EXECUTIVE SUMMARY

2016, the year, which shock the entire globe, left an unforgettable impression on the
history of the financial world. Even though India is predominantly a domestic
consumption driven economy, it suffered from global volatility and uncertainty. During
the year, there has been a slowdown in the economy across the board.

The Indian banking system has shown remarkable growth over the last two decades. The
rapid growth and increasing complexity of the financial markets, especially the capital
market have brought about measures for further development and improvement in the
working of these markets.

Venture capital is money provided by professionals who invest alongside management in

young, rapidly growing companies that have the potential to develop into significant
economic contributors. Venture capital is an important source of equity for start-up
companies. There are basically four key elements in financing of ventures which are
studied in depth by the venture capitalists stated as Management, Potential for Capital
Gain, Financial requirements & Projections and Owners Financial Stake.

The growth drivers on Venture Industry would be:

Development of Technology especially IT and Communication

Development of Financial Markets

Development of political climate for the economy, globalization

In India, however, the potential of venture capital investments is yet to be fully realized.
There are around thirty venture capital funds, which have garnered over Rs. 5000 Crores.
The venture capital investments in India at Rs. 1000.05 crore as in 1997,representing 0.1
percent of GDP, as compared to 5.5 percent in countries such as Hong Kong.

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 CONTENTS

CERTIFICATE OF COMPLETION

ACKNOWLEDGEMENT

EXECUIVE SUMMARY

Chapter-1

Introduction

Chapter-2

Objective of the study

Chapter-3

Review of literature

Chapter-4

Research Methodology

Chapter-5

Data Analysis and Interpretation

Chapter-6

Conclusion

Chapter-7

Findings and suggestions

Chapter-8

Limitations

Bibliography

Questionnaire

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CHAPTER-1

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 INTRODUCTION

A number of technocrats are seeking to set up shop on their own and capitalize on
opportunities. In the highly dynamic economic climate that surrounds us today, few
traditional business models may survive. Countries across the globe are realizing that it
is not the conglomerates and the gigantic corporations that fuel economic growth any
more. The essence of any economy today is the small and medium enterprises. For
example, in the US, 50% of the exports are created by companies with less than 20
employees and only 7% are created by companies with 500 or more employees. This
growing trend can be attributed to rapid advances in technology in the last decade.
Knowledge driven industries like InfoTech, health-care, entertainment and services have
become the cynosure of bourses worldwide. In these sectors, it is innovation and
technical capability that are big business-drivers. This is a paradigm shift from the earlier
physical production and economies of scale model. However, starting an enterprise is
never easy. There are a number of parameters that contribute to its success or downfall.
Experience, integrity, prudence and a clear understanding of the market are among the
sought after qualities of a promoter. However, there are other factors, which lie beyond
the control of the entrepreneur. Prominent among these is the timely infusion of funds.
This is where the venture capitalist comes in, with money, business sense and a lot more.

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 What is Venture Capital?

The venture capital investment helps for the growth of innovative entrepreneurships in
India. Venture capital has developed as a result of the need to provide non-conventional,
risky finance to new ventures based on innovative entrepreneurship. Venture capital is an
investment in the form of equity, quasi-equity and sometimes debt - straight or
conditional, made in new or untried concepts, promoted by a technically or professionally
qualified entrepreneur. Venture capital means risk capital. It refers to capital investment,
both equity and debt, which carries substantial risk and uncertainties. The risk envisaged
may be very high may be so high as to result in total loss or very less so as to result in
high gains

Venture capital means many things to many people. It is in fact nearly impossible to come
across one single definition of the concept.

Jane Koloski Morris, editor of the well known industry publication, Venture Economics,
defines venture capital as 'providing seed, start-up and first stage financing' and also
'funding the expansion of companies that have already demonstrated their business
potential but do not yet have access to the public securities market or to credit oriented
institutional funding sources.

The European Venture Capital Association describes it as risk finance for entrepreneurial
growth oriented companies. It is investment for the medium or long term return seeking
to maximize medium or long term for both parties. It is a partnership with the
entrepreneur in which the investor can add value to the company because of his
knowledge, experience and contact base.

Venture capital is money provided by professionals who invest alongside management in

young, rapidly growing companies that have the potential to develop into significant
economic contributors. Venture capital is an important source of equity for start-up
companies. Professionally managed venture capital firms generally are private
partnerships or closely-held corporations funded by private and public pension funds,
endowment funds, foundations, corporations, wealthy individuals, foreign investors, and
the venture capitalists themselves.

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Venture capitalists generally:

Finance new and rapidly growing companies

Purchase equity securities

Assist in the development of new products or services

Add value to the company through active participation

Take higher risks with the expectation of higher rewards

Have a long-term orientation

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

Venture capitalists mitigate the risk of investing by developing a portfolio of young

companies in a single venture fund. Many times they co-invest with other professional
venture capital firms. In addition, many venture partnerships manage multiple funds
simultaneously. For decades, venture capitalists have nurtured the growth of America's
high technology and entrepreneurial communities resulting in significant job creation,
economic growth and international competitiveness. Companies such as Digital
Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel,
Microsoft and Genetech are famous examples of companies that received venture capital
early in their development.

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Venture capital has a number of advantages over other forms of finance, such as:

It injects long term equity finance which provides a solid capital base for future growth.

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

The venture capitalist is able to provide practical advice and assistance to the company
based on past experience with other companies which were in similar situations.

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

The venture capitalist may be capable of providing additional rounds of funding should
it be required to finance growth.

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 Venture capital firms and funds

Structure of Venture Capital Firms

Venture capital firms are typically structured as partnerships, the general partners of
which serve as the managers of the firm and will serve as investment advisors to
the venture capital funds raised. Investors in venture capital funds are known as
limited partners. This constituency comprises both high net worth individuals and
institutions with large amounts of available capital, such as state and private
pension funds, university financial endowments, foundations, insurance
companies, and pooled investment vehicles, called fund of funds or mutual funds.

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 Types of Venture Capital Firms

Depending on the business type, the venture capital firm differs. For
instance, if you're a startup internet company, funding requests from a
more manufacturing-focused firm will not be effective. Doing some initial
research on which firms to approach will save time and effort. When
approaching a Venture Capital firm, consider their portfolio:
Business Cycle: Do they invest in budding or established
businesses?
Industry: What is their industry focus?
Investment: Is their typical investment sufficient for your needs?
Location: Are they regional, national or international?
Return: What is their expected return on investment?
Involvement: What is their involvement level?
Targeting specific types of firms will yield the best results when seeking
Venture Capital financing. It is important to note that many Venture
Capital firms have diverse portfolios with a range of clients. If this is the
case, finding gaps in their portfolio is one strategy that might succeed.

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Factors to be considered by Venture Capitalist in selection of investment proposal

There are basically four key elements in financing of ventures which are studied in depth
by the venture capitalists. These are:
1. Management-:The strength, expertise & unity of the key people on the board bring
significant credibility to the company. The members are to be mature, experienced
possessing working knowledge of business and capable of taking potentially high risks.

2. Potential for capital gain-: An above average rate of return of about 30 - 40% is
required by venture capitalists. The rate of return also depends upon the stage of the
business cycle where funds are being deployed. Earlier the stage, higher is the risk and
hence the return.

3. Realistic Financial Requirement and Projections- The venture capitalist requires a

realistic view about the present health of the organization as well as future projections
regarding scope, nature and performance of the company in terms of scale of operations,
operating profit and further costs related to product development through Research &
Development.

4. Owners Financial Stake-: The financial resources owned & committed by the
entrepreneur/ owner in the business including the funds invested by family, friends and
relatives play a very important role in increasing the viability of the business. It is an
important avenue where the venture capitalist keeps an open eye.

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 The Venture Capital Spectrum

The growth of an enterprise follows a life cycle as shown in the diagram

below. The requirements of funds vary with the life cycle stage of the
enterprise. Even before a business plan is prepared the entrepreneur
invests his time and resources in surveying the market, finding and
understanding the target customers and their needs. At the seed stage the
entrepreneur continue to fund the venture with his own or family funds. At
this stage the funds are needed to solicit the consultants services in
formulation of business plans, meeting potential customers and technology
partners. Next the funds would be required for development of the 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 attain the critical mass for profit
generation. Venture Capitalists cater to the needs of the entrepreneurs at
different stages of their enterprises. Depending upon the stage they
finance, venture capitalists are called angel investors, venture capitalist or
private equity supplier/investor.

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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:-

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1. Early Stage Finance
Seed Capital
Start up Capital
Early/First Stage Capital
Later/Third Stage Capital

2. Later Stage Finance

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

Not all business firms pass through each of these stages in a sequential
manner. For instance seep capital is normally not required by service
based ventures. It applies largely to manufacturing or research based
activities. Similarly second round finance does not always follow early
stage finance. If the business grows successfully it is likely to develop
sufficient cash to fund its own growth, so does not require venture capital
for growth
The table below shows risk perception and time orientation for different
stages of venture capital financing.

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Venture Capital- Financing Stages

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 Seed up Capital
It is an idea or concept as opposed to a business. European Venture
Capital Association defines seed capital as the financing of the initial
product development or capital provided to an entrepreneur to prove the
feasibility of a project and to qualify for start up capital.
The characteristics of the seed up capital may be enumerated as follows:
Absence of ready product market
Absence of complete management team
Product/Process still in R&D stage
Initial period/Licensing stage of technology transfer

Broadly speaking seed capital investment may take 7 to 10 years to

achieve realization. It is the earliest and therefore riskiest stage of venture
capital investment. The new technology and innovations being attempted
have equal chance of success and failure. Such projects, particularly hi-
tech, projects sink a lot of cash and need a strong financial support for
their adaptation, commencement and eventual success. However, while the
earliest stage of financing is fraught with risk, it also provides greater
potential for realizing significant gains in long term. Typically seed
enterprises lack asset base or track record to obtain finance from
conventional sources and are largely dependent upon 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.

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Volume of Investment Activity
It has been observed that venture capitalist seldom make seed capital
investment and these are relatively small by comparison to other forms of
venture finance. The absence of interest in providing a significant amount
of seed capital can be attributed to the following three factors:-
a) Seed capital projects by their very nature require a relatively small
amount of capital. The success or failure of an individual seed capital
investment will have little impact on the performance of all but the
smallest venture capitalists portfolio. Larger venture capitalists avoid
seed capital investments. This is because the small investments are seen to
be cost inefficient in terms of time required to analyze, structure and
manage them.
b) The time horizon to realization for most seed capital investments is
typically 7-10 years which is longer than all but most long-term oriented
investors will desire.
c) The risk of product and technology obsolescence increases as the time
to realization is extended. These types of obsolescence are particularly
likely to occur with high technology investments particularly in the fields
related to Information Technology.

Start up Capital
It is stage 2 in venture capital cycle and is distinguishable from seed
capital investments. An entrepreneur often needs finance when the
business is just starting. The start up stage involves starting a new
business. Here in the entrepreneur has moved closer towards establishment
of a going concern. Here in the business concept has been fully
investigated and the business risk now becomes that of turning the concept
into product.

Start up capital is defined as: capital needed to finance the product

development, initial marketing and establishment of product facility.

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The characteristics of start-up capital are:-
i. Establishment of company or business- The company is either
being organized or is established recently. New business activity
could be based on experts, experience or a spin-off from R&D.
ii. Establishment of most but not all the members of the team- The
skills and fitness to the job and situation of the entrepreneurs team is an
important factor for start up finance.
iii. Development of business plan or idea- The business plan should be fully
developed yet the acceptability of the product by the market is uncertain. The
company has not yet started trading.

In the start up preposition venture capitalists investment criteria shifts from idea to people
involved in the venture and the market opportunity. Before committing any finance at this
stage, venture capitalist however, assesses the managerial ability and the capacity of the
entrepreneur, besides the skills, suitability and competence of the managerial team are
also evaluated. If required they supply managerial skills and supervision for
implementation. The time horizon for start up capital will be typically 6 or 8 years.
Failure rate for start up is 2 out of 3. Start up needs funds by way of both first round
investment and subsequent follow-up investments. The risk tends to be lower relative to
seed capital situation. The risk is controlled by initially investing a smaller amount of
capital in start-ups. The decision on additional financing is based upon the successful
performance of the company. However, the term to realization of a start up investment
remains longer than the term of finance normally provided by the majority of financial
institutions. Longer time scale for using exit route demands continued watch on start up
projects.

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Volume of Investment Activity
Despite potential for specular returns most venture firms avoid investing
in start-ups. One reason for the paucity of start up financing may be high
discount rate that venture capitalist applies to venture proposals at this
level of risk and maturity. They often prefer to spread their risk by
sharing the financing. Thus syndicates of investors often participate in
start up finance.

Early Stage Finance

It is also called first stage capital is provided to entrepreneur who has a
proven product, to start commercial production and marketing, not
covering market expansion, de-risking and acquisition costs. At this stage
the company passed into early success stage of its life cycle. A proven
management team is put into this stage, a product is established and an
identifiable market is being targeted. British Venture Capital Association
has vividly defined early stage finance as: Finance provided to
companies that have completed the product development stage and require
further funds to initiate commercial manufacturing and sales but may not
be generating profits. The characteristics of early stage finance may be:
-
Little or no sales revenue.
Cash flow and profit still negative.
A small but enthusiastic management team which consists of people
with technical and specialist background and with little experience
in the management of growing business.
Short term prospective for dramatic growth in revenue and profits.

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 The early stage finance usually takes 4 to 6 years time horizon to
realization. Early stage finance is the earliest in which two of the
fundamentals of business are in place i.e. fully assembled management
team and a marketable product. A company needs this round of finance
because of any of the following reasons: -

Project overruns on product development.

Initial loss after start up phase.
The firm needs additional equity funds, which are not available from other
sources thus prompting venture capitalist that, have financed the start up
stage to provide further financing. The management risk is shifted from
factors internal to the firm (lack of management, lack of product etc.) to
factors external to the firm (competitive pressures in sufficient will of
financial institutions to provide adequate capital, risk of product
obsolescence etc.) At this stage, capital needs, both fixed and working
capital needs are greatest. Further, since firms do not have foundation of a
trading record, finance will be difficult to obtain and so Venture capital
particularly equity investment without associated debt burden is key to
survival of the business. The following risks are normally associated to
firms at this stage: -
a) The early stage firms may have drawn the attention of and incurred
the challenge of a larger competition.
b) There is a risk of product obsolescence. This is more so when the
firm is involved in high-tech business like computer, information
technology etc.

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 Second Stage Finance
It is the capital provided for marketing and meeting the growing working
capital needs of an enterprise that has commenced the production but does
not have positive cash flows sufficient to take care of its growing needs.
Second stage finance, the second trench of Early State Finance is also
referred to as follow on finance and can be defined as the provision of
capital to the firm which has previously been in receipt of external capital
but whose financial needs have subsequently exploded. This may be
second or even third injection of capital.
The characteristics of a second stage finance are:
A developed product on the market
A full management team in place
Sales revenue being generated from one or more products
There are losses in the firm or at best there may be a break even but
the surplus generated is insufficient to meet the firms needs.
Second round financing typically comes in after start up and early stage
funding and so have shorter time to maturity, generally ranging from 3 to
7 years. This stage of financing has both positive and negative reasons.
Negative reasons include:
I. Cost overruns in market development.
II. Failure of new product to live up to sales forecast.
III. Need to re-position products through a new marketing
campaign.
IV. Need to re-define the product in the market place once the
product deficiency is revealed

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Positive reasons include:
I. Sales appear to be exceeding forecasts and the enterprise needs to
acquire assets to gear up for production volumes greater than
forecasts.
II. High growth enterprises expand faster than their working capital
permit, thus needing additional finance. Aim is to provide working
capital for initial expansion of an enterprise to meet needs of
increasing stocks and receivables.

Later Stage Finance

It is called third stage capital is provided to an enterprise that has
established commercial production and basic marketing set-up, typically
for market expansion, acquisition, product development etc. It is provided
for market expansion of the enterprise. The enterprises eligible for this
round of finance have following characteristics.
I. Established business, having already passed the risky early stage.
II. Expanding high yield, capital growth and good profitability.
III. Reputed market position and an established formal organization
structure.

Funds are utilized for further plant expansion, marketing, working

capital or development of improved products. Third stage financing is a
mix of equity with debt or subordinate debt. As it is half way between
equity and debt in US it is called mezzanine finance. It is also called
last round of finance in run up to the trade sale or public offer.

Venture capitalist s prefer later stage investment Vis a Vis early stage
investments, as the rate of failure in later stage financing is low. It is
because firms at this stage have a past performance data, track record of
management, established procedures of financial control. The time horizon

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for realization is shorter, ranging from 3 to 5 years. This helps the venture
capitalists to balance their own portfolio of investment as it provides a
running yield to venture capitalists. Further the loan component in third
stage finance provides tax advantage and superior return to the investors.

There are four sub divisions of later stage finance.

Expansion / Development Finance
Replacement Finance
Buyout Financing
Turnaround Finance

Expansion / Development Finance

An enterprise established in a given market increases its profits
exponentially by achieving the economies of scale. This expansion can be
achieved either through an organic growth, that is by expanding
production capacity and setting up proper distribution system or by way of
acquisitions. Anyhow, expansion needs finance and venture capitalists
support both organic growth as well as acquisitions for expansion.
At this stage the real market feedback is used to analyze competition. It
may be found that the entrepreneur needs to develop his managerial team
for handling growth and managing a larger business.
Realization horizon for expansion / development investment is one to
three years. It is favored by venture capitalist as it offers higher rewards
in shorter period with lower risk. Funds are needed for new or larger
factories and warehouses, production capacities, developing improved or
new products, developing new markets or entering exports by enterprise
with established business that has already achieved break even and has
started making profits.

Replacement Finance

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It means substituting one shareholder for another, rather than raising new
capital resulting in the change of ownership pattern. Venture capitalist
purchase shares from the entrepreneurs and their associates enabling them
to reduce their shareholding in unlisted companies. They also buy
ordinary shares from non-promoters and convert them to preference shares
with fixed dividend coupon. Later, on sale of the company or its listing on
stock exchange, these are re-converted to ordinary shares. Thus Venture
capitalist makes a capital gain in a period of 1 to 5 years.

Buy - out / Buy - in Financing

It is a recent development and a new form of investment by venture
capitalist. The funds provided to the current operating management to
acquire or purchase a significant share holding in the business they
manage are called management buyout.
Management Buy-in refers to the funds provided to enable a manager or a
group of managers from outside the company to buy into it.
It is the most popular form of venture capital amongst later stage
financing. It is less risky as venture capitalist in invests in solid, ongoing
and more mature business. The funds are provided for acquiring and
revitalizing an existing product line or division of a major business. MBO
(Management buyout) has low risk as enterprise to be bought have existed
for some time besides having positive cash flow to provide regular returns
to the venture capitalist, who structure their investment by judicious
combination of debt and equity. Of late there has been a gradual shift
away from start up and early finance to wards MBO opportunities. This
shift is because of lower risk than start up investments.

Turnaround Finance
It is rare form later stage finance which most of the venture capitalist
avoid because of higher degree of risk. When an established enterprise

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becomes sick, it needs finance as well as management assistance foe a
major restructuring to revitalize growth of profits. Unquoted company at
an early stage of development often has higher debt than equity; its cash
flows are slowing down due to lack of managerial skill and inability to
exploit the market potential. The sick companies at the later stages of
development do not normally have high debt burden but lack competent
staff at various levels. Such enterprises are compelled to relinquish
control to new management. The venture capitalist has to carry out the
recovery process using hands on management in 2 to 5 years. The risk
profile and anticipated rewards are akin to early stage investment.

Bridge Finance
It is the pre-public offering or pre-merger/acquisition finance to a
company. It is the last round of financing before the planned exit. Venture
capitalist help in building a stable and experienced management team that
will help the company in its initial public offer. Most of the time bridge
finance helps improves the valuation of the company. Bridge finance often
has a realization period of 6 months to one year and hence the risk
involved is low. The bridge finance is paid back from the proceeds of the
public issue.

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Venture Capital Investment Process

Venture capital investment process is different from normal project

financing. In order to understand the investment process a review of the
available literature on venture capital finance is carried out. Tyebjee and
Bruno in 1984 gave a model of venture capital investment activity which
with some variations is commonly used presently.
As per this model this activity is a five step process as follows:
1. Deal Organization
2. Screening
3. Evaluation or due Diligence
4. Deal Structuring
5. Post Investment Activity and Exit

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Venture Capital Investment Process
Deal origination:
In generating a deal flow, the VC investor creates a pipeline of deals or
investment opportunities that he would consider for investing in. Deal
may originate in various ways. Referral system, active search system, and
intermediaries. Referral system is an important source of deals. Deals may
be referred to VCFs by their parent organizations, trade partners, industry
associations, friends etc. Another deal flow is active search through
networks, trade fairs, conferences, seminars, foreign visits etc.
Intermediaries is used by venture capitalists in developed countries USA,
is certain intermediaries who match VCFs and the potential entrepreneurs.

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Screening :
VCFs, before going for an in-depth analysis, carry out initial screening of
all projects on the basis of some broad criteria. For example, the
screening process may limit projects to areas in which the venture
capitalist is familiar in terms of technology, or product, or market scope.
The size of investment, geographical location and stage of financing could
also be used as the broad screening criteria.

Due Diligence:
Due diligence is the industry jargon for all the activities that are
associated with evaluating an investment proposal. The venture capitalists
evaluate the quality of entrepreneur before appraising the characteristics
of the product, market or technology. Most venture capitalists ask for a
business plan to make an assessment of the possible risk and return on the
venture. Business plan contains detailed information about the proposed
venture. The evaluation of ventures by VCFs in India includes;
Preliminary evaluation:
The applicant required to provide a brief profile of the proposed venture
to establish prima facie eligibility.
Detailed evaluation :
Once the preliminary evaluation is over, the proposal is evaluated in
greater detail. VCFs in India expect the entrepreneur to have Integrity,
long-term vision, urge to grow, managerial skills, commercial orientation.

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

Deal Structuring:

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

Post Investment Activities:

Once the deal has been structured and agreement finalized, the venture
capitalist generally assumes the role of a partner and collaborator. He also
gets involved in shaping of the direction of the venture. The degree of the
venture capitalist's involvement depends on his policy. It may not,
however, be desirable for a venture capitalist to get involved in the day-
to-day operation of the venture. If a financial or managerial crisis occurs,
the venture capitalist may intervene, and even install a new management
team.

Exit:
Venture capitalists generally want to cash-out their gains in five to ten
years after the initial investment. They play a positive role in directing
the company towards particular exit routes.
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

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There are following groups of players:
Angels and angel clubs
Venture Capital funds
Small
Medium
Large
Corporate venture funds
Financial service venture groups

Angels and angel clubs

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Angels are wealthy individuals who invest directly into companies. They
can form angel clubs to coordinate and bundle their activities. Besides the
money, angels often provide their personal knowledge, experience and
contacts to support their investee. 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, and Angels
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 50 million (is this deals size or total money under management
or money under management per fund?). As for the small and medium
Venture Capital funds strong competition will clear the marketplace. There
will be mergers and acquisitions leading to a
Concentration of capital. Funds specialized in different business areas will
form strategic partnerships. Only the more successful funds will be able to
attract new money. Examples are:
Artemis Comaford
Abbell Venture Fund
Acacia Venture Partners

Medium Venture Funds

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

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

Examples are:
AIG American International Group
Cap Vest Man
3i

Corporate Venture Funds

These Venture Capital funds are set up and owned by technology
companies. Their aim is to widen the parent company's technology base in
a 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 technology or product
development. The average deals size is between USD 2 million and USD 5
million.
The large funds will try to improve their position by mergers and
acquisitions with other funds to improve size, reputation and their
financial muscle. In addition they will to diversify. Possible areas to enter

31
are other financial services by means of M&As with financial services
corporations and the consulting business. For the latter one the funds have
a rich resource of expertise and contacts in house. In a declining market
for their core activity and with lots of tumbling companies out there is no
reason why Venture Capital funds should offer advice and consulting only
to their investees. Examples are:
Oracle
Adobe
Dell
Kyocera

As an example, Adobe systems launched a $40m venture fund in 1994 to

invest in companies strategic to its core business, such as Cascade
Systems Inc and Lantana Research Corporation. - has been successfully
boosting demand for its core products, so that Adobe recently launched a
second $40m fund.

Financial funds
A solution for financial funds could be a shift to a higher securisation of
Venture Capital activities. That means that the parent companies shift the
risk to their customers by creating new products such as stakes in an
Venture Capital fund. However, the success of such products will depend
on the overall climate and expectations in the economy. As long as the
down turn continues without any sign of recovery customers might prefer
less risky alternatives.

COMPANY PROFILE

32
Overview

Over the last 18 months, the venture capital industry around the globe has experienced a
welcome acceleration in the mature investment hotbeds United States, Europe and
Israel and in the emerging venture capital hotbeds China and India. Global venture
capital investment last year reached US $ 21.4 billion, the highest level since 2010 was in
2013 where it reached $ 35.2 billion, and is maintaining a robust pace in year 2016. The
acceleration has been bolstered by the increasing globalization of both venture capital
funds and venture backed companies and a substantial investor focus on emerging
sectors.

As the dotcom market of the late 1990 has gathered the momentum, venture capital stood
at the nexus of hype and hope. In 2000 , they poured nearly $95 billion into mostly
young , untested companies , some no more than ideas, expecting to reap rich rewards by
later selling of these outfits to public .But the bubble burst the market for the new stock
issues tanked --- and by 2003 , venture capital funding had dwindled to $19 billion.

The VC showed the signs of stabilizing as the industry were bolstered by the 2005s
strong 4th quarter, the financing exceeded the $ 21.5 billion invested in venture-backed
companies in 2004, reaching $22.1billion .While that was far below 2000s peak, it
represents a more sustainable pace of funding for both entrepreneurs and investors. In
another sign of the industry firming, pension funds, foundations, and other investors are
again getting interested to invest their money in venture funds, which provided seed
money for young companies to grow on

33
History & Evolution

Prior to World War Two, the source of capital for entrepreneurs everywhere was either
the government, government-sponsored institutions meant to invest in such ventures, or
informal investors (today, termed "angels") that usually had some prior relationship to the
entrepreneur. In general, throughout history private banks, quite reasonably, have been
unwilling to lend money to a newly established firm, because of the high risk and lack of
collateral. After World War Two, in the U.S. a set of intermediaries emerged who
specialized in investing in fledgling firms having the potential for extremely rapid
growth.

From its earliest beginnings on the U.S. East Coast, venture capital gradually expanded
and became an increasingly professionalized institution. During this period, the locus of
the venture capital industry shifted from New York and Boston on the East Coast to
Silicon Valley on the West Coast. By the mid 1980s, the ideal-typical venture capital firm
was based in Silicon Valley and invested largely in electronics with lesser sums devoted
to biomedical technologies. Until the present, in addition to Silicon Valley, the two other
major concentrations have been Boston and New York City.

In both Europe and Asia, there are significant concentrations of venture capital in
London, Israel, Hong Kong, Taiwan, and Tokyo. In the U.S., the government has played a
role in the development of venture capital, though, for the most part, it was indirect. The
indirect role, i.e., the general policies that also benefited the development of the venture
capital industry, was probably the most significant. Some of the most important of these
were:

The U.S. government generally practiced sound monetary and fiscal policies
ensuring relatively low inflation with a stable financial environment and currency.
U.S. tax policy, though it evolved, has been favorable to capital gains, and a
number of decreases in capital gains taxes may have had some positive effect on
the availability of venture capital.

34
 With the exception of a short period in the 1970s, U.S. pension funds have been
allowed to invest prudent amounts in venture capital funds.

The NASDAQ stock market, which has been the exit strategy of choice for
venture capitalists, was strictly regulated and characterized by increasing
openness thus limiting investor's fears of fraud and deception.

This created a general macroeconomic environment of transparency and predictability,

reducing risks for investors. Put differently, environmental risks stemming from
government action were minimized -- a sharp contrast to most developing nations.

Another important policy has been a willingness to invest heavily and continuously in
university research. This investment funded generations of graduate students in the
sciences and engineering. From this research has come trained personnel and innovations;
some of who formed firms that have been funded by venture capitalists. U.S. universities
particularly, MIT, Stanford, and UC Berkeley played a particularly salient role.

The most important direct U.S. government involvement in encouraging the growth of
venture capital was the passage of the Small Business Investment Act of 1958 authorizing
the formation of small business investment corporations (SBICs). This legislation created
a vehicle for funding small firms of all types. The legislation was complicated, but for the
development of venture capital the following features were most significant:

It permitted individuals to form SBICs with private funds as paid-in capital and
then they could borrow money on a two to one ratio initially up to $300,000,
i.e., they could use up to $300,000 of SBA-guaranteed money for their investment
of $150,000 in private capital.
There were also tax and other benefits, such as income and a capital gains pass-
through and the allowance of a carried interest as compensation.

The SBIC program became one that many other nations either learned from or emulated.
The SBIC program also provided a vehicle for banks to circumvent the Depression-Era
laws prohibiting commercial banks from owning more than 5 percent of industrial firms.

35
The banks' SBIC subsidiaries allowed them to acquire equity in small firms. This made
even more capital available to fledgling firms, and was a significant source of capital in
the 1960s and 1970s. The final investment format permitted SBICs to raise money in the
public market. For the most part, these public SBICs failed and/or were liquidated by the
mid 1970s. After the mid 1970s, with the exception of the bank SBICs, the SBIC program
was no longer significant for the venture capital industry.

The SBIC program experienced serious problems from its inception. One problem was
that as a government agency it was very bureaucratic having many rules and regulations
that were constantly changing. Despite the corruption, something valuable also occurred.
Namely, and especially, in Silicon Valley, a number of individuals used their SBICs to
leverage their personal capital, and some were so successful that they were able to
reimburse the program and raise institutional money to become formal venture capitalists.
The SBIC program accelerated their capital accumulation, and as important, government
regulations made these new venture capitalists professionalize their investment activity,
which had been informal prior to entering the program. Now-illustrious firms such as
Sutter Hill Ventures, Institutional Venture Partners, Bank of America Ventures, and Menlo
Ventures began as SBICs.

The historical record also indicates that government action can harm venture capital. The
most salient example came in 1973 when the U.S. Congress, in response to widespread
corruption in pension funds, changed Federal pension fund regulations. In their haste to
prohibit pension fund abuses, Congress passed the Employment Retirement Income
Security Act (ERISA) making pension fund managers criminally liable for losses
incurred in high-risk investments. This was interpreted to include venture capital funds;
as a result pension managers shunned venture capital nearly destroying the entire
industry.

This was only reversed after active lobbying by the newly created National Venture
Capital Association (NVCA). In 1977, it succeeded in starting a gradual loosening
process that was completed in 1982. The new interpretation of these pension fund
guidelines contributed to first a trickle then a flood of new money into venture capital

36
funds. The most successful case of the export of Silicon Valley-style venture capital
practice is Israel where the government played an important role in encouraging the
growth of venture capital.

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

corruption, massive investment in military and, particularly, electronics research, and the
excellent higher educational system. The importance of the relationships between Israelis
and Jewish individuals in U.S. high-technology industry and the creation of the Israeli
venture capital system should not be underestimated.

For example, the well-known U.S. venture capitalist, Fred Adler, began investing in
Israeli startups in the early 1970s, and in 1985 was involved in forming the first Israeli
venture capital fund. Still, the creation of an Israeli venture capital industry would wait
until the 1990s, when the government funded an organization, Yozma, to encourage
venture capital in Israel.

Yozma received $100 million from the Israeli government. It invested $8 million in ten
funds that were required to raise another $12 million each from "a significant foreign
partner," presumably an overseas venture capital firm. Yozma also retained $20 million to
invest itself. These sibling funds were the backbone of a now vibrant community that
invested in excess of $1 billion in Israel in 1999 (Pricewaterhouse 2000). In the U.S.,
venture capital emerged through an organic trial-and-error process, and the role of the
government was limited and contradictory. In Israel the government played a vital role in
a supportive environment in which private-sector venture capital had already emerged.
The role of government differs. In the U.S. the most important role of the government
was indirect, in Israel it was largely positive in assisting the growth of venture capital, in
India the role of the government has had to be proactive in removing barriers (Dossani
and Kenney 2001).

In every nation, the state has played some role in the development of venture capital.
Venture capital is a very sensitive institutional form due to the high-risk nature of its
investments, so the state must be careful to ensure its policies do not adversely affect its

37
venture capitalists. Put differently, capricious governmental action injects extra risk into
the investment equation. However, judicious, well-planned government policies to create
incentives for private sector involvement have in the appropriate lead to the establishment
of what became an independent self-sustaining venture capital industry.

Global Trend in Venture Capital Industry

The 2016 Global Venture Capital Survey was sponsored by the Global DTT TMT
industry group, in conjunction with the following venture capital associations throughout
the world:

Brazilian Association of Private Equity & Venture Capital (ABVCAP)

British Private Equity & Venture Capital Association (BVCA)

Canadas Venture Capital & Private Equity Association (CVCA)

European Private Equity & Venture Capital Association (EVCA)

Emerging Markets Private Equity Association (EMPEA)

Indian Venture Capital Association (IVCA)

Israel Venture Association (IVA)

Latin American Venture Capital Association (LAVCA)

Malaysian Venture Capital and Private Equity Association (MVCA)

National Venture Capital Association (NVCA)

Singapore Venture Capital & Private Equity Association (SVCA)

Taiwan Private Equity & Venture Capital Association (TVCA)

Zero2IPO

38
The survey was conducted with venture capitalists (VCs) in the Americas, Asia Pacific
(AP), Europe and Israel. There were 725 responses from general partners of venture
capital firms with assets under management ranging from less than $100 million1 to
greater than $1 billion.

Multiple responses from the same firm were allowed, as the survey was a general
measurement of the state of global investing from all general partners, not attitudes of
specific firms. If respondents did not answer a question, the count for the question was
adjusted accordingly.

The highest number of respondents35 percentclaimed assets under management

totaling between $100 million and $499 million. Another 34 percent had managed assets
that were less than $100 million, 17 percent had managed assets greater than $1 billion,
and 14 percent had between $500 million and $1 billion in assets under management.

Geographically, the breakdown of responses continues to be fairly representative of both

the size and location of firms in the venture capital industry around the world. Forty-four
percent of the respondents were from the United States, 21 percent from European
countries (excluding the UK), 16 percent from Asia Pacific countries, 10 percent from the
Americas (excluding the U.S.), 7 percent from the UK, and 2 percent from Israel.

39
40
Seventy-two percent of the respondents had a primary investment focus on venture
capital while 28 percent were primarily focused on private equity and venture capital.
And, this year, 52 percent of venture capitalists noted that they are investing outside of
their home country.

Given the severity of the current global recession, this years survey focused on issues
surrounding its impact on venture capitalists. The survey questions asked how the global
recession is affecting strategy; how future investments are being planned, both by sector
and region; what the anticipated size of the next fund will be and who VCs think their
limited partners will be.

Looking to Government

Around the world, government has been playing an important role in fostering innovation
and entrepreneurship. Governments have a long history in funding research and
development through universities and national laboratories, which has resulted in much
of the technology that has been commercialized during past decades.

As venture capitalists increase their investment in areas like cleantech and life sciences,
where there is more government regulation, VCs are more cognizant of the impact
government policy can have on their future success. For instance, if there arent sufficient
tax credits or stimulus to help struggling solar and wind alternative energy companies get
traction to compete with large traditional energy companies, they wont prosper.
Government can influence policy in key areas such as patent protection, immigration and,
of course, trade.

To some extent the success of Silicon Valley or, as a more recent example, Israeli venture
capital, is the result of defense and other government sponsored research and
development spending. The European Commission launched its Information and
Communications Technology (ICT) strategy in March 2016, to pursue the doubling of
investments into ICT research and development, by calling on member states and the
industry (including private equity houses) to pool resources and cooperate more strongly.

41
Given the important role government traditionally has played in creating a regulatory
environment which encourages venture creation, we asked respondents to identify the top
two government actions, over the next 12 months, they felt would most foster innovation.
Among all respondents, three out of five saw government implementation of favorable
tax policies as the most significant, while half are in favor of increased government
support for entrepreneurial activitysuch as research grants, small business investment
corporations and increased training programs for entrepreneurs. In fact, among all
respondents except Israel, where it was number two, implementation of favorable tax
policies was the key action respondents felt government should take in the next year.

Strikingly, with the only exception being Israel, the most widely preferred action among
the respondents was that government should foster innovation by implementing favorable
tax policies for entrepreneurial and venture development. At 86 percent, Israel preferred
increased government support for entrepreneurial activity as governments most
important action.

42
When broken down by region, with the exception of Israel, investors around the world
agreed that motivating institutional investors to invest in the venture capital asset class
was the most important action government could take. Israelis were more interested by
far (86 percent) in increased investment by government in research and development.
Among U.S. respondents, almost half were interested in encouraging institutional
investors, while 41 percent were in favor of liberalizing tax policies.

It is important to note that culturally, when comparing U.S. attitudes to those held around
the world that by and large, the rest of the world looks to government for a more engaged,
proactive role. Even as VC markets outside the U.S. mature, that stance may not change
and as VCs become more transient in both directions, they have to be aware of that
distinction.

43
Venture Capital in India

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

44
 Promoted by all India development financial institutions

The IDBI started a VC fund in 1987 as per the long term fiscal policy of government of
India, with an initial capital of Rs. 10 cr which raised by imposing a cess of 5% on all
payments made for the import of technology know- how projects requiring funds from
rs.5 lacs to rs 2.5 cr were considered for financing. 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)

45
 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,
promoted the Gujarat Venture Financial Ltd. (GVFL) along with other promoters such as
the IDBI, the World Bank, etc. The GVFL provides financial assistance to businesses in
the form of equity, conditional loans or income notes for technologies development and
innovative products. It also provides finance assistance to entrepreneurs.

The government of Andhra Pradesh has also promoted the Andhra Pradesh Industrial
Development Corporation (APIDC) venture capital ltd. To provide VC financing in
Andhra Pradesh.

Promoted by commercial banks

Canbank Venture Capital Fund, State Bank Venture Capital Fund and Grindlays bank
Venture Capital Fund have been set up by the respective commercial banks to undertake
venture capital activities.

The State Bank Venture Capital Funds provides financial assistance for bought out deal
as well as new companies in the form of equity which it disinvests after the
commercialization of the project.

Canbank Venture Capital Fund provides financial assistance for proven but yet to b
commercially exploited technologies. It provides assistance both in the form of equity
and conditional loans.

Private Venture Capital Funds

46
Several private sector venture capital funds have been established in India such as the
20th Century 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 software house in India

Ruskan software, Pune based software consultancy

SQL Star, Hyderabad-based training and software development consultancy

Satyam infoway, the first private ISP in India

Hinditron, makers of embedded software

Selectia, provider of interactive software selector

Yantra, ITLInfosys US subsidiary, solution for supply chain management

Rediff on the Net, Indian website featuring electronic shopping, news, chat etc.

Industry Life Cycle

From the industry life cycle we can know in which stage we are standing. On the basis of
this management can make future strategies of their business.

The growth of VC in India has four separate phases:

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
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

47
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 1980s
were marked by an increasing disillusionment with the trajectory of the economic system
and a belief that liberalization was needed. The liberalization process started in 1985 in a
limited way. The concept of venture capital received official recognition in 1988 with the
announcement of the venture capital guidelines.

During 1988 to 1992 about 9 venture capital institutions came up in India. Though the
venture capital funds should operate as open entities, Government of India controlled
them rigidly. One of the major forces that induced Government of India to start venture
funding was the World Bank. The initial funding has been provided by World Bank. The
most important feature of the 1988 rules was that venture capital funds received the
benefit of a relatively low capital gains tax rate which was lower than the corporate rate.
The 1988 guidelines stipulated that VC funding firms should meet the following criteria:

Technology involved should be new, relatively untried, very closely held, in the
process of being taken from pilot to commercial stage or incorporate some
significant improvement over the existing ones in India
Promoters / entrepreneurs using the technology should be relatively new,
professionally or technically qualified, with inadequate resources to finance the
project.

Between 1988 and 1994 about 11 VC funds became operational either through
reorganizing the businesses or through new entities.

All these followed the Government of India guidelines for venture capital activities and
have primarily supported technology oriented innovative businesses started by first
generation entrepreneurs. Most of these were operated more like a financing operation.
The main feature of this phase was that the concept got accepted. VCs became
operational in India before the liberalization process started. The context was not fully

48
ripe for the growth of VCs. Till 1995; the VCs operated like any bank but provided funds
without collateral. The first stage of the venture capital industry in India was plagued by
in experienced management, mandates to invest in certain states and sectors and general
regulatory problems. Many public issues by small and medium companies have shown
that the Indian investor is becoming increasingly wary of investing in the projects of new
and unknown promoters.

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

Phase II - Entry of Foreign Venture Capital funds (VCF) between 1995 -1999

The second phase of VC growth attracted many foreign institutional investors. During
this period overseas and private domestic venture capitalists began investing in VCF. The
new regulations in 1996 helped in this. Though the changes proposed in 1996 had a
salutary effect, the development of venture capital continued to be inhibited because of
the regulatory regime and restricted the FDI environment. To facilitate the growth of
venture funds, SEBI appointed a committee to recommend the changes needed in the VC
funding context. This coincided with the IT boom as well as the success of Silicon Valley
start-ups. In other words, VC growth and IT growth co-evolved in India.

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

49
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.

Need for growth of venture capital in India

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In India, a revolution is ushering in a new economy, wherein entrepreneurs mind set is
taking a shift from risk adverse business to investment in new ideas which involve high
risk. The conventional industrial finance in India is not of much help to these new
emerging enterprises. Therefore there is a need of financing mechanism that will fit with
the requirement of entrepreneurs and thus it needs venture capital industry to grow in
India.

Few reasons for which active Venture Capital Industry is important for India include:

Innovation : needs risk capital in a largely regulated, conservative, legacy

financial system
Job creation: large pool of skilled graduates in the first and second tier cities

Patient capital: Not flighty, unlike FIIs

Creating new industry clusters: Media, Retail, Call Centers and back office
processing, trickling down to organized effort of support services like office
services, catering, transportation

51
 Methods of Venture Financing

Venture capital is typically available in three forms in India, they are:

Equity: All VCFs in India provide equity but generally their contribution does not exceed
49 percent of the total equity capital. Thus, the effective control and majority ownership
of the firm remains with the entrepreneur. They buy shares of an enterprise with an
intention to ultimately sell them off to make capital gains.

Conditional Loan: It is repayable in the form of a royalty after the venture is able to
generate sales. No interest is paid on such loans. In India, venture capital firms charge
royalty ranging between 2 to 15 percent; actual rate depends on other factors of the
venture such as gestation period, cost-flow patterns, riskiness and other factors of the
enterprise.

Income Note: It is a hybrid security which combines the features of both conventional
loan and conditional loan. The entrepreneur has to pay both interest and royalty on sales,
but at substantially low rates.

Other Financing Methods: A few venture capitalists, particularly in the private sector,
have started introducing innovative financial securities like participating debentures,
introduced by TCFC is an example.

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Venture capital and alternative financing comparison

If we are struggling to find success in our quest for venture capital, maybe we are
looking in the wrong place. Venture capital is not for everybody. For starters, venture
capitalists tend to be very picky about where they invest. They are looking for something
to dump a lot of money into (usually no less than $1 million) that will pour even more
money right back at them in a short amount of time (typically 3-7 years). We may be
planning for a steady growth rate as opposed to the booming, overnight success that
venture capitalists tend to gravitate toward. We may not be able to turn around as large of
a profit as they are looking for in quick enough time. We may not need the amount of
money that they offer or our business may simply not be big enough.

53
Simply put, venture capital is not the right fit for our business and there are plenty of
other options available when it comes to finding capital.

Substitute in Early stage

1. Angels

Most venture capital funds will not consider investing in anything under $1 million to $2
million. Angels, however, are wealthy individuals who will provide capital for a startup
business. These investors have usually earned their money as entrepreneurs and business
managers and can serve as a prime resource for advice on top of capital. On the other
hand, due to typically limited resources, angels usually have a shorter investment horizon
than venture capitalists and tend to have less tolerance for losses.

2. Private Placement

An investment bank or agent may be able to raise equity for our company by placing our
unregistered securities with accredited investors. However, you should be aware that the
fees and expenses associated with this practice are generally higher than those that come
with venture and angel investors. We will likely receive little or no business counsel from
private investors who also tend to have little tolerance for losses and under-performance.

3. Initial Public Offering

If we are somehow able to gain access to public equity markets than an initial public
offering (IPO) can be an effective way to raise capital. Keep in mind that, while the
public markets high valuations, abundant capital and liquidity characteristics make it
attractive, the transaction costs are high and there are ongoing legal expenses associated
with public disclosure requirements.

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Later Stage Financing

1. Bootstrap Financing

This method is intended to develop a foundation for your business from scratch.
Financial management is essential to make this work. With bootstrap financing youre
building a business from nothing, which means there is little to no margin for error in the
finance department. Keep a rigid account of all transactions and dont stray from your
budget. A few different methods of bootstrapping include:

Factoring-which generates cash flow through the sale of your accounts receivable to a
factor at a discounted price for cash.

Trade Credit-is an option if you are able to find a vendor or supplier that will allow you
to order goods on net 30, 60 or 90 day terms. If you can sell the goods before the bill
comes due then you have generated cash flow without spending any money. Customers
can pay you up front our services.

Leasing your equipment instead of purchasing it outright.

2. Fund from Operations

Look for ways to tweak your business in order to reduce the cash flowing out and
increase the cash flowing in. Funding found in business operations come free of finance
charges, can reduce future financing charges and can increase the value of your business.
Month-by-month operating and cash projections will show how well we have planned,
how you can optimize the elements of your business that generate cash and allow you to
plan for new investments and contingencies.

3. Licensing

Sell licenses to technology that is non-essential to our company or grant limited licensing
to essential technology that can be shared. Through outlicensing we can generate revenue
from up-front fees, access fees, royalties or milestone payments.

55
4. Vendor Financing

Similar to the trade credit related to bootstrap financing, vendors can play a big role in
financing your new business. Establish vendor relationships through our trade association
and strike deals to offer their product and pay for it at a date in the near future. Selling the
product in time is up to us. In hopes of keeping you as a customer, vendors may also be
willing to work out an arrangement if we need to finance equipment or supplies. Just
make sure to look for stability when you research a 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 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.

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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. 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. Micro loans

These types of loans can range from hundreds of dollars to low six-figure amounts.
Although some lenders regard micro loans to be a waste of time because the amount is so
low, these can be a real boon for a startup business or one that just needs to add some
extra cash flow.

10. Finance Debt

It may be more expensive in the long run than purchasing, but financing your equipment,
facilities and receivables can free up cash in the short term or reduce the amount of
money that you need to raise.

11. Friends

Ask your friends if they have any extra money that they would like to invest. Assure
them that you will pay them back with interest or offer them stock options or a share of
the profits in return.

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VC Player List

Government fund list

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59
Private Indian funds

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61
Bank List

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 CHAPTER-2

OBJECTIVE OF THE STUDY

When we study something there is specific purpose for our study. The objectives of my
study are:

To understand the concept of Venture Capital

To study the evolution and need of Venture Capital industry in India

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 To study the problems faced by Venture Capitalists in India

To study the future prospects of Venture Capital financing

To understand Venture Capital industry in global scenario

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

investment.

CHAPTER-3

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 Review of Literature

Private financing used to fund a new business; in other words, money provided by
investors to start-up firms and small businesses with perceived long-term growth
potential. This is a very important source of funding for start-ups that do not have
access to capital markets. It typically entails high risk for the investor, but it has the
potential for above-average returns.

According to Subash and Nair, (May 2005)

According to theses persons though the modern concept of venture capital stated during
1946 and now practiced by almost all economies around the world, there seems to be a
slowdown of venture capital activities after 2000.There may be a long list of reasons for
this situation, where people feel more risky to put their money in new and emerging
ventures. Hardly 5% of the total venture capital investment globally is given to really
stage ventures. In all the years people around the world has seen the potentiality of
venture capital in promoting different economies of the world by improving the standard
of living of the people by expanding business activities, increasing employment and also
generating more revenue to the government

According To Kumar, (June 2003)

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

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 CHAPTER-4

RESEARCH METHODOLOGY

Hypothesis

India is the country with many growth opportunities for Venture Capital industry.
Therefore, in near future India will offer promising opportunities and will emerge as an
attractive place to do the business. Venture Capitalists in India will have newer avenues
and regions to expand.

Research Design

Research design is the plan structure and strategy of investigation

conceived so as to obtain answers to research questions and to control
variance. It is the specification of methods and procedures for acquiring
the information needed. It is overall operational pattern or framework of
the project that stipulates what information is to be collected from which
resources by what procedures.
Research Design is broadly classified into:
Exploratory Research Design
Descriptive Research Design
Causal Research Design

The research is a Descriptive Research: also known as statistical

research, describes data and characteristics about the phenomenon about
studies. It answers the questions who, what, where, when and how. This

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research design can be said to have a low requirement for internal validity
and is used for frequencies, averages and other statistical calculations. In
short descriptive research deals with every thing than can be counted and
studied.

Sample Size:

To understand the venture capital industry in India, a sample size of 25 has been taken
into consideration.

TOOLS USED FOR DATA COLLECTION

Primary data collected through questionnaires and informal interviews.

Secondary data collected through magazines, journals, websites, and other

Corporate publication

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 CHAPTER-5

Data Analysis and Interpretation

Q1. What are the modes of financing adopted by venture capitalists to finance the
highly risky projects?

Response No. Of Respondents Percentage

Equity 13 52

Conditional loan 1 4

Convertible loan 4 16

Others 7 28

Total 25 100

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Interpretation:- The above chart indicates that most of the respondents use equity as a
mode of financing.

Q2. What are the factors affecting investment decisions?

Response No. of respondents Percentage

Project cost and returns 14 56
Future market prospects 2 8
Technology 6 24
Miscellaneous 3 12
Total 25 100

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Interpretation:- The chart indicates that the above factors affect investment decisions.

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Q3. How many respondents are aware of venture capital industry?

Response No. of respondents Percentage

Less than 10 1 1
10 20 4 19
20 40 10 20
More than 40 15 60
Total 25 100

Interpretation:-The above chart indicates that many people are aware of venture capital
industry.

Q4. In which type of risk investor is interested?

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Respondents No. of respondents Percentage
Lowest risk 5 20
Moderate risk 5 20
High risk 15 60
Total 25 100

Interpretation:- The above chart indicates that many respondents are interested in taking
high risk.

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Q5. According to you which are the most known venture capital industries?

Respondents No. of respondents Percentage

Austin ventures 8 32

Atlas venture 6 24

Health cap 6 24

Insight venture partners 5 20

Interpretation:- The chart indicates most of them are known with Austin ventures.

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 CHAPTER-6

CONCLUSION

The study provides that the maturity if the still nascent Indian Venture Capital market is
imminent.

Venture Capitalists in Indian have notice of newer avenues and regions to expand.
Venture Capitalists have moved beyond IT service but are cautious in exploring the right
business model, for finding opportunities that generate better returns for their investors.

In terms of impediments to expansion, few concerning factors to include; Venture

Capitalists unfavorable political and regulatory environment compared to other countries,
difficulty in achieving successful exists and administrative delays in documentation and
approval.

In spite of few non attracting factors, Indian opportunities are no doubt promising which
is evident by the large number of new entrants in past years as well in coming days.
Nonetheless the market is challenging for successful investment.

Therefore Venture capitalists responses are upbeat about the attractiveness of the India as
a place to do the business.

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 CHAPTER-7

FINDINGS AND SUGGESTIONS

During the preparation of my report I have analyzed many things which are following:-

A number of people in India feel that financial institution are not only conservatives
but they also have a bias for foreign technology & they do not trust on the abilities of
entrepreneurs.

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 Some venture fails due to few exit options. Team ignorant of international standards.
The team usually a two or three man team. It does not possess the required depth in
top management. The team is often found to have technical skills but does not possess
the overall organization building skills team is often short sited.

Venture capitalists in India consider the entrepreneurs integrity &urge to grow as the
most critical aspect or venture evaluation.

Some suggestions are as follows:

The investment should be in turnaround stage. Since there are many sick
industries in India and the number is growing each year, the venture capitalists
that have specialized knowledge in management can help sick industries. It would
also be highly profitable if the venture capitalist replace management either good
ones in the sick industries.
It is recommended that the venture capitalists should retain their basic feature that
is tasking high risk. The present situation may compel venture capitalists to opt
for less risky opportunities but is against the spirit of venture capitalism. The
established fact is big gains are possible in high risk projects.

There should be a greater role for the venture capitalists in the promotion of
entrepreneurship. The Venture capitalists should promote entrepreneur forums,
clubs and institutions of learning to enhance the quality of entrepreneurship.

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 CHAPTER-8

Limitations of Study

1. The biggest limitation was time because the time was not sufficient as there was
lot of information to be got & to have it interpretation

2. The data required was secondary & that was not easily available.

3. Study by its nature is suggestive & not conclusive

4. Expenses were high in collecting & searching the data.

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 BIBLIOGRAPHY

WEBSITE:

www.sebi.gov.in

www.ivca.org

www.nenonline.org.

www.indiavca.org.

www.vcindia.com

www.ventureintelligence.in

www.vccircle.com

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 QUESTIONNAIRE

Q1. Do you believe that your business has high growth potential?

o Agree
o Disagree

o Strongly agree

Q2. Does the company have proprietary intellectual property in the form of patent,
trademarks, and copyrights?

o Yes
o No

Q3. In which type of risk investor is interested ?

o Low risk
o Medium risk

o High risk

Q4. Which mode of financing is mostly adopted by the venture capitalists?

o Equity
o Conditional loan

o Convertible loan

Q5. Is the market large enough to create an annual rate of return for investors?

o Yes
o No

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 o Dont know

Q6. Is there any difficulty in raising funds?

o Not difficult at all

o Somewhat difficult

o Very difficult

Q7. What are the factors which should taken into account while selecting the venture
capitalists?

o Project cost
o Future market prospects

o Technology

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