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and highlight the venture capital regulations. It has briefly explained about the Chandra
Sekhar Committee recommendations, various types of Venture Capital Funds and the
venture capital process in India. A simple case on first Venture Capital Fund in India,
Technology Development & Information Company Of India Ltd., has also developed with
concluding remarks.
Introduction
The venture capital investment helps for the growth of innovative entrepreneurships in
India. Venture capital has developed as a result of the need to provide non-conventional,
risky finance to new ventures based on innovative entrepreneurship. Venture capital is an
investment in the form of equity, quasi-equity and sometimes debt - straight or conditional,
made in new or untried concepts, promoted by a technically or professionally qualified
entrepreneur. Venture capital means risk capital. It refers to capital investment, both equity
and debt, which carries substantial risk and uncertainties. The risk envisaged may be very
high may be so high as to result in total loss or very less so as to result in high gains
The concept of Venture Capital
Venture capital means many things to many people. It is in fact nearly impossible to come
across one single definition of the concept.
Jane Koloski Morris, editor of the well known industry publication, Venture Economics,
defines venture capital as 'providing seed, start-up and first stage financing' and also
'funding the expansion of companies that have already demonstrated their business
potential but do not yet have access to the public securities market or to credit oriented
institutional funding sources.
The European Venture Capital Association describes it as risk finance for
entrepreneurial growth oriented companies. It is investment for the medium or long term
return seeking to maximize medium or long term for both parties. It is a partnership with
the entrepreneur in which the investor can add value to the company because of his
knowledge, experience and contact base.
The Origin of Venture Capital
In the 1920's & 30's, the wealthy families of and individuals investors provided the start up
money for companies that would later become famous. Eastern Airlines and Xerox are the
more famous ventures they financed. Among the early VC funds set up was the one by the
Rockfeller Family which started a special fund called VENROCK in 1950, to finance new
technology companies. General Doriot, a professor at Harvard Business School, in 1946 set
up the American Research and Development Corporation (ARD), the first firm, as opposed
to a private individuals, at MIT to finance the commercial promotion of advanced technology
developed in the US Universities. ARD's approach was a classic VC in the sense that it used
only equity, invested for long term, and was prepared to live with losers. ARD's investment
in Digital Equipment Corporation (DEC) in 1957 was a watershed in the history of VC
financing. While in its early years vc may have been associated with high technology, over
the years the concept has undergone a change and as it stands today it implies pooled
investment in unlisted companies.
Venture Capital in India
In India the Venture Capital plays a vital role in the development and growth of innovative
entrepreneurships. Venture Capital activity in the past was possibly done by the
developmental financial institutions like IDBI, ICICI and State Financial Corporations. These
institutions promoted entities in the private sector with debt as an instrument of funding.
For a long time funds raised from public were used as a source of Venture Capital. This
source however depended a lot on the market vagaries. And with the minimum paid up
capital requirements being raised for listing at the stock exchanges, it became difficult for
smaller firms with viable projects to raise funds from public. In India, the need for Venture
Capital was recognised in the 7th five year plan and long term fiscal policy of GOI. In 1973
a committee on Development of small and medium enterprises highlighted the need to
faster VC as a source of funding new entrepreneurs and technology. VC financing really
started in India in 1988 with the formation of Technology Development and Information
Company of India Ltd. (TDICI) - promoted by ICICI and UTI. The first private VC fund was
sponsored by Credit Capital Finance Corporation (CFC) and promoted by Bank of India,
Asian Development Bank and the Commonwealth Development Corporation viz. Credit
Capital Venture Fund. At the same time Gujarat Venture Finance Ltd. and APIDC Venture
Capital Ltd. were started by state level financial institutions. Sources of these funds were
the financial institutions, foreign institutional investors or pension funds and high net-worth
individuals. The venture capital funds in India are listed in Annexure I.
1. Deal origination
2. Screening
3. Due diligence Evaluation)
4. Deal structuring
5. Post-investment activity
6. Exist
Venture Capital Investment Process
Deal origination:
In generating a deal flow, the VC investor creates a pipeline of deals or investment
opportunities that he would consider for investing in. Deal may originate in various ways.
referral system, active search system, and intermediaries. Referral system is an important
source of deals. Deals may be referred to VCFs by their parent organisaions, trade partners,
industry associations, friends etc. Another deal flow is active search through networks, trade
fairs, conferences, seminars, foreign visits etc. Intermediaries is used by venture capitalists
in developed countries like USA, is certain intermediaries who match VCFs and the potential
entrepreneurs.
Screening:
VCFs, before going for an in-depth analysis, carry out initial screening of all projects on the
basis of some broad criteria. For example, the screening process may limit projects to areas
in which the venture capitalist is familiar in terms of technology, or product, or market
scope. The size of investment, geographical location and stage of financing could also be
used as the broad screening criteria.
Due Diligence:
Due diligence is the industry jargon for all the activities that are associated with evaluating
an investment proposal. The venture capitalists evaluate the quality of entrepreneur before
appraising the characteristics of the product, market or technology. Most venture capitalists
ask for a business plan to make an assessment of the possible risk and return on the
venture. Business plan contains detailed information about the proposed venture. The
evaluation of ventures by VCFs in India includes;
Preliminary evaluation: The applicant required to provide a brief profile of the proposed
venture to establish prima facie eligibility.
Detailed evaluation: Once the preliminary evaluation is over, the proposal is evaluated in
greater detail. VCFs in India expect the entrepreneur to have:- Integrity, long-term vision,
urge to grow, managerial skills, commercial orientation.
VCFs in India also make the risk analysis of the proposed projects which includes: Product
risk, Market risk, Technological risk and Entrepreneurial risk. The final decision is taken in
terms of the expected risk-return trade-off as shown in Figure.
Deal Structuring:
In this process, the venture capitalist and the venture company negotiate the terms of the
deals, that is, the amount, form and price of the investment. This process is termed as deal
structuring. The agreement also include the venture capitalist's right to control the venture
company and to change its management if needed, buyback arrangements, acquisition,
making initial public offerings (IPOs), etc. Earned out arrangements specify the
entrequreneur's equity share and the objectives to be achieved.
Post Investment Activities:
Once the deal has been structured and agreement finalised, the venture capitalist generally
assumes the role of a partner and collaborator. He also gets involved in shaping of the
direction of the venture. The degree of the venture capitalist's involvement depends on his
policy. It may not, however, be desirable for a venture capitalist to get involved in the day-
to-day operation of the venture. If a financial or managerial crisis occurs, the venture
capitalist may intervene, and even install a new management team.
Exit:
Venture capitalists generally want to cash-out their gains in five to ten years after the initial
investment. They play a positive role in directing the company towards particular exit
routes. A venture may exit in one of the following ways:
1. APIDC Venture Capital Limited ,1102, Babukhan Estate, Hyderabad 500 001
2. Canbank Venture Capital Fund Limited, IInd Floor, Kareem Towers, Bangalore
3. Gujarat Venture Capital Fund 1997, Ashram Road, Ahmedabad 380 009
4. Industrial Venture Capital Limited, Thyagaraya Road, Chennai 600 017
5. Auto Ancillary Fund Opp. Signals Enclave, New Delhi 110 010
6. Gujarat Venture Capital Fund 1995 Ashram Road Ahmedabad 380 009
7. Karnataka Information Technology Venture Capital Fund Cunningham Rd Bangalore
8. India Auto Ancillary Fund Nariman Point, Mumbai 400 021
9. Information Technology Fund, Nariman Point, Mumbai 400 021
10. Tamilnadu Infotech Fund Nariman Point, Mumbai 400 021
11. Orissa Venture Capital Fund Nariman Point Mumbai 400 021
12. Uttar Pradesh Venture Capital Fund Nariman Point, Mumbai 400 021
13. SICOM Venture Capital Fund Nariman Point Mumbai 400 021
14. Punjab Infotech Venture Fund 18 Himalaya Marg, Chandigarh 160 017
15. National Venture Fund for Software and Information Technology Industry, Nariman
Point,
Mumbai 400 021
References