A PROJECT

ON

“STUDY OF PROBLEM & PROSPECTS VENTURE CAPITAL IN INDIA”

SUBMITTED FOR THE COMPLETION OF THE REQUIREMENT FOR THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

(Session 2012-2014)

Submitted By

Name: Ravinder Kumar Uni Roll No: 1685

MBA 2012-14

BABA FARID COLLEGE OF MANAGEMENT AND TECHNOLOGY

MUKTSAR ROAD, DEON, BATHINDA

PUNJAB

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CERTIFICATE

This is to certify that Name Ravinder Kumar U.I.D.122562029 has preceded under my

supervision his / her project report on "STUDY OF PROBLEM & PROSPECTS VENTURE

CAPITAL IN INDIA” in specialization area “FINANCE”.

The work embodied in this report is original and is of the standard expected -of an MBA

student and has not been submitted in part or full to this or any other University for the award

of any degree or diploma. He has completed all requirements of guidelines for research

project report and the work is fit for evaluation.

Name:

Signature of Supervisor/Guide

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CANDIDATE'S DECLARATION

This is certified that I Ravinder Kumar, the student of Department of Management Studies,

studying in MBA (4th Sem.), has undergone research project on title “STUDY OF

PROBLEM & PROSPECTS VENTURE CAPITAL IN INDIA” for the completion of

degree of Master of Business Administration to BABA FARID COLEEGE OF

MANAGEMENT AND TECHNOLOGY, BATHINDA , PUNJAB.

I solemnly declare that the work done by me is original and no copy of it has been submitted

to any other university for award of any other degree/fellowship or a similar title and topic.

Ravinder Kumar

Specialization: Finance

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ACKNOWLEDGEMENT

I am highly grateful to MR.SAURAV BANSAL (H.O.D) & all the faculty members of

Management of Business Administration department of BABA FARID COLLEGE OF

MANAGEMENT & TECHNOLOGY, DEON for providing this opportunity to make a

Major Project Report on “Study of Problem & Prospects Venture Capital in India”

Every study is incomplete without having a well plan and concrete exposure to the student.

Management studies are not exception. Scope of the project at this level is very wide ranging.

On the other hand it provide sound basis to adopt the theoretical knowledge and on the other

hand it gives an opportunities for exposure to real time situation.

I obliged to Mr. SANDEEP ARORA for his criticism & discussion that have constantly

inspired me throughout the tuner of my world. I am also very thankful to for making

available the guidance and encouragement since the day of my joining throughout my work.

My increased spectrum of knowledge in this field is the result of there constant supervision

and direction that has helped me to absorb relevant and high quality information.

I am extremely grateful to BABA FARID COLLEGE OF MANAGEMENT &

TECHNOLOGY, BATHINDA (DEON) for granting me permission to be part of this

college.

Thanking you

RAVINDER KUMAR M.B.A 4th Sem

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TABLE OF CONTENT

CHAPTERS TITLE PAGE NO.

CHAPTER 1: Introduction 01-21

CHAPTER 2: Reliance Venture Capital 22-25

CHAPTER3: Review of Literature 26-30

CHAPTER 4: Significance of Study 31-32

CHAPTER 5: Objective of Study 33-34

CHAPTER 6: Research Methodology 35-37

Research Design Data Collection Limitations of Study

CHAPTER 7: Analysis & Interpretation 38-53

CHAPTER 8: Suggestions 54-55

CHAPTER 9: Findings 56-57

CHAPTER10: Conclusion 58-59

CHAPTER11: Bibliography 60

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CHAPTER:- 1

INTRODUCTION

INTRODUCTION

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

growth startup companies. The venture capital fund makes money by owning equity in the

companies it invests in, which usually have a novel technology or business model in high

technology industries, such as biotechnology, IT, software, etc. The typical venture capital

investment occurs after the seed funding round as growth funding round (also referred to as

Series A round) in the interest of generating a return through an eventual realization event, such

as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore, all

venture capital is private equity, but not all private equity is venture capital.

In addition to angel investing and other seed funding options, venture capital is attractive for new

companies with limited operating history that are too small to raise capital in the public

markets and have not reached the point where they are able to secure a bank loan or complete a

debt offering. In exchange for the high risk that venture capitalists assume by investing in

smaller and less mature companies, venture capitalists usually get significant control over

company decisions, in addition to a significant portion of the company's ownership (and

consequently value).

Venture capital is also associated with job creation (accounting for 2% of US GDP), the

knowledge economy, and used as a proxy measure of innovation within an economic sector or

geography. Every year, there are nearly 2 million businesses created in the USA, and 600–

800 get venture capital funding. According to the National Venture Capital Association, 11% of

private sector jobs come from venture backed companies and venture backed revenue

accounts for 21% of US GDP.

It is also a way in which public and private sectors can construct an institution that

systematically creates networks for the new firms and industries, so that they can progress.

This institution helps in identifying and combining pieces of companies, like finance,

technical expertise, know-hows of marketing and business models. Once integrated, these

enterprises succeed by becoming nodes in the search networks for designing and building

products in their domain.

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

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‘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. 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

The Concept of Venture Capital

Venture capital means many things to many people. It is in fact nearly impossible to come

across one single definition of the concept.

Jane Koloski Morris, editor of the well known industry publication, Venture Economics,

defines venture capital as 'providing seed, start-up and first stage financing' and also

'funding the expansion of companies that have already demonstrated their business

potential but do not yet have access to the public securities market or to credit oriented

institutional funding sources.

The European Venture Capital Association describes it as risk finance for entrepreneurial

growth oriented companies. It is investment for the medium or long term return seeking to

maximize medium or long term for both parties. It is a partnership with the entrepreneur in

which the investor can add value to the company because of his knowledge, experience and

contact base.

Meaning of Venture Capital:

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

young, rapidly growing companies that have the potential to develop into significant

economic contributors. Venture capital is an important source of equity for start-up

companies.

Professionally managed venture capital firms generally are private partnerships or closely-

held corporations funded by private and public pension funds, endowment funds,

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foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists

themselves.

Venture capitalists generally:

Finance new and rapidly growing companies

Purchase equity securities

Assist in the development of new products or services

Add value to the company through active participation

Take higher risks with the expectation of higher rewards

Have a long-term orientation

When considering an investment, venture capitalists carefully screen the technical and

business merits of the proposed company. Venture capitalists only invest in a small

percentage of the businesses they review and have a long-term perspective. They also

actively work with the company's management, especially with contacts and strategy

formulation.

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

companies in a single venture fund. Many times they co-invest with other professional

venture capital firms. In addition, many venture partnerships manage multiple funds

simultaneously.

For decades, venture capitalists have nurtured the growth of America's high technology and

entrepreneurial communities resulting in significant job creation, economic growth and

international competitiveness. Companies such as Digital Equipment Corporation, Apple,

Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and Genetech are famous

examples of companies that received venture capital early in their development.

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Private Equity Investing

Venture capital investing has grown from a small investment pool in the 1960s and early

1970s to a mainstream asset class that is a viable and significant part of the institutional and

corporate investment portfolio. Recently, some investors have been referring to venture

investing and buyout investing as "private equity investing." This term can be confusing

because some in the investment industry use the term "private equity" to refer only to buyout

fund investing. In any case, an institutional investor will allocate 2% to 3% of their

institutional portfolio for investment in alternative assets such as private equity or venture

capital as part of their overall asset allocation. Currently, over 50% of investments in venture

capital/private equity comes from institutional public and private pension funds, with the

balance coming from endowments, foundations, insurance companies, banks, individuals and

other entities who seek to diversify their portfolio with this investment class.

What is a Venture Capitalist?

The typical person-on-the-street depiction of a venture capitalist is that of a wealthy financier

who wants to fund start-up companies. The perception is that a person who develops a brand

new change-the-world invention needs capital; thus, if they can’t get capital from a bank or

from their own pockets, they enlist the help of a venture capitalist.

In truth, venture capital and private equity firms are pools of capital, typically organized as a

limited partnership that invests in companies that represent the opportunity for a high rate of

return within five to seven years. The venture capitalist may look at several hundred

investment opportunities before investing in only a few selected companies with favorable

investment opportunities. Far from being simply passive financiers, venture capitalists foster

growth in companies through their involvement in the management, strategic marketing and

planning of their investee companies. They are entrepreneurs first and financiers second.

Even individuals may be venture capitalists. In the early days of venture capital investment,

in the 1950s and 1960s, individual investors were the archetypal venture investor. While this

type of individual investment did not totally disappear, the modern venture firm emerged as

the dominant venture investment vehicle. However, in the last few years, individuals have

again become a potent and increasingly larger part of the early stage start-up venture life

cycle. These "angel investors" will mentor a company and provide needed capital and

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expertise to help develop companies. Angel investors may either be wealthy people with

management expertise or retired business men and women who seek the opportunity for first-

hand business development.

Factor to be considered by venture capitalist in selection of investment proposal

There are basically four key elements in financing of ventures which are studied in depth by

the venture capitalists. These are:

1. Management: The strength, expertise & unity of the key people on the board bring

significant credibility to the company. The members are to be mature, experienced possessing

working knowledge of business and capable of taking potentially high risks.

2. Potential for Capital Gain: An above average rate of return of about 30 - 40% is required

by venture capitalists. The rate of return also depends upon the stage of the business cycle

where funds are being deployed. Earlier the stage, higher is the risk and hence the return.

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

realistic view about the present health of the organization as well as future projections

regarding scope, nature and performance of the company in terms of scale of operations,

operating profit and further costs related to product development through Research &

Development.

4. Owner’s Financial Stake: The financial resources owned & committed by the

entrepreneur/ owner in the business including the funds invested by family, friends and

relatives play a very important role in increasing the viability of the business. It is an

important avenue where the venture capitalist keeps an open eye.

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A BRIEF HISTORY

The concept of venture capital is not new. Venture capitalists often relate the story of

Christopher Columbus. In the fifteenth century, he sought to travel westwards instead of

eastwards from Europe and so planned to reach India. His far-fetched idea did not find favor

with the King of Portugal, who refused to finance him. Finally, Queen Isabella of Spain

decided to fund him and the voyages of Christopher Columbus are now empanelled in

history.

The modern venture capital industry began taking shape in the post – World War II years. It

is often said that people decide to become entrepreneurs because they see role models in

other people who have become successful entrepreneurs. Much the same thing can be said

about venture capitalists. The earliest members of the organized venture capital industry had

several role models, including these three:

A venture may be defined as a project prospective of converted into a process with an

adequate assumed risk and investment. With few exceptions, private equity in the first half of

the 20th century was the domain of wealthy individuals and families.

The Vanderbilt’s, Whitney’s, Rockefellers, and Warburg’s were notable investors in private

companies in the first half of the century. In 1938, Laurence S. Rockefeller helped finance the

creation of both Eastern Air Lines and Douglas Aircraft, and the Rockefeller family had vast

holdings in a variety of companies. Eric M. Warburg founded E.M. Warburg & Co. in 1938, which

would ultimately become Warburg Pincus, with investments in both leveraged buyouts and venture

capital.

Origins of Modern Private Equity

Before World War II, money orders (originally known as "development capital") were

primarily the domain of wealthy individuals and families. It was not until after World War II

that what is considered today to be true private equity investments began to emerge marked

by the founding of the first two venture capital firms in 1946: American Research and Development

Corporation (ARDC) and J.H. Whitney & Company.

ARDC was founded by Georges Doriot, the "father of venture capitalism" (former dean of

Harvard Business School and founder of INSEAD), with Ralph Flanders and Karl Compton (former

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president of MIT), to encourage private sector investments in businesses run by soldiers who

were returning from World War II.

ARDC's significance was primarily that it was the first institutional private equity investment

firm that raised capital from sources other than wealthy families although it had several

notable investment successes as well. ARDC is credited with the first trick when its 1957

investment of $70,000 in Digital Equipment Corporation (DEC) would be valued at over $355

million after the company's initial public offering in 1968 (representing a return of over 1200

times on its investment and an annualized rate of return of 101%).

Former employees of ARDC went on and established several prominent venture capital firms

including Greylock Partners (founded in 1965 by Charlie Waite and Bill Elfers) and Morgan,

Holland Ventures, the predecessor of Flagship Ventures (founded in 1982 by James Morgan).

ARDC continued investing until 1971 with the retirement of Doriot. In 1972, Doriot merged

ARDC with Textron after having invested in over 150 companies.

J.H. Whitney & Company was founded by John Hay Whitney and his partner Benno Schmidt. Whitney

had been investing since the 1930s, founding Pioneer Pictures in 1933 and acquiring a 15%

interest in Technicolor Corporation with his cousin Cornelius Vanderbilt Whitney. By far Whitney's

most famous investment was in Florida Foods Corporation.

The company developed an innovative method for delivering nutrition to American soldiers,

which later came to be known as Minute Maid orange juice and was sold to The Coca-Cola

Company in 1960. J.H. Whitney & Company continues to make investments in leveraged buyout

transactions and raised $750 million for its sixth institutional private equity fund in 2005.

Early Venture Capital and The Growth of Silicon Valley

A highway exit for Sand Hill Road in Menlo Park, California, where many Bay Area venture capital

firms are based

One of the first steps toward a professionally-managed venture capital industry was the

passage of the Small Business Investment Act of 1958. The 1958 Act officially allowed the U.S.

Small Business Administration (SBA) to license private "Small Business Investment Companies"

(SBICs) to help the financing and management of the small entrepreneurial businesses in the

United States.

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During the 1960s and 1970s, venture capital firms focused their investment activity primarily

on starting and expanding companies. More often than not, these companies were exploiting

breakthroughs in electronic, medical, or data-processing technology. As a result, venture

capital came to be almost synonymous with technology finance.

An early West Coast venture capital company was Draper and Johnson Investment Company,

formed in 1962 by William Henry Draper III and Franklin P. Johnson, Jr. In 1965, Sutter Hill

Ventures acquired the portfolio of Draper and Johnson as a founding action. Bill Draper and

Paul Wythes were the founders, and Pitch Johnson formed Asset Management Company at

that time.

It is commonly noted that the first venture-backed startup is Fairchild Semiconductor (which

produced the first commercially practical integrated circuit), funded in 1959 by what would

later become Venrock Associates.[13] Venrock was founded in 1969 by Laurance S. Rockefeller, the

fourth of John D. Rockefeller's six children as a way to allow other Rockefeller children to

develop exposure to venture capital investments.

It was also in the 1960s that the common form of private equity fund, still in use today, emerged.

Private equity firms organized limited partnerships to hold investments in which the investment

professionals served as general partner and the investors, who were passive limited partners, put

up the capital.

The compensation structure, still in use today, also emerged with limited partners paying an

annual management fee of 1.0–2.5% and a carried interest typically representing up to 20% of

the profits of the partnership.

The growth of the venture capital industry was fueled by the emergence of the independent

investment firms on Sand Hill Road, beginning with Kleiner, Perkins, Caufield & Byers and Sequoia

Capital in 1972. Located in Menlo Park, CA, Kleiner Perkins, Sequoia and later venture capital

firms would have access to the many semiconductor companies based in the Santa Clara Valley as

well as early computer firms using their devices and programming and service companies.

Throughout the 1970s, a group of private equity firms, focused primarily on venture capital

investments, would be founded that would become the model for later leveraged buyout and

venture capital investment firms. In 1973, with the number of new venture capital firms

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increasing, leading venture capitalists formed the National Venture Capital Association (NVCA).

The NVCA was to serve as the industry trade group for the venture capital industry. Venture

capital firms suffered a temporary downturn in 1974, when the stock market crashed and

investors were naturally wary of this new kind of investment fund.

It was not until 1978 that venture capital experienced its first major fundraising year, as the

industry raised approximately $750 million. With the passage of the Employee Retirement Income

Security Act (ERISA) in 1974, corporate pension funds were prohibited from holding certain

risky investments including many investments in privately held companies.

In 1978, the US Labor Department relaxed certain of the ERISA restrictions, under the

"prudent man rule," thus allowing corporate pension funds to invest in the asset class and

providing a major source of capital available to venture capitalists.

1980s

The public successes of the venture capital industry in the 1970s and early 1980s (e.g., Digital

Equipment Corporation, Apple Inc., Genentech) gave rise to a major proliferation of venture capital

investment firms. From just a few dozen firms at the start of the decade, there were over 650

firms by the end of the 1980s, each searching for the next major "home run". The number of

firms multiplied, and the capital managed by these firms increased from $3 billion to $31

billion over the course of the decade.

The growth of the industry was hampered by sharply declining returns, and certain venture

firms began posting losses for the first time. In addition to the increased competition among

firms, several other factors impacted returns. The market for initial public offerings cooled in

the mid-1980s before collapsing after the stock market crash in 1987 and foreign

corporations, particularly from Japan and Korea, flooded early stage companies with capital.

In response to the changing conditions, corporations that had sponsored in-house venture

investment arms, including General Electric and Paine Webber either sold off or closed these

venture capital units. Additionally, venture capital units within Chemical Bank and Continental

Illinois National Bank, among others, began shifting their focus from funding early stage

companies toward investments in more mature companies. Even industry founders J.H.

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Whitney & Company and Warburg Pincus began to transition toward leveraged buyouts and growth

capital investments.

The Venture Capital Boom and The Internet Bubble (1995 To 2000)

By the end of the 1980s, venture capital returns were relatively low, particularly in

comparison with their emerging leveraged buyout cousins, due in part to the competition for hot

startups, excess supply of IPOs and the inexperience of many venture capital fund managers.

Growth in the venture capital industry remained limited throughout the 1980s and the first

half of the 1990s, increasing from $3 billion in 1983 to just over $4 billion more than a

decade later in 1994.

After a shakeout of venture capital managers, the more successful firms retrenched, focusing

increasingly on improving operations at their portfolio companies rather than continuously

making new investments.

Results would begin to turn very attractive, successful and would ultimately generate the

venture capital boom of the 1990s. Yale School of Management Professor Andrew Metrick

refers to these first 15 years of the modern venture capital industry beginning in 1980 as the

"pre-boom period" in anticipation of the boom that would begin in 1995 and last through the

bursting of the Internet bubble in 2000.

The late 1990s were a boom time for venture capital, as firms on Sand Hill Road in Menlo Park

and Silicon Valley benefited from a huge surge of interest in the nascent Internet and other

computer technologies. Initial public offerings of stock for technology and other growth

companies were in abundance, and venture firms were reaping large returns.

The Private Equity Crash (2000 To 2003)

The technology-heavy NASDAQ Composite index peaked at 5,048 in March 2000, reflecting the

high point of the dot-com bubble. The Nasdaq crash and technology slump that started in

March 2000 shook virtually the entire venture capital industry as valuations for startup

technology companies collapsed. Over the next two years, many venture firms had been

forced to write-off large proportions of their investments, and many funds were significantly

"under water" (the values of the fund's investments were below the amount of capital invested).

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Venture capital investors sought to reduce size of commitments they had made to venture

capital funds, and, in numerous instances, investors sought to unload existing commitments

for cents on the dollar in the secondary market. By mid-2003, the venture capital industry had

shriveled to about half its 2001 capacity. Nevertheless, PricewaterhouseCoopers's Money

Tree Survey shows that total venture capital investments held steady at 2003 levels through

the second quarter of 2005.

Although the post-boom years represent just a small fraction of the peak levels of venture

investment reached in 2000, they still represent an increase over the levels of investment

from 1980 through 1995.

As a percentage of GDP, venture investment was 0.058% in 1994, peaked at 1.087% (nearly

19 times the 1994 level) in 2000 and ranged from 0.164% to 0.182% in 2003 and 2004. The

revival of an Internet-driven environment in 2004 through 2007 helped to revive the venture

capital environment. However, as a percentage of the overall private equity market, venture

capital has still not reached its mid-1990s level, let alone its peak in 2000.

Venture capital funds, which were responsible for much of the fundraising volume in 2000

(the height of the dot-com bubble), raised only $25.1 billion in 2006, a 2%-decline from 2005

and a significant decline from its peak.

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VENTURE CAPITAL IN INDIA

Venture capital was introduced in India in mid eighties by All India Financial Institutions

with the inauguration of Risk Capital Foundation (RCF) sponsored by IFCI with a view to

encourage the technologists and the professional to promote new industries. Consequently the

government of India promoted the venture capital during 1986-87 by creating a venture

capital fund in the context of structural development and growth of small-scale business

enterprises.

Since then several venture capital firms/funds (VCFs) are incorporated by Financial

Institutions (FIs), Public Sector Banks (PSBs), and Private Banks and Private Financial

companies.

The Indian Venture Capital Industry (IVCI) is just about a decade old industry as compared

to that in Europe and US. In this short span it has nurtured close to one thousand ventures,

mostly in SME segment and has supported building technocrat/professionals all through. The

VC industry, through its investment in high growth companies as well as companies adopting

newer technologies backed by first generation entrepreneurs, has made a substantial

contribution to economy.

In India, however, the potential of venture capital investments is yet to be fully

realized. There are around thirty venture capital funds, which have garnered over Rs. 5000

Crores. The venture capital investments in India at Rs. 1000.05 crore as in 1997, representing

0.1 percent of GDP, as compared to 5.5 per cent in countries such as Hong Kong.

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INVESTMENT PHILOSOPHY

Venture capitalists can be generalists, investing in various industry sectors, or various

geographic locations, or various stages of a company’s life. Alternatively, they may be

specialists in one or two industry sectors, or may seek to invest in only a localized geographic

area.

Not all venture capitalists invest in "start-ups." While venture firms will invest in companies

that are in their initial start-up modes, venture capitalists will also invest in companies at

various stages of the business life cycle. A venture capitalist may invest before there is a real

product or company organized (so called "seed investing"), or may provide capital to start up

a company in its first or second stages of development known as "early stage investing."

Also, the venture capitalist may provide needed financing to help a company grow beyond a

critical mass to become more successful ("expansion stage financing").

The venture capitalist may invest in a company throughout the company’s life cycle and

therefore some funds focus on later stage investing by providing financing to help the

company grow to a critical mass to attract public financing through a stock offering.

Alternatively, the venture capitalist may help the company attract a merger or acquisition

with another company by providing liquidity and exit for the company’s founders.

At the other end of the spectrum, some venture funds specialize in the acquisition, turnaround

or recapitalization of public and private companies that represent favorable investment

opportunities.

There are venture funds that will be broadly diversified and will invest in companies in

various industry sectors as diverse as semiconductors, software, retailing and restaurants and

others that may be specialists in only one technology.

While high technology investment makes up most of the venture investing in the U.S., and

the venture industry gets a lot of attention for its high technology investments, venture

capitalists also invest in companies such as construction, industrial products, business

services, etc. There are several firms that have specialized in retail company investment and

others that have a focus in investing only in "socially responsible" start-up endeavors.

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The basic principal underlying venture capital – invest in high-risk projects with the

anticipation of high returns. These funds are then invested in several fledging enterprises,

which require funding, but are unable to access it through the conventional sources such as

banks and financial institutions. Typically first generation entrepreneurs start such

enterprises. Such enterprises generally do not have any major collateral to offer as security,

hence banks and financial institutions are averse to funding them. Venture capital funding

may be by way of investment in the equity of the new enterprise or a combination of debt and

equity, though equity is the most preferred route.

Since most of the ventures financed through this route are in new areas (worldwide venture

capital follows "hot industries" like InfoTech, electronics and biotechnology), the probability

of success is very low. All projects financed do not give a high return. Some projects fail and

some give moderate returns. The investment, however, is a long-term risk capital as such

projects normally take 3 to 7 years to generate substantial returns. Venture capitalists offer

"more than money" to the venture and seek to add value to the investee unit by active

participation in its management. They monitor and evaluate the project on a continuous basis.

The venture capitalist is however not worried about failure of an investee company, because

the deal which succeeds, nets a very high return on his investments – high enough to make up

for the losses sustained in unsuccessful projects. The returns generally come in the form of

selling the stocks when they get listed on the stock exchange or by a timely sale of his stake

in the company to a strategic buyer.

The idea is to cash in on an increased appreciation of the share value of the company at the

time of disinvestment in the investee company. If the venture fails (more often than not), the

entire amount gets written off. Probably, that is one reason why venture capitalists assess

several projects and invest only in a handful after careful scrutiny of the management and

marketability of the project.

To conclude, a venture financier is one who funds a start up company, in most cases

promoted by a first generation technocrat promoter with equity. A venture capitalist is not a

lender, but an equity partner. He cannot survive on minimalism. He is driven by

maximization: wealth maximization. Venture capitalists are sources of expertise for the

companies they finance. Exit is preferably through listing on stock exchanges. This method

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has been extremely successful in USA, and venture funds have been credited with the success

of technology companies in Silicon Valley. The entire technology industry thrives on it

Length of Investment:

Venture capitalists will help companies grow, but they eventually seek to exit the investment

in three to seven years. An early stage investment make take seven to ten years to mature,

while a later stage investment many only take a few years, so the appetite for the investment

life cycle must be congruent with the limited partnerships’ appetite for liquidity. The venture

investment is neither a short term nor a liquid investment, but an investment that must be

made with careful diligence and expertise.

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STAGES OF VENTURE CAPITAL FUNDING

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

various stages are::

1. Pre seed Stage: Here, a relatively small amount of capital is provided to an

entrepreneur to conceive and market a potential idea having good future prospects.

The funded work also involves product development to some extent.

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

initial marketing formalities.

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

commercial manufacturing and sales.

4. Second Stage: In the Second Stage of Financing working capital is provided for the

expansion of the company in terms of growing accounts receivable and inventory.

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

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

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

Mezzanine Financing or Later Stage Financing is financing a company just before its

IPO (Initial Public Offer). Often, bridge finance is structured so that it can be repaid,

from the proceeds of a public offering.

Page | 23

METHODS OF VENTURE FINANCING

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

1. 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.

2. Conditional Loan: It is repayable in the form of a royalty after the venture is able

to generate sales. No interest is paid on such loans. In India, VCFs charge royalty

ranging between 2 to 15 percent; actual rate depends on other factors of the venture

such as gestation period, cost-flow patterns, riskiness and other factors of the

enterprise.

3. 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.

4. 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.

Page | 24

VENTURE CAPITAL FUND OPERATION

Venture capitalists are very selective in deciding what to invest in. A common figure is that

they invest only in about one in four hundred ventures presented to them.

They are only interested in ventures with high growth potential. Only ventures with high

growth potential are capable of providing the return that venture capitalists expect, and

structure their businesses to expect. Because many businesses cannot create the growth

required having an exit event within the required timeframe, venture capital is not suitable for

everyone.

Venture capitalists usually expect to be able to assign personnel to key management positions

and also to obtain one or more seats on the company's board of directors. This is to put

people in place, a phrase that has sometimes quite unfortunate implications as it was used in

many accounting scandals to refer to a strategy of placing incompetent or easily bypassed

individuals in positions of due diligence and formal legal responsibility, enabling others to rob

stockholders blind. Only a tiny portion of venture capitalists, however, have been found liable

in the large scale frauds that rocked American (mostly) finance in 2000 and 2001.

Venture capitalists expect to be able to sell their stock, warrants, options, convertibles, or

other forms of equity in three to ten years: this is referred to as harvesting. Venture

capitalists know that not all their investments will pay-off. The failure rate of investments can

be high; anywhere from 20% to 90% of the enterprises funded fail to return the invested

capital.

Many venture capitalists try to mitigate this problem through diversification. They invest in

companies in different industries and different countries so that the systematic risk of their

total portfolio is reduced. Others concentrate their investments in the industry that they are

familiar with. In either case, they work on the assumption that for every ten investments they

make, two will be failures, two will be successful, and six will be marginally successful.

They expect that the two successes will pay for the time given to, and risk exposure of the

other eight. In good times, the funds that do succeed may offer returns of 300 to 1000% to

investors.

Page | 25

Venture capital partners (also known as "venture capitalists" or "VCs") may be former chief

executives at firms similar to those which the partnership funds. Investors in venture capital

funds are typically large institutions with large amounts of available capital, such as state and

private pension funds, university endowments, insurance companies and pooled investment vehicles.

Most venture capital funds have a fixed life of ten years—this model was pioneered by some

of the most successful funds in Silicon Valley through the 1980s to invest in technological trends

broadly but only during their period of ascendance, to cut exposure to management and

marketing risks of any individual firm or its product.

In such a fund, the investors have a fixed commitment to the fund that is "called down" by

the VCs over time as the fund makes its investments. In a typical venture capital fund, the

VCs receive an annual "management fee" equal to 2% of the committed capital to the fund

and 20% of the net profits of the fund. Because a fund may run out of capital prior to the end

of its life, larger VCs usually have several overlapping funds at the same time—this lets the

larger firm keep specialists in all stage of the development of firms almost constantly

engaged. Smaller firms tend to thrive or fail with their initial industry contacts—by the time

the fund cashes out, an entirely new generation of technologies and people is ascending,

whom they do not know well, and so it is prudent to re-assess and shift industries or

personnel rather than attempt to simply invest more in the industry or people it already knows

Page | 26

Page | 27

CHAPTER:- 2

RELIANCE VENTURE CAPITAL

INTRODUCTION TO RELIANCE VENTURE CAPITAL

As the worlds of finance, technology, markets and people expand and converge, Reliance

Group's horizons are constantly expanding. Reliance Venture Asset Management Limited

(RVAM) has been promoted by the Reliance Group to leverage emerging and high growth

potential technologies, business models, world class management teams and markets to look

ahead at future opportunities that can be enriched and enhanced by taking advantage of the

group and its ecosystem.

The company was ranked 30th in the Red Herring Top 100 Global Venture Capital Firms in

2009-2010 and was the only India based corporate venture capital company to feature in the

ranking.

Our critical differentiators

Amongst the few Indian VC funds going global, contrary to the popular trend that is

reverse in nature

Investments in leading edge technologies, disruptive business models and technology

enabled companies around the world

Reliance Venture Asset Management, wholly owned subsidiary of Reliance Capital, is the

venture capital arm of the Reliance Group with an investment mandate to incubate or invest

into high-growth, new business ideas and is stage, sector and geography agnostic

RVAM currently manages assets of approx. Rs. 2 billion (US$ 35 million)

Page | 28

PORTFOLIO

Reliance Venture Asset Management has partnered in the establishment, growth and

success of numerous innovative business ideas worldwide. Till date, we have invested and

advised in deals to the tune of over $1 billion:

Page | 29

INVESTMENT APPROACH

With an overall strategy to enable innovation, Reliance Venture Asset Management Ltd.

seeks and invests in promising technology, media and entertainment, telecom, infrastructure

(logistics and defense), clean technology and mass consumption driven sectors. Our focus is

both - on established as well as emerging or disruptive technologies and business model. We

invest across the globe in various stages of the company’s lifecycle.

We believe that in a rapidly-changing knowledge economy, organizations can prosper only

by mobilizing diverse competencies, skill sets and expertise, by driving synergies across

attractive opportunities. To further this belief, we seek to create an ecosystem whereby it not

only maximizes investor returns but also provides a fertile environment for the growth of our

investee companies.

We believe in relationship capital and empowerment of companies to access our worldwide

customer base, technical knowledge, access to capital, and leverage the power of the Reliance

Group ecosystem. We strongly believe in the spirit of entrepreneurship and our mission is to

help build businesses that not only deliver outstanding financial value but also emerge as

category leaders.

Page | 30

Page | 31

CHAPTER:- 3

REVIEW OF LITERATURE

LITERATURE REVIEW

According to Subash and Nair, (May 2005)

According to theses persons though the modern concept of venture capital stated during 1946

and now practiced by almost all economies around the world, there seems to be a slowdown

of venture capital activities after 2000.There may be a long list of reasons for this situation,

where people feel more risky to put their money in new and emerging ventures. Hardly 5% of

the total venture capital investment globally is given to really stage ventures. In all the years

people around the world has seen the potentiality of venture capital in promoting different

economies of the world by improving the standard of living of the people by expanding

business activities, increasing employment and also generating more revenue to the

government

According To Kumar, (June 2003)

This study focus on the industry should concentrate more on early stage business

opportunities instead of later stage. It is the experience world over and especially in the

United States of America that the early stage opportunities have generated exceptional returns

for the industry. He also suggests that individual capitalists should follow a focused

investment strategy. The specialization should be in a board technology segment.

According to Kumar and Kaura, (March 2006)

The present study reports four factors which are used by the venture capitalist to screen new

venture proposals. Using Kendall’s tau-c analysis, the study brings out strong association

between several variable pair. Broadly, the analysis finds that:

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

They are highly meticulous while attending to the details.

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

experience.

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

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

tech.

The study brings out four important variables which are highly unique to successful

venture in India. They are:

Page | 32

Ability to evaluate and react to risk Attention to details Market share Profits.

Evaluating risk seems to be an area where unsuccessful venture fail. Since successful

teams focus on established markets and meticulously pursue these markets to gain

market share, they achieve desired profits.

According to Kumar, (May 2004)

The Indian Venture Capital Industry has followed the classical model of venture capital

finance. The early stage financing which includes seeds, startup & early stage investment was

always the major part of the total investment. Whenever venture capitalists invest in venture

certain basic preference play a crucial role in investment decision. Two such considerations

are location preferences and ownership preferences. Seed stage finance is provided to new

companies for the use in product development & initial marketing company may be in the

process of setting up the business or may be in the business for short period but have not

reach the stage of commercialization.

According to Kumar, (March, 2004)

The industry should concentrate more an early stage business opportunities instead of later

stage. It is the experience world over and especially in the United states of America that the

early stage opportunities have generated exceptional for the industry. It is recommended that

the venture capitalists should retain their basic feature that taking retain their basic feature

that is taking high risk. The present situation may compel venture capitalists to opt for less

risky opportunities but it is against the sprit of venture capitalism. The established fact is big

gains are possible in high risk projects.

According to Chary, (September 2005)

There has been a plethora of literature on venture capital finance, which is helping the

practitioners’ viz., venture capital finance companies and fund manage for better

understanding the role of venture capital in economic development. There are number of

studies on the venture capital and activities of venture capitalists in developed countries.

Page | 33

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

Whenever Indian policy makers have to encourage any industry. The usual practice is to

grant that the industry tax breaks for a limited period. This definitely acts as a positive

incentive for that industry. However, what is required is a through understanding of the

industry requirement framing and implementation of aggregative strategy for its

development. VC funds are not even registered with SEBI in spite of all the benefit available.

VC industry is one, which will today prepare a base for a strong tomorrow. What is need for

the development of VC industry is not only tax breaks but simpler procedures legislation for

simplified exit form investment, more transparency and legal backing to participate in

business amongst other things.

According to Kumar, (July, 2005)

One of the integral aspects of venture funding is venture capitalist's involvement with the

entrepreneurial team. The relationship through broad interaction was explored by Rosenstein

(1988). A comparison was drawn between small and large firms with regard to board

interaction. While it is important in large firms the relative power of small conventional

firms, board interaction generally is undermined. Rosenstein et. a. (1993) studied the finer

aspects of boards in the venture funded companies in the USA. From 98 candidates in the

sample, the study attempted to bring out the changes in the board size, board composition and

control and their relation to value added to the funded unit. The empirical analysis yielded

results wherein the size of the board increased after venture funding, indicating more

transparency in board operations.

Through a case based approach Lloyd et. al. (1995) explored the aspect of deal

structuring and post investment staging of venture capitalists through venture capitalists' co-

investing strategy. The study finds that even through venture capitalists fix tight milestones

and time lines they themselves contribute to many of the delays that are experienced by a

typical start up firm. This is because of the hierarchical co-investing partners and the lack of

understanding within the venture capitalist co-investors as to what role they individually play

in the development of their portfolio company.

According to Robbie, (1997)

Robbies, et. al. (1997) highlights the monitoring policies of funded units by venture

capitalists and studies the performance targets, monitoring information, and monitoring

Page | 34

actions through a questionnaire-based survey. The survey was administered to 108 British

Venture Capital Association members and total of 77 responses were gathered in the study.

The findings related to performance targets and other monitoring issues were considerable

addition to the literature in the subject.

The issues concerning board of directors' role in venture backed companies are widely

debated topics in academic research. The findings of the study by Fried et. al. (1998)

emphasize that the board of directors are a more involved in the venture-backed firms than

boards where members do not have large ownership at stake. The study provides an empirical

evidence of variation in the boards' involvement and shows its relevance in performance

management of funded units.

According to Mishra, (July 2004)

There is abundant empirical research conducted in developed countries which address the

relative investment evaluation criteria taken into account in the screening process for new

venture investment proposals. Zopunidis (1994) provides a useful summary of the previous

research in this field. The identification of selection criteria has been researched using

different methodologies such as simple rating of criteria (perpetual and deal specific

responses) Knight, 1986; Dixon, 1991; Hall and Hofer, 1993; Rah, Jung and Lee, 1994),

construct analysis (Fried and Hisrich, 1994), verbal protocols (Zhacharakis and Meyer,

1998), and quantitative compensatory models (Muzyka, Birley and Leleux, 1996; Shepherd,

1999). Multi methods (case analysis, study of administrative records, published interviews,

questionnaire and personal interviews) approach has also been used (Riquelme, 1994) to

enhance understanding of investment criteria and also extend it to other aspects of investment

process like deal structuring and divestment.

Page | 35

SIGNIFICANCE OF STUDY

Page | 36

CHAPTER:- 4

SIGNIFICANCE OF STUDY

Venture capitalists not only support high technology projects they also fiancé any risky idea,

they provide funds (a) if one needs additional capital to expand his existing business or one

has a new & promising project to exploit (b) if one cannot obtain a conventional loan the

requirement terms would create a burden during the period the firm is struggling to grown.

It is the ambition of many talented people in India to set up their own venture if they could

get adequate & reliable support. Financial investment provides loans & equity. But they do

not provide management support, which is often needed by entrepreneurs. But the venture

capital industries provide such support along with capital also. Venture capitalist acts a

partner not a financier.

Page | 37

OBJECTIVE OF THE STUDY

Page | 38

CHAPTER:- 5

OBJECTIVE OF STUDY

When we are going to study something there is specific purpose for our study. It may be for

our course, as hobby, for passing our time, to find out genuine solution for any problem or to

draw out certain inferences out of the available data. The objectives of my study are:

To find out the venture capital investment volume in India.

To study the problem faced by venture capitalist in India.

To study the future prospects of venture capital financing

Page | 39

RESEARCH METHODOLOGY

Page | 40

CHAPTER:- 6

RESEARCH METHODOLOGY

REDMEN & MORY defines, “Research as a systematized effort to gain now knowledge.”

It is a careful investigation for search of new facts in any branch of knowledge. The purpose

of research methodology section is to describe the procedure for conduction the study.

It includes research design, sample size, data collection and procedure of analysis of research

instrument.

Research always starts with a question or a problem. Its purpose is to find answers to

questions through the application of the scientific method. It is a systematic and intensive

study directed towards a more complete knowledge of the subject studied.

RESEARCH DESIGN:-

Acc. to Kerlinger, “Research design is the plan structure & strategy of investigation

conceived so as to obtain answers to research questions and to control variance.

Acc. to Green and Tull, “A research design is the specification of methods and

procedures for acquiring the information needed. It is the overall operational pattern or

framework of the project that stipulates what information is to be collected from which

sources by what procedures.

Its found that research design is purely and simply the framework for a study that guides the

collection and analysis of required data.

Research design is broadly classified into

Exploratory research design Descriptive research design Casual research design

This research is a Exploratory research. The major purpose of this research is description of

state of affairs as it exists at present.

DATA COLLECTION

Page | 41

SECONDARY DATA

Secondary data is the data which is already collected by someone and complied for different

purposes which are used in research for this study. It includes:-

Internet

Magazine

Journal

Newspaper

LIMITATIONS OF STUDY

The biggest limitation was time because the time was not sufficient as there was lot of

information to be got & to have it interpretation

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

Study by its nature is suggestive & not conclusive

Expenses were high in collecting & searching the data.

Page | 42

Page | 43

CHAPTER:- 7

ANALYSIS & INTERPRETATION

OBJECTIVE NO. 1

To Find out the venture capital investment volume in India

Methods of Financing

Instruments Rs million Per centEquity Shares 6,318.12 63.18Redeemable Preference Shares 2,154.46 21.54Non Convertible Debt 873.01 8.73Convertible Instruments 580.02 5.8Other Instruments 75.85 0.75Total 10,000.46 100

Rs million

6,318.12

2,154.46

873.01 580.0275.85

0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

7,000.00

Equ

ityS

hare

s

Red

eem

able

Pre

fere

nce

Sha

res

Non

Con

vert

ible

Deb

t

Con

vert

ible

Inst

rum

ents

Oth

erIn

stru

men

ts

Interpretation:-: This diagram shows the venture capital financing in equity share and secondly they invest in redeemable preference shares to get higher returns.

Page | 44

CONTRIBUTORS OF FUNDS

Contributors Rs. million Per cent

Foreign Institutional Investors 13,426.47 52.46%

All India Financial Institutions 6,252.90 24.43%

Multilateral Development Agencies 2,133.64 8.34%

Other Banks 1,541.00 6.02%

Foreign Investors 570 2.23%

Private Sector 412.53 1.61%

Public Sector 324.44 1.27%

Nationalized Banks 278.67 1.09%

Non Resident Indians 235.5 0.92%

State Financial Institutions 215 0.84%

Other Public 115.52 0.45%

Insurance Companies 85 0.33%

Mutual Funds 4.5 0.02%

Total 25,595.17 100.00%

Interpretation:-: This table shows the highest contribution of fund FII and secondly AIFI

to develop the Industry.

Page | 45

FINANCING BY INVESTMENT STAGE

Investment Stages Rs million Number

Start-up 3,813.00 297

Later stage 3,338.99 154

Other early stage 1,825.77 124

Seed stage 963.2 107

Turnaround financing 59.5 9

Total 10,000.46 691

Rs million

3,813.003,338.99

1,825.77

963.2

59.50.00

500.001,000.001,500.002,000.002,500.003,000.003,500.004,000.004,500.00

Start-up Later stage Other earlystage

Seed stage Turnaroundfinancing

Interpretation:-: This diagram shows the highest finance is received by the venture in

startup stage of any venture.

Page | 46

FINANCING BY INDUSTRY

Industry Rs million

Industrial products, machinery 2,599.32

Computer Software 1,832

Consumer Related 1,412.74

Medical 623.8

Food, food processing 500.06

Other electronics 436.54

Tel & Data Communications 385.09

Biotechnology 376.46

Energy related 249.56

Computer Hardware 203.36

Miscellaneous 1,380.85

Total 10,000.46

Page | 47

Rs million

2,599.32

1,832

1,412.74

623.8 500.06 436.54 385.09 376.46 249.56 203.36

1,380.85

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

Indu

stria

lpr

oduc

ts,

Com

pute

rS

oftw

are

Con

sum

erR

elat

ed

Med

ical

Food

, foo

dpr

oces

sing

Oth

erel

ectr

onic

s

Tel &

Dat

aC

omm

unic

atio

ns

Bio

tech

nolo

gy

Ener

gy r

elat

ed

Com

pute

rH

ardw

are

Mis

cella

neou

s

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

machinery and secondly finance received by computer software.

Page | 48

FINANCING BY STATES

Investment Rs million

Maharashtra 2,566

Tamil Nadu 1531Andhra Pradesh 1372Gujarat 1102Karnataka 1046West Bengal 312Haryana 300Delhi 294Uttar Pradesh 283Madhya Pradesh 231Kerala 135Goa 105Rajasthan 87Punjab 84Orissa 35Dadra & Nagar Haveli 32Himachal Pradesh 28Pondicherry 22Bihar 16Overseas 413

Total 9994

Page | 49

Rs million

2,566

15311372

1102 1046

312 300 294

0

500

1,000

1,500

2,000

2,500

3,000

Mahar

asht

ra

Tamil N

adu

Andhr

a Pr

ades

h

Gujara

t

Karna

taka

Wes

t Ben

gal

Harya

naDelh

i

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

to promote the state economy growth.

Page | 50

OBJECTIVE NO.2

To study the problems faced by venture capitalist in India.

Problems of Venture Capital in Indian Context

One can ask why venture funding is so successful in USA and faced a number of problems in

India. The biggest problem was a mindset change from "collateral funding" to high risk high

return funding. Most of the pioneers in the industry were people with credit background and

exposure to manufacturing industries. Exposure to fast growing intellectual property business

and services sector was almost zero. Moreover VCF is in its nascent stages in India. The

emerging scenario of global competitiveness has put an immense pressure on the industrial

sector to improve the quality level with minimization of cost of products by making use of

latest technological skills. The implication is to obtain adequate financing along with the

necessary hi-tech equipments to produce an innovative product which can succeed and grow

in the present market condition. Unfortunately, our country lacks on both fronts. The

necessary capital can be obtained from the venture capital firms who expect an above average

rate of return on the investment. The financing firms expect a sound, experienced, mature and

capable management team of the company being financed. Since the innovative project

involves a higher risk, there is an expectation of higher returns from the project. The payback

period is also generally high (5 - 7 years). The other issues that led to such a situation

include:

License Raj and The IPO Boom

Till early 90s, under the license raj regime, only commodity centric businesses thrived in a

deficit situation. To fund a cement plant, venture capital is not needed. What was needed was

ability to get a license and then get the project funded by the banks and DFIs. In most cases,

the promoters were well-established industrial houses, with no apparent need for funds. Most

of these entities were capable of raising funds from conventional sources, including term

loans from institutions and equity markets.

Scalability

The Indian software segment has recorded an impressive growth over the last few years and

earns large revenues from its export earnings, yet our share in the global market is less than 1

per cent. Within the software industry, the value chain ranges from body shopping at the

bottom to strategic consulting at the top. Higher value addition and profitability as well as

Page | 51

significant market presence take place at the higher end of the value chain. If the industry has

to grow further and survive the flux it would only be through innovation. For any venture

idea to succeed there should be a product that has a growing market with a scalable business

model. The IT industry (which is most suited for venture funding because of its "ideas"

nature) in India till recently had a service centric business model. Products developed for

Indian markets lack scale.

Mindsets

Venture capital as an activity was virtually non-existent in India. Most venture capital

companies want to provide capital on a secured debt basis, to established businesses with

profitable operating histories. Most of the venture capital units were offshoots of financial

institutions and banks and the lending mindset continued. True venture capital is capital that

is used to help launch products and ideas of tomorrow. Abroad, this problem is solved by the

presence of `angel investors’. They are typically wealthy individuals who not only provide

venture finance but also help entrepreneurs to shape their business and make their venture

successful.

Returns, Taxes and Regulations

There is a multiplicity of regulators like SEBI and RBI. Domestic venture funds are set up

under the Indian Trusts Act of 1882 as per SEBI guidelines, while offshore funds routed

through Mauritius follow RBI guidelines. Abroad, such funds are made under the Limited

Partnership Act, which brings advantages in terms of taxation. The government must allow

pension funds and insurance companies to invest in venture capitals as in USA where

corporate contributions to venture funds are large.

Exit

The exit routes available to the venture capitalists were restricted to the IPO route. Before

deregulation, pricing was dependent on the erstwhile CCI regulations. In general, all issues

were under priced. Even now SEBI guidelines make it difficult for pricing issues for an easy

exit. Given the failure of the OTCEI and the revised guidelines, small companies could not

hope for a BSE/ NSE listing. Given the dull market for mergers and acquisitions, strategic

sale was also not available.

Page | 52

Valuation

The recent phenomenon is valuation mismatches. Thanks to the software boom, most

promoters have sky high valuation expectations. Given this, it is difficult for deals to reach

financial closure as promoters do not agree to a valuation. This coupled with the fancy for

software stocks in the bourses means that most companies are preponing their IPO’s.

Consequently, the number and quality of deals available to the venture funds gets reduced

Some other major problems facing by venture capitalist in India are:

a. Requirement of an experienced management team.

b. Requirement of an above average rate of return on investment.

Longer payback period.

c. Uncertainty regarding the success of the product in the market.

d. Questions regarding the infrastructure details of production like plant location,

accessibility, relationship with the suppliers and creditors, transportation facilities,

labour availability etc.

e. The category of potential customers and hence the packaging and pricing details of

the product.

f. The size of the market.

g. Major competitors and their market share.

h. Skills and Training required and the cost of training.

i. Financial considerations like return on capital employed (ROCE), cost of the project,

the Internal Rate of Return (IRR) of the project, total amount of funds required, ratio

of owners investment (personnel funds of the entrepreneur), borrowed capital,

mortgage loans etc. in the capital employed.

Page | 53

Assessing Venture Capital

Venture funds, both domestic and offshore, have been around in India for some years now.

However it is only in the past 12 to 18 months, they have come into the limelight. The

rejection ratio is very high, about 10 in 100 get beyond pre evaluation stage, and 1 gets

funded.

Venture capital funds are broadly of two kinds - generalists or specialists. It is critical for the

company to access the right type of fund, ie who can add value. This backing is invaluable as

focused/specialized funds open doors, assist in future rounds and help in strategy. Hence, it is

important to choose the right venture capitalist.

The standard parameters used by venture capitalists are very similar to any investment

decision. The only difference being exit. If one buys a listed security, one can exit at a price

but with an unlisted security, exit becomes difficult.

The Management

Most businesses are people driven, with success or failure depending on the performance of

the team. It is important to distinguish the entrepreneur from the professional management

team. The value of the idea, the vision, putting the team together, getting the funding in place

is amongst others, some key aspects of the role of the entrepreneur. Venture capitalists will

insist on a professional team coming in, including a CEO to execute the idea. One-man

armies are passe. Integrity and commitment are attributes sought for. The venture capitalist

can provide the strategic vision, but the team executes it. As a famous Silicon Valley saying

goes "Success is execution, strategy is a dream".

The Idea

The idea and its potential for commercialization are critical. Venture funds look for a scalable

model, at a country or a regional level. Otherwise the entire game would be reduced to a

manpower or machine multiplication exercise. For example, it is very easy for Hindustan

Lever to double sales of Liril - a soap without incremental capex, while Gujarat Ambuja

needs to spend at least Rs4bn before it can increase sales by 1mn ton. Distinctive competitive

advantages must exist in the form of scale, technology, brands, distribution, etc which will

make it difficult for competition to enter.

Page | 54

Valuation

All investment decisions are sensitive to this. An old stock market saying "Every stock is a

buy at a price and vice versa". Most deals fail because of valuation expectation mismatch. In

India, while calculating returns, venture capital funds will take into account issues like rupee

depreciation, political instability, which adds to the risk premia, thus suppressing valuations.

Linked to valuation is the stake, which the fund takes. In India, entrepreneurs are still

uncomfortable with the venture capital "taking control" in a seed stage project.

Exit

Without exit, gains cannot be booked. Exit may be in the form of a strategic sale or/and IPO.

Taxation issues come up at the time. Any fund would discuss all exit options before closing a

deal. Sometimes, the fund insists on a buy back clause to ensure an exit.

Portfolio Balancing

Most venture funds try and achieve portfolio balancing as they invest in different stages of

the company life cycle. For example, a venture capital has invested in a portfolio of

companies predominantly at seed stage; they will focus on expansion stage projects for future

investments to balance the investment portfolio. This would enable them to have a phased

exit. In summary, venture capital funds go through a certain due diligence to finalize the deal.

This includes evaluation of the management team, strategy, execution and commercialization

plans. This is supplemented by legal and accounting due diligence, typically carried out by an

external agency. In India, the entire process takes about 6 months. Entrepreneurs are advised

to keep that in mind before looking to raise funds. The actual cash inflow might get delayed

because of regulatory issues. It is interesting to note that in USA, at times angels write checks

across the table.

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Financing Options in General

The possibility of raising a substantial part of project finances in India through both equity

and debt instruments are among the key advantages of investing in India.

The Indian banking system has shown remarkable growth over the last two decades. The

rapid growth and increasing complexity of the financial markets, especially the capital market

have brought about measures for further development and improvement in the working of

these markets. Banks and development financial institutions led by ICICI, IDBI and IFCI

were providers of term loans for funding projects. The options were limited to conventional

businesses, i.e. manufacturing centric. Services sector was ignored because of the "collateral"

issue.

Equity was raised from the capital markets using the IPO route. The bull markets of the 90s,

fuelled by Harshad Mehta and the FIIs, ensured that (ad) venture capital was easily available.

Manufacturing companies exploited this to the full.

The services sector was ignored, like software, media, etc. Lack of understanding of these

sectors was also responsible for the same. If we look back to 1991 or even 1992, the situation

as regards financial outlay available to Indian software companies was poor. Most software

companies found it extremely difficult to source seed capital, working capital or even venture

capital.

Most software companies started off undercapitalized, and had to rely on loans or overdraft

facilities to provide working capital. This approach forced them to generate revenue in the

short term, rather than investing in product development. The situation fortunately has

changed.

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OBJECTIVE NO. 3

To study the future prospect of Venture Capital Financing.

Prospects of Venture Capital Financing

With the advent of liberalization, India has been showing remarkable growth in the economy

in the past 10 - 12 years. The government is promoting growth in capacity utilization of

available and acquired resources and hence entrepreneurship development, by liberalizing

norms regarding venture capital. While only eight domestic venture capital funds were

registered with SEBI during 1996-1998, 14 funds have already been registered in 1999-2000.

Institutional interest is growing and foreign venture investments are also on the rise. Many

state governments have also set up venture capital funds for the IT sector in partnership with

the local state financial institutions and SIDBI. These include Andhra Paradesh, Karnataka,

Delhi, Kerala and Tamil Nadu. The other states are to follow soon.

In the year 2000, the finance ministry announced the liberalization of tax treatment for

venture capital funds to promote them & to increase job creation. This is expected to give a

strong boost to the non resident Indians located in the Silicon Valley and elsewhere to invest

some of their capital, knowledge and enterprise in these ventures. A Bangalore based media

company, Gray cell Ltd., has recently obtained VC investment totaling about $ 1.7 mn. The

company would be creating and marketing branded web based consumer products in the near

future.

The following points can be considered as the harbingers of VC financing in India:-

Existence of a globally competitive high technology. Globally competitive human resource capital. Second Largest English speaking, scientific & technical manpower in the world. Vast pool of existing and ongoing scientific and technical research carried by large

number of research laboratories.

Initiatives taken by the Government in formulating policies to encourage investors

and entrepreneurs.

Initiatives of the SEBI to develop a strong and vibrant capital market giving the

adequate liquidity and flexibility for investors for entry and exit.

In a recent survey it has been shown that the VC investments in India's I.T. - Software and

services sector (including dot com companies)- have grown from US $ 150 million in 1998 to

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over US$ 1200 million in 2008. The credit can be given to setting up of a National Venture

Capital Fund for the Software and I.T. Industry (NFSIT) in association with various financial

institutions of Small Industries and Development Bank of India (SIDBI). The facts reveal that

VC disbursements as on September 30, 2002 made by NFSIT totaled Rs 254.36 mn.

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CHAPTER:- 8

SUGGESTIONS

SUGGESTIONS

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 taking

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:- 9

FINDINGS

FINDINGS

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

A number of people in India feel that financial institution are not only conservatives but

they also have a bias for foreign technology & they do not trust on the abilities of

entrepreneurs.

Some venture fails due to few exit options. 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 entrepreneur’s integrity & urge to grow as the

most critical aspect or venture evaluation.

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CHAPTER:- 10

CONCLUSION

CONCLUSION

Venture capital can play a more innovation and development role in a developing country

like India. It could help the rehabilitation of sick unit through people with ideas and

turnaround management skill. A large number of small enterprises in India because sick unit

even before the commencement of production of production. Venture capitalist could also be

in line with the developments taking place in their parent companies.

Yet another area where can play a significant role in developing countries is the service

sector including tourism, publishing, healthcare etc. they could also provide financial

assistance to people coming out of the universities, technical institutes etc. who wish to start

their own venture with or without high-tech content, but involving high risk. This would

encourage the entrepreneurial spirit. It is not only initial funding which is need from the

venture capitalists, but the should also simultaneously provide management and marketing

expertise-a real critical aspect of venture capitalists, but they also simultaneously provide

management and marketing expertise-a real critical aspect of venture capital in developing

countries. Which can improve their effectiveness by setting up venture capital cell in R&D

and other scientific generation, providing syndicated or consortium financing and acing as

business incubators.

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CHAPTER:-11

BIBLIOGRAPHY

BIBLIOGRAPHY

http://en.wikipedia.org/wiki/Venture_capital

http://www.relianceventure.com

www.vcapital.com

www.investopedia.com

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