hotels, transport & 11.51 11.8 12.0
communication
Financial, real estate & 11.41 13.9 11.8
business services
Community, social and 7.21 6.9 7.3
personal services
Source : Confederation of Indian Industry, July 2008
Most of the venture capital industry invest their money in IT companies, hotels,
transport, communication, bio-technology, BIFS etc. This shows an impressive
growth year by year. This are emerging sectors for venture capital industry.
 SENSEX CRASHDOWN
SENSEX IN 2008
20000
17578.72 17287.31
18000
16000 17648.71 16415.57 14355.75
14000 15644.44 12860.43
12000 13461.6 14564.53
9092.72
10000
8000 9788.06
6000
4000
2000
0
N
IL
G
H
E
AY
V
B
LY
PT
T
JA
O
C
FE
U
PR
JU
SE
M
JU
O
AR
N
A
M
www.bseindia.com
Figure: 5.7 SENSEX in 2008

IMPACT
The SENSEX is down by 51% from January 2008 to Nov 2008. So one company
is try to come up with IPO. IPO in first two quarter of 2007 is 43 and value of IPO
is 6337.4 and in first two quarter of 2008 there is only 5 IPO and value is only
282.7 through VC company go for exit. Because IPO is one of the exit route for
Venture capitalist from the company. It is also favorable for venture capital
company because no one try to come up with IPO so they must go to the venture
capital for money
 SMALL SCALE INDUSTRIES
No. deals V/S No. of SMEs
450 128.44 130

400 387
123.42 125
350
299
300 120
118.59
250
115
200 113.95
146
150 109.49 110
100 71
56 105
50
0 100
2003 2004 2005 2006 2007
No. of deals No. of SMEs
Source: www.MSME.org.in, Economiv Survey 2007-08,chapter 8
Figure: 5.8 No. of deals V/S No. of SMEs
IMPACT
VC, to be able to contribute to developing entrepreneurship in India, needs to
concentrate its investment in small and medium enterprises. A “Package for
Promotion of Micro and Small Enterprises” was announced in February 2007.
This includes measures addressing concerns of credit, fiscal support, cluster-based
development, infrastructure, technology, and marketing. Capacity building of
MSME Associations and support to women entrepreneurs are the other important
features of this package. SMEs have been allowed to manage their direct/indirect
exposure to foreign exchange risk by booking/canceling/roll over of forward
contracts without prior permission of RBI.

To boost the micro and small enterprise sector, the bank has decided to refinance
an amount of 7000 crore to the Small Industries Development Bank of India,
which will be available up to March 31, 2010. The Central Bank said that it is also
working on a similar refinance facility for the National Housing Bank (NHB) of an
amount of Rs 4, 000 crore.
 INTEREST RATE :
INTEREST RATE
PERCENTAGE
10 8.73 9.11
7.98
8 7.23
6.11
6
4
2
0
MA MA MA JUNE-- JULY--
RCH--06 RCH--07 RCH--08 08 08
Sources:- The Macro economic and monetary development annual statement on monetary
policy, First Quarter Review 2008-09
Figure: 5.9 Interest Rate
IMPACT :
The interest rate increase year by year. It is 6.11% in March-2006 and now in July
2008 it is 9.11%. venture capital firms generally borrow from banks now if
interest rates are increasing interest cost of venture capital firms will also increase
which led reduce the profitability of Venture Capital firms. Because if anyone is
investing in any option he will look for good return, so here if they will maintain
their own profits they will have to give less return to investors then investors will
go for other options. Here increase in bank rates affect Venture Capital firms in
both ways from the suppliers as well as buyers side.

 CURRENCY RISK :
Exchange Rate(INR/US$)
60
EXCHANGE RATE
45.75 47.73 48.42 45.95 44.87 44.09 45.11

50
40.01
40
30
20
10
0
2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007-
01 02 03 04 05 06 07 08
Figure: 5.10 Exchange Rate(INR/US$)
IMPACT
From the above chart we can see that exchange rate is highly fluctuated. Nowadays
the exchange rate touches to 50 Rs. Per dollar. Now due to globalization venture
capital firms are entering at global level. Nowa for a particular country currency
risk can be defined in two ways.
 Indian venture capital are concentrated on global level due to increasing

opportunity in global level. They make a deal with global company. So
there is directly affect the movement of exchange rate.
 In second way , Foreign institutional investor incest their money Indian
stock market and nowadays due to crash down of market the investment of
FII is decreasing. Due to this nobody like to bring IPO. It is directly affected
to venture capital company because IPO is one way for exist.

 EXPORT AND IMPORT
VALUE OF EXPORT AND IMPORT
200 185.7 185.7

180
149.2 155.5
US dollars in billions
160
140 126.4
120 111.5
103.1
100 83.6
78.1
80 61.4 63.8
52.7
60
40
20
0
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
EXPORT IMPORT
Figure: 5.11 Value of export and import
IMPACT :
The value of Import and export are increasing year by year. In 2002-03 the value
of import and export are 52.7 and 61.4 US$bn respectively and in 2007-08 the
value of import and export are 155.7 and 185.7 US$bn. It means industry need
more money for import and export. So it is an opportunity for venture capital. On
the other side when company going to export the company must have good contact
with other country’s company. So for that venture capital industry is useful because
they have good contact and affiliation network with other country’s company.
 REPO RATE
The Repo Rate is now reduced to 6.5 from 8.5 in july 2008. It is directly affect the
home loan rate. The rate of home loan is reduced so it is very helpful for real estate
sector. And most of the Venture Capital companies invest their money in real estate
sector. There is an improve the flow of credit to productive sectors of the economy.
 LACK OF FINANCIAL TRANSPERANCY AND OTHER PROCESSES :

Again, partly because the Indian economy was a “socialistic and closed”
economy and partly because Indian entrepreneurs are not as proficient at
business development as their counterparts in the US, Indian start-ups lack
financial transparency and often have limited experience in implementing
effective financial processes. This usually makes the task of the Venture Capital
much more difficult not only during the due-diligence phase, but also in helping
the start-up grow rapidly.
FACTOR FAVOURABLE UNFAVOURABLE BOTH

MERGER& √
ACQUISITION,IPO
INFLATION RATE √
GDP GROWTH √
RATE
SENSEX √
CRASHDOWN
SMALL SCALE √
INDUSTRIES
INTEREST RATE √
CURRENCY RISK : √
EXPORT & √
IMPORT
REPO RATE √
Table: 5.3 Result of Economic factors
5.2.3 SOCIAL FACTORS:

 Demographic factor:
 AGE:
Population Demographic Shift
Age % of population 1997 2002 2007
Under 15 years 37.20% 33.50% 30.00%
Between 15-59 years 56.10% 59.30% 62.30%
Above 60 years 06.60% 06.90% 07.50%
Table: 5.4 Population Demographic Shift
AGE BETWEEN 15-59 YEARS

64 62.3
PERCENTAGE
62
60 59.3
58
56.1
56
54
52
1997 2002 2007
(Source: Planning Commission Projection data)

Figure: 5.12 population demographic shift between 15-59 years
In above chart we can see young working people in India is increasing rapidly.
Earlier the young working peoples are 56.1% out of total population and nowadays
it is 62.3%. Young people out of total population. The average young age in India
is 25 upto year 2025.
 UNEMPLOYMENT RATE:
UNEMPLOYMENT RATE
9.5 9.2
10 8.8 8.8 8.9
7.8
PERCENTAGE
8 7.2
6
4
2
0
2002 2003 2004 2005 2006 2007 2008
www.indexmundi.com
Figure: 5.13 Unemployment rate
In India the unemployment rate is very high. No doubt it is decreasing year by
year. It is 9.5% in 2004 and now it is 7.2% in 2008. Here there is a great
opportunity for Venture capital firm because there is a huge untapped market and
they require amount fr strting the business.
According to one survey by National Entrepreneurship Development Board
(NEBD), Ministry of SSI & ARI, Govt. of India, on ‘Entry barriers to
entrepreneurship as perceived by youth’. In this survey out of 1625 respondents
19.2% people have future plan to become entrepreneur for starting the business
and 80.8% persons are not ready for business. But out of this 80.8% persons 58.3%
person are ready for becoming entrepreneurship if they get help in finance, project
idea, and training for business and management. So here there is a great
opportunity for venture capital firms.
 INDIAN ENTREPRENEUR LACKS IN MARKETING, SALES AND

BUSINESS DEVELOPMENT EXPERTISE :
An Indian entrepreneur is found to be quite adept technically and definitely at par

with similar entrepreneurs in developed countries. However, entrepreneurs in
India generally lacked expertise in marketing, sales and business development
areas, especially when compared to their counterparts in the US. Furthermore,
since India had socialistic economic policies during 1947-1992, there is a lack of
good talent in marketing and sales professionals who can thrive in an extremely
competitive environment.
Hence, finding the appropriate marketing, sales and business development people
is one area where Indian start-ups need help. This problem is further exacerbated
because the Indian economy has been growing at 8% and most start-ups have to
compete for talent not only with other companies who are exporting similar or
dissimilar products and services but also with many Indian domestic companies.
In fact, finding and retaining the ‘right talent’ has become an issue not only in
marketing, sales and business development but also in research, technical and
advanced development areas. Finally, if the eventual market were a developed

country, then such expertise can be potentially found in that country. However, if
the market for the corresponding product or service is India, China or some other
developing nation, then finding such people can be a Herculean task!
 INDIAN ENTREPRENEURS ARE HESISTANT TO GIVE UP

CONTROL :
Indian entrepreneurs are usually hesitant about giving up control. In fact, most
of the entrepreneurs in India currently receive their initial funding from family
and friends, and even if they do not do so, the Indian social system is such that
relatives and friends still end up being a major influence. Also, company can
borrow money from bank and other financial institution at lower than Venture
capital rather give substantial share to the VC.
Consequently, the Venture Capital will have to provide a very clear value
proposition to the start-ups and cannot simply state that they bring value to the
table just because they are well connected, etc. In fact, we believe that in some
cases the Venture Capital may even have to go to the extreme of closing contracts
and bringing in the revenue on behalf of a start-up rather than simply “opening
doors” by providing the contacts in their “Rolodex.”
 ORIGIN OF IMMIGRANT ENTREPRENEUR

PERCENTAGE OF FOUNDERS
ORIGIN OF IMMIGRANT ENTERPRENEUR
30
25
20
15
10
5
0
A
Y
N
L
A
A
IA
N
K
D
A
E
A
E
IN
A
D
A
A
IW
IR
H
N
IN
R
JA
O
A
C
A
IS
R
K
T
C
E
G
COUNTRY OF ORIGIN
Source: Presentation of ITeC (institute for technology entrepreneurship &

commercialization)
Figure: origin of immigrant entrepreneur
Salaries of skilled people are rising 15-20% annually in India and China. Skilled
immigrants have contributed to greatly to US industrial growth but there is a huge
immigration backlog:
– Legal, Educated, skilled workers currently waiting for green cards

– 500,040 in main employment-based visa categories plus 555,044 family
members
– Over 1 million skilled immigrants waiting for yearly quota of 120,000 visas –
with 8,400 max/country

FACTOR FAVOURABLE UNFAVOURABLE BOTH

DEMOGRAPHIC FACTOR
AGE & UNEMPLOYMENT √

RATE
INDIAN ENTREPRENEUR √
LACKSIN MARKETING,
SALES AND BUSINESS
DEVELOPMENT
EXPERTISE
INDIAN √
ENTREPRENEURS ARE
HESISTANT TO GIVE UP
CONTROL
ORIGIN OF IMMIGRANT √
ENTREPRENEUR
Table: 5.5 Result of demographic factors
5.2.4 GEOGRAPHIC FACTOR :

1. EMERGING CITIES
TOP CITIES ATTRACTING VENTURE CPITAL INVESTMENTS(2007)
City NO. Of Deals Value(US$M)

Mumbai 109 5995
Delhi (Include Noida 63 2688
& Gurgaon)
Bangalore 49 685
Hyderabad 41 1380
Chennai 32 824
Ahmedabad 14 492
Kolkata 12 339
Table: 5.6 Top cities attracting venture capital investment
Cities Sectors
Mumbai Software services, BPO, Media, Computer
Graphics, Animation, Finance and Banking
Bangalore All IP-led companies; IT and IT-enabled
services, Biotechnology
Delhi Software services, IT enabled services,
Telecom.
Chennai IT and Telecom
Hyderabad IT and IT enabled services, Pharma
Pune Biotech, IT, BPO
Source: IVCA
Table: 5.7 city wise sectorial investment by venture capital
In Venture Capital industry most of the deals are made in emerging city like
Mumbai, Delhi, Bangalore, Chennai, Kolkata. In this industry Venture Capital
firms invest their money in most highly risk and emerging sector like bio-
technology, IT-ITES, real estate, healthcare and this sectors are highly developed
in this emerging city. So there is a great opportunity for Venture Capital to invest
their money in this city.

5.3 FIVE FORCE ANALYSIS:
Substitute
Products
Bargaining Rivalry among Bargaining

power of buyer competing power of
Investor supply money company receives VC
Threats from
new entrants
Figure: 5.15 Porter’s five force model
5.3.1 THREATS FROM NEW ENTRANTS / ENTRY BARRIERS:
1. Capital requirement:
Here if any investor want to invest in venture capital firm, the investment
should not be less than Rs. 5 lac, while for the venture capital firms minimum
requirement for starting the investment is Rs. 5 crore. So being a venture
capital firm one must fulfill these types of conditions. Here the fund
requirement for starting up the venture capital firm is so high that an ordinary
persons can not start this business. And in addition the venture capitalists must
have good industrial contacts and large network also to obtain funds as well as
to sell their services.
2. High risky business:
we can see from the chart that generally more deals are taking place at early
stage. But at the early stage it is difficult to predict the success of the business
so there is a high risk of getting failure in these types of investments. So the
investors of venture capital also found high risk in investing in venture capital
firms. And generally it is known that when there is high risk in investment the
bargaining power of supplier is high. It is clear that when company is in its later
stage the risk associated with it is lower compared to the early stage and at later

stage there are many options with the companies to borrow the funds so the
investment is less risky.
300 282 90
81 80
250 226
211 70
65
200 176 62 53 60
170
53 153 144 51 50
150 151 51
40
33
100 30
20
50
10
0 0
2004 2005 2006 2007
EARLY STAGES ($ MILLIONS) LATER STAGES ($ MILLIONS)

EARLY STAGES (no. of deals) LATER STAGES (no. of deals)
Figure: 5.16 investment in early and later stage
Possible result of venture capital investments
No. of companies out of 10 Annual rate of

investments return
Failure 4 0%
Viable 3 15%
Solid 2 50%
Superstars 1 100%
Blended average 24.5
Source : IVCA Presentation 2007
Table: 5.8 success ratio of venture capital deals
From the above table we can see the success ratio of the venture capital investment.
40% of the investments are getting failure and only 10% of them are able to give
100% return. And the average return by the venture capitalists is only 24.5% which is
not extra ordinary. This type of returns can be found in many other investment
options. So there isn’t any special reason to invest in venture capital. So if there is not
any extra advantage of investment or special feature to attract investors bargaining
power of suppliers is high and entry barrier for new entrants are high. So threat from
new entrants from this point of view is low.

3 Exit route barriers:
Here the venture capital company can exit through IPO or through merger and
acquisition with other companies. Now-a-days, from the below given table and
current crash in stock market we can see that the comparison between M&A deals and
IPO in the year 2007 and 2008 (first two quarters of both years). Now in the year
2007 there were 189 M&A deals while in 2008 number of M&A deals are 120 only. In
addition in 2007 number of IPO were 43 which are 5 only in the year 2008. So there
is a crucial problem for the Venture Capital firms to get their funds back from the
companies in which they have invested. Now if new player will enter he will have to
collect more funds and will also have to wait for the return. The risk is also high in
current market for the Venture Capital firms. So entry barrier is high for new entrants.
Quarter/Ye Total M&A Deals Total Average No.of

Total Offer Average IPO
ar M&A with Disclosed M&AsDeal IPO's
Amount Offer
Deals Disclosed M&A Value Size($M) ($M) Amount
Values ($M) ($M)
2007-1 82 29 4,540.3
156.6 18 2,190.6 121.7
2007-2 87 36 3,972.3
110.3 25 4,146.8 165.9
2008-1 70 28 3,602.4
128.7 5 282.7 56.5
2008-2 50 14 2,397.3
171.2 0 0.0 n/a
Source: www.thomsonreuters.com.
Table: 5.9 M& A deals and IPOs in 2007-08 (Q-1 & Q-2 )
4. Learning and experience curve effect: Venture capital funds, before going for
an in-depth analysis, carry out initial screening of all projects on the basis of
some broad criteria. Main screening criteria are……
 Size of investment
 Geographical location
 Stage of financing
 Knowledge about product and market
So the existing firms can have the benefit of experience in the industry, so on the basis
of their capabilities they can use that experience for the shake of the firm. But new
firms don’t have the experience in the industry so they may have a loss from this side.
So threat from new entrants is low from this point of view also. Experience person
can become competitive advantage.

5. Time constraint:
As we have discussed above risk associated with early stage of financing is very
high compared to other stages because of uncertainty attached with early stage.
But from the below given table we can say that the business can’t satisfy the
investor.
Stage wise financing :
Financing Stage Period (funds Risk Activity to be financed

locked in perception
years)
Early stage finance 7-10 Extreme For supporting a concept
Seed or idea or R & D for
product development
Start up 5-9 Very high Initializing operations or
developing prototypes
First stage 3-7 High Start commercial
production and marketing
Second stage 3-5 Sufficiently Expand market & growing
high working capital need
Later stage finance 1-3 Medium Market expansion,
acquisition & product
development for profit
making company
Buy out-in 1-3 Medium Acquisition financing
Turnaround 3-5 Medium to Turning around a sick
high company
Mezzanine 1-3 Low Facilitating public issue
Source : Satish Taneja, Venture capital india, first edition, Galgotia publishing
company, page no. 18
Table: 5.10 stage wise financing
From the above we can say that threat from new entrants are low to moderate.
Because there are high entry barriers.

5.3.2 Rivalry among competitors:
1. Fragmented industry:
Here the venture capital industry is highly fragmented no one is market leader. The
market for industry’s product or service is becoming more global, putting
companies in more and more countries in the same competitive arena. The industry
is young and crowded with aspiring contenders. As in the year of 2006 and 2007
the stock market of India was booming like anything thus more venture capital
investors and players were attracted towards industry, which can be seen from the
chart given below. But in the year 2008 because of sub-prime crisis the stock
market has crashed and it affect adversely the venture capital industry because the
IPO is the main exit route for the venture capital industry and because of current
crash no one is coming with IPO. As there was high growth of stock market in the
year 2006 and 2007 most of the VCs have entered in the market so now in crashed
market every one is eager to sell their services in small market of buyers. So the
competition is very high at current stage.
NO. OF VC FIRMS IN INDIA

180 160
160 146
NO. OF VC FIRMS
140
120 105
100 86 89
81 77 78 81
80
60
40
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
YEARS
www.nasscom.org, strategic review 2008 published by (National Association of

Software and Service Companies) strategic review 2008
Figure: 17 Number of venture capital firms in india

Top VC Investments
Company Sector Amount Investors
(US$ M)
TutorVista Online Services 18.0 Sequoia Capital India,

(Remote Tutoring) Lightspeed Ventures
Connectiva Communications 17.0 IFC, NEA-IUV, SAP
Systems Tech (Revenue Ventures, Others
Seventymm Assurance)
Online Services 12.0 NEA-IUV, ePlanet
(Video Rental) Ventures, Matrix Partners
India,DFJ
Equitas Micro Microfinance 12.0 Bellwether, Others
Finance
HaloSource Water Purifiers 11.5 Origo Sino-India,
Unilever Tech Ventures
Source: www.nasscom.org
Table: 5.11 Top venture capital investment
Investment pattern:
In venture capital industry, firms are investing on some basic criteria which they
have decided by their own requirements. Here some companies are investing in
some particular industries and some of them have also decided the stage of
financing the company. So Venture Capital firm investing in early seed stage does
not directly compete with the firm investing in the later stage, one investing in
LBO, MBO and MBI deals. So the competition between stages is moderate while
It is high within the stages. So the overall competition is moderate to high.
Company Seed Start up Early Later

stage stage stage stage
IDBI venture fund 50 63 1 2
ICICI venture funds 5 109 68 73
SIDBI 5 19 2 3
RCTC veture capital fund scheme 6 43 3 7
CANBANK VC fund LTD 2 40 3 13
Gujrat venture capital funds 1995 0 7 0 8
Industrial venture capital Ltd. 8 17 19 12
(source: Venture Capital in India by “Satish Taneja” , “Galgotia Publishing
Company”, Pg No.245 to 288)
Table: 5.12 companies stage wise investment

3. Effect of Globalization:
Formerly whenever money was invested in a company, many factors were

considered---the kind of market available for the product, the economic viability,
and its place in the stock market. Today however globalization is a factor to
contend with. The investors want to be the 1st in the market to be associated with
something that is really “hot’ and are prepared to take the “high risk” factor in their
stride because they know that it is likely to produce tremendously “ high returns”.
so because of less concerned about other factors investors are looking only for the
returns thus the competition among players is moderate to high.
4. Fast growing market
CAGR OF VC
16000 14234
14000
VALUE OF DEALS
12000
10000
8000 43%
6000
4000
2000 1160
0
2000 2007
Source: www.ivca.com
Figure: 5.18 CAGR of venture capital industry
We can see from the chart that the market is growing at 43% CAGR. As we know
market will grow only if the demand for services is increasing which will attract
new entrants to the market and will also led the existing players think on the matter
how to handle new entrants and how to compete with other existing players. So the
growth rate will increase the competition among rivalry.
5. Emerging sectors:

In today’s world new entrepreneurs are entering in businesses which lead to increase in
competition and also give arise to new emerging businesses which will need finance
which can increase the scope of venture capital. From the below given chart we can see
that there is a huge investment opportunities for the money suppliers. This can raise funds
in market and will also increase the competition among existing players.
2007 VC INVESTMENTS BY INDUSTRY TOTAL

US$14.2Bn
1284 988
1638
1839
685
616
3979
1101
478
1628
IT&ITES Manufacturing
BFSI Eng & Construction
Healthcare & lifesciences Energy
Media&Entertinment Shipping&Logistics
Telecom Others
Source : TSJ Venture Intelligence India
Figure: 5.19 sector wise venture capital investment 2007
From the above we can say that competition among rivalry is moderate to high.
5.3.3 Threat from substitutes:

Stages Early stage Start up stage Expansion stage
Angel investors IPO Bank

Substitute Friends & family Preference shares IPO
IPO Debentures Parent firms
Private placements Bank loan FDI
Substitute at early stage financing: Here the substitute are angle investors,
friends, family and here the level of investment is very low, so no one is ready to
take the money from venture capital firm. Threat from substitute is high.
CONTROL FINANCIAL MANAGEMENT

BURDEN SUPPORT
Angel NO LOW NO
investors
Friends & NO LOW NO
Family
IPO YES LOW NO
Private YES LOW NO
placement
Venture YES HIGH YES
capital
Here the venture capital is the only option providing management support to the
business while the financial burden are very low. It also have the control over the
business. Thus, the mind set of Indian entrepreneur can not accept the entry of
venture capital funds in his business. So at early stage threats from substitute is
so high.
Substitute at start up stage: Here the company requires huge capital for starting
the business and that time there is lot of risk. So the company collects the money
through IPO rather than through Venture Capial. Threat from substitute is
moderate.
BURDEN SUPPORT
IPO YES LOW NO
PREFERENCE NO LOW NO
SHARES
DEBENTURE NO MODERATE NO
BANK LOAN NO MODERATE NO
VENTURE YES HIGH YES
CAPITAL
Here also the venture capital only is providing management support while the
other options (IPO, Debenture, Bank loan, Preference shares) can provide more
management safety then VCs. Moreover it also handover some management
control to venture capitalist while other options except IPO provide full freedom.
Thus, venture capital doesn’t fit according to Indian entrepreneur mindset. So
threat from substitute is moderate to high.
Substitute at expansion stage: Here the company wants to expand geographically

and make merger and acquisition with another company, and also make
LBO,MBO/MBI deals so the requirement of investment is very high and there is
less risk and this stage company has good bargaining power because the company
is already developed and they can collect the money from any where.. Nobody is
ready to give money to the company at this stage rather than venture capital.
Threat from substitute is low.

BURDEN SUPPORT
BANK NO MODERATE NO
FDI MODERATE HIGH NO
IPO YES LOW NO
PARENT YES YES
FIRM
VENTURE YES HIGH YES
CAPITAL
At this stage the biggest substitute for the Venture Capital. is FDI.because at this
stage firm requires a huge capital for expansion and here the Venture Capital
having only one competitive advantage over FDI is management support provided
by them. In all other sectors Venture capital firm and FDI are mostly similar like
control, financial burden and risk associated with them.
WORKING CAPITAL MANAGEMENT:

As at this stage working capital requirement is not so high,so the firms can get the
funds from any of the substitute available at this stage which are as follows.
 Factoring
 Vendor finance
 Parent company
 Short term loan
If the company is going to borrow money from Venture Capitalists it will increase
their interest cost while company can get the funds from the above options at low
interest rates. So the threat from substitute is high at this stage.
The overall we can say that threat from substitute moderate.
5.3.4 BARGAINING POWER OF SUPPLIERS:

Here suppliers are the investors who provide funds to venture capitalist. The
investors are corporations, individual, banks, pension funds, insurance companies.
1. Risky business: Here generally venture capitalists are investing in businesses

which are highly risky, but are confident. Generally the projects or proposals
which do not get funds from other cheap options or need management support
will go for the borrowing from venture capital firms. It also has been mentioned
that most of the deals take place at early stage of business and its hard to predict
success of business at early stage, so the risk associated with investment is high,
which lead to increase the bargaining power of suppliers (investors)

investments return
Failure 4 0%
Viable 3 15%
Solid 2 50%
Superstars 1 100%
Source: IVCA Presentation 2007
Table: 5.13 success ratio of venture capital deals
2. In the following stakeholder map we have arranged the most important

stakeholders according to their interest in the industry/single companies and to
their power to exert any impact.

Figure: 5.20 Stake holders’ Impact
So here from the interest taken by the investors we can define their bargaining
power. If they will take interest it will create high impact on performance of the
firm. With the expected globalisation and development of capital markets investors
have a wider choice of investments. . A good track record and good investor
relationships will become even more important. Personal contacts are essential. So,
high returns are the most powerful means for attracting and maintaining investors.
With a rising competition for the really qualified people across all industries we
expect salaries levels to rise. Due to this bargaining power of supplier is high.
2. Switching cost: Here this is the list of money supplier for the venture capital
firms. These suppliers are in large number and every contributor is so much
important for the Venture Capital firm. Now all of them are having many other
options of investment and the risk associated with other options is low compared
to investment in Venture Capital firms. Thus, the bargaining power of supplier
is high.

Indian scenario (2007)

Contributors of funds to Venture Capital
Contributors Rs mn Per cent
Foreign institutional 13,426.47 52.46
investors
All india financial 6,252.90 24.43
institutions
Multilateral 2,133.64 8.34
development
agencies
Other banks 1,541.00 6.02
Foreign investors 570 2.23
Private sector 412.53 1.61
Public sector 324.44 1.27
Nationalized banks 278.67 1.09
Non resident Indians 235.5 0.92
State financial 215 0.84
institutions
Other public 115.52 0.45
Insurance companies 85 0.33
Mutual funds 4.5 0.02
Total 25,595.17 100.00
(Source: www.ivca.com)
Table: 5-20 contributors of funds to venture capital
3. They are interested in high returns. Besides that, few investors have other
preferences as well, like the support for certain industries or technologies. The
investment preferences of the investors influence, where they put their money in.
Therefore, it is very important for the Venture Capital companies to demonstrate
a good track record of high returns to attract funds. Bargaining power of
suppliers is very high.
Company Seed Start up Early Later

stage stage stage stage
IDBI venture fund 50 63 1 2
ICICI venture funds 5 109 68 73
SIDBI 5 19 2 3
RCTC veture capital fund scheme 6 43 3 7
CANBANK VC fund LTD 2 40 3 13
Gujrat venture capital funds 1995 0 7 0 8
Industrial venture capital Ltd. 8 17 19 12
(source: Venture Capital in India by “Satish Taneja” , “Galgotia Publishing

Company”, Pg No.245 to 288)

Table: 5.15 companies stage wise investment
4. Nowadays there is high liquidity in today’s financial market. Because RBI

reduces the repot rate, reverse report, CRR for enhancing the liquidity position of
the bank. Taking swift action to inject about Rs 60,000 crore into the cash-
strapped system, the Reserve Bank cut CRR 1.5% on October 11, 2008. and last
time RBI reduce CRR further 1% from 6.5% to 5.5% and that time Rs. 40000
crore are inject in the market. Nowadays venture capital firm can get easily
money from the market. Here the bargaining power of suppliers are moderate.
Source: www.economictimes.com News 11 october
On the basis of above we can say that the bargaining power of suppliers are high
5.3.5 BARGAINING POWER OF BUYERS
The "buyers" are the companies in which we invest. The venture capital firms
select them on the basis of their criteria and after evaluating them they limit the
losses.
 As the investment made by the Venture Capital firms are generally in risky
projects, because if any firm is getting firm at lower interest rates it will not
go to the Venture Capital firms, but if their projects are more risky other
investors won’t be ready to invest in their projects. At that time they will go
to the venture capitalists for borrowing the funds. On the basis of this
discussion we can decide that the bargaining power of buyers is moderate.
 Sensex crash:
SENSEX & IPO
17648.71 17578.72 17287.31

20000 16415.57 14564.53 9
8 8 15644.44 8
13461.614355.75
15000 12860.43 7
NO. OF IPO
9788.06 6
SENSEX
5 5
10000 4 4
3 3 3
5000 2 2
1 1
0 0 0
0
y
ay
ril
e
r
ch
ry
er
st
l
r
a
Ju
be
Ap
M
nu
ua
gu
ob
Ju
ar
em
br
M
Ja
Au
ct
Fe
O
pt
Se
MONTHS(2008)
SENSEX NO. of IPO
www.bseindia.com
Figure: 5.21 SENSEX vis-à-vis IPO movement

The bargaining power of buyers is very low, because of current crash in market no
one can come with IPO. So for getting fund company must go to the venture
capital firm. So here the bargaining power of buyer is very low.
 Bargaining power of buyer is also dependent on when buyer borrows the

money. In early stage bargaining power of buyer is high because at that time
Company can take finance from any other substitute like friends, family, and
angel investor and can bring IPO. In later or development stage bargaining
power of buyer is low because at that time there is huge requirement of capital
and at that time company make M&A deal or MBI/MBO. So it is very risky. At
this stage no other banks, institutions are ready to give money to the company
as there is a high risk associated with high capital requirements. So here at this
stage bargaining power of buyers is very low.
300 282 90
81 80
250 226
211 70
65
200 176 62 53 60
170
53 153 144 51 50
150 151 51
40
33
100 30
20
50
10
0 0
2004 2005 2006 2007
EARLY STAGES ($ MILLIONS) LATER STAGES ($ MILLIONS)

EARLY STAGES (no. of deals) LATER STAGES (no. of deals)
Figure: 5.22 investment in early and later stage
Advantages of financing by venture capital:
• It injects long term equity finance which provides a solid capital base for
future growth.
• The venture capitalist is a business partner, sharing both the risks and
rewards. Venture capitalists are rewarded by business success and the
capital gain.
• The venture capitalist is able to provide practical advice and assistance to
the company based on past experience with other companies which were in
similar situations.
• 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.
• The venture capitalist may be capable of providing additional rounds of
funding should it be required to finance growth.
Result of Five force analysis
Threat from new Rivalry Threat from Bargaiing Bargaiing

entrants/entry against substitute power of power of
barriers competitors buyers suppliers
√
Low
Low to √
moderate
Moderate √
Moderate √
to high
High √
Table: 5.16 Result of five force analysis

5.4 DRIVING FORCES FOR VENTURE CAPITAL FIRM
 Growth of Small Scale industries
SMALL SCALE ENTERPRIZE
130
No. of units ( lakhs)
125
128.44
120 123.42
115 118.59
110 113.95
109.49
105
100
2002-2003 2003-2004 2004-2005 2005-2006 2006-2007
Source: www.MSME.com
Figure: 5.23 Growth of small scall and medium scale industry
To boost the micro and small enterprise sector, the bank has decided to refinance an
amount of 7000 crore to the Small Industries Development Bank of India, which will be
available up to March 31, 2010. The Central Bank said that it is also working on a similar
refinance facility for the National Housing Bank (NHB) of an amount of Rs 4, 000 crore.
According to one survey by National Entrepreneurship Development Board

(NEBD), Ministry of SSI & ARI, Govt. of India, on ‘Entry barriers to
entrepreneurship as perceived by youth’. In this survey out of 1625 respondents 19.2%
people have future plan to become entrepreneur for starting the business and 80.8%
persons are not ready for business. But out of this 80.8% persons 58.3% person are ready
for becoming entrepreneurship if they get help in finance, project idea, and training for
business and management. So here there is a great opportunity for venture capital firms.

There are also some driving forces for industry :
Drivers Expected future development and Impact on Venture

capital industry
Development of  Will go on at a high pace
technology,  Broad variety of new developments; it is uncertain, which of
esp. IT and these will become industry standards and which not
communication  Risk of failure for investees gets higher
 Harder to determine successful investments
 Venture Capital firms need more expert knowledge in various
fields
 Shorter lifecycles for IT-systems lead to higher capital
requirements
 IT provides much easier access to information for everyone
 Investors seeking for higher returns are better informed and
take smarter decisions – money will concentrate at
investments with the best track records
 Knowledge, not money, becomes the key factor for a
competitive advantage
Development of  Rising liquidity leads to

financial markets  More money available to invest
 Higher prospects for IPO's
 Rise of new / alternative forms of investments that compete
for funds
 If the first wave of e-start-ups starts to break down, the
attractiveness of the whole industry for funds might decline,
specialized and small Venture Capital firms will have problems
 Rising integration, liberalization on a global scale will improve
the attractiveness and performance of financial markets in
general, thus also boosting the Venture Capital industry
State of the  Business cycles, economic up- and downturns influence the
economy Venture
 Capital companies and all industries in which they invest
 Economic upturn:
• Fuels growth and the number of start-ups – need for
Venture Capital
• High returns seek for re-investment – willingness to invest
in Venture Capital -funds will rise
 Economic downturn:
• investors preferences will slide from high returns to stable
returns – investments in Venture Capital funds loose
attractiveness
• companies need money for restructuring / recovering
Development of  Global deregulation of capital markets provides new
political climate opportunities
for the economy,

Globalization  National protectionism and national subsidies programmes in

some countries would make these economies less attractive
for investments
 Positive climate for education, R&D fuels new business
opportunities and start-ups
 Tax policy can have a huge influence on investment
preferences and can change the attractiveness of Venture
Capital-funds for investors in both directions
 Globalisation drives scale
 Requires huge investments in acquisitions and market
development
 Need for external expertise
 Ongoing globalisation and liberalisation provide twofold
opportunities for Venture Capital firms
 Direct Venture Capital activities in new markets, e.g. eastern
Europeanentrants into the EU
 companies go global and need funding for their international
activities
Table: 5.17 Driving forces for the venture capital industry

5.5 KEY SUCCESS FACTOR FOR VENTURE CAPITAL INDUSTRY

IN INDIA
Knowledge become the key factor for a competitive advantage for company. Venture
Capital firms need more expert knowledge in various fields. The various key success
factor for venture capital industry are as follow:
 Knowledge about Govt. changing policies:
Investment, management and exit should provide flexibility to suit the business
requirements and should also be driven by global trends. Venture capital investments have
typically come from high net worth individuals who have risk taking capacity. Since high
risk is involved in venture financing, venture investors globally seek investment and exit
on very flexible terms which provides them with certain levels of protection. Such exit
should be possible through IPOs and mergers/acquisitions on a global basis and not just
within India. In this context the judgement of the judiciary raising doubts on
treatment of tax on capital gains made by firms registered in Mauritius gains
significance - changing policies with a retrospective effect is undoubtedly acting as a
dampener to fresh fund raising by Venture capital firms.
 Quick Response time :
The company have flat organization structure results in quicker decision making. The
entrepreneur is relieved of the trauma that one normally goes through in an interface with
a funding institution or a development agency. They follow a clearly defined decision
making process that works with clock like precision, which means that if they agree on a
funding schedule entrepreneur can count on them to stick it.
 Knowledge about Global Environment
With increasing global integration and mobility of capital it is important that Indian
venture capital firms as well as venture financed enterprises be able to have opportunities
for investment abroad. This would not only enhance their ability to generate better
returns but also add to their experience and expertise to function successfully in a
global environment.
 Good Human Resource :
Venture capital should become an institutionalized industry financed and managed by

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

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

the industries to invest in
Risk management skills Knowledge Possible investees and

and contacts to investors external expertise
Figure: 5.24 frame work for key success factor
Knowledge is key, to get the balance in this "Magic Triangle". With knowledge we mean
knowledge about the financial markets and the industries to invest in, risk
management skills and contacts to investors, possible investees and external
expertise. High profits, achievable by larger deals, are not only important for the financial
performance of the Venture Capital company. As a good track record they are also a vital
argument to attract funds which are the basis for larger deals. However, larger deals imply
higher risks of losses. Many Venture Capital companies try to share and limit their risks.
Solutions could be alliances and careful portfolio management. There are Venture Capital
firms that refuse to invest in e-start-up's because they perceive it as too risky to follow
today's type.

5.6 GE NINE – CELL INDUSTRY ATTRACTIVENESS –

COMPETITIVE STRENGTH MATRIX
Industry attractiveness:
Industrial Attractiveness Importance weight Rating Score

Growth Rate 0.20 7 1.4
Intensity of competition 0.20 6 1.2
Regulatory policies 0.10 4 0.40
Domestic economic factor 0.20 8 1.6
Industrial profitability 0.20 7 1.4
Product innovation 0.10 4 0.4
Total 1.00 6.4
Table: 5.18 industry attractiveness
Business strength :
Business Importance APIDC IVCF UTI ICICI AVISHKAR

Strength weight (Rank/score) (Rank/score) (Rank/score) (Rank/score) (Rank/score)
Quick response 0.20 7/1.4 4/0.8 5/1.00 8/1.6 7/1.4
time
International 0.15 6/0.90 5/0.75 5/0.75 7/1.05 6/0.90
Affiliation &
network
Entrepreneurial 0.20 7/1.4 5/1.00 4/0.8 6/1.20 7/1.40
Edge
Intellectual 0.25 6/1.5 6/1.5 6/1.5 7/1.75 6/1.50
Assets
Management 0.20 6/1.2 7/1.4 4/0.8 7/1.4 6/1.20
support
Total 1.00 6.40 5.45 4.85 7.00 6.40
Table: 5.19 Business strength

10
High
1 1 2
1 IVCF
ess
ICICI APIDC,AVISKAR
en 6.7
2 3
tiv
rac
Att Moderate UTI
2 3 3
ry
ust
nd
I 3.3
Low
0
10 6.7 3.3 0
High Moderate Low
Business Strength
Figure: 5.25 GE 9 cell matrix
Implication :

The First Zone consists of the three cells in the upper left corner. The ICICI venture
capital firms falls in this zone that it is in a favorable position with relatively attractive
growth opportunities. This indicates to invest in this service.
The Second Zone consists of the three diagonal cells from the lower left to the upper
right. The APIDC, Aviskar, VCF, UTI fall in this phase. A position in this zone is viewed
as having medium attractiveness. Management must therefore exercise caution when
making additional investments in this service. The suggested strategy is to seek to
maintain share rather than growing or reducing share.
The ICICI venture capital fund will try to go in upward line and try to increase their
strength and must allocate their source on his strength like affiliation & network
Management support and Intellectual assets. For this company make Strategic Business
Unit(SBU) for each deal. Company can make network with other global companies . So it
is useful when company make deal in Merger& Acquisition deals and company must have
knowledge about global culture. Due to large network it may become useful in generation
a flow of deals The company must hire experienced professional person. Because it can
become competitive advantage for company in Venture Capital Industry. The company
can increase its strength by providing better post investment services like strategic
planning, better portfolio management services and helpful in financing from other
companies.
Industrial attractiveness
 Market growth rate
CAGR OF VC
16000 14234
14000
VALUE OF DEALS
12000
10000
8000 43%
6000
4000
2000 1160
0
2000 2007
Figure: 5.26 CAGR of venture capital industry
From the above graph we can say that Venture capital industry is growing at the CAGR of
43%. And the value of deals in 2000 was 1160 which increased to 14234 in the year of
2007. which shows substantial increase in the number of deals. This attract the new
entrepreneur to enter in the industry.
 Intensity of competition :
NO. OF VC FIRMS IN INDIA

180 160
160 146
NO. OF VC FIRMS
140
120 105
100 86 89
81 77 78 81
80
60
40
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
YEARS
Source: www.nasscom.org, strategic review 2008 published by (National

Association of Software and Service Companies) strategic review 2008
Figure: 5.27 Number of venture capital firms in india

Here the number of venture capital firms is increasing year by year. In 2001 it is only 77
now it has been increased to 160 in the year of 2008. the reason behind that is there is
over all growth in the GDP and also substantial growth position in sectors
likebiotechnology, ITes, retailing, telecom etc. due to this more players are eager to
establish their foothold in the industry.
 Regulatory policy
Minimum contribution and fund size : the minimum investment in a Venture Capital Fund
from any investor will not be less than Rs. 5 lacs and the minimum corpus of the fund
before the fund can start activities shall be at least Rs. 5 crores. And the foreign players
can easily enter in the venture capital industry of India. An offshore venture capital
company may contribute 100% of the capital of domestic venture capital fund. There are
other hurdles to enter in the industry so there is favorable condition for them to enter in to
venture capital industry in India.
 Domestic economic factors:
• GDP growth rate
GDP V/S VC GROWTH RATE
12 300
GDP GROWTH RATE(%)
VC GROWTH RATE(%)
251.06 9.4 9.6
10 8.5 240.91 250
7.5
8 200
6 150
4 89.79 100
2 33.33 50
0 0
2004 2005 2006 2007
GDP GROWTH RATE VC GROWTH RATE
Source: CII (Confederation of Indian Industry) July 2008 Presentation
Figure: 5.28 GDP V/S VC Growth rate
In above chart there was a positive relation ship there was between GDP growth rate. But
in 2007 the growth of Venture Capital was decline to 89.79% from 240.91% in 2006 but
here the value of deal was increasing. In 2008 the growth rate is 9% and project the next
year GDP 8% to 9%. So here we can conclude that there is good growth prospect for the
venture capital players to enter in the horizon of India.

INFLATION v/s VC GROWTH RATE

8 7.4 300
VC GROWTH RATE
251.06 250
INFLATION RATE
5.8
6 240.91
200
5 4.5
4 150
3.2
3
100
89.79
2
50
1 33.33
0 0
2004 2005 2006 2007
INFLATION RATE VC GROWTH RATE
Source: CII (Confederation of Indian Industry) July 2008 Presentation
Figure: 5.29 Inflation V/S Venture capital growth rate
In above chart the inflation rate is decreased to 4.5 in 2005 from 7.4 in 2004. At same
time the growth of Venture Capial is also declining to 33.33% in 2005 from 251.06% in
2004. From the above chart we can conclude that inflation and Venture Capital has
positive relationship. Now in June 2008 the inflation rate was 11.9 and the NO. of deal in
first two quarter in 2008 was 170 and value of deal was 6390 US$mn and in third quarter
of 2008 there was only four deals. And in October the inflation touch the 13.01%. Due to
increase in inflation rate the people will going to spend more. Thus, their savings will
decrease. So more money will come into the market and demand of the products will
increase continuously. now due to growth of any sector will attract new entrepreneur to
enter in the industry. For that they must need funds. So there is a great opportunity for
venture capital industry to attract this new entrepreneur.

• SMALL SCALE INDUSTRIES
SMALL SCALE ENTERPRIZE
130
No. of units ( lakhs)
125
128.44
120 123.42
115 118.59
110 113.95
109.49
105
100
2002-2003 2003-2004 2004-2005 2005-2006 2006-2007
Source : economic survey 2007-08, chapter-8
Figure: 5.30 growth fo smalla and medium scale industries
Venture Capital, to be able to contribute to developing entrepreneurship in India, needs to

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

• EXPORT AND IMPORT
VALUE OF EXPORT AND IMPORT
200 185.7 185.7

180
149.2 155.5
US dollars in billions
160
140 126.4
120 111.5
103.1
100 83.6
78.1
80 61.4 63.8
52.7
60
40
20
0
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
EXPORT IMPORT
Source: CII, july,2008 presentation
Figure: 5.31 value of export import
The value of Import and export are increasing year by year. In 2002-03 the value of
import and export are 52.7 and 61.4 US$bn respectively and in 2007-08 the value of
import and export are 155.7 and 185.7 US$bn. It means industry need more money for
import and export. So it is an opportunity for venture capital. On the other side when
company going to export the company must have good contact with other country’s
company. So for that venture capital industry is useful because they have good contact
and affiliation network with other country’s company.

5.6.1 Industry Profitability :
The venture capital firms invest their money in most emerging sectors like biotechnology,
ITes, retailing, infrastructure which gives higher return but also they all involved risk in
substantial amount.

investments return
Failure 4 0%
Viable 3 15%
Solid 2 50%
Superstars 1 100%
Source : IVCA Presentation 2007
Table: 5.20 Success ratio of venture capital deals
From the above table we can see the success ratio of the venture capital investment. 40%
of the investments are getting failure and only 10% of them are able to give 100% return.
And the average return by the venture capitalists is only 24.5% which is not extra
ordinary. This type of returns can be found in many other investment options. So there
isn’t any special reason to invest in venture capital.
 Product innovation:
Venture capital firms are coming with new ideas of investment to attract the buyers to
their firms. For this purpose they are introducing new types of funds and schemes.
For example, IFCI Venture Capital Funds Limited (IVCF) has launched three new funds
in emerging sectors of the economy namely :
i) India Automotive Component Manufacturers Private Equity Fund –1-Domestic (IACM-

1-D) with a target corpus of Euro 60 million equivalent to Rs.396 crores. This Fund will
be dedicated for investment mainly in Indian Automotive Component companies and in
other related/ emerging sectors.
ii) India Enterprise Development Fund (IEDF) ,a Venture Capital fund set up with target
corpus of Rs.250 crores to invest in knowledge based projects in key sectors of Indian
economy with outstanding growth prospects.
iii) Green India Venture Fund (GIVF), a Venture Capital fund setup with a target corpus
of Euro 50 million (approx. Rs.330 crores) with the objective to invest in commercially
viable Clean Development Mechanism (CDM), energy efficient and other commercially
viable projects with an aim to reduce negative ecological impact, efficient usage of

resources such as energy, power etc and other related sectors/projects. The summary of
the Funds :
Launching of new funds by IFCI
Funds IACM –1 GIVF IEDF

Objective To invest in IndianThe objective of GIVFTo invest in knowledge
companies engaged in,would be to invest inbased projects with
amongst others, thecompanies setting uprelatively high entry
automotive parts andClean Developmentbarriers, critical
components Mechanism (CDM)applications, prospects
manufacturing sector inprojects and otherfor high growth and
order to generate highcommercially viableglobal scalability in
returns for its investors. projects/ business. diversified and/ or
emerging sectors.
Size Euro 60 million (INR 396Euro 50 million (INRINR 250 Cr
Cr) 330 Cr) with green shoe
option
Nature of Fund PE Fund VC Fund VC Fund
Tenure 8 yrs. With two10 years with two10 years with two
prolongation option of 1prolongation options ofprolongation options of
year each 1 year each 1 year each.
Expected returns 20% p.a. 20% p.a. 20% p.a.
Size of investment Rs. 6 to 40 Cr Rs. 2 to 30 Cr Rs. 2 to 25 Cr
Management fee 2% of the total2% of the total2% of the total
subscription amount subscription amount subscription amount
Source: www.ifciventure.com
Table: 5.21 launching of new funds by IFCI
The SICOM venture capital firm introduce SME opportunity fund for small scale
industries.
5.6.2 Business attractiveness:
1. Quick response time :
Quick Response time :the company have flat organization structure results in quicker
decision making. The entrepreneur is relieved of the trauma that one normally goes
through in an interface with a funding institution or a development agency. They follow a
clearly defined decision making process that works with clock like precision, which
means that if they agree on a funding schedule entrepreneur can count on them to stick it.
2. International Affiliation & network
in today’s era, the company must have a good network with financial institution for
getting finance and must have a good network with global companies because Venture
capital industry concentrate on global level.

For e.g. Andhra Pradesh industrial development corporation (APIDC), a state owned
institution promoting industrial development , has an excellent track record of promoting
and nurturing industrial development. The fund can draw on APIDC’s rich and varied
experience and government connectivity to assist start-up venture as well as those with
expansion plans. APIDC, a state- owned institution promoting industrial development has
an excellent track record of promoting and nurturing industrial development.
APIDC-VCL identifies and explores high-potential opportunities that entrepreneurs can

use to advantage. It facilitates access to sophisticated technologies for Indian
entrepreneurs through links with technical institutions in India and abroad affects
technical alliances through connections with corporate, research institutions, and
technology innovators in the west.
IVCF has provided finance to over 350 ventures since inception and has supported
commercialization of over 50 new technologies. IVCF has pioneered effort for widening
entrepreneurial base in the country.
Avishkar venture capital concentrate on Micro & small enterprise. But the response they
have received from this sector is not supportive. Their main concentrated areas are rural
and semi urban.
3. Entrepreneurial edge
APIDC-VCL has honed to fine skill, the ability to recognize the potential of a great
entrepreneurial idea, understand it, and gauge its true worth. An uncanny feel for projects
based on the strength of their fundamentals.
Asset managers
It is one of less than handful of asset managers, which are owner – manager driven. Most
of other asset managers and large hierarchical structures are dominated by a big
institution. Unlike the “effective” model successful in the developed market. The asset
management team has impressive credentials, strengths in business building,
entrepreneurship and strong overseas capabilities that are essential In today’s liberalized
markets, rather than pure financial skills. This allows APIDC-VCL to better relate and
assess provide value- addition to investee companies.
4. Intellectual Assets :
The company must have good intellectual assts for screening and evaluating the business
plan and must take care while pricing the deals. The venture capitalists evaluate project’s
risk in isolation and thus effect of risk on total portfolio investment are rarely assessed. So
company must have good intellectual assets for minimizing the risk.
The UTI venture capital firm has experienced local team they have proactive team with
unmatched local insight. With over 75 years of collective experience in Indian capital
markets, the skill sets of each team member are both diverse and complimentary. Our
knowledge of domestic regulatory frameworks and cultural sensitivities gives us a
distinctive edge among private equity firms in India.

The ICICI Venture capital funds possess for skills assessing promoters, deal structuring
and in depth evaluation of ventures including future commercial feasibility study while
carrying out due diligence of businesses and investments _ Network for interaction with
financial institutions, banks, industry association etc. Experience in all the phases of
investment cycle viz. from deal sourcing to exit from investment.
The IVCF evaluate the business plan by 360 degree. The evaluation include financial
feasibility, risk measurement and compensation factors.
The IVCF can provide independent, fair and informed assessment for undertaking
investment in business in India which will help Managers vigoroursly pursue focus areas,
identify growth impediments and draw-out plan to overcome them.
5. Management support :
Following two are examples of management support services provided by venture capital
firms to the investee company.
ICICI Venture endeavours to ensure that the Portfolio Companies are governed effectively
and that there is active involvement and timely intervention by the team once the
investment is made. The team creates value in the Portfolio Companies by taking
strategic, operational and financial initiatives aimed at strengthening their competitive
position vis-à-vis competitors and industry benchmarks.
The Investment team works with management teams to identify opportunities for
enhancing value through cost reduction and internal rationalization. They also work
together to implement growth strategies based on market definitions, customer
segmentation, price management, focused marketing and sales plans, strategic capital
investments and /or the introduction of proven technologies. The Investment teams also
help in further strengthening the management teams. ICICI Venture works actively with
management teams to identify and execute acquisitions.
IVCF provide investment monitoring services:
 Provide Value addition to invested business by guiding raise funds/ working capital,
listing of securities, undertake strategic moves, plan organizational strategy & solving
problems, it faces.
 Enable recovery of loan, evaluation of options for disinvestments etc.
 Portfolio management upto closure of investment.
 Analyze trends and identification of upside potential for the investee cos.
 Risk Analysis and mitigation by initiating remedial actions for improvement of

performance of the investee company.

5.7 Is Indian Venture Capital attractive?

Increasingly, corporate strategies have to be seen in a global context. Even if an
organization does not plan to import or to export directly, management has to look at an
international business environment, in which actions of competitors, buyers, sellers, new
entrants of providers of substitutes may influence the domestic market. Information
technology is reinforcing this trend.
• Enhance globally
• Concentrate on project
Evaluation
• Strategic alliance
• Sector wise
investment Firm strategy,
structure and
rivalry • Number of Venture
capital firms
• Increase in small scale
industry
Factor Demand
Conditions Conditions
• Labor force
• Increasing literacy rate
• Infrastructure
Related and
supporting
Industries
• Public, insurance companies,
corporate funds, banks,
pension funds, FIIs, FDIs
Figure: 5.32 Is Indian Venture Capital attractive?

 Factor conditions:
The situation in a country regarding production factors, like skilled labor, infrastructure,
etc., which are relevant for competition in particular industries.
Labour Literacy
year force Year (%)
2002 40.6 2002 37.7
2003 40.6 2003 48.3
2004 47.2 2004 48.3
2005 48.22 2005 48.3
2006 49.64 2006 48.3
2007 50.93 2007 47.8
2008 51.64 2008 47.8
Sour
ce: www.indexmundi.com
Table: 5.22 Labour and Literacy rate from 2002 to 2008
Here we can see that year by year literacy rate is increasing, only in the year 2007 it has
been decreased by 0.5%. during the year 2003 it has registered tremendous growth of
10.6%. Now we can say that condition of availability of skilled labor is good enough to
survive in any industry. As a venture capitalist one will look for experienced people to
appoint in his firm. Venture capital firms will have to evaluate the proposals of
entrepreneurs and will provide them funds. they also provide management support
because of which buyers are ready to pay their high interest rates. If they will have good
skilled labor they can use them in beneficial way of the firm by using their skills in
evaluation process and for providing management support.
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 organizations. The India is IT hub for foreign companies.
 Home demand conditions:
Describes the state of home demand for products and services produced in a country.

Source: www.nasscom.org, strategic review 2008 published by (National

Association of Software and Service Companies) strategic review 2008
Figure: 5.33 Number of venture capital firms in india
We can see from the above chart that year by year numbers of venture capital firms are
increasing. Now it is known that whenever in any industry demand is increasing number
of competitors will increase. As growing demand attract new entrants, competition among
firms will increase.
Source: www.rbi.org.in, Economy Survey 2007-08,chapter 8
Figure: 5.34 growth of small and medium scale enterprise
Because of some level of unemployment youth is attracting towards entering into new
businesses. and in the below given chart we can see that number of SMEs are also
increasing continuously, which shows increase in demand of funds. Thus scopes for
venture capital firms are increasing.

 Firm strategy, structure and industry:
The conditions in a country that determine how companies are established, are organized
and are managed, and that determine the characteristics of domestic competition.
Firm Strategies:
currently venture capital firms are facing recession because of sudden crash in stock
market exit rout has been closed for them. No one can come with IPO so investment of
the firm is getting blocked. As players in this industry has been increased tremendously
during last few years because of constant growth in stock market. So now at this stage if
they will found a single opportunity all will try to catch it, so everyone will find severe
competition. Presently venture capital firms are using following strategies to compete in
current market conditions.
 ENHANCE GLOBALLY:
They go global for expanding their contacts with other firms at global level. As
they also provide management support to the firms borrow from them, if they
have global contacts they can also attract the firms which want to expand their
business at global level. these types of firms will also like to borrow from venture
capital firms as they will get ready contacts at global level through venture
capitalist’s network.
 HIGH CONCENTRATION ON PROJECT EVALUATION:

As venture capital firms invest in new or a risky projects they must evaluate it
carefully. Because wrong evaluation may create loss for them. They will have to
appoint some experienced or trustworthy person to evaluate any project.
 SECTOR AND STAGE WISE INVESTMENT STRATEGY:

Most of the venture capital firms are investing in their interested areas only. They
mostly invest in the sectors or in the stages from which they can get more return
with less risk. Some particular sectors are providing constant or incremental
returns to venture capitalists. Thus they are concentrating on those particular
sectors only. They are also concentrating on stage wise investment as risks
associated with different stages are different.
 STRATEGIC AND BUSINESS ALLIANCES:

As per current trend in market venture capital firms are also going for alliances
with other firms for diversifying their risks in investment. They also use this
strategy when they are not having enough funds for investing in any field.
Industry structure
The players and the market segments can be differentiated by a number of criteria,
including time of investment (in the investees lifecycle), deals size and ownership of the
Venture Capital companies. There are different group of player like angel player, small,
medium and large venture fund, corporate venture fund and financial venture fund. They
are investing at different stage of funds like at seed stage, start-up stage, expansion stage,
turnaround stage.

Related and supporting industry:
The existence or non-existence of internationally competitive supplying industries and

supporting industries.
Here firms are borrowing money from many industrial suppliers which themselves are
also substitute for them. The list of those suppliers are given below.
Indian scenario (2007)

Contributors of funds to VC
Contributors Rs mn Per cent
Foreign institutional investors 13,426.4 52.46
7
All india financial institutions 6,252.90 24.43
Multilateral development agencies 2,133.64 8.34
Other banks 1,541.00 6.02
Foreign investors 570 2.23
Private sector 412.53 1.61
Public sector 324.44 1.27
Nationalized banks 278.67 1.09
Non resident Indians 235.5 0.92
State financial institutions 215 0.84
Other public 115.52 0.45
Insurance companies 85 0.33
Mutual funds 4.5 0.02
Total 25,595.1 100.00
7
Source: ICFAI reader, April-2007,”Analysis of venture capital industry in india”,

page no. 36 to 40.
Table: 5.23 contributors of funds to venture capital
All the above given suppliers are having their own industry and rules and regulations
from government. Total funds coming to India is Rs. 25,595.17 mn. The rules and
regulations for these industries also affect the performance of venture capital firms.

5.8 VALUE CHAIN ANALYSIS
ACTIVITIES
SCREENIN
EVALUATI
ORGANISA
INVESTME
DILLIGEN
STRUCTU
ON & DUE
Primary
DEAL
RING
DEAL
POST
TION
Activities
CE
NT
G
And
Costs
Support
HUMAN RESOURCE DEVELOPMENT
Activities
And ASSET MANAGER
Costs MIS SYSTEM
Figure: 5.35 value chain
In primary activities there are four activities which supporting the venture capital’s
service. The primary activities that are foremost in creating value for customers and
requisite support activities that enhance the performance of primary activities.
Primary activities:
1. Deal organization
2. Screening
3. Deal structuring
4. evaluation or Due Diligence
5. Post investment Activities
There are four supporting activities:
1. Human Resource Development

2. Asset Manager
3. MIS System
4. International affiliation & Network
Primary Activities
1. Deal origination:
In generating a deal flow, the Venture capital investor creates a pipeline of deals or
investment opportunities that he would consider for investing in. Deal may originate in
various ways. Referral system active search system and intermediaries. Referral system is
an important source of deals. Deals may be referred to VCFs by their parent
organizations, trade partners, industry associations, friends etc. Another deal flow is
active search through networks, trade fairs, conferences, seminars, foreign visits etc.
Intermediaries is used by venture capitalists in developed countries like USA, is certain

intermediaries who match VCFs and the potential entrepreneurs. . A continuous flow of
deals is necessary for the venture capital business.Yet another important source of deals
flows is the active search through networks, trade fairs, conferences, seminars, etc.
For e.g. APIDC-VCL deal generation strategy will produce a relatively higher level of
quality deals than a general promotional approach and will generate sufficient deals to
invest the monies raised by it. Their focused approach to canvassing entrepreneurs will be
more efficient in finding qualified entrepreneurs and project ideas that meet their criteria
of ‘Key Differentials’. APIDC-VCL has set up a flow of investment opportunities with its
existing network in India and with its associates in the USA. APIDC-VCL also plans to
promote through focused seminars, a public relations, campaign to institutions and
industry associations, to heighten the awareness of its activities.
2. Screening:
VCFs, before going for an in-depth analysis, carry out initial screening of all projects on
the basis of some broad criteria. For example, the screening process may limit projects to
areas in which the venture capitalist is familiar in terms of technology, or product, or
market scope. The size of investment, geographical location and stage of financing could
also be used as the broad screening criteria.
Here the company must identifying the market and company must have knowledge about
how large the market, where is the market headed, what is the competition, how is the
market segmented, how will the product or service be positioned in the market. And
company must have knowledge about the product.
3. Due Diligence:
Due diligence is the industry jargon for all the activities that are associated with
evaluating an investment proposal. The venture capitalists evaluate the quality of
entrepreneur before appraising the characteristics of the product, market or technology.
Most venture capitalists ask for a business plan to make an assessment of the possible risk
and return on the venture. Business plan contains detailed information about the proposed
venture. The evaluation of ventures by Venture Captal Funds in India includes; For the
venture capital investment process, due diligence means a rigorous investigation and
evaluation of an investment opportunity before committing funds. This investigation is
conducted by the parties involved in preparing a registration statement to form a basis for
believing the statements contained therein are true and that no material facts are omitted.
This process includes review of its management team, business conditions, projections,
philosophy, and investment terms and conditions.
Absolutely vital to making a sound investment, due diligence verifies any business
opportunities that survive the initial screening stage. For venture capital investments, as
few as 10-15% of proposals make it past the initial screening stage to the full due-
diligence process, and only 10% of those receive funding. This verification process
consists of checking the accuracy of business plans, audited accounts, and management
accounts; getting replies to warranty and other standard questionnaires; patent searches;
and technical studies. Unpublished accounting information and subjective information are
equally important; these data are collected by calling customers, suppliers, lawyers, and
bankers, and by checking trade journals.

Preliminary evaluation: The applicant required to provide a brief profile of the proposed
venture to establish prima facie eligibility.
Detailed evaluation: Once the preliminary evaluation is over, the proposal is evaluated in
greater detail. Venture Capital funds in India expect the entrepreneur to have:- Integrity,
long-term vision, urge to grow, managerial skills, commercial orientation.
Venture Capital Funds in India also make the risk analysis of the proposed projects which
includes: Product risk, Market risk, Technological risk and Entrepreneurial risk. The final
decision is taken in terms of the expected risk-return trade-off.
For e.g. APIDC-VCL will evaluate each deal against the started ‘investment strategy’ and
whether the returns meet the target rates, and whether theriskd can be contained and are
appropriate, prior to proceeding further. Specifically, APIDC-VCL will evaluate.
1. The quality of the management team.

2. The match with its strategy of ‘Key Differential’ resulting in a strong, competitive
edge for the company.
3. The size and growth rate of market.
4. Types of risk and their management.
5. potential for high profitability while protecting the downside.
MONITORING AND VALUE ADDITION:
APIDC-VCL in line with its proactive strategy of value addition follows an active mode
of monitoring and value addition. APIDC-VCL in collaboration with the investee
company sets up milestones that lead up to the eventual disinvestments from the investeee
company. These milestones are then monitored actively and the investee company is
urged to adopt a reporting system that facilitates the monitoring of the progress versus the
milestones.
4. Deal Structuring:
In this process, the venture capitalist and the venture company negotiate the terms of the
deals, that is, the amount, form and price of the investment. This process is termed as deal
structuring. The agreement also include the venture capitalist's right to control the venture
company and to change its management if needed, buyback arrangements, acquisition,
making initial public offerings (IPOs), etc. Earned out arrangements specify the
entrepreneur's equity share and the objectives to be achieved.
1. The process involves the details of the financing instruments and the percentage
ownership of the venture capitalist. The structure should also consider various
commercial issues. The common instruments are equity, preferred shares, convertible
debt, conditional loans, conventional secured or unsecured loans and income notes, etc.
the instruments used by the venture capitalist to optimize venture capital’s return /
protection on one hand and to satisfy the entrepreneur’s requirement on the other.

PRICING OF DEAL
Pricing is the most sensitive part of the negotiation process. Pricing involves valuation of
a company before and after financing based on an analysis of risk and return. In seed
capital and other early stage investment. VCC/VCFs expect a compounded annual return
of 50% or more, whereas in second stage investment VCC/VCF, may be satisfied with an
annual return of 30-40% and in later stage financing, 25-30%. Venture capitalist must take
care while pricing the deal as far as control over the ownership of the firm is concerned.
Company used various method for valuation of deals. They are as follow.
1. Conventional valuation method
This is based on the expected increase in the initial investment that could be sold out to a
third party or through public offering via the exit route. Price –earning ratio(P/E) is
calculated on the maturing date, also known as liquidity date. Multiplying the earning
level post-tax effect by P/E ratio on the future maturity date arrives at valuation of
investment at a future date. This method does not take into account the stream of cash
flows beginning from the date of investment till the date of liquidity of investment.
2. Present-value-base method
This method takes into account the stream of earnings (or losses) generated during the
entire period of the investment from the date of initial investment till date of maturity at a
presumed discounted rate. The method was developed by Stanely Golder of the first
Chicago corporation and is popularly known as “first chicago method”. Three alternative
scenarios styled as “success; ‘survival’ and failure’ are assumed for the entire maturing
period of the project that are discounted by a uniform discount rate to arrive at the present
value of investment.
Each scenario is assigned a probability figure. Probability figures are based on many
factors, which affect the earning stream: prices of raw material ;prices of finished good;
marketing factors. The product is multiplied by respective probability figures to arrive at
expected value in each scenario. The total of these scenarios gives the expected present
value of the company. Based on such value the venture capitalist makes his investment.
The problem with this method is that it is based more on a value judgment by the venture
capitalist than empiricial consideration.
3. REVENUE MULTIPLIER METHOD
Revenue multiplier is an assumed factor used to estimate the value of an enterprise. By

multiplying the annual estimated sales by such factor, the valuation figure is derived. This
method is based on sales income and not on earnings. Assuming the absence of profit in
the early stages of project, the method is useful for valuation at the early stages.
The multiplier (M) is obtained by using the following equation :
(1 + g ) n (e)( PE )
M=
(1) + d n

Where,
M = stands for multiplier.

g = standa for growth rate.
n = stands for number of years between initial investment and exit date.
e = stands for expected profit margin (post tax) percentage at the exit date.
PE = stands for expected price earning ratio at the exit date.
d = stands for appropriate discount rate for venture capital investment and undertaking
risk
.
Valuation, (v) is obtained by using the following equation
R (1 + g ) n (e)( PE )
M=
(1) + d n
Utilization of earlier investment is an important part of investigation that would reveal the
ability of management to economically and efficiently utilize funds.
Post Investment Activities:
Once the deal has been structured and agreement finalized, the venture capitalist generally
assumes the role of a partner and collaborator. He also gets involved in shaping of the
direction of the venture. The degree of the venture capitalist's involvement depends on his
policy. It may not, however, be desirable for a venture capitalist to get involved in the
day-to-day operation of the venture. If a financial or managerial crisis occurs, the venture
capitalist may intervene, and even install a new management team.
The company also provides following value added service:
1. Strategic planning
2. Recruitment
3. Operational planning
4. Help in obtaining additional financing
5. introduction to potential customers and suppliers
6. international access
7. legal and other professional services
8. Negotiation and execution of M&A
SECONDARY ACTIVITIES:
1. Human resource development :
The company must have good expertise person like engineers, professional etc. for the
evaluation and screening of the deal. Because this is the most important stage in the
venture capital investment process. On the basis of screening and evaluating of the
deal we can get idea about the success or failure in the deal.

2. Asset Manager :
It is one of less than handful of asset manger, which are owner manager driven. The
asset management team must have impressive credentials and strong overseas
capabilities are essential in today’s liberalized market. This allows to better relate and
assess provide value addition to investee companies.
3. MIS system
The company must have fully developed management information system for
screening the deal and for evaluating the deal. The MIS system is also useful in
pricing of the deal.
Cisco Systems Inc.

Cisco Systems Inc. used the venture acquisition approach with remarkable success. The
company has pioneered the use of carefully designed and effectively operated acquisition
process governed by hard-and-fast criteria and and ability to strike a deal within twenty-
four hours and close it within two months.
Cisco listens to the market, and if it doesn't have what the market wants, it uses company
stock to buy a start-up or an emerging company that already has the product and
integrates the new company along with its technology, as fast as possible. In 1994, Cisco
acquired three companies, in 1995 – four, in 1996 – seven, in 1997 – six, in 1998 – nine,
in 1999 – eighteen, and in 2000 – twenty-three.
Being Acquired
Ideally, a company considering being acquired can first work with its corporate candidate
to sample the relationship. One way of accomplishing this is by accepting a strategic
investment. However, the benefits and the risks for both sides must be weighed carefully.
Relationships don't always develop into the merger or the acquisition.
Having a strategic investor is definitely a double-edged weapon. Before accepting
corporate investments, companies should be sure that the investing company's agenda is
consistent with theirs and be certain that they are prepared to manage conflicting agendas.
Start-up companies must be sure to consider the universe or potential investors and what
effect having one of those investors on their board will have on the others.
Winning is not necessary achieved without partners and parents. Expand your search to
the international marketplace. Prepare the team, as well as your investors, for the
possibility of acquisition as means to realize the full potential of the company's
entrepreneurial vision.

5.9 OPPORTUNITIES AND THREATS:

5.9.1 OPPORTUNITIES :
 Initiatives taken by the Government in formulating policies to encourage investors

and entrepreneurs
The emerging scenario of global competitiveness has put an immense pressure on the
industrial sector to improve the quality level with minimization of cost of products by
making use of latest technological skills. The implication is to obtain adequate financing
along with the necessary hi-tech equipments to produce an innovative product which can
succeed and grow in the present market condition. Unfortunately, our country lacks on
both fronts. The necessary capital can be obtained from the venture capital firms who
expect an above average rate of return on the investment. Government of India
understands this.
Also, The Government of India in an attempt to bring the nation at par and above the
developed nations has been promoting venture capital financing to new, innovative
concepts & ideas, liberalizing taxation norms providing tax incentives to venture firms,
giving an opportunity for the creation of local pools of capital and holding training
sessions for the emerging VC investors.
In the year 2000, the finance ministry announced the liberalization of tax treatment for
venture capital funds to promote them & to increase job creation. This is expected to give
a strong boost to the non resident Indians located in the Silicon Valley and elsewhere to
invest some of their capital, knowledge and enterprise in these ventures.
 SME GROWTH
No. deals V/S No. of SMEs
450 128.44 130

400 387
123.42 125
350
299
300 120
118.59
250
115
200 113.95
146
150 109.49 110
100 71
56 105
50
0 100
2003 2004 2005 2006 2007
No. of deals No. of SMEs

VC, to be able to contribute to developing entrepreneurship in India, needs to

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

sector like manufacturing, services sector. So there is a great opportunities for
Venture Capital firms. Because mostly invest their money in this sectors.
 India amongst leading entrepreneurial Hotbeds globally
City competencies emerging
 Bangalore
• All IP-led companies; IT and IT-enabled services
 Delhi (NCR)
• Software services, IT enabled services, Telecom
 Mumbai
• Software services, IT enabled services, Media,
Computer Graphics, Animation, Banking
 Other emerging Centers

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

Clean technology.
Global climate changes, high oil prices, accelerated growth in emerging markets, energy
security concerns and the finite nature of resources are some of the key drivers of the
growing global demand for clean technologies in energy and water. In addition ,the
increased willingness of consumers and governments to pay for and use green
technologies ,combined with the positive exit environment of the last years ,has provided
venture capitalists with the confidence to invest in emerging companies around the globe.
According to the research from Dow Jones Venture One and Ernst &Young .US $1.28
billion was invested in 140financing rounds in 2006 in China , Europe Israel and United
States that compares to US $ 664.1 million invested in 103 financing rounds in
2005,showing the capital investment in the field has nearly doubled over the past year. It
is expected that investment in clean technologies will continue to increase not only in
developed markets but also in the developing markets, mainly in India and China.
Biotechnology
Over last few years ,the story of the US biotech industry has been one of the remarkable
success .There are signs that this success story is now repeated in other parts of world
,with maturing pipelines, record breaking financing totals, strong deal activity and
impressive financial results. Industry is grew 31% for second year in raw in 2007.
Exemption of import duty on key R&D, Contract manufacturing/clinical trial equipment
and duty credit for R&D and consumer goods.
BIOTECH IDUSTRY REVENUES
2500
2078
Re v e nue (US$ million)
2000
1587
1500
1000
500
0
2005-2006 2006-2007
Year
Source : ://http://indiabudget.nic.in , Economic survey 2007-08 ,chapter 8

Figure: 5.36 Biotech industry revenues

Pharmaceutical
Table: 5.24 export and import of pharmaceuticals
EXPORT OF PHARM ACEUTICAL/DRUGS

16000
14000 14380
12000
Export(Rs.)
10000 10821
8000 9263
6000 7445
6779
4000
2000
0
2002-03 2003-04 2004-05 2005-06 2006-07
Years
Figure: 5.37 export of pharmaceuticals
 The industry's growth rate is likely to touch 19 per cent from the current 13 per
cent, according to a projection released by the Confederation of Indian Industries
(CII), on September 1, 2008.
 According to a McKinsey study, the Indian pharmaceutical industry is projected to
grow to US$ 25 billion by 2010 whereas the domestic market is likely to more
than triple to US$ 20 billion by 2015 from the current US$ 6 billion to become
one of the leading pharmaceutical markets in the next decade.
 The Indian pharmaceutical industry has shown robust growth in terms of
infrastructure development, technology base creation and a wide range of products
with a determination to flourish in the rapidly changing environment, thereby
establishing its global presence. The Indian pharmaceutical industry has increased

its competitive intensity owing to pricing pressures and striving consistently to

innovate. ICICI Venture-controlled Ranbaxy Fine Chemicals (RFCL) has acquired
the US-based speciality chemicals major Mallinckrodt Baker in a deal estimated at
US$ 340 million.
 SO there is great opportunity for venture capital industry to invest their money in
this sector. Nowadays, India will become a global pharma hub exporting by
exporting domestically produced generic products
IT/ITes Industry
IT/ITeS Sector revenue
2006-2007 15.9
31.9
2005-2006 13.2
24.2
10.2
Year
2004-2005
18.3
2003-2004 8.3
13.3
2002-2003 6.3
9.8
0 5 10 15 20 25 30 35
US$ billion
Domestic market Export
Figure: 5.38 IT/ITes Industry revenue
Source: http://www.ibef.org/sector/informationtechnolgy.aspx
 The Department of Information Technology is setting up Nano Electronic Centres at the

Indian Institute of Technology, Mumbai and the Indian Institute of Science, Bangalore.
with an outlay of about Rs. 100 crore to carry out R&D activities in nano-electronics
devices and materials.
 In 2006-07, the performance of the Information Technology Enabled Services–Business
Process Outsourcing (ITES-BPO) industry was marked by double-digit revenue growth,
steady expansion into newer service lines and increased geographic penetration and an
unprecedented rise in investments by multinational corporations (MNCs).
 The Special Incentive Package Scheme (SIPS) to encourage investments for setting up
semiconductor fabrication and other micro- and nano-technology manufacturing
industries was announced in March2007. The incentives admissible would be 20 per
cent of the capital expenditure during the first 10 years for units located in Special
Economic Zones (SEZs) and 25 per cent for units located outside SEZs.

ELECTRONIC INDUSTRY
PRODUCTION OF ELECTRONIC INDUSTRY
300000
250000 245600
200000 190300
AMOUNT
150000 152420
118290
100000 97000
50000
0
2002-03 2003-04 2004-05 2005-06 2006-07
Figure: 5.39 Electronic industry production
 There is a high growth of software and solutions related to the consumer Internet,
software as a service (SAAS), open source, software-cum-services and
telecommunications (both wireless and wire-line) products and related services.
There is a great opportunity for venture capital industry to invest in this electronic
production industry.
 In 11th five year plan investment estimate in telecommunication sector are 65.1
US$bn.
 The industry has seen the following trends in growth rate in April-June 2008
(estimated) over same period in 2007 :-
 Transformers – 4.1%
 Motors & Starters – -14.58%
 Boilers – 35%

5.9.2 Threats :
 Venture Capital Market in India Getting Overheated
The Venture Capital market in India seems to be getting as hot as the country’s famous
summers. However, this potential over-exuberance may lead to some stormy days ahead,
based on sobering research compiled by global research and analytics services firm,
Evalueserve. Evalueserve research shows an interesting phenomenon is beginning to
emerge:
Over 44 US-based Venture capital firms are now seeking to invest heavily in start-ups and
early-stage companies in India. These firms have raised, or are in the process of raising,
an average of US $100 million each. Indeed, if these 40-plus firms are successful in
raising money, they would garner approximately $4.4 billion to be invested during the
next 4 to 5 years. Taking Indian Purchasing Power Parity (PPP) into consideration, this
would be equivalent to $22 billion worth of investment in the US. Since about $1.75
billion (or approximately 40% of $4.4 billion) has been already raised, even if only $2.2
billion is raised by December 2006, Evalueserve cautions that there will be a glut of
Venture Capital money for early stage investments in India. This will be especially true if
the VCs continue to invest only in currently favorite sectors such as IT, BPO, software
and hardware products, telecom, and consumer Internet. Given that a typical start-up in
India would require $9 million during the first three years (i.e., $3 million per year) and
even assuming that the start-up survives for three years, investing $2.2 billion during
2007-2010 would imply investing in 150 to 180 start-ups every year during this period,
which simply does not seem practical if the VCs continue to focus only on their current
favorite sectors.
 Unproductive workforce:
A global survey by McKinsey & Company revealed that Indian business leaders are much
more optimistic about the future than their international peers. So Indian employees are
tardy in their job so it will effect reversly on the economic condition of the country.
Because they are unproductive to the economy of the country.
 Exit route barriers :
Due to crashdown of market by 51% fromjanuary to novembor 2008. It create a problem

for venture capital firms. Because Nobody is trying to come up with IPO and IPO is the
exist route dor Venture Capital.
 Taxes on emerging sector :
As per Union Budget 2007 and its broad guidelines, Government proposed to limit
pass-through status to venture capital funds (VCFs) making investment in nine
areas. These nine areas are biotechnology, information technology,
nanotechnology, seed research and development, R&D for pharma sectors, dairy

industry, poultry industry and production of bio-fuels. Pass-through status means

that the incomes earned by funds are taxable now.

5.10 Contemporary Issue In Venture Capital Industry

 IIM-A Eyes venture capital to fund its incubators
 Buoyed by the growing tribe of students wanting to go solo with their own
entrepreneurial venture, the Indian Institute of Management, Ahmedabad
(IIM-A) is looking to attract venture capital funds to the campus. The
premier management institute is also in talks with several corporates to
provide seed capital to budding entrepreneurs from its incubation lab.
 “The number of students starting up their own venture is increasing in
every batch. In a batch of 250 students, at least 10-15 are starting their own
ventures.
Source: Business Daily from THE HINDU group of publications

Sunday, Jan 27, 2008
 Angel investors betting big on Indian start-ups
 Amid a slowdown in global venture capital investments, Indian start-up

firms are emerging as clear favourites for seed capital among global angel
investors.
 During the first quarter of 2008, US-based venture capitalists invested
$350 million in 38 deals in India, a 42 per cent jump from the previous
quarter, when $246 million was invested in 33 companies. In the case of
China, the funding by US-based Venture Capital firms dipped 24 per cent
to $250 million invested in 32 firms during the first quarter of 2008, down
from the $331 million invested in 39 deals in the previous quarter,
according to data from the Money Tree report from
PricewaterhouseCoopers and the US-based National Venture Capital
Association
Source: Business Daily from THE HINDU group of publications

Saturday, Apr 26, 2008

CHAPTER 6
CONCLUSION

CONCLUSION
The study provides that the maturity if the still nascent Indian Venture Capital market is
imminent.
Venture Capitalists in Indian have notice of newer avenues and regions to expand. VCs
have moved beyond IT service but are cautious in exploring the right business model, for
finding opportunities that generate better returns for their investors.
In terms of impediments to expansion, few concerning factors to VCs include;

unfavorable political and regulatory environment compared to other countries, difficulty
in achieving successful exists and administrative delays in documentation and approval.
In spite of few non attracting factors, Indian opportunities are no doubt promising which
is evident by the large number of new entrants in past years as well in coming days.
Nonetheless the market is challenging for successful investment.
Therefore Venture capitalists responses are upbeat about the attractiveness of the India as
a place to do the business.

CHAPTER 7
ANNEXURE

ANNEXURE
VC Player list
Government fund list
Name Type of company they Deal stage they Companies they fund
fund fund
APIDC venture Information technology New Project Nagarjuna

capital limited Biotechnology projects, group
Companies with registered Expansion NCL
office in Andhra Pradesh. Diversificati Novo pan
on&
Modernization
Andhra Pradesh state Food processing start –up Speck system limited
finance corporation Pharmaceuticals Early stage Chemiloids
Bio-technology Shree paper limited
Tourism related activity Thermal Systems
Infrastructure development private ltd.
Hospital and Nursing
homes Small and Medium
scale industry
Arunachal Pradesh Agriculture and Start up
industrial Horticulture
development and Mining
financial Plantation of crops
corporation Adventure Tourism
Assam Financial
Corporation Start up
Bihar State
financial
corporation
Delhi financial Industrial transport Start up M.S.Chhabra and Co.
corporation Services Modernization Electro spark
Marketing companies in Expansion
Delhi and Chandigarh
GDDIDC Lupin
Goa Glass FibreLtd
High mark India Pvt
Ltd
Gujarat Biotechnology Start up
Biotechnology Early Stage
Venture Fund
Gujarat

Infrastructure
Development Fund
Gujarat Information Technology
Information
Technology Fund
Gujarat State SSI Start Up

Financial MSI Expansion
Corporation Diversification
Modernization
Gujarat Venture Information Technology Start up Saraf Foods Limited
Finance Limited Biotechnology, ventures Decca net Designs
Other Technology Limited
Segments Neil soft Limited
Should belong to SME Lumen Cables
segment Scicom Limited
Haryana Financial Nursing Homes

Corporation Hotels
Amusement Parks
Software Parks
E-commerce
Himachal Pradesh Hotel Industry Start up
Financial Healthcare Modernization
Corporation Mining SSI
Infrastructures MSI
Industrial Venture IT / Software / Hardware Seed
Capital Ltd. Hi Tech Printing Startup
Construction Mezzanine
Textile
Kerala Venture Information Technology Start Up Invis Infotech Private

Capital Fund Pvt. Biotechnology Early Stage Ltd
Ltd Tourism Growth Ushus Technologies
Development / EcommIT Labs Pvt.
Expansion Ltd.
Xylon Technologies
Pvt. Ltd
KITVEN Information Technology Relq Software Pvt Ltd
Logix Microsystem
Ltd
Ecad Technologies Ltd
, Itwine Technologies
Pvt Ltd
Orissa Venture
Capital Fund
Pradeshiya Electronics and electrical

Industrial & Telecommunications ,

Investment Food Processing ,
Corporation of Engineering
Uttar Pradesh
Limited
Punjab Venture Infotech. ll stages
Capital Fund hi tech health care,
telecommunication
Rajasthan Venture Information Technology Start up Tech Axes

Capital Fund Retail Growth and
Biotechnology Expansion
Entertainment Turn around
Tourism Buy outs
SIDBI Venture IT Start up Axiom Consulting
Capital Limited Computer Hardware Growth E-cube India Solutions
Computer Software Development/ IndiaIdeas.com Ltd
IT Enabled Services Expansion Bravo Healthcare
Tamilnadu Infotech Medical Software Midas Communication

Fund BPO IPF Online
Security Banking Security Banking 004
Lasersoft
iMetrix (DATS)
Uttar Pradesh
Venture Capital
Fund

Private Indian funds
Name Type of companies they Deal stage Portfolio companies

fund
Aavishkar India Fund Rural and Semi Initial commercial Servals Automation
Micro Capital Urban expansion Shri Kamadhenu
development companies
Electronics Private Ltd.
Vortex Engineering
Pvt.Ltd .
Tide Technocrats
Alliance Venture
Capital Advisors
Ltd.
BOA IT Start up Knowcross

Consultancy Retail Consultants Sanshadow
services Bio Tech and pharma Consultants
Media MobileNxt
High end BPO Media Madhouse Author
GEN
Electronic Tender
CDC Advisors
Private Limited
Chrys Capital Biotech Start up Bajaj auto finance

Fund Computer Hardware Early Stage Jobs ahead
Computer Software Growth Bazee
IT
IT Enabled Outsourcing Expansion/Develop NIIT
Services ment Spectra mind
Mezzanine
Cipher Capital Career Launcher

Advisors Ltd Nuance
Equinox Corporation
SRF Limited
2i Capital (India) IT Early Stage

Pvt. Ltd. Engineering Growth
Technology services Development/

Expansion
Dawn Consulting Technology Early Stage Change pond
- GA software services, Later Stage Mind tree
embedded Quest
Bio-Tech & Healthcare Woodlands
Manufacturing Sandisk
Hospitality
Global IT Consulting & Software All stages Mind tree
Technology Services Global edge
Ventures Intimae
Liqwik Krstal
Internet Infrastructure & Net magic
Services
R& D & Products

Hansuttam Infrastructure
Finance Limited Real Estate
Oil and Gas
Healthcare
Hospitality
Manufacturing
Helion Venture Outsourcing seed stage United Lex
Partners Internet Mobile, later stage Makemytripcom
Technology Products Embassy Gridstone
Research
Jigrahak
HIVETEL Information TechnologyStart ups
Early Stage
ICF Ventures IT Start up Explocity
Computer Hardware and Early stage Matexnet
Software Development / Linc Software
Media Expansion Gangagen
Consumer Sansken
Bio-technology
IFB Venture
Capital Finance
Limited
IFCI Venture Computer Hardware Start Up
Capital Funds Computer Software Early Stage/Growth
Ltd. IT Enabled Services Development/
Telecommunications Expansion
Life Sciences Mezzanine
Retail MBO
Auto Ancillary
Engineering
iLabs Venture Consumer & Financial Proven early-stage, Sify
Capital Fund Services Expansion-stage Intelligroup
Media & Entertainment Restructuring/buy- DQ Entertainment
Telecom out Cibernet,
Technology driven opportunities Megasoft,

Products & Services,

IL&FS Venture Engineering Start Up
Corporation Ltd. Auto Ancillary Early Stage/Growth
x IT Seed Development/
IT Enabled Services Expansion
Telecommunications MBO Mezzanine
Biotech
Life Sciences
Retail
India Co
Ventures Limited
Indian Direct Technology Early stage Alok Textile Industries

Equity Advisors Communication Expansion Limited
Pvt. Ltd Entertainment BrainGEM L.L.C Ltd.
United Studios
Limited/UTV
Sun Earth Ceramics Ltd
Delta Innovative
Enterprises Ltd.
INDIA IDFC Oil and Gas Industry
Infrastructure Electricity
Fund
India Value Fund Healthcare Care Hospital

Retailing Biocon
Media & Entertainment Shringar
Precision Engineering
Infinity Venture IT Start up India games
Software Services Early /stage Brain visas
Marketing Services Growth cognosys
Internet services aztec
India parenting
Jumpstart up Software Start Up Chutney Technologies

Fund Advisors Semi conductor and Early Stage/Growth Apnaloan
Pvt. Ltd. embedded Certus
systems ,
services
Communication
Marigold Capital
Management Ltd
Marigold Capital
Services Limited
Nova Star Power Amara Raja

Infrastructure Batteries
Manufacturing Amtek Auto
Software Bio Con

Bio tech
Peninsula Realty Real Estate Cross roads

Fund Ashok
Reliance IT Yatra
Technology Media and Entertainment Seed fund
Ventures Ltd Telecommunications Yipes Holdings
Seed Fund Retail

Telecom
Internet
Media
Mobile
Consumer facing plays
Sicom Capital Computer Hardware Early stage Persistent e business
Management Computer Software Growth Solutions
Ltd. . IT PARI Robotics
Neilsoft
SREI Venture Real Estate

Capital Limited
Sterling
Technology &
Venture Corp.
Tata Investment Retail Infiniti Retail
Corporation Pharmaceuticals Nelco
Limited Advinus Therapeutics

Bank list
Name Type of companies Deal stage they Company they funded

they fund fund
Can bank Venture Computer Software Start Up Omnitech Info Solutions
Capital Computer Hardware Early Limited
Fund Biotech Stage/Growth KLT Automotive &
IT Development/E Tubular
xpansion Components Limited
Telesis Global Solutions
IDBI
ICICI Venture Funds Pharmaceuticals Growth Biocon

Management Media Buy out Avesthagen
Company Ltd Real Estate Deccn Aviation
Overseas Investment Pantaloon Retail
Manufacturing Reliance Petroleum
IT I Shopper's stop
Guardian Bank
HDFC Bank
HSBC Pvt. Equity

Management India
Kotak Mahindra Retailing Pantaloons
Venture Healthcare Sasken
Capital Fund Entertainment Transelektra
Life Sciences Divis Laboratories
IT
Food Processing
SBI Ventures Pharmaceuticals
SIDBI Venture IT- related New project Axiom Consulting

Capital Ltd. SIDBI Networking Expansion Bhrigus
Venture Capital Ltd. Multimedia Diversification Compulink
Axiom Consulting Data Communication Product Convergence Contact
National Venture Value Added services development center
Fund for DSS
Software and IT E-cube India
(NFSIT) Eisodus Networks
India ideas
Mithi
Manthan

SIDBI Venture Unlisted SMEs New project Bravo Healthcare

Capital Ltd Manufacturing sector Expansion Carzonrent
SME Growth Fund Service sector Diversification Direct logistic
Infrastructure support Product Naturol Bioenergy
development
Unit Trust of India- IT & convergence Subex

Technology Venture technologies Excel soft
Unit BPO Koutons Retail
Scheme Auto Ancillaries Semantic Space
Life Sciences Technology
Technology
Retail and Textiles
Private global players
Name Types of the Deal stage they Portfolio companies

companies they fund fund
Artiman Ventures Leading Edge Concept Kasenna
Technology Start up Invensense
Early stage Nuance
Aureos India Later Stage Grupo Difoto
Fund Expansion Voltie
Buy Out DPL
Shelys
Orange
Accutest (India Fund)
Ordyn (India Fund)
Axis Venture Information Elliptic

Capital Fund Technology Hyla Corporation
Infoterra
Netistix
BancAmerica Start Up
Equity Partners ,Mezzanine
(India) Growth
Buy Out
Baring Private ITES Development Molecular connection
Equity Partners IT /Expansion Gridstone Research
Software MBO Seccova
Mphasis
Blue Run IT Start up byte mobile
Ventures Mobile enpocket
Consumer , India Freedompay
Technologies
BTS Investment Information
advisors technology
(managing

SWISS
technology VC )
Canaan Partners Technology Jobdirect
Healthcare National medical
diagnostics
Praecis
Pharamceuticals
Silicon Optix
Vue Technologies
iYogi (India fund)
Bharat Matrimony
(India fund)
Clearstone Communication and Seed stage SyncVoice
Venture Partners Optical Early Stage Communications
Networking Later Stage for Aoptix
Enterprise and highly DigiBee
infrastructure Successful Phasebridge
software technology
Services companies
Business and
Consumer Internet
Draper Software Early Stage CMM ltd
International Media Start ups Yantra
Geometric software
services
Indus league clothing
Eureka Venture MultimediaEnergy

Fund Robotics
.Biotechnology
Material
Feedback Infrastructure Start up and onwards
Ventures Development
Frontline Venture Computer Hardware Early Stage/Growth ESL services

Services Pvt Ltd Computer Software Development/ Shilpa Medicare Ltd
IT Expansion Megavisa Mktg &
IT Enabled Services Mezzanine Solns. Ltd
Media/Retail Cbay Systems Ltd
Astra Micro wave Pdts
Ltd
Global Internet Technology/ Internet Start up Global Technology
Ventures LLC Early stage Ventures (BLR)
(GIV) Venture infotek
(Mumbai)
Tarang (Bangalore)
Intel Capital Information Comat Technologies
Technology Microland Limited
Maya Entertainment
Matrix Partners Interne Seed stage Four Interactive
Mobile Later stage Yo !China

Financial services Seventymm
Hospitality vJive
Healthcare
Travel and Tourism
Satwik Ventures Materials Early Stage OnMobile
Semi conductors Growth Stage Niksun
Wireless Later Stage Jareva
Optical Components Lara Networks
Systems
Sequoia Capital Services Seed stage Apple computers

Software Early stage Cisco system
System and Growth stage Yahoo
components Google
Solitaire Capital Real Estate
Development
Symphony Health care Buy outs Minor international
Capital Partners Hospitality Buy ins One Central residences
(Asia) Ltd Life style Later stage Macua
development / C Larsen Ltd.
expansion
Templeton India
Private Equity
fund
Waygate Capital IT Mezzamine

Computer Hardware MBO
Computer Software
IT Enabled Services
Media/Entertainment
Walden Electronics Seed 2bsure
International communications Start up Digicom Systems
Semi conductors Early stage Fast Mobile
IT enabled services Growth stage
Development /
Expansion
West Bridge
Capital Partner
Advisors Ltd
Unitus Advisors
Pvt. Ltd

Top India deals In October 2008

Target Investor Investor nation Deal size ($m)
Comat technologies Omidyar network us 15.00

Kotak mahindra Warburg pincus Us 13.50
bank
Prozone-liberty Ltg development Uk 11.97
capital
Telibrahma Ojas venture India 2.00
convergent partners
communications
Pegasus solar Gvfl India 0.77
Havell’s India Warbug pincus Us 0.33
Suvidhaa infoserve Norwest venture Us Na
partner
Kotak up Kleiner perkins Us Na
caufield & byers
Trivitron medical Montagu private Us Na
systems equity
Univercell Peepul capital mauritius Na
telecommunications
India
Top Indian deals In Novembor 2008

Target Nation Acquirer Nation Deal size
($m)
tata teleservices India Nit docomo Japan 2654.8
Sks India Sandstone Us 77.4
microfinance capital
Mena Uae Srl India 20.0
healthcare
Giridharilal- India Olam Singapore 9.9
sugar milling international
Champagne India Arisaig partners Singapore 4.3
indage (asia)
Oldstone India Goldstone India 3.5
infratech exports
V3 controls India Gefran spa Italy 0.2
Woolite India Umesh p India 0.1
mercantile chamdia
Shree om trades India Investor group India 0.0
Dlf assets India Syphony capital uk India na
partners

Top Asia deals In Novembor 2008

Target Target nation Investor Investor nation Deal size ($m)
China national china Blackstone Us 600.00
bluestar (group) group
corporation
Nvc lighting China Goldman, Us 37.00
technologies sacha &co.
Comat technologies India Omidyar Us 15.00
network
Kotak mahindra India Warburg Us 13.50
bank pincus
Prozone-liberty India Ltg Uk 11.97
development
capital
Hangzhou China Beljing China 7.32
prodigious drawing zhengrun
co. investment co.
Son kim fashion Vietnam Bankinvest Denmark 2.76
corporation
Senodia China Dragon venture Us 2.00
technologies
Neomics co. South korea Novartis Us 1.00
venture fund
Univercell China Pepul capital Mauritius Na
telecommunications
india

Top Indian M&A Deals In October 2008
DEAL
TARGET ACQUIRER SIZE
TARGET NATION ACQUIRER NATION ($M)
Citigroup Global
Services India Tata Consultancy Shift India 505
Lavasa Corp. India Bank of India India 31.3
Audit Control &
Expertise Switzerland Financial Tech India 22.5
Prozone-Liberity India LTG International UK 12
Goldman
ICSA India India sachs(asia)Finance Hong Kong 8.3
Alcon Cement Co. India ACC India 4.7
Rotate Black India India Rotate Black Inc. US 4.2
Mijobil Grenland Norway Tata Motors European UK 1.9
Bhuruka Gases India Bhuruka Gases Holdings India 1.9
Thai Union Frozen
Avanti Feeds India Products Thailand 900
Swan Telecom India Etisalat India 802.7
Axon Group UK HCL Technologies UAE 177.5
WinWind oy finland Masdar India 25.7
Aztecsoft india MindTree India 23.4
Gammon India india Warhol Singapore 22.1
New Millennium Capital
Corp. canada Tata Steel Global Minerals Mauritius 15.2
Deutshe Securities
Prakash Industries India Mauritious Cyprus 13.2
Sz Design Srl italy koderat investments Cyprus 13.2
Zagato Srl italy koderat investments India 4.3

BIBLIOGRAPHY
BOOKS :
1. Taneja Satish, “Venture Capital In India”, Galgotia Publishing Company, 2002, pg

1 – 44.
2. Chary T Satyanarayana, “Venture Capital – Concepts & Applications”,

Macmillian India Ltd, 2005, pg 19 – 22.
3. Pandey I M, “Venture Capital – The Indian Experience”, Prentice Hall of India Pvt
Ltd, 1999, pg 95 – 97.
4. Thompson Arthur, Strickland A J, Gamble John E, Jain Arun K, “Crafting &

Executing Strategy – The Quest for Competitive Advantage”, Tata McGraw Hill,
14th edition, 2006, pg 44 – 80.
MAGAZINE :
1. Sharma Kapil, An Analysis of Venture Capital Industry in India, ICFAI Reader,

April 2007, pg 37 – 43.
REPORT :
1. Trends of Venture Capital in India, survey Report by Deloitte, 2007.
2. Global Trends of Venture Capital, survey report by Deloitte, 2007.
3. Acceleration – Global Venture Capital Insights Report by Ernst & Young, 2007
4. Economic survey 2007-08, Chepter-8
WEBSITE :
1. www.sebi.gov.in
2. www.ivca.org
3. www.nenonline.org.
4. www.indiavca.org.
5. www.vcindia.com
6. www.ventureintelligence.in
7. www.vccircle.com

8. www.indiape.com
9. www.nvca.org
10. www.indexmundi.com
11. www.nasscom.org
12. www.ciiionline.org
13. www.rekha.com
14. www.msme.com
15. www.exim.indiamart.com
16. www.economictimes.indiatimes.com
17. www.100ventures.com
18. www.Thompsonrouters.com
19. www.planningcommission.nic.in

Venture Capital

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Venture Capital

Uploaded by

Copyright:

Available Formats

MRP on “venture capital industry in India”

S.V .Institute Of Management, Kadi 1

1.1 Research objective:

 To understand concept of Venture Capital.

 To understand Venture Capital industry in global scenario.

 To study the evolution and need of Venture Capital Industry in India.

 To understand the legal framework formulated by SEBI to encourage Venture

 To know the impact of political and economical factors on Venture Capital

1.2 Limitation of project

1.3 Research Design & Instruments

S.V .Institute Of Management, Kadi 2

S.V .Institute Of Management, Kadi 3

S.V .Institute Of Management, Kadi 4

2.1 Concept of Venture Capital

Venture capital is not a passive finance. It may be at any stage of business/production

The most flexible definition of Venture capital is-

“The support by investors of entrepreneurial talent with finance and

2.2 Features of Venture Capital

2.2.1 High Risk

 Management risk - Inability of management teams to work together.

 Market risk - Product may fail in the market.

 Product risk - Product may not be commercially viable.

 Operation risk - Operations may not be cost effective resulting in

2.2.2 High Tech

2.2.3 Equity Participation & Capital Gains

2.2.4 Participation In Management

S.V .Institute Of Management, Kadi 6

2.2.5 Length of Investment

2.2.6 Illiquid Investment

2.3 Difference between Venture Capital & Other Funds

2.3.1 Venture Capital Vs Development Funds

2.3.2 Venture Capital Vs Seed Capital & Risk Capital

S.V .Institute Of Management, Kadi 7

professionals to become promoters of industrial projects. The seed capital is provided to

Seed Capital Scheme Venture capital Scheme

2.3.3 Venture Capital Vs Bought Out Deals

S.V .Institute Of Management, Kadi 8

2.4 The Venture Capital Spectrum

Building a sustainable business

Venture Private Public Public Equity for

Figure 2.1: Venture Capital Spectrum

S.V .Institute Of Management, Kadi 9

began to operate across a broader spectrum of investment interest. This diversity of

1. Early Stage Finance

2. Later Stage Finance

Financing Stage Period (funds Risk perception Activity to be financed

S.V .Institute Of Management, Kadi 10

Turnaround 3-5 Medium to high Turning around a sick

Table 2.2: Venture Capital- Financing Stages

2.4.1 Seed Capital

It is an idea or concept as opposed to a business. European Venture capital association

The characteristics of the seed capital may be enumerated as follows:

 Absence of ready product market

Volume of Investment Activity

S.V .Institute Of Management, Kadi 11

2.4.2 Start up Capital

The characteristics of start-up capital are:-

i. Establishment of company or business. The company is either being organized or is

S.V .Institute Of Management, Kadi 12

Volume of Investment Activity

2.4.3 Early Stage Finance

The characteristics of early stage finance may be: -

 Little or no sales revenue.