INDEX

Sr. No.
1.
2.
3.
4.

Particular

Title Page
Certificate, Acknowledgement, Declaration, Preface
Company Profile

5.

Significance of Study
6.
7.

Objective of Study
Research Methodology
Literature Review

Conceptual Framework

Operational Definition
8.

Analysis & Interpretation

9.

Findings
10.

Suggestions
11.

Conclusion
12.

Limitation
13.

Bibliographies
14.

Annexure

PROJECT REPORT
ON

VENTURE CAPITAL IN INDIA AND ITS

ASPECTS
AT

VIBE TECH
Submitted for the partial fulfilment of requirement for the degree
of Bachelor in business administration

SUBMITTED TO:PUNJABI UNIVERSITY,PATIALA

MR. ROHIT ARORA
LEC, DBIMCS, M.G.G

SUBMITTED BY:GURIQBALSINGH SANDHU

BBA FINAL YEAR

(2011-2014)

DESH BHAGAT INSTITUTE OF MANAGEMENT AND

COMPUTER SCIENCE, MANDI GOBINDGARH

Acknowledgement
No Learning is proper and effective without
Proper Guidance
It gives me great pleasure to submit this project to Punjabi university Patiala. I take
this opportunity with great pleasure to present before this project on Venture
Capital In India and Its Aspects which is result of co-operation, hard work and
good wishes of many people. The most pleasant part of any project is to express the
gratitude towards all those who have contributed to the success of the project.
I would like to thanks Mr. Preet Kanwal Singh who has been my mentor for this
project. It was only through her excellence assistance and good suggestions that I
have able to complete this project.
I am deeply grateful to Prof. Rohit Arora, faculty (Department of Business
Management ), for their everlasting support and guidance on the ground of which I
have acquired a new field of knowledge. The course structure created for this
curriculum has benefited with the inclusion of recent development in the
organizational and managerial aspects.
Above all I would like to thank all contacted persons of firm who took out valuable
time to answer my queries and gave me full information related to my project.
I extent my sincere gratitude toward my parents, who have always encouraged me and
gave suggestions as how to work on project. They always stand by me in solving all
my queries. Their support has always motivated me.

DECLARATION

I am Guriqbal Singh Sandhu of BBA- final year, hereby declare that I have completed
a project on Venture Capital In India and Its Aspects in the Academic year 20132014. The information submitted is true and original to the best of my knowledge.

Signature of the Student

__________________

PREFACE
In todays era of cut-throat competition, Bachelor of Business Administration (B.B.A)
is sure to have an edge over their counterparts BBA education brings its students in
direct contact with the real corporate world through industrial training. The BBA
program provides its students with an in depth study of various managerial activities
that are performed in any organization. A detailed analysis of managerial activities
conducted in various departments like production, marketing, finance, human
resources, export-imports, credit dept, etc. gives the student a conceptual idea of what
they are expected to manage , how to manage and how to obtain the maximum output
through minimum inputs and how to minimize the wastage of resources.
I have undergone my comprehensive training at VIBE TECH . It is one of the leading
IT educational centers in the country. I feel great pleasure to present this report work
after my training at VIBE TECH that produced to be golden opportunity for me by
enriching my knowledge by comparing my theoretical knowledge with the managerial
skill and application.

Company Profile
Vibe Internet Solutions Pvt. Ltd. has today become a name to reckon with in the
sphere of high performance enterprise applications. The credit for our phenomenal
growth in past two years from starting out as a web solutions company to a complete
business solutions company specializing in enterprise applications (custom-fromscratch ERP solutions) today, goes to our result oriented focused approach, a high
level of stress on quality and ethical business practices we follow.
Our simple principle is - We take the stress, you take the success. Following this
principle, we have always ensured that the applications we develop actually WORK
for our clients. Being a company which is at the steepest point in its growth curve and
still working out its first few chasms we go out of our way to ensure that our
applications deliver not only the promised but more, besides providing an extremely
responsive and interactive dealing during the product development life cycle. All of
our clients would also vouch for the high quality documentation, training, support and
maintenance provided after the application has been rolled out. All this results into
what we continuously endeavor to achieve - The highest level of client satisfaction.
We DO NOT work as a mere development company, but as an IT Business
Development organization. We work through with our client to understand his
complete business model. Then our team of experts works out every intensive and
expansive details regarding how the client business can be taken to the next leap using
IT. We then devise a complete solution plan for the client, which upon agreement is
implemented in-house. We do not believe in outsourcing our development work. After
the successful deployment of the solution, project does not end there. We ensure that
we provide continuous support and consultancy to the client and keep on tracking
how the devised solution is benefiting the client. We understand that the solutions
developed by us for a client are like an infrastructure for his business, so it has to be
always taken care of. This complete cycle is divided into many phases ranging from
Planning and Concept Building to Development to Continuous Support and
Consultancy.
To ensure that we provide the best combination of quality, performance and
affordability, we have a large talent pool comprising experts from diverse areas of

technology and management. Be it a wide range of web technologies or the cutting

edge desktop technologies; if business needs it, we can do it.
We take pride in the fact that keeping pace with the rapid development in the world of
technology, we have achieved the distinction of being among the very few in the
region who have developed applications using cutting edge technologies like .NET
framework 3.0 and 3.5, CAB, SCSF, WMI based enterprise services, WCF and WPF
using silverlight and other application blocks released by Microsoft practices and
patterns group in 2007. Besides these, we hold ample experience and hence, a high
level of expertise in PHP, ASP, ASP.NET, AJAX, Anthem Library, SQL, Oracle, Flash
etc. We have also acquired expertise in technologies like SharePoint and Cloud
Hosting. Along with development, we have also been providing web hosting solutions
(shared as well as dedicated) to our clients.
Thriving on this strong and versatile skill set, we have provided expert custom
solutions to a diverse range of enterprises. Our clientele includes names like

HT Media Entertainment Pvt. Ltd.

Maxpro Networking Pvt. Ltd.
TimeRack Corporation, USA
EzBoxx Ltd., Ireland
The Scottish Amateur Football Association, Scotland
New Engineering, Scotland
Kwality Walls Group, India
The British United Provident Association, England (A veteran global

healthcare organization)
ITVoir.com, India (ADG Online Solutions Pvt. Ltd.)
The range of work is as follow:

Custom Business ERP software

Web Hosting
Share Point Solutions
E-Commerce Portals (news portals to shopping carts)
SEO/SEM
Revenue Generation Assistance
Corporate websites

What is Venture Capital???

The venture capital investment helps for the growth of innovative entrepreneurships
in India. Venture capital has developed as a result of the need to provide non-

conventional, risky finance to new ventures based on innovative entrepreneurship.

Venture capital is an investment in the form of equity, quasi-equity and sometimes
debt - straight or conditional, made in new or untried concepts, promoted by a
technically or professionally qualified entrepreneur. Venture capital means risk
capital. It refers to capital investment, both equity and debt, which carries substantial
risk and uncertainties. The risk envisaged may be very high may be so high as to
result in total loss or very less so as to result in high gains

The concept of Venture Capital

Venture capital means many things to many people. It is in fact nearly impossible to
come across one single definition of the concept.
Jane Koloski Morris, editor of the well known industry publication, Venture
Economics, defines venture capital as 'providing seed, start-up and first stage
financing' and also 'funding the expansion of companies that have already
demonstrated their business potential but do not yet have access to the public
securities market or to credit oriented institutional funding sources.
The European Venture Capital Association describes it as risk finance for
entrepreneurial growth oriented companies. It is investment for the medium or long
term return seeking to maximize medium or long term for both parties. It is a
partnership with the entrepreneur in which the investor can add value to the company
because of his knowledge, experience and contact base.
Meaning of venture capital:
Venture capital is money provided by professionals who invest alongside management
in young, rapidly growing companies that have the potential to develop into
significant economic contributors. Venture capital is an important source of equity for
start-up companies.
Professionally managed venture capital firms generally are private partnerships or
closely-held corporations funded by private and public pension funds, endowment
funds, foundations, corporations, wealthy individuals, foreign investors, and the
venture capitalists themselves.
Venture capitalists generally:

Finance new and rapidly growing companies

Purchase equity securities

Assist in the development of new products or services

Add value to the company through active participation

Take higher risks with the expectation of higher rewards

Have a long-term orientation

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

Private Equity Investing

Venture capital investing has grown from a small investment pool in the 1960s and
early 1970s to a mainstream asset class that is a viable and significant part of the
institutional and corporate investment portfolio. Recently, some investors have been
referring to venture investing and buyout investing as "private equity investing." This
term can be confusing because some in the investment industry use the term "private
equity" to refer only to buyout fund investing. In any case, an institutional investor
will allocate 2% to 3% of their institutional portfolio for investment in alternative
assets such as private equity or venture capital as part of their overall asset allocation.
Currently, over 50% of investments in venture capital/private equity comes from
institutional public and private pension funds, with the balance coming from
endowments, foundations, insurance companies, banks, individuals and other entities
who seek to diversify their portfolio with this investment class.

What is a Venture Capitalist?

The typical person-on-the-street depiction of a venture capitalist is that of a wealthy
financier who wants to fund start-up companies. The perception is that a person who
develops a brand new change-the-world invention needs capital; thus, if they cant get
capital from a bank or from their own pockets, they enlist the help of a venture
capitalist.
In truth, venture capital and private equity firms are pools of capital, typically
organized as a limited partnership that invests in companies that represent the
opportunity for a high rate of return within five to seven years. The venture capitalist
may look at several hundred investment opportunities before investing in only a few
selected companies with favorable investment opportunities. Far from being simply
passive financiers, venture capitalists foster growth in companies through their
involvement in the management, strategic marketing and planning of their investee
companies. They are entrepreneurs first and financiers second.
Even individuals may be venture capitalists. In the early days of venture capital
investment, in the 1950s and 1960s, individual investors were the archetypal venture

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.

Factor to be considered by venture capitalist in

selection of investment proposal
There are basically four key elements in financing of ventures which are studied in
depth

by

the

venture

capitalists.

These

are:

1. Management: The strength, expertise & unity of the key people on the board bring
significant credibility to the company. The members are to be mature, experienced
possessing working knowledge of business and capable of taking potentially high
risks.
2. Potential for Capital Gain: An above average rate of return of about 30 - 40% is
required by venture capitalists. The rate of return also depends upon the stage of the
business cycle where funds are being deployed. Earlier the stage, higher is the risk
and hence the return.
3. Realistic Financial Requirement and Projections: The venture capitalist requires
a realistic view about the present health of the organization as well as future
projections regarding scope, nature and performance of the company in terms of scale
of operations, operating profit and further costs related to product development
through Research & Development.
4. Owner's Financial Stake: The financial resources owned & committed by the
entrepreneur/ owner in the business including the funds invested by family, friends
and relatives play a very important role in increasing the viability of the business. It is
an important avenue where the venture capitalist keeps an open eye.

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.

Venture Capital in INDIA

Venture capital was introduced in India in mid eighties by All India Financial
Institutions with the inauguration of Risk Capital Foundation (RCF) sponsored by
IFCI with a view to encourage the technologists and the professional to promote new
industries. Consequently the government of India promoted the venture capital during
1986-87 by creating a venture capital fund in the context of structural development
and growth of small-scale business enterprises. Since then several venture capital
firms/funds (VCFs) are incorporated by Financial Institutions (FIs), Public Sector
Banks (PSBs), and Private Banks and Private Financial companies.
The Indian Venture Capital Industry (IVCI) is just about a decade old industry
as compared to that in Europe and US. In this short span it has nurtured close to one
thousand ventures, mostly in SME segment and has supported building
technocrat/professionals all through. The VC industry, through its investment in high
growth companies as well as companies adopting newer technologies backed by first
generation entrepreneurs, has made a substantial contribution to economy. In India,
however, the potential of venture capital investments is yet to be fully realized. There
are around thirty venture capital funds, which have garnered over Rs. 5000 Crores.
The venture capital investments in India at Rs. 1000.05 crore as in 1997, representing
0.1 percent of GDP, as compared to 5.5 per cent in countries such as Hong Kong.

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.

Stages of Venture Capital Funding

The Venture Capital funding varies across the different stages of growth of a firm. The
various stages are:

:
1. Pre seed Stage: Here, a relatively small amount of capital is provided to an
entrepreneur to conceive and market a potential idea having good future prospects.
The funded work also involves product development to some extent.

2. Seed Stage: Financing is provided to complete product development and

commence initial marketing formalities.

3. Early Stage / First Stage: Finance is provided to companies to initiate

commercial manufacturing and sales.

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.

5. Third Stage: Funds provided for major expansion of a company having

increasing sales volume. This stage is met when the firm crosses the break even point.

6. Bridge / Mezzanine Financing or Later Stage Financing: Bridge /

Mezzanine Financing or Later Stage Financing is financing a company just before its
IPO (Initial Public Offer). Often, bridge finance is structured so that it can be repaid,
from the proceeds of a public offering.

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.

Venture Capital Fund Operation

Venture capitalists are very selective in deciding what to invest in. A common figure
is that they invest only in about one in four hundred ventures presented to them.
They are only interested in ventures with high growth potential. Only ventures with
high growth potential are capable of providing the return that venture capitalists
expect, and structure their businesses to expect. Because many businesses cannot
create the growth required having an exit event within the required timeframe, venture
capital is not suitable for everyone.
Venture capitalists usually expect to be able to assign personnel to key management
positions and also to obtain one or more seats on the company's board of directors.
This is to put people in place, a phrase that has sometimes quite unfortunate
implications as it was used in many accounting scandals to refer to a strategy of
placing incompetent or easily bypassed individuals in positions of due diligence and
formal legal responsibility, enabling others to rob stockholders blind. Only a tiny
portion of venture capitalists, however, have been found liable in the large scale
frauds that rocked American (mostly) finance in 2000 and 2001.
Venture capitalists expect to be able to sell their stock, warrants, options, convertibles,
or other forms of equity in three to ten years: this is referred to as harvesting. Venture
capitalists know that not all their investments will pay-off. The failure rate of
investments can be high; anywhere from 20% to 90% of the enterprises funded fail to
return the invested capital.
Many venture capitalists try to mitigate this problem through diversification. They
invest in companies in different industries and different countries so that the
systematic risk of their total portfolio is reduced. Others concentrate their investments
in the industry that they are familiar with. In either case, they work on the assumption
that for every ten investments they make, two will be failures, two will be successful,
and six will be marginally successful. They expect that the two successes will pay for
the time given to, and risk exposure of the other eight. In good times, the funds that do
succeed may offer returns of 300 to 1000% to investors.

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 of the Study

When we are going to study something there is specific purpose for our study. It may
be for our course, as hobby, for passing our time, to find out genuine solution for any
problem or to draw out certain inferences out of the available data. The objectives of
my study are:
To find out the venture capital investment volume in India.
To study the problem faced by venture capitalist in India.
To study the future prospects of venture capital financing

Objective No. 1

To Find out the venture capital investment

volume in India
Methods of Financing

Instruments

Rs million

Per cent

Equity Shares

6,318.12

63.18

Redeemable Preference Shares

2,154.46

21.54

Non Convertible Debt

873.01

8.73

Convertible Instruments

580.02

5.8

Other Instruments

75.85

0.75

Total

10,000.46

100

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

Rs. mn

Per cent

Foreign Institutional Investors

13,426.47

52.46%

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

25,595.17

100.00%

Interpretation: This table shows the highest contribution of fund FII and secondly
AIFI to develop the Industry.

Financing By Investment Stage

Investment Stages

Rs million

Number

Start-up

3,813.00

297

Later stage

3,338.99

154

Other early stage

1,825.77

124

Seed stage

963.2

107

Turnaround financing

59.5

Total

10,000.46

691

Interpretation: This diagram shows the highest finance is received by the venture
in startup stage of any venture.

Financing By Industry

Industry

Rs million

Industrial products, machinery

2,599.32

Computer Software

1,832

Consumer Related

1,412.74

Medical

623.8

Food, food processing

500.06

Other electronics

436.54

Tel & Data Communications

385.09

Biotechnology

376.46

Energy related

249.56

Computer Hardware

203.36

Miscellaneous

1,380.85

Total

10,000.46

Interpretation: In this diagram highest finance received by industrial products and

machinery and secondly finance received by computer software.

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

Bihar

16

Overseas

413

Total

9994
Source IVCA (2005-06)

Interpretation: In this diagram highest finance given by the Maharashtra to the

ventures to promote the state economy growth.

Assessing Venture Capital

Venture funds, both domestic and offshore, have been around in India for some years
now. However it is only in the past 12 to 18 months, they have come into the
limelight. The rejection ratio is very high, about 10 in 100 get beyond pre evaluation
stage, and 1 gets funded.
Venture capital funds are broadly of two kinds - generalists or specialists. It is critical
for the company to access the right type of fund, ie who can add value. This backing
is invaluable as focused/specialized funds open doors, assist in future rounds and help
in strategy. Hence, it is important to choose the right venture capitalist.
The standard parameters used by venture capitalists are very similar to any investment
decision. The only difference being exit. If one buys a listed security, one can exit at a
price but with an unlisted security, exit becomes difficult. The key factors which they
look for in

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.

Financing Options in General

The possibility of raising a substantial part of project finances in India through both
equity and debt instruments are among the key advantages of investing in India.

The Indian banking system has shown remarkable growth over the last two decades.
The rapid growth and increasing complexity of the financial markets, especially the
capital market have brought about measures for further development and
improvement in the working of these markets. Banks and development financial
institutions led by ICICI, IDBI and IFCI were providers of term loans for funding
projects. The options were limited to conventional businesses, i.e. manufacturing
centric. Services sector was ignored because of the "collateral" issue.
Equity was raised from the capital markets using the IPO route. The bull markets of
the 90s, fuelled by Harshad Mehta and the FIIs, ensured that (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

According To Kumar, (June 2003)

This study focus on the industry should concentrate more on early stage business
opportunities instead of later stage. It is the experience world over and especially in
the United States of America that the early stage opportunities have generated
exceptional returns for the industry. He also suggests that individual capitalists should
follow a focused investment strategy. The specialization should be in a board
technology segment.

According to Kumar and Kaura, (March 2006)

The present study reports four factors which are used by the venture capitalist to
screen new venture proposals. Using Kendalls tau-c analysis, the study brings out
strong association between several variable pair. Broadly, the analysis finds that:

Successful venture teams put in sustained efforts o identified target markets.

They are highly meticulous while attending to the details.

These teams are adept at dealing with risk because of their impeccable past
experience.

Indian venture capitalists do not seem to be much enamored of technology

venturing; at least some of the successful funded by them do not seem to
show signs of being hi- tech.

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 Kumar, (May 2004)

The Indian Venture Capital Industry has followed the classical model of venture
capital finance. The early stage financing which includes seeds, startup & early stage
investment was always the major part of the total investment. Whenever venture
capitalists invest in venture certain basic preference play a crucial role in investment
decision. Two such considerations are location preferences and ownership
preferences. Seed stage finance is provided to new companies for the use in product
development & initial marketing company may be in the process of setting up the
business or may be in the business for short period but have not reach the stage of
commercialization.

According to Kumar, (March, 2004)

The industry should concentrate more an early stage business opportunities instead of
later stage. It is the experience world over and especially in the United states of
America that the early stage opportunities have generated exceptional for the industry.
It is recommended that the venture capitalists should retain their basic feature that
taking retain their basic feature that is taking high risk. The present situation may
compel venture capitalists to opt for less risky opportunities but it is against the sprit
of venture capitalism. The established fact is big gains are possible in high risk
projects.

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.

According to Vijayalakshman & Dalvi, ((Jan., 2006)

Whenever Indian policy makers have to encourage any industry. The usual practice is
to grant that the industry tax breaks for a limited period. This definitely acts as a
positive incentive for that industry. However, what is required is a through
understanding of the industry requirement framing and implementation of aggregative
strategy for its development. VC funds are not even registered with SEBI in spite of
all the benefit available. VC industry is one, which will today prepare a base for a
strong tomorrow. What is need for the development of VC industry is not only tax
breaks but simpler procedures legislation for simplified exit form investment, more
transparency and legal backing to participate in business amongst other things.

According to Kumar, (July, 2005)

One of the integral aspects of venture funding is venture capitalist's involvement with
the entrepreneurial team. The relationship through broad interaction was explored by
Rosenstein (1988). A comparison was drawn between small and large firms with
regard to board interaction. While it is important in large firms the relative power of
small conventional firms, board interaction generally is undermined. Rosenstein et. a.
(1993) studied the finer aspects of boards in the venture funded companies in the
USA. From 98 candidates in the sample, the study attempted to bring out the changes
in the board size, board composition and control and their relation to value added to
the funded unit. The empirical analysis yielded results wherein the size of the board
increased after venture funding, indicating more transparency in board operations.
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.

According to Robbie, (1997)

Robbies, et. al. (1997) highlights the monitoring policies of funded units by venture
capitalists and studies the performance targets, monitoring information, and
monitoring actions through a questionnaire-based survey. The survey was
administered to 108 British Venture Capital Association members and total of 77
responses were gathered in the study. The findings related to performance targets and
other monitoring issues were considerable addition to the literature in the subject.
The issues concerning board of directors' role in venture backed companies are
widely debated topics in academic research. The findings of the study by Fried et. al.
(1998) emphasize that the board of directors are a more involved in the venturebacked firms than boards where members do not have large ownership at stake. The
study provides an empirical evidence of variation in the boards' involvement and
shows its relevance in performance management of funded units.

According to Mishra, (July 2004)

There is abundant empirical research conducted in developed countries which address
the relative investment evaluation criteria taken into account in the screening process
for new venture investment proposals. Zopunidis (1994) provides a useful summary
of the previous research in this field. The identification of selection criteria has been
researched using different methodologies such as simple rating of criteria (perpetual
and deal specific responses) Knight, 1986; Dixon, 1991; Hall and Hofer, 1993; Rah,
Jung and Lee, 1994), construct analysis (Fried and Hisrich, 1994), verbal protocols
(Zhacharakis and Meyer, 1998), and quantitative compensatory models (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.

Conceptual Frame Work

The Venture Capital Process
The Venture Capital Investment Process:
The venture capital activity is a sequential process involving the following six steps.
1. Deal origination
2. Screening
3. Due diligence Evaluation
4. Deal structuring
5. Post-investment activity
6. Exit

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
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

Issues

Loan

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

exercise price, expiry period

Common shares

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

To study the problems faced by venture

capitalist in India.
Problems of Venture Capital in Indian Context
One can ask why venture funding is so successful in USA and faced a number of
problems in India. The biggest problem was a mindset change from "collateral
funding" to high risk high return funding. Most of the pioneers in the industry were
people with credit background and exposure to manufacturing industries. Exposure to
fast growing intellectual property business and services sector was almost zero.
Moreover VCF is in its nascent stages in India. The emerging scenario of global
competitiveness has put an immense pressure on the industrial sector to improve the
quality level with minimization of cost of products by making use of latest
technological skills. The implication is to obtain adequate financing along with the
necessary hi-tech equipments to produce an innovative product which can succeed
and grow in the present market condition. Unfortunately, our country lacks on both
fronts. The necessary capital can be obtained from the venture capital firms who
expect an above average rate of return on the investment. The financing firms expect
a sound, experienced, mature and capable management team of the company being
financed. Since the innovative project involves a higher risk, there is an expectation of
higher returns from the project. The payback period is also generally high (5 - 7
years). The other issues that led to such a situation include:

License Raj and The IPO Boom

Till early 90s, under the license raj regime, only commodity centric businesses thrived
in a deficit situation. To fund a cement plant, venture capital is not needed. What was
needed was ability to get a license and then get the project funded by the banks and
DFIs. In most cases, the promoters were well-established industrial houses, with no
apparent need for funds. Most of these entities were capable of 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.

Returns, Taxes and Regulations

There is a multiplicity of regulators like SEBI and RBI. Domestic venture funds are
set up under the Indian Trusts Act of 1882 as per SEBI guidelines, while offshore
funds routed through Mauritius follow RBI guidelines. Abroad, such funds are made
under the Limited Partnership Act, which brings advantages in terms of taxation. The
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

To study the future prospect of Venture

Capital Financing.
Prospects of Venture Capital Financing
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. While only eight
domestic venture capital funds were registered with SEBI during 1996-1998, 14 funds
have already been registered in 1999-2000. Institutional interest is growing and
foreign venture investments are also on the rise. Many state governments have also set
up venture capital funds for the IT sector in partnership with the local state financial
institutions and SIDBI. These include Andhra Paradesh, Karnataka, Delhi, Kerala and
Tamil

Nadu.

The

other

states

are

to

follow

soon.

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.
A Bangalore based media company, Gray cell Ltd., has recently obtained VC
investment totaling about $ 1.7 mn. The company would be creating and marketing
branded web based consumer products in the near future.
The following points can be considered as the harbingers of VC financing in India:a. Existence of a globally competitive high technology.
b. Globally competitive human resource capital.
c. Second Largest English speaking, scientific & technical manpower in the
world.

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.

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,

3. VARIOUS NEWS PAPERS

4. INTERNET

www.indiainfoline.com

www.vcapital.com

www.investopedia.com

www.vcinstitute.com

ANNEXURE
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

Sequoia Capital

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.