Professional Documents
Culture Documents
Submitted in partial fulfilment of the requirement of MBA Degree of Maharshi Dayanand University, Rohtak
Under the supervision of: Mr Vivek Bhatia Faculty International Business, ITM Gurgaon Submitted by: sandeep arora 07-MBA-127 Session 2007-2009 Institute of Technology and Management Gurgaon
Acknowledgement
No Learning is proper and effective without Proper Guidance
Every study is incomplete without having a well plan and concrete exposure to the student. Management studies are not exception. Scope of the project at this level is very wide ranging. On the other hand it provide sound basis to adopt the theoretical knowledge and on the other hand it gives an opportunities for exposure to real time situation.
This study is an internal part of our MBA program and to do this project in a short period was a heavy task.
Intention, dedication, concentration and hard work are very much essential to complete any task. But still it needs a lot of support, guidance, assistance, cooperation of people to make it successful. I bear to imprint of my people who have given me, their precious ideas and times to enable me to complete the research and the project report. I want to thanks them for their continuous support in my research and writing efforts.
I wish to record my thanks and indebtedness to Mr Vivek Bhatia - Faculty International Business, ITM Gurgaon, whose inspiration, dedication and helping nature provided me the kind of guidance necessary to complete this project. I am extremely grateful to management of Institute of Technology & Management, Gurgaon for granting me permission to be part of this college. I would also like to acknowledge my parents and my batch mates for their guidance and blessings
Table of Content
1. 2.
3.
4.
Literature Review
Conceptual Framework
Operational Definition
5.
6.
7.
8.
9.
10.
11.
ANNEXURE I NAME OF VENTURE CAPITAL FIRMS OUT SIDE OF INDIA ANNEXURE II NAME OF VENTURE CAPITAL FIRMS IN INDIA.
Introduction
A number of technocrats are seeking to set up shop on their own and capitalize on opportunities. In the highly dynamic economic climate that surrounds us today, few traditional business models may survive. Countries across the globe are realizing that it is not the conglomerates and the gigantic corporations that fuel economic growth any more. The essence of any economy today is the small and medium enterprises. For example, in the US, 50% of the exports are created by companies with less than 20 employees and only 7% are created by companies with 500 or more employees. This growing trend can be attributed to rapid advances in technology in the last decade. Knowledge driven industries like InfoTech, health-care, entertainment and services have become the cynosure of bourses worldwide. In these sectors, it is innovation and technical capability that are big business-drivers. This is a paradigm shift from the earlier physical production and economies of scale model. However, starting an enterprise is never easy. There are a number of parameters that contribute to its success or downfall. Experience, integrity, prudence and a clear understanding of the market are among the sought after qualities of a promoter. However, there are other factors, which lie beyond the control of the entrepreneur. Prominent among these is the timely infusion of funds. This is where the venture capitalist comes in, with money, business sense and a lot more.
Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves. Venture capitalists generally:
Finance new and rapidly growing companies Purchase equity securities Assist in the development of new products or services Add value to the company through active participation Take higher risks with the expectation of higher rewards Have a long-term orientation
When considering an investment, venture capitalists carefully screen the technical and business merits of the proposed company. Venture capitalists only invest in a small percentage of the businesses they review and have a long-term perspective. They also actively work with the company's management, especially with contacts and strategy formulation. Venture capitalists mitigate the risk of investing by developing a portfolio of young companies in a single venture fund. Many times they co-invest with other professional venture capital firms. In addition, many venture partnerships manage multiple funds simultaneously. For decades, venture capitalists have nurtured the growth of America's high technology and entrepreneurial communities resulting in significant job creation, economic growth and international competitiveness. Companies such as Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and Genetech are famous examples of companies that received venture capital early in their development. (Source: National Venture Capital Association 1999 Year book)
investor. While this type of individual investment did not totally disappear, the modern venture firm emerged as the dominant venture investment vehicle. However, in the last few years, individuals have again become a potent and increasingly larger part of the early stage start-up venture life cycle. These "angel investors" will mentor a company and provide needed capital and expertise to help develop companies. Angel investors may either be wealthy people with management expertise or retired business men and women who seek the opportunity for first-hand business development.
A Brief History
The concept of venture capital is not new. Venture capitalists often relate the story of Christopher Columbus. In the fifteenth century, he sought to travel westwards instead of eastwards from Europe and so planned to reach India. His far-fetched idea did not find favor with the King of Portugal, who refused to finance him. Finally, Queen Isabella of Spain decided to fund him and the voyages of Christopher Columbus are now empanelled in history. The modern venture capital industry began taking shape in the post World War II years. It is often said that people decide to become entrepreneurs because they see role models in other people who have become successful entrepreneurs. Much the same thing can be said about venture capitalists. The earliest members of the organized venture capital industry had several role models, including these three: American Research and Development Corporation, formed in 1946, whose biggest success was Digital Equipment. The founder of ARD was General Georges Doroit, a French-born military man who is considered "the father of venture capital." In the 1950s, he taught at the Harvard Business School. His lectures on the importance of risk capital were considered quirky by the rest of the faculty, who concentrated on conventional corporate management. J.H. Whitney & Co also formed in 1946, one of whose early hits was Minute Maid juice. Jock Whitney is considered one of the industrys founders. The Rockefeller Family, and in particular, L S Rockefeller, one of whose earliest investments was in Eastern Airlines, which is now defunct but was one of the earliest commercial airlines. The Second World War produced an abundance of technological innovation, primarily with military applications. They include, for example, some of the earliest work on micro circuitry. Indeed, J.H. Whitneys investment in Minute Maid was
intended to commercialize an orange juice concentrate that had been developed to provide nourishment for troops in the field. In the mid-1950s, the U.S. federal government wanted to speed the development of advanced technologies. In 1957, the Federal Reserve System conducted a study that concluded that a shortage of entrepreneurial financing was a chief obstacle to the development of what it called "entrepreneurial businesses." As a response this a number of Small Business Investment Companies (SBIC) were established to "leverage" their private capital by borrowing from the federal government at belowmarket interest rates. Soon commercial banks were allowed to form SBICs and within four years, nearly 600 SBICs were in operation. At the same time a number of venture capital firms were forming private partnerships outside the SBIC format. These partnerships added to the venture capitalists toolkit, by offering a degree of flexibility that SBICs lack. Within a decade, private venture capital partnerships passed SBICs in total capital under management. The 1960s saw a tremendous bull IPO market that allowed venture capital firms to demonstrate their ability to create companies and produce huge investment returns. For example, when Digital Equipment went public in 1968 it provided ARD with 101% annualized Return on Investment (ROI). The US$70,000 Digital invested to start the company in 1959 had a market value of US$37mn. As a result, venture capital became a hot market, particularly for wealthy individuals and families. However, it was still considered too risky for institutional investors. In the 1970s, though, venture capital suffered a double-whammy. First, a red-hot IPO market brought over 1,000 venture-backed companies to market in 1968, the public markets went into a seven-year slump. There were a lot of disappointed stock market investors and a lot of disappointed venture capital investors too. Then in 1974, after Congress legislation against the abuse of pension fund money, all high-risk investment of these funds was halted. As a result of poor public market and the pension fund legislation, venture capital fund raising hit rock bottom in 1975. Well, things could only get better from there. Beginning in 1978, a series of legislative and regulatory changes gradually improved the climate for venture
investing. First Congress slashed the capital gains tax rate to 28% from 49.5%. Then the Labor Department issued a clarification that eliminated the pension funds act as an obstacle to venture investing. At around the same time, there was a number of high-profile IPOs by venture-backed companies. These included Federal Express in 1978, and Apple Computer and Genetech Inc in 1981. This rekindled interest in venture capital on the part of wealthy families and institutional investors. Indeed, in the 1980s, the venture capital industry began its greatest period of growth. In 1980, venture firms raised and invested less than US$600 million. That number soared to nearly US$4bn by 1987. The decade also marked the explosion in the buy-out business. The late 1980s marked the transition of the primary source of venture capital funds from wealthy individuals and families to endowment, pension and other institutional funds. The surge in capital in the 1980s had predictable results. Returns on venture capital investments plunged. Many investors went into the funds anticipating returns of 30% or higher. That was probably an unrealistic expectation to begin with. The consensus today is that private equity investments generally should give the investor an internal rate of return something to the order of 15% to 25%, depending upon the degree of risk the firm is taking. However, by 1990, the average long-term return on venture capital funds fell below 8%, leading to yet another downturn in venture funding. Disappointed families and institutions withdrew from venture investing in droves in the 1989-91 periods. The economic recovery and the IPO boom of 1991-94 have gone a long way towards reversing the trend in both private equity investment performance and partnership commitments. In 1998, the venture capital industry in the United States continued its seventh straight year of growth. It raised US$25bn in committed capital for investments by venture firms, who invested over US$16bn into domestic growth companies US firms have traditionally been the biggest participants in venture deals, but non-US venture investment is growing. In India, venture funding more than doubled from $420 million in 2002 to almost $1 billion in 2003. For the first half of 2004, venture capital investment rose 32% from 2003.
Investment Philosophy
Venture capitalists can be generalists, investing in various industry sectors, or various geographic locations, or various stages of a companys life. Alternatively, they may be specialists in one or two industry sectors, or may seek to invest in only a localized geographic area. Not all venture capitalists invest in "start-ups." While venture firms will invest in companies that are in their initial start-up modes, venture capitalists will also invest in companies at various stages of the business life cycle. A venture capitalist may invest before there is a real product or company organized (so called "seed investing"), or may provide capital to start up a company in its first or second stages of development known as "early stage investing." Also, the venture capitalist may provide needed financing to help a company grow beyond a critical mass to become more successful ("expansion stage financing"). The venture capitalist may invest in a company throughout the companys life cycle and therefore some funds focus on later stage investing by providing financing to help the company grow to a critical mass to attract public financing through a stock offering. Alternatively, the venture capitalist may help the company attract a merger or acquisition with another company by providing liquidity and exit for the companys founders. At the other end of the spectrum, some venture funds specialize in the acquisition, turnaround or recapitalization of public and private companies that represent favorable investment opportunities. There are venture funds that will be broadly diversified and will invest in companies in various industry sectors as diverse as semiconductors, software, retailing and restaurants and others that may be specialists in only one technology. While high technology investment makes up most of the venture investing in the U.S., and the venture industry gets a lot of attention for its high technology investments, venture capitalists also invest in companies such as construction, industrial products, business services, etc. There are several firms that have specialized in retail company investment and others that have a focus in investing only in "socially responsible" start-up endeavors.
The basic principal underlying venture capital invest in high-risk projects with the anticipation of high returns. These funds are then invested in several fledging enterprises, which require funding, but are unable to access it through the conventional sources such as banks and financial institutions. Typically first generation entrepreneurs start such enterprises. Such enterprises generally do not have any major collateral to offer as security, hence banks and financial institutions are averse to funding them. Venture capital funding may be by way of investment in the equity of the new enterprise or a combination of debt and equity, though equity is the most preferred route. Since most of the ventures financed through this route are in new areas (worldwide venture capital follows "hot industries" like InfoTech, electronics and biotechnology), the probability of success is very low. All projects financed do not give a high return. Some projects fail and some give moderate returns. The investment, however, is a long-term risk capital as such projects normally take 3 to 7 years to generate substantial returns. Venture capitalists offer "more than money" to the venture and seek to add value to the investee unit by active participation in its management. They monitor and evaluate the project on a continuous basis. The venture capitalist is however not worried about failure of an investee company, because the deal which succeeds, nets a very high return on his investments high enough to make up for the losses sustained in unsuccessful projects. The returns generally come in the form of selling the stocks when they get listed on the stock exchange or by a timely sale of his stake in the company to a strategic buyer. The idea is to cash in on an increased appreciation of the share value of the company at the time of disinvestment in the investee company. If the venture fails (more often than not), the entire amount gets written off. Probably, that is one reason why venture capitalists assess several projects and invest only in a handful after careful scrutiny of the management and marketability of the project. To conclude, a venture financier is one who funds a start up company, in most cases promoted by a first generation technocrat promoter with equity. A venture capitalist is not a lender, but an equity partner. He cannot survive on minimalism. He is driven by maximization: wealth maximization. Venture capitalists are sources of expertise
for the companies they finance. Exit is preferably through listing on stock exchanges. This method has been extremely successful in USA, and venture funds have been credited with the success of technology companies in Silicon Valley. The entire technology industry thrives on it
Length of investment:
Venture capitalists will help companies grow, but they eventually seek to exit the investment in three to seven years. An early stage investment make take seven to ten years to mature, while a later stage investment many only take a few years, so the appetite for the investment life cycle must be congruent with the limited partnerships appetite for liquidity. The venture investment is neither a short term nor a liquid investment, but an investment that must be made with careful diligence and expertise.
4. Second Stage: In the Second Stage of Financing working capital is provided for
the expansion of the company in terms of growing accounts receivable and inventory.
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.
private sector, have started introducing innovative financial securities like participating debentures, introduced by TCFC is an example.
Venture capital partners (also known as "venture capitalists" or "VCs") may be former chief executives at firms similar to those which the partnership funds. Investors in venture capital funds are typically large institutions with large amounts of available capital, such as state and private pension funds, university endowments, insurance companies and pooled investment vehicles. Most venture capital funds have a fixed life of ten yearsthis model was pioneered by some of the most successful funds in Silicon Valley through the 1980s to invest in technological trends broadly but only during their period of ascendance, to cut exposure to management and marketing risks of any individual firm or its product. In such a fund, the investors have a fixed commitment to the fund that is "called down" by the VCs over time as the fund makes its investments. In a typical venture capital fund, the VCs receive an annual "management fee" equal to 2% of the committed capital to the fund and 20% of the net profits of the fund. Because a fund may run out of capital prior to the end of its life, larger VCs usually have several overlapping funds at the same timethis lets the larger firm keep specialists in all stage of the development of firms almost constantly engaged. Smaller firms tend to thrive or fail with their initial industry contactsby the time the fund cashes out, an entirely new generation of technologies and people is ascending, whom they do not know well, and so it is prudent to re-assess and shift industries or personnel rather than attempt to simply invest more in the industry or people it already knows
Significance of Study
Venture capitalists not only support high technology projects they also fianc any risky idea, they provide funds (a) if one needs additional capital to expand his existing business or one has a new & promising project to exploit (b) if one cannot obtain a conventional loan the requirement terms would create a burden during the period the firm is struggling to grown. It is the ambition of many talented people in India to set up their own venture if they could get adequate & reliable support. Financial investment provides loans & equity. But they do not provide management support, which is often needed by entrepreneurs. But the venture capital industries provide such support along with capital also. Venture capitalist acts a partner not a financier.
Objective No. 1
Instruments Equity Shares Redeemable Preference Shares Non Convertible Debt Convertible Instruments Other Instruments Total
Rs million 7,000.00 6,000.00 5,000.00 4,000.00 3,000.00 2,000.00 1,000.00 0.00 Redeemable Preference Shares Equity Shares 6,318.12
Interpretation: This diagram shows the venture capital financing in equity share
and secondly they invest in redeemable preference shares to get higher returns.
Contributors of Funds
Contributors Foreign Institutional Investors All India Financial Institutions Multilateral Development Agencies Other Banks Foreign Investors Private Sector Public Sector Nationalized Banks Non Resident Indians State Financial Institutions Other Public Insurance Companies Mutual Funds Total
Rs. mn 13,426.47 6,252.90 2,133.64 1,541.00 570 412.53 324.44 278.67 235.5 215 115.52 85 4.5 25,595.17
Per cent 52.46% 24.43% 8.34% 6.02% 2.23% 1.61% 1.27% 1.09% 0.92% 0.84% 0.45% 0.33% 0.02% 100.00%
Interpretation: This table shows the highest contribution of fund FII and
secondly AIFI to develop the Industry.
Investment Stages Start-up Later stage Other early stage Seed stage Turnaround financing Total
Rs million 3,813.00 3,338.99 1,825.77 963.2 59.5 10,000.46 Rs million 297 154 124 107 9 691
Number
4,500.00 4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0.00
3,813.00
Start-up
Later stage
Seed stage
Turnaround financing
Interpretation: This diagram shows the highest finance is received by the venture
in startup stage of any venture.
Financing By Industry
Industry Industrial products, machinery Computer Software Consumer Related Medical Food, food processing Other electronics Tel & Data Communications Biotechnology Energy related Computer Hardware Miscellaneous Total
Rs million 2,599.32 1,832 1,412.74 623.8 500.06 436.54 385.09 376.46 249.56 203.36 1,380.85 10,000.46
Rs million 3,000.00 2,599.32 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0.00 Computer Softw are Medical Food, food processing Energy related Tel & Data Communications Computer Hardw are Industrial products, Consumer Related Miscellaneous Other electronics Biotechnology 1,832 1,412.74 623.8 500.06 436.54 385.09 376.46 1,380.85
249.56 203.36
Financing By States
Investment Maharashtra Tamil Nadu Andhra Pradesh Gujarat Karnataka West Bengal Haryana Delhi Uttar Pradesh Madhya Pradesh Kerala Goa Rajasthan Punjab Orissa Dadra & Nagar Haveli Himachal Pradesh Pondicherry Rs million 2,566 1531 1372 1102 1046 312 300 294 283 231 135 105 87 84 35 32 28 22
Rs million
3,000 2,500 2,000 1,500 1,000 500 0
Ta m il N ad u Pr ad es h t na ta ka Be ng al G uj ar a as h Ha r ya na De lh i tra
2,566
1531
1372
1102
M ah ar
Ka r
nd hr
W es t
The Management
Most businesses are people driven, with success or failure depending on the performance of the team. It is important to distinguish the entrepreneur from the professional management team. The value of the idea, the vision, putting the team together, getting the funding in place is amongst others, some key aspects of the role of the entrepreneur. Venture capitalists will insist on a professional team coming in, including a CEO to execute the idea. One-man armies are passe. Integrity and commitment are attributes sought for. The venture capitalist can provide the strategic vision, but the team executes it. As a famous Silicon Valley saying goes "Success is execution, strategy is a dream".
The Idea
The idea and its potential for commercialization are critical. Venture funds look for a scalable model, at a country or a regional level. Otherwise the entire game would be reduced to a manpower or machine multiplication exercise. For example, it is very easy for Hindustan Lever to double sales of Liril - a soap without incremental capex,
while Gujarat Ambuja needs to spend at least Rs4bn before it can increase sales by 1mn ton. Distinctive competitive advantages must exist in the form of scale, technology, brands, distribution, etc which will make it difficult for competition to enter.
Valuation
All investment decisions are sensitive to this. An old stock market saying "Every stock is a buy at a price and vice versa". Most deals fail because of valuation expectation mismatch. In India, while calculating returns, venture capital funds will take into account issues like rupee depreciation, political instability, which adds to the risk premia, thus suppressing valuations. Linked to valuation is the stake, which the fund takes. In India, entrepreneurs are still uncomfortable with the venture capital "taking control" in a seed stage project.
Exit
Without exit, gains cannot be booked. Exit may be in the form of a strategic sale or/and IPO. Taxation issues come up at the time. Any fund would discuss all exit options before closing a deal. Sometimes, the fund insists on a buy back clause to ensure an exit.
Portfolio Balancing
Most venture funds try and achieve portfolio balancing as they invest in different stages of the company life cycle. For example, a venture capital has invested in a portfolio of companies predominantly at seed stage; they will focus on expansion stage projects for future investments to balance the investment portfolio. This would enable them to have a phased exit. In summary, venture capital funds go through a certain due diligence to finalize the deal. This includes evaluation of the management team, strategy, execution and commercialization plans. This is supplemented by legal and accounting due diligence, typically carried out by an external agency. In India, the entire process takes about 6 months. Entrepreneurs are advised to keep that in mind before looking to raise funds. The actual cash inflow might get delayed because of regulatory issues. It is interesting to note that in USA, at times angels write checks across the table.
The Indian banking system has shown remarkable growth over the last two decades. The rapid growth and increasing complexity of the financial markets, especially the capital market have brought about measures for further development and improvement in the working of these markets. Banks and development financial institutions led by ICICI, IDBI and IFCI were providers of term loans for funding projects. The options were limited to conventional businesses, i.e. manufacturing centric. Services sector was ignored because of the "collateral" issue.
Equity was raised from the capital markets using the IPO route. The bull markets of the 90s, fuelled by Harshad Mehta and the FIIs, ensured that (ad) venture capital was easily available. Manufacturing companies exploited this to the full.
The services sector was ignored, like software, media, etc. Lack of understanding of these sectors was also responsible for the same. If we look back to 1991 or even 1992, the situation as regards financial outlay available to Indian software companies was poor. Most software companies found it extremely difficult to source seed capital, working capital or even venture capital. Most software companies started off undercapitalized, and had to rely on loans or overdraft facilities to provide working capital. This approach forced them to generate revenue in the short term, rather than investing in product development. The situation fortunately has changed.
Research Methodology
REDMEN & MORY defines,Research as a systematized effort to gain now knowledge. It is a careful investigation for search of new facts in any branch of knowledge. The purpose of research methodology section is to describe the procedure for conduction the study. It includes research design, sample size, data collection and procedure of analysis of research instrument. Research always starts with a question or a problem. Its purpose is to find answers to questions through the application of the scientific method. It is a systematic and intensive study directed towards a more complete knowledge of the subject studied. RESEARCH DESIGN: Acc. to Kerlinger, Research design is the plan structure & strategy of investigation conceived so as to obtain answers to research questions and to control variance. Acc. to Green and Tull, A research design is the specification of methods and procedures for acquiring the information needed. It is the overall operational pattern or framework of the project that stipulates what information is to be collected from which sources by what procedures. Its found that research design is purely and simply the framework for a study that guides the collection and analysis of required data. Research design is broadly classified into Exploratory research design Descriptive research design Casual research design
This research is a Exploratory research. The major purpose of this research is description of state of affairs as it exists at present.
DATA COLLECTION Secondary data Secondary data is the data which is already collected by someone and complied for different purposes which are used in research for this study. It includes: Internet Magazine Journal Newspaper
Literature Review
According to Subash and Nair, (May 2005)
According to theses persons though the modern concept of venture capital stated during 1946 and now practiced by almost all economies around the world, there seems to be a slowdown of venture capital activities after 2000.There may be a long list of reasons for this situation, where people feel more risky to put their money in new and emerging ventures. Hardly 5% of the total venture capital investment globally is given to really stage ventures. In all the years people around the world has seen the potentiality of venture capital in promoting different economies of the world by improving the standard of living of the people by expanding business activities, increasing employment and also generating more revenue to the government
The study brings out four important variables which are highly unique to successful venture in India. They are: Ability to evaluate and react to risk Attention to details Market share Profits.
Evaluating risk seems to be an area where unsuccessful venture fail. Since successful teams focus on established markets and meticulously pursue these markets to gain market share, they achieve desired profits.
According to Chary, (September 2005) There has been a plethora of literature on venture capital finance, which is helping the practitioners viz., venture capital finance companies and fund manage for better understanding the role of venture capital in economic development. There are number of studies on the venture capital and activities of venture capitalists in developed countries.
Through a case based approach Lloyd et. al. (1995) explored the aspect of deal structuring and post investment staging of venture capitalists through venture capitalists' co-investing strategy. The study finds that even through venture capitalists fix tight milestones and time lines they themselves contribute to many of the delays that are experienced by a typical start up firm. This is because of the hierarchical coinvesting partners and the lack of understanding within the venture capitalist coinvestors as to what role they individually play in the development of their portfolio company.
(Muzyka, Birley and Leleux, 1996; Shepherd, 1999). Multi methods (case analysis, study of administrative records, published interviews, questionnaire and personal interviews) approach has also been used (Riquelme, 1994) to enhance understanding of investment criteria and also extend it to other aspects of investment process like deal structuring and divestment.
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 organizations, trade partners, industry associations, friends etc. Another deal flow is active search through networks, trade fairs, conferences, seminars, foreign visits etc. Intermediaries is used by venture capitalists in developed countries like USA, is certain intermediaries who match VCFs and the potential entrepreneurs. Screening: VCFs, before going for an in-depth analysis, carry out initial screening of all projects on the 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: Structuring refers to putting together the financial aspects of the deal and negotiating with the entrepreneurs to accept a venture capitals proposal and finally closing the deal. To do a good job in structuring, one needs to be knowledgeable in areas of accounting, cash flow, finance, legal and taxation. Also the structure should take into consideration the various commercial issues (ie what the entrepreneur wants and what the venture capital would require protecting the investment). Documentation refers to the legal aspects of the paperwork in putting the deal together. The instruments to be used in structuring deals are many and varied. The objective in selecting the instrument would be to maximize (or optimize) venture capitals returns/protection and yet satisfies the entrepreneurs requirements. The instruments could be as follows: Instrument Loan Issues Clean vs secured Interest bearing vs non interest bearing convertible vs one with features (warrants) 1st Charge, 2nd Charge, loan vs loan stock Maturity Preference shares redeemable (conditions under Company Act) participating par value nominal shares Warrants Common shares exercise price, expiry period new or vendor shares par value
partially-paid shares In India, straight equity and convertibles are popular and commonly used. Nowadays, warrants are issued as a tool to bring down pricing. A variation that was first used by PACT and TDICI was "royalty on sales". Under this, the company was given a conditional loan. If the project was successful, the company had to pay a % age of sales as royalty and if it failed then the amount was written off. In structuring a deal, it is important to listen to what the entrepreneur wants, but the venture capital comes up with his own solution. Even for the proposed investment amount, the venture capital decides whether or not the amount requested, is appropriate and consistent with the risk level of the investment. The risks should be analyzed, taking into consideration the stage at which the company is in and other factors relating to the project. (eg exit problems, etc). 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. 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: 1. Initial Public Offerings (IPOs) 2. Acquisition by another company 3. Purchase of the venture capitalist's shares by the promoter, 4. Purchase of the venture capitalist's share by an outsider
Objective No.2
raising funds from conventional sources, including term loans from institutions and equity markets.
Scalability
The Indian software segment has recorded an impressive growth over the last few years and earns large revenues from its export earnings, yet our share in the global market is less than 1 per cent. Within the software industry, the value chain ranges from body shopping at the bottom to strategic consulting at the top. Higher value addition and profitability as well as significant market presence take place at the higher end of the value chain. If the industry has to grow further and survive the flux it would only be through innovation. For any venture idea to succeed there should be a product that has a growing market with a scalable business model. The IT industry (which is most suited for venture funding because of its "ideas" nature) in India till recently had a service centric business model. Products developed for Indian markets lack scale.
Mindsets
Venture capital as an activity was virtually non-existent in India. Most venture capital companies want to provide capital on a secured debt basis, to established businesses with profitable operating histories. Most of the venture capital units were offshoots of financial institutions and banks and the lending mindset continued. True venture capital is capital that is used to help launch products and ideas of tomorrow. Abroad, this problem is solved by the presence of `angel investors. They are typically wealthy individuals who not only provide venture finance but also help entrepreneurs to shape their business and make their venture successful.
government must allow pension funds and insurance companies to invest in venture capitals as in USA where corporate contributions to venture funds are large.
Exit
The exit routes available to the venture capitalists were restricted to the IPO route. Before deregulation, pricing was dependent on the erstwhile CCI regulations. In general, all issues were under priced. Even now SEBI guidelines make it difficult for pricing issues for an easy exit. Given the failure of the OTCEI and the revised guidelines, small companies could not hope for a BSE/ NSE listing. Given the dull
market for mergers and acquisitions, strategic sale was also not available. Valuation
The recent phenomenon is valuation mismatches. Thanks to the software boom, most promoters have sky high valuation expectations. Given this, it is difficult for deals to reach financial closure as promoters do not agree to a valuation. This coupled with the fancy for software stocks in the bourses means that most companies are preponing their IPOs. Consequently, the number and quality of deals available to the venture funds gets reduced Some other major problems facing by venture capitalist in India are: a. Requirement of an experienced management team. b. Requirement of an above average rate of return on investment. Longer payback period. c. Uncertainty regarding the success of the product in the market. d. Questions regarding the infrastructure details of production like plant location, accessibility, relationship with the suppliers and creditors, transportation facilities, labour availability etc. e. The category of potential customers and hence the packaging and pricing details of the product. f. The size of the market. g. Major competitors and their market share.
h. Skills and Training required and the cost of training. i. Financial considerations like return on capital employed (ROCE), cost of the project, the Internal Rate of Return (IRR) of the project, total amount of funds required, ratio of owners investment (personnel funds of the entrepreneur), borrowed capital, mortgage loans etc. in the capital employed.
[Source Pandey, I. M., Venture Capital The Indian Express VIth Edition (2006)]]
Objective No. 3
d. Vast pool of existing and ongoing scientific and technical research carried by large number of research laboratories. e. Initiatives taken by the Government in formulating policies to encourage investors and entrepreneurs. f. Initiatives of the SEBI to develop a strong and vibrant capital market giving the adequate liquidity and flexibility for investors for entry and exit. In a recent survey it has been shown that the VC investments in India's I.T. - Software and services sector (including dot com companies)- have grown from US $ 150 million in 1998 to over US$ 1200 million in 2008. The credit can be given to setting up of a National Venture Capital Fund for the Software and I.T. Industry (NFSIT) in association with various financial institutions of Small Industries and Development Bank of India (SIDBI). The facts reveal that VC disbursements as on September 30, 2002 made by NFSIT totaled Rs 254.36 mn. Source www.evaluesevrve.com
Findings
During the preparation of my report I have analyzed many things which are following: A number of people in India feel that financial institution are not only conservatives but they also have a bias for foreign technology & they do not trust on the abilities of entrepreneurs.
Some venture fails due to few exit options. Teams are ignorant of international standards. The team usually a two or three man team. It does not possess the required depth In top management. The team is often found to have technical skills but does not possess the overall organization building skills team is often short sited.
Venture capitalists in India consider the entrepreneurs integrity &urge to grow as the most critical aspect or venture evaluation.
Limitations of Study
1. The biggest limitation was time because the time was not sufficient as there was lot of information to be got & to have it interpretation 2. The data required was secondary & that was not easily available. 3. Study by its nature is suggestive & not conclusive 4. Expenses were high in collecting & searching the data.
Suggestions
1. The investment should be in turnaround stage. Since there are many sick industries in India and the number is growing each year, the venture capitalists that have specialized knowledge in management can help sick industries. It would also be highly profitable if the venture capitalist replace management either good ones in the sick industries. 2. It is recommended that the venture capitalists should retain their basic feature that is tasking high risk. The present situation may compel venture capitalists to opt for less risky opportunities but is against the spirit of venture capitalism. The established fact is big gains are possible in high risk projects. 3. There should be a greater role for the venture capitalists in the promotion of entrepreneurship. The Venture capitalists should promote entrepreneur forums, clubs and institutions of learning to enhance the quality of entrepreneurship.
Bibliography
1.
JOURNALS
APPLIED FINANCE VENTURE STAGE INVESTMENT PREFERENCE IN INDIA, VINAY KUMAR, MAY, 2004. ICFAI JOURNAL OF APPLIED FINANCE MAY- JUNE VIKALPA VOLULMLE 28, APRI L- JUNE 2003 ICFAI JOURNAL OF APPLIED FINANCE, JULY- AUG.
2. BOOKS
I.M. Panday- venture capital development process in India I. M. Panday- venture capital the Indian experience,
www.vcapital.com
www.investopedia.com
www.vcinstitute.com
ANNEXURE I
Venture capital firms
Examples of venture capital firms include:
Accede Partners Austin Ventures Atlas Venture Battery Ventures Benchmark Capital Charles River Ventures Doughty Hanson Technology Ventures Fidelity Ventures Health Cap Hummer Wimbled Insight Venture Partners Mobius Venture Capital Mohr Davidow Ventures Sevin Rosen Funds
ANNEXURE II
Some important Venture Capital Funds in India 1. APIDC Venture Capital Limited, , Babukhan Estate, Hyderabad 500 001 2. Canbank Venture Capital Fund Limited, IInd Floor, Kareem Towers, Bangalore. 3. Gujarat Venture Capital Fund 1997, Ashram Road, Ahmedabad 380 009 4. Industrial Venture Capital Limited, Thyagaraya Road, Chennai 600 017 5. Gujarat Venture Capital Fund 1995 Ashram Road Ahmedabad 380 009 6. Karnataka Information Technology Venture Capital Fund Cunningham Rd Bangalore 7. India Auto Ancillary Fund Nariman Point, Mumbai 400 021 8. Information Technology Fund, Nariman Point, Mumbai 400021 9. Tamilnadu InfoTech Fund Nariman Point, Mumbai 400021 10. Orissa Venture Capital Fund Nariman Point Mumbai 400021 11. Uttar Pradesh Venture Capital Fund Nariman Point, Mumbai 400021 12. SICOM Venture Capital Fund Nariman Point Mumbai 400 021
Conclusion
Venture capital can play a more innovation and development role in a developing country like India. It could help the rehabilitation of sick unit through people with ideas and turnaround management skill. A large number of small enterprises in India because sick unit even before the commencement of production of production. Venture capitalist could also be in line with the developments taking place in their parent companies. Yet another area where can play a significant role in developing countries is the service sector including tourism, publishing, healthcare etc. they could also provide financial assistance to people coming out of the universities, technical institutes etc. who wish to start their own venture with or without high-tech content, but involving high risk. This would encourage the entrepreneurial spirit. It is not only initial funding which is need from the venture capitalists, but the should also simultaneously provide management and marketing expertise-a real critical aspect of venture capitalists, but they also simultaneously provide management and marketing expertise-a real critical aspect of venture capital in developing countries. Which can improve their effectiveness by setting up venture capital cell in R&D and other scientific generation, providing syndicated or consortium financing and acing as business incubators.