INTRODUCTIONVenture capital (VC) is financial capital provided to early-stage, high-potential, high risk,

growth startup companies. The venture capital fund makes money by owning equity in the
companies it invests in, which usually have a novel technology or business model in high
technology industries, such as biotechnology, IT, software, etc. The typical venture capital
investment occurs after the seed funding round as growth funding round (also referred to
as Series A round) in the interest of generating a return through an eventual realization
event, such as an IPO or trade sale of the company. Venture capital is a subset of private
equity. Therefore, all venture capital is private equity, but not all private equity is venture
capital.
In addition to angel investing and other seed funding options, venture capital is attractive
for new companies with limited operating history that are too small to raise capital in the
public markets and have not reached the point where they are able to secure a bank loan
or complete a debt offering. In exchange for the high risk that venture capitalists assume by
investing in smaller and less mature companies, venture capitalists usually get significant
control over company decisions, in addition to a significant portion of the company's
ownership (and consequently value).
Venture capital is also associated with job creation (accounting for 2% of US GDP), the
knowledge economy, and used as a proxy measure of innovation within an economic
sector or geography. Every year, there are nearly 2 million businesses created in the USA,
and 600800 get venture capital funding. According to the National Venture Capital
Association, 11% of private sector jobs come from venture backed companies and venture
backed revenue accounts for 21% of US GDP.

Evolution of VC Industry in India

The first major analysis on risk capital for India was reported in 1983. It indicated that new
companies often confront serious barriers to entry into capital market for raising equity
finance which undermines their future prospects of expansion and diversification. It also
indicated that on the whole there is a need to revive the equity cult among the masses by
ensuring competitive return on equity investment. This brought out the institutional
inadequacies with respect to the evolution of venture capital. In India, the Industrial finance
Corporation of India (IFCI) initiated the idea of VC when it established the Risk Capital
Foundation in 1975 to provide seed capital to small and risky projects. However the
concept of VC financing got statutory recognition for the first time in the fiscal budget for
the year 1986-87.The Venture Capital companies operating at present can be divided
into four groups:

Promoted by All India Development Financial Institutions

Promoted by State Level Financial Institutions
Promoted by Commercial banks
Private venture Capitalists.

Promoted by all India development financial institutions

The IDBI started a VC fund in 19876 as per the long term fiscal policy of government
of India, with an initial capital of Rs. 10 Cr which raised by imposing access of 5% on
all payments made for the import of technology know- how projects requiring funds
fromrs.5 Lakhs to Rs 2.5 Cr were considered for financing. Promoters contribution ranged
from this fund was available at a concessional interest rate of 9% (during gestation period)
which could be increased at later stages. The ICICI provided the required impetus to VC
activities in India 1986, it started providing VC finance in 1998 it promoted, along with the
Unit Trust of India (UTI) Technology Development and Information Company of India
(TDICI) as the first VC company registered under the companies act, 1956. The TDICI may
provide financial assistance to venture capital undertakings which are set up by technocrat

entrepreneurs, or technology information and guidance services. The risk capital

foundation established by the industrial finance corporation of India (IFCI) in 1975, was
converted in 1988 into the Risk Capital and Technology Finance company (RCTC) as a
subsidiary company of the IFCI the RCTC provides assistance in the form of conventional
loans, interest free conditional loans on profit and risk sharing basis or equity participation
in extends financial support to high technology projects for technological up gradations.
The RCTC has been renamed as IFCI Venture Capital Funds Ltd. (IVCF)

Promoted by State Level Financial Institutions

In India, the State Level financial institutions in some states such as Madhya Pradesh,
Gujarat, Uttar Pradesh, etc., have done an excellent job and have provided VC to a small
scale enterprises. Several successful entrepreneurs have been the beneficiaries of the
liberal funding environment. In 1990, the Gujarat Industrial Investment Corporation,
56 promoted the Gujarat Venture Financial Ltd.(GVFL) along with other promoters such as
the IDBI, the World Bank, etc. The GVFL provides financial assistance to businesses in the
form of equity, conditional loans or income notes for technologies development and
innovative products. It also provides finance assistance to entrepreneurs. The government
of Andhra Pradesh has also promoted the Andhra Pradesh Industrial Development
Corporation (APIDC) venture capital ltd. To provide VC financing in Andhra Pradesh.

Promoted by commercial banks

3

Can bank Venture Capital Fund, State Bank Venture Capital Fund and Grind lays
bank Venture Capital Fund have been set up by the respective commercial banks to
undertake VC activities. The State Bank Venture Capital Funds provides financial
assistance for bought out deal as well as new companies in the form of equity which it
disinvests after the commercialization of the project. Can bank Venture Capital Fund
provides financial assistance for proven but yet to be commercially exploited technologies.
It provides assistance both in the form of equity and conditional loans.

Private Venture Capital Funds

Several private sector venture capital funds have been established in India such as the 20
The Can Venture Capital Company, Indus Venture Capital Fund, Infrastructure Leasing and
Financial Services Ltd .Some of the companies that have received funding through this
route include:

Mastek, on of the oldest soft warehouse in India

Rusk an software, Pune based software consultancy
SQL Star, Hyderabad-based training and software development consultancy
Satyam info way, the first private ISP in India
Hindi tron, makers of embedded software
Select, provider of interactive software selection
Yantra, ITL Infosys US subsidiary, solution for supply chain management
Rediff on the Net, Indian website featuring electronic shopping, news, chat etc.

Phase I
-Formation of TDICI in the 80s and regional funds as GVFL & APIDC in the early 90s.The
first origins of modern venture capital in India can be traced to the setting up of a
4

Technology Development Fund in the year 1987-88, through the levy of access on all
technology import payments. Technology Development Fund was started to provide
financial support to innovative and high risk technological programmes through the
Industrial Development Bank of India. The first phase was the initial phase in which the
concept of VC got wider acceptance. The first period did not really experience any
substantial growth of VCs. The 1980swere marked by an increasing disillusionment with
the trajectory of the economic system and a belief that liberalization was needed. The
liberalization process started in 1985 in a limited way. The concept of venture capital
received official recognition in 1988 with the announcement of the venture capital
guidelines. During 1988 to 1992 about 9 venture capital institutions came up in India.
Though the venture capital funds should operate as open entities, Government of India
controlled them rigidly. One of the major forces that induced Government of India to start
venture funding was the World Bank. The initial funding has been provided by World Bank.
The most important feature of the 1988 rules was that venture capital funds received the
benefit of a relatively low capital gains tax rate which was lower than the corporate rate.
The 1988 guidelines stipulated that VC funding firms should meet the following criteria:
Introduction growthTechnology involved should be new, relatively untried, very closely held, in the process of
being taken from pilot to commercial stage or incorporate some significant improvement
over the existing ones in India Promoters / entrepreneurs using the technology should be
relatively new, professionally or technically qualified, with inadequate resources to finance
the project. Between 1988 and 1994 about 11 VC funds became operational either through
reorganizing the businesses or through new entities. All these followed the Government of
India guidelines for venture capital activities and have primarily supported technology
oriented innovative businesses started by first generation entrepreneurs. Most of these
were operated more like a financing operation. The main feature of this phase was that the
concept got accepted. VCs became operational in India before the liberalization process
started. The context was not fully ripe for the growth of VCs. Till 1995; the VCs operated
like any bank but provided funds without collateral. The first stage of the venture capital
industry in India was plagued by in experienced management, mandates to invest in
5

certain states and sectors and general regulatory problems. Many public issues by small
and medium companies have shown that the Indian investor is becoming increasingly wary
of investing in the projects of new and unknown promoters. The liberation of the economy
and toning up of the capital market changed the economic landscape. The decisions
relating to issue of stocks and shares was handled by an office namely: Controller of
Capital Issues (CCI). According to 1988 VC guideline, any organization requiring to start
venture funds have to forward an application to CCI. Subsequent to the liberalization of the
economy in 1991, the office of CCI was abolished in May 1992 and the powers were
vested in Securities and Exchange Board of India. The Securities and Exchange Board of
India Act, 1992 empowers SEBI under section 11(2) thereof to register and regulate the
working of venture capital funds. This was done in1996, through a government notification.
The power to control venture funds has been given to SEBI only in 1995 and the
notification came out in 1996. Till this time, venture funds were dominated by Indian firms.
The new regulations became the harbinger of the second phase of the VC growth.

Phase II
Entry of Foreign Venture Capital funds (VCF) between 1995 -1999 The second phases of
VC growth attracted many foreign institutional investors. During this period overseas and
private domestic venture capitalists began investing in VCF. The new regulations in 1996
helped in this. Though the changes proposed in 1996 had a salutary effect, the
development of venture capital continued to be inhibited because of the regulatory regime
and restricted the FDI environment. To facilitate the growth of venture funds, SEBI
appointed a committee to recommend the changes needed in the VC funding context. This
coincided with the IT boom as well as the success of Silicon Valley start ups.

Phase III
(2000 onwards) - VC becomes risk averse and activity declines:

Not surprisingly, the investing in India came crashing down when NASDAQ lost 60%of its
value during the second quarter of 2000 and other public markets (including those in India)
also declined substantially. Consequently, during 2001-2003, the VCs started investing less
money and in more mature companies in an effort to minimize the risks. This decline
broadly continued until 2003.

Phase IV
2004 onwards - Global VCs firms actively investing in India Since Indias economy has
been growing at 7%-8% a year, and since some sectors, including the services sector and
the high-end manufacturing sector, have been growing at 12%-14% a year, investors
renewed their interest and started investing again in 2004.The number of deals and the
total dollars invested in India has been increasing substantially

GLOBAL TREND IN VENTURE CAPITAL INDUSTRY.

The 2007 Global Venture Capital Survey was sponsored by Deloitte &Touch LLP in
conjunction with the National Venture Capital Association and other venture capital
associations* throughout the world. It was administered in April and May 2007 to venture
capitalists (VCs) in the Americas, Asia Pacific, Europe, the Middle East, and Africa. There
were 528 responses from general partners, with 45 percent of respondents from the United
States and 31 percent from Europe.

Investing globally by investing locally.

One way to build a comfort zone for global investing and to take advantage of opportunities
abroad is to invest locally in companies with operations outside their home country, as

opposed to investing directly in foreign countries. This year, there was a significant
increase in the number of respondents who indicated that a sizeable number of their
portfolio companies have a considerable amount of operations outside the country in which
theyre head quartered. A significant number, 88 percent of U.S. respondents and 82
percent of non-U.S .respondents, indicated that at least some portion of their portfolio has
significant operations outside of the country of headquarters. Again, moderation is evident
as more than half of those indicated that less than 25 percent of their portfolio had
significant foreign operations. Nonetheless, these numbers have increased significantly
from prior years and reflect an increased trend in this method of investment

CURRENT TRENDSThe venture capital is growing 43% CAGR. However, in spite of the venture capital
scenario improving, several specific VC funds are setting up shop in India, with the year
2006 having been a landmark year for VC funding in India. The total deal value in 2007 is
14234 USD Million. The

NO. Of deals are increase year by year. The no. of

deals in

2006 only 56 and now in 2007 it touch the 387deals. The introduction stage of venture
capital industry in India is completed in2003 after that growing stage of Indian venture
capital industry is started. There are 160 venture capital firms/funds in India. In 2006 it is
only but in 2007the number of venture capital firms are 146. The reason is good position of
capital market. But in 2008 no. of venture capital firms increase by only 14. The reason is
crash down of capital market by 51% from January to November 2008. The No. of venture
capital funds are increasing year by year.
YEAR
NO.OF

2000
841

2001
77

2002
78

2003
81

VC
FUND

2004
86

2005
105

2006
146

2007
160

Venture capital growth and industrial clustering have a strong positive correlation. Foreign
direct investment, starting of R&D centers, availability of venture capital and growth of
entrepreneurial firms are getting concentrated into five clusters. The cost of monitoring and
the cost of skill acquisition are lower in clusters, especially for innovation. Entry costs are
also lower in clusters. Creating entrepreneurship and stimulating innovation in clusters
have to become a major concern of public policy makers. This is essential because only
when the cultural context is conducive for risk management venture capital will take-of.
Clusters support innovation and facilitates risk bearing. VCs prefer clusters because the
information costs are lower. Policies for promoting dispersion of industries are becoming
redundant after the economic liberalization. The venture capital firm invest their money in
most developing sectors like healthcare, IT-ITes, telecom, Bio-technology, Media &
Entertainment, shipping & logistics etc.
It is also a way in which public and private sectors can construct an institution that
systematically creates networks for the new firms and industries, so that they can progress.
This institution helps in identifying and combining pieces of companies, like finance,
technical expertise, know of marketing and business models. Once integrated, these
enterprises succeed by becoming nodes in the search networks for designing and building
products in their domain.
Venture capital (VC) funding rebounded in the first quarter of 2013, raising $16 million in
three deals after the previous quarter saw just one $500,000 VC deal, according to
Mercom Capital Group, llc, a global clean energy communications and consulting firm.
VC deals included Export Development Canada's $7 million financing of Endurance, a
Vancouver-based manufacturer of wind turbines designed for power grid applications. Also
receiving financing was Petaluma, a developer of a wind LiDAR (light detection and
ranging) system for remote sensing of wind, which raised $5.5 million from Bright Capital,
Cedar Fund, Evergreen Venture Partners, ABB and Draper Fisher Jurvetson. Heartland

Energy Solutions, a manufacturer of 100 kW wind turbines and blades, on the other hand,
raised $3.9 million.
The report said most of the funding activity this quarter went towards project funding.
Announced project funding in Q1 2013 came to $6.2 billion in 29 deals with some
extremely large transactions recorded this quarter. Large-scale onshore wind projects
received over $3.42 billion in 26 deals while offshore wind projects received over $2.74
billion in three deals. In the United States, wind became the most installed energy
generation source in 2012 and has continued that momentum in the first quarter of 2013.
According to Mercom, funding and M&A activity in the Indian wind energy sector in Q1
2013 was active with transactions in project, debt and other funding as well as project
M&A. Notable transactions, according to Mercom, include Continuum Wind Energy
receiving a $164 million loan from State Bank of India for its 175 MW wind project in
Maharashtra, Gujarat Venture Finance picking up an equity stake in a special purpose
vehicle of UK based SITAC group.

LITRATURE REVIEW.
According to Subash and Nair, (May 2005).
The modern concept of venture capital state during 1946 and how 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 venture capital
investment globally is given to really stage ventures in all years people around the world
Hessen the potentiality of venture capital in promoting different economies of the world by
improving the standard of living of the people by expending business..

According To Kumar, (June 2003).

10

This stud y 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).

11

The venture capital industry has followed the classical model of venture capital finance. the
early stage financing which includes seed, start-up & early stage investment was always
the major part of the venture investment.
Whenever venture capitalists in venture certain basic preferences play a crucial role in
investment decision. Two such consideration are location preferences and ownership
preferences.
According to Kumar, (March,2004)The industry should concentrate more an early stage bu
siness 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 theindustry. It i
s recommended that the venture capitalists should retain their basicfeature that taking ret
ain their basic feature that is taking high risk. The presentsituation may compel venture c
apitalists to opt for less risky opportunities but it isagainst the sprit of venture capitalism. T
he established fact is big gains are possible in high risk projects.

CHAPTER-2
12

RESEARCH METHODOLOGY.
The term Research literally means to search diligently, investigate or experiment to
discover facts, revise accepted theories on laws in light of new facts, or to discover a
practical application of new facts, theories or laws. One uses research to get information to
make decisions or implement a plan.

Research process.

13

DEFINE RESEARCH PROBLEM

REVIEW OF LITERATURE
REVIEW CONCEPTS AND THEORIES
REVIEW PREVIOUS RESEARCH FINDINGS

FORMULATE HYPOTHESIS

DESIGN RESEARCH

FF

FF

FF

COLLECT DATA (EXECUTION)

F
ANALYSE DATA

F
INTERPRET AND REPORT
SUGGESTIONS AND CONCLUSION

RESEARCH DESIGN .

14

The types of research are financial research type. Because financial instruments research
studies are those studies which are concerned with exploratory the characteristics of a
particular instrument.
It includes surveys and fact finding enquires.

SAMPLE :
To conduct any research a scientific method must be followed. The universe of study is
very large in which it is difficult to correct information from all the people. So, the sampling
method has been followed for the study. The analysis is based On secondary data.

Research Area

:.VENTURE CAPITAL INDUSTRY IN INDIA.

DATA COLLECTION- The study is based on secondary data. I have collected data from
different sources. I have collected the data with the help of various which are follow

Internet
Company magazines
Various newspaper ( Business standard, Times of India, Economic Times)
Past records

Objective of project :

To understand the concept of venture capital

To examine the legal framework & regulations of the venture capital activity in India.
To analyse the direction, pattern and growth of venture capital investment in India
To analyse the relationship between economic growth and venture capital
investment.

15

CHAPTER-3
Conceptual framework
Concept of Venture Capital

16

The term venture capital comprises of two words that is, Venture and Capital .Venture is
a course of processing, the outcome of which is uncertain but to which is attended the risk
or danger of loss. Capital means recourses to start an enterprise. To connote the risk
and adventure of such a fund, the generic name Venture Capital was coined. Venture
capital is considered as financing of high and new technology based enterprises. It is said
that Venture capital involves investment in new or relatively untried technology, initiated by
relatively new and professionally or technically qualified entrepreneurs with inadequate
funds. The conventional financiers, unlike Venture capitals, mainly finance proven
technologies and established markets. However, high technology need not be pre-requisite
for venture capital. Venture capital has also been described as unsecured risk financing.
The relatively high risk of venture capital is compensated by the possibility of high returns
usually through substantial capital gains in the medium term. Venture capital in broader
sense is not solely an injection of funds into a new firm, it is also an input of skills needed
to set up the firm, design its marketing strategy, organize and manage it. Thus it is a long
term association with successive stages of companys development under highly
risk investment conditions, with distinctive type of financing appropriate to each stage
of development. Investors join the entrepreneurs as co-partners and support the project
with finance and business skills to exploit the market opportunities. Venture capital is not a
passive finance. It may be at any stage of business/production cycle, that is, start up,
expansion or to improve a product or process, which are associated with both risk and
reward. The Venture capital makes higher capital gains through appreciation in the value of
such investments when the new technology succeeds. Thus the primary return sought by
the investor is essentially capital gain rather than steady interest income or dividend yield.
Definition of Venture capitals-The support by investors of entrepreneurial talent with
finance

and business

skills

to

exploit

market

opportunities

and

thus

obtain

capital gains.Venture capital commonly describes not only the provision of startup finance
or seed corn capital but also development capital for later stages of business. A long term
commitment of funds is involved in the form of equity investments, with the aim of eventual
capital gains rather than income and active involvement in the management of customers
business.

17

Features of Venture Capital.

High Risk
By definition the Venture capital financing is highly risky and chances of failure are
high as it provides long term start up capital to high risk-high reward ventures.
Venture capital assumes four types of risks, these are:
Management risk
-Inability of management teams to work together.
Market risk
-Product may fail in the market.
Product risk
- Product may not be commercially viable.
Operation risk
- Operations may not be cost effective resulting in increased cost decreased
gross margins.
High Tech
As opportunities in the low technology area tend to be few of lower order, and hitech projects generally offer higher returns than projects in more traditional areas, venture
capital investments are made in high tech. areas using new technologies or producing
innovative goods by using new technology. Not just high technology, any high risk ventures
where the entrepreneur has conviction but little capital gets venture finance. Venture capital
is available for expansion of existing business or diversification to a high risk area. Thus
technology financing had never been the primary objective but incidental to venture capital.

Equity Participation & Capital Gains

18

Investments are generally in equity and quasi equity participation through direct purchase
of shares, options, convertible debentures where the debt holder has the option to convert
the loan instruments into stock of the borrower or a debt with warrants to equity investment.
The funds in the form of equity help to raise term loans that are cheaper source of funds. In
the early stage of business, because dividends can be delayed, equity investment implies
that investors bear the risk of venture and would earn a return commensurate with success
in the form of capital gains.

Participation In Management
Venture capital provides value addition by managerial support, monitoring and follow up
assistance. It monitors physical and financial progress as well as market development
initiative. It helps by identifying key resource person. They want one seat on the companys
board of directors and involvement, for better or worse, in the major decision.
This is a unique philosophy of hands on management where Venture capitalist acts as
complementary to the entrepreneurs. Based upon the experience other companies, a
venture capitalist advise the promoters on project planning, monitoring, financial
management, including working capital and public issue. Venture capital investor cannot
interfere in day today management of the enterprise but keeps a close contact with the
promoters or entrepreneurs to protect his investment.

Length of Investment.
Venture capitalist help companies grow, but they eventually seek to exit the investment in
three to seven years. An early stage investment may take seven to ten years to mature,
while most of the later stage investment takes only a few years. The process of having
significant returns takes several years and calls on the capacity and talent of venture
capitalist and entrepreneurs to reach fruition.

Illiquid Investment

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Venture capital investments are illiquid, that is, not subject to repayment on demand
or following a repayment schedule. Investors seek return ultimately by means of capital
gains when the investment is sold at market place. The investment is realized only on
enlistment of security or it is lost if enterprise is liquidated for unsuccessful working. It may
take several years before the first investment starts to locked for seven to ten years.
Venture capitalist understands this illiquidity and factors this in his investment decisions.

Difference between Venture Capital & Other

2.3.1 Venture Capital Vs Development Funds Venture capital differs from Development
funds as latter means putting up of industries without much consideration of use of new
technology or new entrepreneurial venture but having a focus on underdeveloped areas
(locations). In majority of cases it is in the form of loan capital and proportion of equity is
very thin. Development finance is security oriented and liquidity prone. The criteria for
investment are proven track record of company and its promoters, and sufficient cash
generation to provide for returns (principal and interest). The development bank safeguards
its interest through collateral. They have no say in working of the enterprise except
safeguarding their interest by having a nominee director. They do not play any active role in
the enterprise except ensuring flow of information and proper management information
system, regular board meetings, adherence to statutory requirements for effective
management control where as Venture capitalist remain interested if the overall
management of the project o account of high risk involved I the project till its completion,
entering into production and making available proper exit route for liquidation of the
investment. As against this fixed payments in the form of installment of principal and
interest are to be made to development banks.

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Venture Capital Vs Seed Capital & Risk Capital

It is difficult to make a distinction between venture capital, seed capital, and risk capital as
the latter two form part of broader meaning of Venture capital. Difference between them
arises on account of application of funds and terms and conditions applicable. The seed
capital and risk funds in India are being provided basically to arrange promoters
contribution to the project. The objective is to provide finance and encourage professionals
to become promoters of industrial projects. The seed capital is provided to conventional
projects on the consideration of low risk and security and use conventional techniques for
appraisal. Seed capital is normally in the form of low interest deferred loan as against
equity investment by Venture capital. Unlike Venture capital, Seed capital providers neither
provide any value addition nor participate in the management of the project. Unlike Venture
capital Seed capital provider is satisfied with low risk-normal returns and lacks any
flexibility in its approach. Risk capital is also provided to established companies for
adapting new technologies. Herein the approach is not business oriented but
developmental. As a result on one hand the success rate of units assisted by Seed
capital/Risk Finance has been lower than those provided with venture capital. On the other
hand there turn to the seed/risk capital financier had been very low as compared to venture
capitalist.
BASIS

SEED

CAPITAL

VENTURE CAPITAL

BENEFICARIES

SCHEME
Income or aid

SCHEME
Commercial viability

SIZE OF ASSISTENCE

Very small entrepreneurs

Medium

and

large

entrepreneurs
AMOUNT

OF 15 lakhs

Upto

40%

of

promoter

ASSISTENCE
APPRAISAL PROCESS

(max)
Normal

equity
Skilled &specialized

RETURN

20%

30%

EXIT OPTION

Sell back

Public offer

21

Difference between Seed Capital Scheme and Venture capital Scheme

Venture capital was started as early stage financing of relatively small but rapidly growing
companies. However various reasons forced venture capitalists to be more and more
involved in expansion financing to support the development of existing portfolio companies.
With increasing demand of capital from newer business, Venture capitalists began to
operate across a broader spectrum of investment interest. This diversity of opportunities
enabled Venture capitalists to balance their activities in term of time involvement, risk
acceptance and reward potential, while providing on going assistance to developing
business. Different venture capital firms have different attributes and aptitudes for different
types of Venture capital investments. Hence there are different stages of entry for different
Venture capitalists and they can identify and differentiate between types of Venture capital
investments, each appropriate for the given stage of the investee company, These are:-

1.Early Stage finance

Seed Capital
Startup Capital
Early/First Stage Capital
Later/Third Stage Capital

2. Later Stage Finance

Expansion/Development
Stage Capital Replacement
Finance Management Buy Out and Buy in Turnarounds
Mezzanine/Bridge

Finance not all business firms pass through each of these stages in a sequential
manner. For instance seed capital is normally not required by service based ventures. It
applies largely to manufacturing or research based activities. Similarly second round
finance does not always follow early stage finance. If the business grows successfully it is

22

likely to develop sufficient cash to fund its own growth, so does not require venture capital
for growth. The table below shows risk perception and time orientation for different stages
of venture capital financing. The characteristics of the seed capital may be enumerated as
follows:
Finance

Period(funds

Risk perception

Activity

to

be

locked in years)
Early stage finance 7-10

finance
Extreme or concept For support and R&D

seed
Start up

idea for product

Very high

5-9

develop
Initialization
operation or develop

First stage

3-7

High

prototype
Start
commercial
production

Second stage

3-5

Sufficient

marketing
Extend market

and
&

growth

Absence of ready product market

Absence of complete management team
Product/ process still in R & D stage Initial period / licensing stage of technology
transfer Broadly speaking seed capital investment may take 7 to 10 years to achieve
realization. It is the earliest and therefore riskiest stage of Venture capital
investment. The new technology and innovations being attempted have equal
chance of success and failure. Such projects, particularly hi-tech, projects sink a lot
of cash and need a strong financial support for their adaptation, commencement and
eventual success. However, while the earliest stage of financing is fraught with risk,
it also provides greater potential for realizing significant gains in long term. Typically
seed enterprises lack asset base or track record to obtain finance from conventional

23

sources and are largely dependent upon entrepreneurs personal resources. Seed
capital is provided after being satisfied that the entrepreneur has used up his own
resources and carried out his idea to a stage of acceptance and has initiated
research. The asset underlying the seed capital is often technology or an idea as
opposed to human assets (a good management team) so often sought by venture
capitalists.

Venture capital financing processDeal 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.
Key considerations
For investor/venture capitalist Ideal entrepreneur
A venture capital (VC) who is financing the firm would as the first necessity assess
and gauge the promoters. Because in the case of start-up where the product or the
technology is yet to be tested, the only thing they can trust and their investment on
the people behind it. While investing in a company what a VC is essentially looking
24

for is a partnership and therefore the first decision making criterion is the character
and personality of the promoters. However from a venture capitalists perspective,
the ideal entrepreneur,
is qualified in a hot area of interest
Delivers sales or technical advances

such

as FDA

approval

with reasonable probability

Tells a compelling story and is presentable to outside investors,
Recognizes the need for speed to an IPO for liquidity,
Has a good reputation and can provide references that show

competences and skill,

Understand the need for a team with a variety of skill and

therefore sees why equity has to be allocated to other people

Works diligently toward a goal but maintains flexibility
Get along with the investor group
Understands the cost of capital and typical deal structures and is

not offended by them

Is sought after by many VCs
Has a realistic expectation about process and outcome.
Besides the ideal entrepreneur, the investor tries to ensure the following for himself.
Reasonable reward given in the level of risk.
Sufficient
influence
on
the management
of the
company
through
board representation.. Minimization of taxes.
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

25

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
Smake the risk analysis of the proposed projects which includes :Product risk,
Market risk, Technological risk and Entrepreneurial risk. The final decision is taken
in terms of the expected risk-return trade-off as shown in Figure.

Deal Structuring:
In this process, the venture capitalist and the venture company negotiate the terms
of the deals, that is, the amount, form and price of the investment. This process is
termed as deal structuring. The agreement also include the venture capitalists
right to control the venture company and to change its management if needed,
buyback arrangements, acquisition, making initial public offerings (IPOs), etc.
Earned out arrangements specify the entrepreneur's equity share and the objectives
to be achieved.

Post Investment Activities:

Once the deal has been structured and agreement 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:

26

Venture capitalists generally want to cash-out their gains in five to ten years after the
initial investment. They play a positive role in directing the company towards
particular exit routes. A venture may exit in one of the following ways: There are four
ways for a venture capitalist to exit its investment:

Initial Public Offer (IPO)

Acquisition by another company
Re-purchase of venture capitalists share by the investee company
Purchase of venture capitalists share by a third party

Promoters Buy-back
The most popular disinvestments route in India is promoters buy-back. This route is
suited to Indian conditions because it keeps the ownership and control of the
promoter intact. The obvious limitation, however, is that in a majority of cases the
market value of the shares of the venture firm would have appreciated so much after
some years that the promoter would not be in a financial position to buy them back
.In India, the promoters are invariably given the first option to buy back equity of
their enterprises. For example, RCTC participates in the assisted firms equity with
suitable agreement for the promoter to repurchase it. Similarly, Can fina -VCF offers
an opportunity to the promoters to buy back the shares of the assisted firm within an
agreed period at a predetermined price. If the promoter fails to buy back the shares
within the stipulated period, Can fina-VCF would have the discretion to divest them
in any manner it deemed appropriate. SBI capital Markets ensures through
examining the personal assets of the promoters and their associates, which buy
back, would be a feasible option. GVFL would make disinvestments, in consultation
with the promoter, usually after the project as settled down, to a profitable level and
the entrepreneur is in a position to avail of finance under conventional schemes of
assistance from banks or other financial institutions.

Initial Public Offers (IPOs)

27

The benefits of disinvestments via the public issue route are, improved marketability
and liquidity, better prospects for capital gains and widely known status of the venture
as well as market control through public share participation. This option has certain
limitations in the Indian context. The promotion of the public issue would be difficult and
expensive since the first generation entrepreneurs are not known in the capital markets.
Further,33 difficulties will be caused if the entrepreneurs business is perceived to be an
unattractive investment proposition by investors. Also, the emphasis by the Indian
investors on short-term profits and dividends may tend to make the market price
unattractive. Yet another difficulty in India until recently was that the Controller of Capital
Issues (CCI) guidelines for determining the premium on shares took into account the
book value and the cumulative average EPS till the date of the new issue. This formula
failed to give due weight age to the expected stream of earning of the venture firm.
Thus, the formula would underestimate the premium. The Government has now
abolished the Capital Issues Control Act, 1947 and consequently, the office of the
controller of Capital Issues. The existing companies are now free to fix the premium on
their shares. The initial public issue for disinvestments of VCFs holding can involve
high transaction costs because of the inefficiency of the secondary market in a country
like India. Also, this option has become far less feasible for small ventures on account
of the higher listing requirement of the stock exchanges. In February 1989, the
Government of India raised the minimum capital for listing on the stock exchanges from
Rs 10 million to Rs 30 million and the minimum public offer from Rs 6 million to Rs 18
million.

Sale on the OTC Market

An active secondary capital market provides the necessary impetus to the success of
the venture capital. VCFs should be able to sell their holdings, and investors should be
able to trade shares conveniently and freely. In the USA, there exist well-developed
OTC markets where dealers trade in shares on telephone/terminal and not on an
exchange floor. This mechanism enables new, small companies which are not
otherwise eligible to be listed on the stock exchange, to enlist on the OTC markets and
28

provides liquidity to investors. The National Association of Securities Dealers

Automated Quotation System (NASDAQ) in the USA daily quotes over 8000 stock
prices of companies backed by venture capital. The OTC Exchange in India was
established in June 1992. The Government of India had approved the creation for the
Exchange under the Securities Contracts (Regulations) Act in 1989. It has been
promoted jointly by UTI, ICICI, SBI Capital Markets, Can bank Financial Services, GIC,
LIC and IDBI. Since this list of market-makers (who will decide daily prices and appoint
dealers for trading) includes most of the public sector venture financiers, it should pick
up fast, and it should be possible for investors to trade in the securities of new small
and medium size enterprises. The other disinvestments mechanisms such as the
management buyouts or sale to other venture funds are not considered to be
appropriate by VCFs in India. The growth of an enterprise follows a life cycle as shown
in the diagram below. The requirements of funds vary with the life cycle stage of the
enterprise. Even before a business plan is prepared the entrepreneur invests his time
and resources in surveying the market, finding and understanding the target customers
and their needs. At the seed stage the entrepreneur continue to fund the venture with
his own or family funds. At this stage the funds are needed to solicit the consultants
services in formulation of business plans , meeting potential customers and technology
partners. Next the funds would be required for development of the product/process and
producing prototypes, hiring key people and building up the managerial team. This is
followed by funds for assembling the manufacturing and marketing facilities in that
order. Finally the funds are needed to expand the business and attaint the critical mass
for profit generation. Venture capitalists cater to the needs of the entrepreneurs at
different stages of their enterprises. Depending upon the stage they finance, venture
capitalists

are

called

angel

investors,

supplier/investor.

OTC MARKET PLAYERS-

29

venture

capitalist

or

private

equity

Angels and angel clubs

Angels are wealthy individuals who invest directly into companies. They can form angel
clubs to coordinate and bundle their activities. Besides the money, angel soften provide
their personal knowledge, experience and contacts to support their investees. With
average deals sizes from USD 100,000 to USD 500,000 they finance companies in their
early stages. Examples for angel clubs are Media Club, Dinner Club , Angel's Forum.

Small and Upstart Venture Capital Funds

These are smaller Venture Capital Companies that mostly provide seed and start-up
capital. The so called "Boutique firms" are often specialized in certain industries or
market segments. Their capitalization is about USD 20 to USD 50million
(is this deals size or total money under management or money under management per
fund?)

30

As for the
small and medium Venture Capital funds
strong competition will clear the marketplace. There will be mergers and acquisitions
leading to a concentration of capital. Funds special in different business areas will
form strategic partnerships. Only the more successful funds will be able to attract
new money. Examples
are: Artemis Comaford Abbell Venture Fund Acacia Venture Partners.
Medium Venture Funds
The medium venture funds finance all stages after seed stage and operate in
all business segments. They provide money for deals up to USD 250 million. Single
funds have up to USD 5 billion under management. An example is Aces Partners.
Large Venture Funds
As the medium funds, large funds operate in all business sectors and provide all
types of capital for companies after seed stage. They often operate internationally
and finance deals up to USD 500 million The
large funds will try to improve their position by mergers and acquisitions with other
funds to improve size, reputation and their financial muscle. In addition they will to
diversify. Possible areas to enter are other financial services by means of M&As with
financial services corporations and the consulting business. For the latter one the
funds have a rich resource of expertise and contacts in house. In a declining market
for their core activity and with lots of tumbling companies out there is no reason why
Venture Capital funds should offer advice and consulting only to their investees.
o Examples are: AIG American International Group Cap Vest Man 3i
Corporate Venture Funds These Venture Capital funds are set up and owned by
technology companies. Their aim is to widen the parent company's technology base
in an win-win-situation for both, the investor and the investee. In general, corporate
funds invest in growing or maturing companies, often when the investee wishes to
make additional investments in echnology or product development. The average
deals size is between USD 2 million and USD 5 million.
large funds will try to improve their position by mergers and acquisitions with other
funds to improve size ,reputation and their financial muscle. In addition they will to
diversify. Possible areas to enter are other financial services by means of M&As with

31

financial services corporations and the consulting business. For the latter one the
funds have a rich resource of expertise and contacts in house. In a declining market
for their core activity and with lots of tumbling companies out there is no reason why
Venture Capital funds should offer advice and consulting only to their investees
.Examples are: Oracle Adobe Dell Kyocera As an example, Adobe systems
launched a $40m venture fund in 1994 to invest in companies strategic to its core
business, such as Cascade Systems Inc and Lantana Research Corporation.- has
been successfully boosting demand for its core products, so that Adobe recently
launched a second $40m fund.
Financial funds:
A solution for could be a shift to a higher secursation of Venture Capital activities.
That means that the parent companies shift the risk to their customers by creating
new products such as stakes in an Venture Capital fund. However, the success of
such products will depend on the overall climate and expectations in the economy.
As long as the sown turn continues without any sign of recovery customers might
prefer less risky alternatives.
Industry shifts
It is perhaps no surprise that the contraction is mostly concentrated in information
technology and the business, consumer and retail industries, give the huge
number of companies financed in the technology and Internet boom of 1999-2000,
and the subsequent downturn. The healthcare pool, driven by investment
in biopharmaceuticals and medical devices, has actually grown to some degree in
the different geographies .In United States, the healthcare pool has grown
consistently over the last several years, both in terms of number of companies and
cumulative dollars invested. Key observations on the pool of private companies by
industry:The information

and

technology

pool

has

declined

by

just

6%

since

2002; particularly due to increasing Interest in WEB 2.0 innovations.

Since 2003, the IT pool has decreased by 27% in Europe and since 2004
17%in Israel. Cumulative investment has declined in similar amounts.

32

The business, consumer and retail category has faced the steepest declines across
the board. In US the number had fallen 54% since 2002 and 54% in Europe since
2003 .In Israel; it dropped 67% since 2004.
The number of healthcare companies has grown in U.S. since 2002 by 27%and the
capital risen 30% in last five years. Capital investment to the pool of healthcare
companies in Europe and Israel has also climbed, although the number of
companies dropped by 9%in Europe since 2003 and 9% in Israel since 2004.
Clean technology is a small but increasing element of the pool. There were262
clean technology companies with a cumulative invested venture capital of US $38
billion in 2007.
Mega trends
Several global mega trends will likely have an impact on venture capital in the next
decade:Beyond the BRICs: - A new wave of fast growing economies is joining the global
growth leaders like Brazil, China, India, and Russia. The beginning of venture capital
activity has been seen in others countries such as Indonesia, Korea, Turkey and
Vietnam.
The new multinationals: - A new breed of global company is emerging from
developing countries and redefining industries through low-cost advantage, modern
infrastructure, and vast customer databases in their home countries.
These companies are potential acquirers of developed market companies at all
stages of growth.
Globalization of capital:- Changes in economic and financial landscape are creating
a significant regional shifts in IPO activity. These changes have also sparked global
consolidation alliances among stock exchanges.
Transformation of the CFOs role and function:- With

the globalization

and

increasingly complex regulatory environment, CFOs have a wider range

of responsibilities

and

finance

function

has

been

transformed

to

face

broader mandates.
Clean Technology: - Clean technology is poised to become the first break through
sector of 21st

33

Century. Encompassing energy, air and water treatment, industrial efficiency

improvements, new material and waste management etc are playing very vital role
globally because of which VC investors are enjoying rewards.
Investment by stageNeed for growth of venture capital in India
In India, a revolution is ushering in a new economy, wherein entrepreneurs mind set
is taking a shift from risk averse business to investment in new ideas which involve
high risk. The conventional industrial finance in India is not of much help to these
new emerging enterprises. Therefore there is a need of financing mechanism that
will fit with the requirement of entrepreneurs and thus it needs venture capital
industry to grow in India.

34

CHAPT
ER-4

Regulatory and legal framework

Definition of Venture Capital Fund :
The Venture Capital Fund is now defined as a fund established in the form of a Trust, a
company including a body corporate and registered with SEBI which: A. Has a dedicated
pool of capital; B. Raised in the manner specified under the regulations; and C. To invest in
venture capital undertakings in accordance with the regulations."

Definition of Venture Capital Undertaking

35

Venture Capital Undertaking means a domestic company:-a. Whose shares are not
listed on a recognized stock exchange in India b. Which is engaged in business including
providing services, production or manufacture of articles or things, or does not include such
activities or sectors which are specified in the negative list by the Board with the approval
of the Central Government by notification in the Official Gazette in this behalf?

The negative list

includes real estate, non-banking financial services, gold financing, activities not permitted
under the Industrial Policy of the Government of India.

Minimum contribution and fund size

:the minimum investment in a Venture Capital Fund from any investor will not be less than
Rs. 5 lakhs and the minimum corpus of the fund before the fund can start activities shall be
at least Rs. 5 crores.
Investment Criteria
: The earlier investment criteria has been substituted by a new investment criteria which
has the following requirements :
Disclosure of investment strategy;
maximum investment in single venture capital undertaking not to exceed 25% of the
corpus of the fund;
Investment in the associated companies not permitted;
At least 75% of the investible funds to be invested in unlisted equity shares or equity
linked instruments.
Not more than

25%

of

the

investible

funds

may

be

invested

by

way of:a. Subscription to initial public offer of a venture capital undertaking whose share
sare

proposed

to

be

listed

subject

to

lock-in

period

of

one

year; b. Debt or debt instrument of a venture capital undertaking in which the ventureca
pital fund has already made an investment by way of equity.
It has also been provided that Venture Capital Fund seeking to avail benefit under the
relevant provisions of the Income Tax Act will be required to divest from the investment
within a period of one year from the listing of the Venture Capital Undertaking.
36

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

Investments by Mutual Funds in Venture Capital Funds:

In order to increase there sources for domestic venture capital funds, mutual funds are
permitted to invest upto5% of its corpus in the case of open ended schemes and up to 10%
of its corpus in the case of close ended schemes. Apart from raising the resources for
Venture Capital Funds this would provide an opportunity to small investors to participate in
Venture Capital activities through mutual funds.
Government of India Guidelines:

37

The Government of India (MOF) Guidelines for Overseas Venture Capital Investment in
India dated September 20, 1995 will be repealed by the MOF on notification of SEBI
Venture Capital Fund Regulations.
The following will be the salient features of SEBI (Foreign Venture Capital Investors)
Regulations, 2000 : Definition of Foreign Venture Capital Investor
Any entity incorporated and established outside India and proposes to make investment in
Venture Capital Fund or Venture Capital Undertaking and registered with SEBI.
Eligibility Criteria
Entity incorporated and established outside India in the form of investment company,
trust, partnership, pension fund, mutual fund, university fund, endowment fund, asset
management company, investment manager, investment management company or other
investment vehicle incorporated outside India would be eligible for seeking registration from
SEBI. SEBI for the purpose of registration shall consider whether the applicant is regulated
by an appropriate foreign regulatory authority; or is an income tax payer; or submits a
certificate from its banker of its or its promoters track record where the applicant is neither
a regulated entity nor an income tax payer.
Hassle Free Entry and Exit:
The Foreign Venture Capital Investors proposing to make venture capital investment under
the Regulations would be granted registration by SEBI.SEBI registered Foreign Venture
Capital Investors shall be permitted to make investment on an automatic route within the
overall sectoral ceiling of foreign investment under Annexure III of Statement of Industrial
Policy without any approval from FIPB. Further, SEBI registered FVCIs shall be granted a
general permission from the exchange control angle for inflow and outflow of funds and no
prior approval of RBI would be required for pricing, however, there would be ex-post
reporting requirement for the amount transacted.
Trading in unlisted equity :

38

The Board also approved the proposal to permit OTCEI to develop a trading window for
unlisted securities where Qualified Institutional Buyers(QIB) would be permitted to
participate.
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 exceed49 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, costflow patterns, riskiness and other factors of the enterprise.
Income Note:
It is a hybrid security which combines the features of both convention all 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 financing practices and procedures
Entrepreneurs who need VC financing for their enterprises should have sufficient
information to be able to choose a VC company or fund suitable for their requirement and
have a broad understanding of the procedures required to be followed for obtaining
financial assistance at different stages of implementation of their projects. Basically they
need to develop a business plan or prototype to get venture finance.

39

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

is

under:1 Analysis of

management.

of organization pattern.3. Analysis of production

marketing & sales.5. Financial

2.

Analysis

process.4. Analysis of
analysis and projections.6. Analysis of

reference information.
Venture capital comparison venture capital and alternative1. Leasing

40

Your equipment instead of purchasing it outright.

2. Fund From Operations
Look for ways to tweak your business in order to reduce the cash flowing out and increase
the cash flowing in. Funding found in business operations come free of finance charges,
can reduce future financing charges and can increase the value of your business. Monthby-month operating and cash projections will show how well we have planned, how you
can optimize the elements of your business that generate cash and allow you to plan for
new investments and contingencies.
3. Licensing
Sell licenses to technology that is non-essential to our company or grant limited licensing
to essential technology that can be shared. Through out licensing we can generate
revenue from up-front fees, access fees, royalties or milestone payments.
4. Vendor Financing
Similar to the trade credit related to bootstrap financing, vendors can splay a big role in
financing your new business. Establish vendor relationships through our trade association
and strike deals to offer their product and pay for it at a date in the near future. Selling the
product in time is up to us. In hopes of keeping you as a customer, vendors may also be
willing to work out an arrangement if we need to finance equipment or supplies. Just make
sure to look for stability when you research a vendors credentials and reputation before
you sign any kind of agreement. And keep in mind that many major suppliers (GE Small
Business Solutions, IBM Global Financing) own financial companies that can help you.
5. Self Funding
Search between the couch cushions and in old jacket pockets for whatever extra money
you might have lying around and invest it into your business. Obviously loose change will
not be enough for extra business funding, but take a look at your savings, investment
portfolio, retirement funds and employee buyout options from your previous employer. You
wont have to deal with any creditors or interest and the return on your investment could be
much higher. However, make sure that you consider the risks involved with using your own
resources. How competitive is the market that you are about to enter into? How long will it

41

take to pay yourself back? Will you be able to pay yourself back? Can you afford to lose
everything that you are investing if your business were to fail?
Its important that your projected returns are more than enough to cover the risk that you
will be taking.
6. SBIR and STTR Programs
Coordinated by the SBA, SBIR (Small Business Innovation Research) and STTR (Small
business Technology Transfer) programs offer competitive federal funding awards to
stimulate technological innovation and provide opportunities for small businesses. You can
learn more about these programs at SBIRworld.com.
7. State Funding
If youre not having any luck finding funding from the federal government take a look at
what your state has to offer. There is a list of links to state development agencies that offer
an array of grants and financial assistance for small businessessonsAbout.com..8.
8. Community Banks
These smaller banks may have fewer products than their financial institution counterparts
but they offer a great opportunity to build banking relationships and are generally more
flexible with payment plans and interest rates.
9. Microloans
These types of loans can range from hundreds of dollars to low six-figure amounts.
Although some lenders regard microloans to be a waste of time because the amount is so
low, these can be a real boon for a startup business or one that just needs to add some
extra cash flow.
10. Finance Debt
It may be more expensive in the long run than purchasing, but financing your equipment,
facilities and receivables can free up cash in the short term or reduce the amount of money
that you need to raise.
11. Friends

42

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

43

card can help you to build business credit, keep your business expenses separate from
your personal expenses and can make tax season easier to manage.
Political factors:
Venture Capital being a very sensitive institutional form due to the high-risk nature of its
investments it was prerequisite for the government to be careful to ensure that its policies
do not adversely affect its venture capitalists. There are number of rules and regulation for
VC and these would broadly come under either of the following heads:
The Indian Trust Act, 1882 or the company Act,1956 depending on whether the fund is set
up as a trust or a company.
The foreign investment Promotion Board (FIPB) and the RBI in case of an offshore fund.
These funds have to secure the permission of the FIPB while setting up in India and need a
clearance from the RBI for any repatriation of income.
The Central Board of Direct Taxation (CBDT) governs the issues pertaining to income tax
on the proceed from VC funding activity. The long term capital gain tax is at around 10% in
India and the relevant clauses to VC may be found in Section 10(sub section 23)
Minimum contribution and fund size
the minimum investment in a Venture Capital Fund from any investor will not be
less than Rs. 5 lakhs and the minimum corpus of the fund before the fund can start
activities shall beat least Rs. 5 crores.
Short term capital gain
Rate of tax on short term capital gains under Section 111A & Section 115AD
increased to 15 per cent from earlier 10%.
QIB status for Venture Capital Funds:
The venture capital funds will be eligible to participate in the IPO through book building
route as Qualified Institutional Buyer subject to compliance with the SEBI (Venture Capital
Fund) Regulations.
Relaxation in Takeover Code:
The acquisition of shares by the company or any of the promoters from the Venture Capital
Fund under the terms of agreement shall be treated on the same footing as that of

44

acquisition of shares by promoters/companies from the state level financial institutions and
shall be exempt from making an open offer to other shareholders.
Investments by Mutual Funds in Venture Capital Funds:
In order to increase the resources for domestic venture capital funds, mutual funds
are permitted to invest up to 5% of its corpus in the case of open ended scheme sand up to
10% of its corpus in the case of close ended schemes. Apart from raising the resources for
Venture Capital Funds this would provide an opportunity to small investors to participate in
Venture Capital activities through mutual funds.
Government of India Guidelines:
The Government of India (MOF)Guidelines for Overseas Venture Capital Investment in
India dated September 20, 1995 will be repealed by the MOF on notification of SEBI
Venture Capital Fund Regulations.
GUIDELINES FOR OVERSEAS VENTURE CAPITAL INVESTMENT IN INDIA
In recognition of growing importance of Venture Capital as one of the sources of finance
for Indian industry, particularly for the smaller unlisted companies, the Government has
announced

a policy governing the

establishment of domestic Venture

Capital

Funds/Companies. An amendment has also been carried out in the SEBI Act empowering
the Securities and Exchange Board of India (SEBI) to register and regulate Venture Capital
Funds (VCFs) and Venture Capital Companies (VCCs) through specific regulations. With a
view to augment the availability of Venture Capital, the Government has decided to allow
overseas venture capital investments in India subject to suitable guidelines as outlined
below:
a. Offshore

investment

may

invest

in approved

domestic

Venture

Capital

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

45

investment in non-bank financial services companies. c. Once the initial With foreign
investment to manage such funds would require FIPB approval and would be subject to the
existing norms for foreign FIPB approval has been obtained, the subsequent investment b
y the domestic venture capital company/fund in Indian companies will not require FIPB
approval. Such investments will be limited only by the general restriction applicable to
venture capital companies viz.
(i)A

minimum

lock-in

period

three

years

will

apply

to

all

suchinvestments.ii. VCFs and VCCs shall invest only in unlisted companies and their
investment shall be limited to 40% of the paid up capital of the company.
(ii) The ceiling will be subject to relevant equity investment limits that may be in force from
time to time in relation to areas reserved for the Small Scale Sector
iii. Investment in any single company by a VCF/VCC
shall not exceed 20% of the paid-up
corpus of the domestic VCF/VCC. d. The tax exemption available to domestic VCFs
and VCCs under Section10(23F) of the Income Tax Act, 1961, will also be extended to
domestic VCFs and VCCs which attract overseas venture capital investments provided
these VCFs/VCCs conform to the guidelines applicable for domestic VCFs/VCCs.
However, if the VCF/VCC is willing to forego the tax exemptions available under Section
10(23F) of the Income Tax Act, it would be within its rights to invest in any sector
.e. Income paid to offshore investors from Indian VCFs/VCCs will be subject to tax as per
the normal rates applicable to foreign investors. f. Offshore investors may also invest
directly in the equity of unlisted Indian companies without going through the route of a
domestic VCF/VCC. However, in such cases each investment will be treated as a separate
act of foreign investment and will require separate approval as required under the general
policy for foreign investment proposals.
Hassle free entry/exit for foreign venture capital firm
SEBI registered Foreign Venture Capital Investors shall be permitted to make investment
on an automatic route within the overall sectorial ceiling of foreign investment under
Annexure III of Statement of Industrial Policy without any approval from FIPB. Further,
SEBI registered FVCIs shall be granted a general permission from the exchange control

46

angle for inflow and outflow of funds and no prior approval of RBI would be required for
pricing, however, there would be ex-post reporting requirement for the amount transacted.
DTAT (Double Tax Avoidance Treaties)
Foreign funds investing in India directly into Indian portfolio companies will not be affected
by the proposed amendment. As most of these funds have been set up in tax neutral
jurisdictions like Mauritius, they will continue to enjoy tax exemption on capital gains tax
under the Double Tax Avoidance Agreements, effectively getting the equivalent of a pass
through notwithstanding which sector they invest in.
Controller of Capital Issue
The exist route available to the venture capitalist were restricted to the IPO route. Pricing of
the issue was dependent on Controller of Capital Issues (CCI) regulations before
deregulations. Many of the issues were underpriced. Failure of OTCEOI so small
companies could not hope for BSE/NSE listing.
RELAXATION IN IPO NORMS :
The SEBI norms for an IPO by a Venture Capital company / fund be relaxed. The
requirement of three years track record should be waived off for a Venture Capital
company / fund registered with S$EBI. This will help the Venture Capital company/ fund to
generate resources locally..
SEBI registered VCFs have been permitted to invest in equity and equity linked
instruments of offshore venture capital undertakings, subject to overall limit of USD 500
million and with prior SEBI approval. Investment can be made only in those companies
which have an Indian connection and the investment can not exceed 10% of the VCFs
investible funds.
Taxes on emerging sector
As per Union Budget 2007 and its broad guidelines, Government proposed to limit passthrough status to venture capital funds (VCFs) making investment in nine areas. These
nine areas are biotechnology, information technology, nanotechnology, seed research and

47

development, R&D for pharma sectors, dairy industry, poultry industry and production of
bio-fuels. Pass-through status means that the incomes earned by funds are taxable now.

CHAPTER-5

48

DATA ANAYSIS AND INTERPRETATION

Objective-1 To understand the concept of venture capital:
The support by investors of entrepreneurial talent with finance and business skills to
exploit market opportunities and thus obtain capital gains.Venture capital commonly
describes not only the provision of startup finance or seed corn capital but also
development capital for later stages of business. A long term commitment of funds is
involved in the form of equity investments, with the aim of eventual capital gains
rather than income and active involvement in the management of customers
business.
Venture capital includes different risks like-management risk, market risk, product
risk, operation risk. Venture capital is different from other funds the financing stages
are early stage finance startup capital, third stage capital, later stage capital.
venture capital investment globally is given to really stage ventures in all years
people around the world hassen the potentiality of venture capital in promoting
different economies of the world by improving the standard of living of the people by
expending business..
Whenever venture capitalists in venture certain basic preferences play a crucial role
in investment decision. Two such consideration are location preferences and
ownership preferences.
Venture capital is a very good tool for improving the economy of the country and
utilize the resources in optimum and effective manner. When we tells about the India
so a new techniques comes into picture which are helpful to make better utilization
of the resources.
Venture capital growth and industrial clustering have a strong positive correlation.
Foreign direct investment, starting of R&D centers, availability of venture capital and
growth of entrepreneurial firms are getting concentrated into five clusters. The cost
of monitoring and the cost of skill acquisition are lower in clusters, especially for
innovation. Entry costs are also lower in clusters.(detailed inchapter-3)

Objective -2 To examine the legal framework & regulations of venture capital in India.
49

 The Venture Capital Fund is now defined as a fund established in the form of a
Trust, a company including a body corporate and registered with SEBI which: A. Has
a dedicated pool of capital; B. Raised in the manner specified under the
regulations; and C. To invest in venture capital undertakings in accordance with the
regulations.
SEBI has been a regulatory body for venture capital companies or funds with effect
from January 25, 1995. It issued certain guidelines on December 4.1996 which
defines venture capital fund as fund establishment on the form of a company or
trust which raises money through loans, donation. Issue of securities or units as the
case may be, and make or proposes to make investments in accordance with these
regulations.
The guidelines are listed for registration of venture capital funds, investment
conditions, contents of placement memorandum, foreign venture capital investment
funds.
The foreign investment Promotion Board (FIPB) and the RBI in case of an offshore
fund. These funds have to secure the permission of the FIPB while setting up in
India and need a clearance from the RBI for any repatriation of income.
SEBI regulation,2000 (foreign venture capital investment (FVCI); foreign VC/PE
players can invest in India either directly under the foreign direct investment (FDI)
regime or may invest under the FVCI regime. While it is not mandatory to register
with the SEBI as a FVCI, several benefits have been granted to registered users.
A restricted definition of venture capital is followed in india for the purpose of tex
concessions. The approved venture capital firms are eligible for tax exemption on
the capital gains on equity investment.

Objective-3- To analyze the direction, pattern, and growth of venture capital investment
in India- to fulfillment of this objective, I want to link the venture capital with two economic
measure(GDP growth & index(BSE sensex).
this table shows the growth investment in venture capital in india from year 1995 to 2013.
Total amount investment in growth
50

venture capital
Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

investment
year in( %)

3976738900
4202909400
4869073700
7154706700
16347380700
28547154800
7334293400
4346840500
3706946200
5444545400
5907005500
6291826300
7711954400
6545999300
3480491300
4286009200
5438590200
4217891800
903083600

5.68
15.85
46.94
128.40
74.62
-74.30
-40.73
-14.72
46.87
8.49
6.51
22.57
-15.11
-46.83
23.14
26.89
-22.44
-78.58

51

per

InterpretationIf we analyze this diagram so easily define that starting growth is very high in amount
investment. in 2000 the growth rate is 74% which was so high .but coming next year the
growth rate was drastically decrease by 74% approx. and we can see that the growth
rate is very low last few years. The growth rate in declining year by year.

52

Percentage Growth in deals from year 1995 to 2012- table is shows the no.
of deals which have been done from 1995 to 2013no. of growth in deals
Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

deals
901
1146
1304
1430
2469
3390
1234
850
776
975
1076
1280
1417
1308
828
1086
1325
1203
203

%
27.19
13.78
9.66
72.65
37.30
-63.59
-31.11
-8.70
25.64
10.35
18.95
10.70
-7.69
-36.69
31.15
22.00
-9.20
-83.12

Interpretation - now look upon the data which refers to no. of deals in venture capital.
Initial stage the deals growth rate was in a peak. 72% deals have took place in year
1999 .which refers that the investors ware more influenced by

venture capital growth.

Next years the rate is declining in very fast pace .from year 2008 the rate going down
which indicate that the investors are not interested to invest the money in venture capital.

53

This table shown that what is the growth amount investment in per year in per unitsGrowth in investment per year in per unit (industry)-

growth in average
investment in each investment
Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

unit per year

4413694.673
3667460.209
3733952.224
5003291.399
6621053.341
8420989.617
5943511.669
5113930
4776992.526
5584149.128
5489782.063
4915489.297
5442451.941
5004586.621
4203491.908
3946601.473
4104596.377
3506144.472
4448687.685

per

year(%)
-16.9072516
1.813026201
33.99452105
32.33395407
27.18504417
-29.42027078
-13.95776967
-6.588621163
16.89675247
-1.689909471
-10.4611214
10.72045145
-8.045368608
-16.00721045
-6.111357903
4.003315387
-14.58004272
26.88261194

54

55

INTERPRETATIONHere I analyzing that what kind of rate is going on the investment in each unit per year.
Most investment in each unit in year 1999 which indicate the high investment in each unit
in year 1999.that also refers that the investors have done the high investment in this year
to see the growth of venture capital. But again the things went wrong from year 2001 and
the rate in very low last years. means that the investors are not interested in investment in
risk capital.

INVESTMENT IN YEAR 2012 (%)

Interpretation- this is the chart which showing the investment in year of 2012.we can
easily identified that which sector is more influencing the investors. Here clearly shows that
56

the software industry is looks more influencing the investors rather then other sectors. the
software industry contribution 42 approx in total investment.

TOP FIVE INDUSTRY IN 2013

57

Investment by industryLed by the $12

million investment by Bellwether and others into Chennai-based

microfinance firm Equit as, BFSI emerged as the second largest (in value terms) for VC
investments during the period. Other microfinance firms that attracted investments during
Q2,2013 included Kolkata-based Arohan Financial Services (which raised funding from
Lok

Capital

and

others)

and

Guwahati-

Aavishkaar Goodwell).

58

based

Asomi

Finance

(IFC

and

INTERPRETATION- The chart is based on data which showing the top five industry.
We can easily says that the software industry is the most attractive for the investors .then
the bio-tech, computer services ,media& entertainment, IT.

59

Objective-4 To analyse the relationship between economic growth and venture

capital investment
as it is known that GDP growth rate and index (BSE sensex) which measures the actual
performance of the economy (detailed analysis given below)
RELATION BETWEEN THE ANNUAL GROWTH RATE OF GDP & AMOUNT
INVESTMENT IN VENTURE CAPITAL- This table is shows the
amount investment in venture capital

and BSE(index) with

relation between the

quarterly closing from

year1999 to 2013. I want to analyse, is there any kind of relation between these two or not.
(detailed analysis is given below:

AMOUNT
YEAR
1999

INVESMENT

INDEX(BSE)

Q1
Q2
Q3
Q4
2000

1963194000
3313160800
4089296100
6981729800

3597
4111
4797
4861

Q1
Q2
Q3
Q4
2001Q1
Q2
Q3
Q4
2002Q1
Q2
Q3
Q4
2003Q1
Q2

8642448400
8431280800
6111988000
5361437100
2809354700
2007158100
1265218800
125261800
1310487500
123225910
978536400
825557500
763826600
971230900

5156
4721
4090
3826
3635
3456
2667
3184
3516
3264
3021
3382
3140
3500
60

Q3
ssQ4
2004Q1
Q2
Q3
Q4
2005Q1
Q2
Q3
Q4
2006Q1
Q2
Q3
Q4
2007Q1
Q2
Q3
Q4
2008Q1
Q2
Q3
Q4
2009Q1
Q2
Q3
Q4
2010Q1
Q2
Q3
Q4
2011Q1
Q2
Q3
Q4
2012Q1
Q2
Q3
Q4

847882300
1124006400
1086100900
1338404700
1322914100
1697125700
1464223300
156146010
1498072400
1383249700
1440642800
1668113700
1663015800
1520054000
1622074100
197365340
1907716500
2208510400
1851475800
1762273100
1660647500
1271202900
653791800
84611340
804927300
1175659100
945289000
1133207700
1292751800
914760700
1272155300
1601657900
1294548100
1296928900
921439700
1106686800
1065075300
1124690300

4297
5791
5571
4644
5511
6498
6535
7049
8222
9372
11280
10130
12173
13340
13308
14650
16899
19162
16371
13802
13570
9328
9568
14993
16781
17360
17644
17755
20117
19911
19290
18492
16162
15813
17121
16972
18762
19444

INTERPRETATION-The coefficient of correlation = -0.294

61

This value is refers that there is no positive correlation between the amount investment in
venture capital and index(BSE).
The relation between

the

amount investment in venture capial and

annual GDP

growth(%)-Here I analyzing that what is the relation between the GDP growth(%) and
amount investment. the table is given belowYear
2008
2009
2010
2011
2012
2013

Amount investment($)
6545999300
3480491300
4286009200
5438590200
4217891800
903083600

GDP growth(%)
3.9
8.5
10.5
6.3
5.5
4.8

Coefficient of correlation- -0.077

Interpretation- the value is explain that

there is a very slight negative correlation

between these two. But we can not say that only this amount investment will affect the
GDP because other factors also contribute in GDP.

LIMITATION OF THE STUDY

A study of this type cannot be without limitation. it has been observed that venture capital
are very secretive about their performance as well as their investments. this attitude has
been a major hurdle in data collection .however venture capital funds /companies that are
members of Indian venture capital association are included in the study.

62

63

CHAPTER-6

Conclusions & SuggestionsConclusions1- The reason for inadequate growth and expansion of venture capital in India may be
attributed to unfavorable and political regality environment bureaucracy in
documentation process and approvals aggravate the problem.
2- Growth in venture capital was quite satisfactory until 2000. Their after it has come
down significantly. The government since then has taken a no of measures

64

to promote venture capital.

3- The presence of venture capital is highest in the IT sector followed by bio-tech and
media & Entertainment. Other sector like retail have not benefited much due to lack
of venture capital available for this sectors.
4- Venture capital is more flourishing in IT sector and focusing more on bio-tech, media
& entertainment the investment in the other sectors like retail and financial services
are not significant..
5- There is no relationship between the GDP and venture capital & also there is no
relationship between the venture capital and index (BSE). Because other factors
also contributes in GDP growth rate and index moment

Suggestions1- There is huge potential for growth in retail and services sector more inflow venture
capital into these sectors would definitely contribute to growth of these sectors and
the Indian economy.

BIBLOGRAPHYBooks Pandey, I.M. and jang, A; (1996), Venture capital of financing techonology in
Taiwan. Pp.499-514.
MacMillan, I.C.S;Robin;subba Narasimha,p.n.;1985.Crieteria used by venture
capitalists to evaluate new venture proposals. Journal of business venturing,1(1):
119-129

Websites

www.national venture capital association(may 2013)

www.wikipedea.com(may 2013)
www.sebi.com(may 2013)
www.management paradise.com(may 2013)
www.moneycontrol.com(may 2013)

65

66