Chapter - 1 INTRODUCTION TO THE PROJECT

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1.1 RESEARCH OBJECTIVES:

1. To understand the concept of venture capital 2. To understand venture capital investment process in India 3. To study the evolution and need of Venture Capital Industry in India 4. To understand the legal framework formulated y !"#I to encourage Venture Capital activity in Indian economy $. To find out opportunities % threats those hinder and encourage Venture Capital Industry in India

1.2 Limitati !" # the pr $e%t:

& study of this type cannot e without limitations. It has een o served that venture capital is very sensitive a out their performance as well as a out their investment. This attitude has een a ma'or hurdle in data collection. (owever) venture capital funds*companies that are mem ers of Indian Venture Capital association are included in study. +inancial analysis has een restricted y and large to mem ers of IVC&.

1.& Re"ear%h ' De"i(! I!"tr)me!t":

In India neither the venture capital theory has een developed nor are there many comprehensive ooks on this pro'ect. "ven the num er of research papers availa le is limited . The research design used is descriptive in nature. ,The attempt has een made to collect ma-imum facts % figures availa le on the availa ility of venture capital in India) nature of assistance granted) future pro'ected demand for this financing) analysis of pro lem faced y entrepreneurs in getting venture capital) analysis of venture capitalist) and social and environmental impact on the e-isting framework.. The research is ased on secondary data collected from pu lished material. The data was also collected from the pu lications and press releases of venture capital associations in India. !canning the usiness papers filled the gap in information. The "conomic Times) +inancial "-press and #usiness !tandards were scanned for any article of news item related to venture capital. !ufficient amount of data a out the venture capital has een derived from these reports.

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1.* S% pe:
The scope of the research includes all type of Venture capital firms whether set up as company or a trust fund. Venture Capital companies % funds irrespective of the fact that they are registered with !"#I of India or not the part of this study. &ngel investors have een kept out of the study as it was not feasi le to collect authenticated information a out them.

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Chapter + 2 CONCEPTUAL ,RA-E.OR/

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2.1 C !%ept # Ve!t)re Capita0

Venture Capital plays an important role in financing small scale enterprise and high technology and risky ventures. The Venture Capital activity is /uite advanced in developed countries. It has also taken root in a num er of developing countries. Venture Capital has potential to ecome an important source of financing small scale enterprises. The term Venture Capital comprises of two words that is) 0Venture1 and 0Capital1. Venture is a course of processing) the outcome of which is uncertain ut to which is attended the risk or danger of 0loss1. 0Capital1 means recourses to start an enterprise. To connote the risk and adventure of such a fund) the generic name Venture Capital was coined. Venture capital is considered as financing of high and new technology ased enterprises. It is said that Venture Capital involves investment in new or relatively untried technology) initiated y relatively new and professionally or technically /ualified entrepreneurs with inade/uate funds. The conventional financiers) unlike Venture capitals) mainly finance proven technologies and esta lished markets. (owever) high technology need not e pre2re/uisite for venture capital. Venture Capital has also een descri ed as 3unsecured risk financing4. The relatively high risk of venture capital is compensated y the possi ility of high returns usually through su stantial capital gains in the medium term. Venture capital in roader sense is not solely an in'ection of funds into a new firm) it is also an input of skills needed to set up the firm) design its marketing strategy) organi5e and manage it. Thus it is a long term association with successive stages of company4s development under highly risk investment conditions) with distinctive type of financing appropriate to each stage of development. Investors 'oin the entrepreneurs as co2partners and support the pro'ect with finance and usiness skills to e-ploit the market opportunities. Venture capital is not a passive finance. It may e at any stage of usiness*production cycle) that is) start up) e-pansion or to improve a product or process) which are associated with oth risk and reward. The Venture capital makes higher capital gains through appreciation in the value of such investments when the new technology succeeds. Thus the primary return sought y the investor is essentially capital gain rather than steady interest income or dividend yield. The most fle-i le definition of Venture capital is2 0The support y investors of entrepreneurial talent with finance and usiness skills to e-ploit market opportunities and thus o tain capital gains.1

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Venture capital commonly descri es not only the provision of start up finance or 3seed corn4 capital ut also development capital for later stages of usiness. & long term commitment of funds is involved in the form of e/uity investments) with the aim of

eventual capital gains rather than income and active involvement in the management of customer4s usiness.

2.2 ,eat)re" # Ve!t)re Capita0:

0Venture capital com ines the /ualities of a entrepreneur in one.1 anker) stock market investor and

The main features of venture capital can e summari5ed as follows6 i. Hi(h De(ree" # Ri"1: Venture capital represents financial investment in a highly risky pro'ect with the o 'ective of earning a high rate of return. Venture capital assumes 4 types of risk6 7anagement risk6 Ina ility of management teams to work together. 7arket risk6 8roduct may fail in the market. 8roduct risk6 8roduct may not e commercially via le. 9perations risk6 9peration may not e cost effective resulting in increased cost and decreased gross margins. ii. E2)it3 Parti%ipati !: Venture capital financing is) invaria ly) an actual or potential e/uity participation wherein the o 'ective of venture capitalist is to make capital gain y selling the shares once the firm ecomes profita le. iii. L !( Term I!4e"tme!t: Venture capital financing is a long term investment. It generally takes a long period to en2cash the investment in securities made y the venture capitalists. iv. Parti%ipati ! i! -a!a(eme!t: In addition to providing capital) venture capital funds take an active interest in the management of the assisted firms. Thus) the approach of venture capital firms is different from that of a traditional lender or anker. It is also different from that of a ordinary stock market investor who merely trades in the shares of a company without participating in their management. It has een rightly said) 0venture capital com ines the /ualities of anker) stock market investor and entrepreneur in one1. v. A%hie4e S %ia0 O5$e%ti4e": It is different from the development capital provided y several central and state level government odies in that the profit o 'ective is the motive ehind the financing. #ut venture capital pro'ects generate employment) and alanced regional growth indirectly due to setting up of successful new usiness.

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vi. I!4e"tme!t i" 0i2)i6: & venture capital is not su 'ect to repayment on demand as with an overdraft or following a loan repayment schedule. The investment is reali5ed only when the company is sold or achieves a stock market listing. It is lost when the company goes into li/uidation.

2.& Di##ere!%e 5et7ee! Ve!t)re Capita0 ' Other ,)!6":

2.&.1. Ve!t)re Capita0 VS De4e0 pme!t ,)!6":
Venture Capital differs from :evelopment +unds as latter means putting up of industries without much consideration of use of new technology or new entrepreneurial venture ut having a focus on undeveloped areas ,locations.. In ma'ority of cases it is in the form of loan capital and proportion of e/uity is very thin. :evelopment finance is security oriented and li/uidity prone. The criteria for investment are proven track record of company and its promoters) and sufficient cash generation to provide for returns ,principal % interest.. The development ank safeguards its interest through collateral. They have no say in working of the enterprise e-cept safeguarding their interest y having a nominee director. They do not play any active role in the enterprise e-cept ensuring flow of information and proper management information system) regular oard meetings) adherence to statutory re/uirements for effective management control where as Venture capitalist remain interested if the overall management of the pro'ect o account of high risk involved I the pro'ect till its completion) entering into production and making availa le proper e-it route for li/uidation of the investment. &s against this fi-ed payments in the form of installment of principal and interest are to e made to development anks.

2.&.2 Ve!t)re Capita0 V" See6 Capita0 ' Ri"1 %apita0

It is difficult to make a distinction etween venture capital and seed capital and ;isk capital as the latter two forms part of roader meaning of venture capital. :ifference etween them arises on account of application of funds and terms and conditions applica le. The seed capital and risk funds in India are eing provided asically to arrange promoters contri ution to the pro'ect. The o 'ective is to provide finance and encourage professionals to ecome promoters of industrial pro'ects. The seed capital is provided to conventional pro'ect on the consideration of low risk and security and use conventional techni/ues for appraisal. <nlike Venture Capital) !eed capital providers neither provide any value addition nor participation in the management of the pro'ect. <nlike Venture capital !eed capital provider is satisfied with low risk2normal returns and lacks any fle-i ility in its approach. ;isk capital is also provided to esta lished companies for adapting new technologies. (erein the approach is not usiness oriented ut developmental. &s a result on the one hand the success rates of units assisted y !eed Capital=;isk

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+inance has een lower than those provided with venture capital. 9n the other hand the return to the seed=risk capital financier has een very low as compare to venture capitalist. !eed capital scheme #asis #eneficiaries !i5e of assistance &ppraisal process "stimates returns +le-i ility Value addition "-it options +unding sources !yndication Ta- concession !uccess rate Income or aid Very small entrepreneurs <pto 1$ >acs ,7a-. Aormal 2?@ Ail AI> !ell ack to promoters 9wners fund Aot done Ail Aot good Venture capital scheme Commercial via ility 7edium or large entrepreneurs are also covered <pto 4?@ of promoters e/uity !killed % !peciali5ed 3?@ plus (ighly +le-i le 7ultiple ways !everal) including pu lic offer 9utsider contri ution allowed 8ossi le "-empted Very satisfactory

Di##ere!%e 5et7ee! See6 Capita0 S%heme a!6 Ve!t)re Capita0 S%heme

2.&.& Ve!t)re Capita0 V" B )(ht )t 6ea0"

The important difference etween Venture Capital and #ought out deals is that ought out deals are not ased on high risk2high reward principle. +urther unlike Venture Capital) they do not provide e/uity finance at different stages of the enterprise) (owever oth have common e-ception of capital gains yet their o 'ectives and intents are totally different.

2.* The Ve!t)re Capita0 Spe%tr)m:

The growth of an enterprise follows a life cycle. The re/uirement of funds vary with the life stages of the enterprise. "ven efore a usiness plan is prepared the entrepreneur invests his time and resource in surveying the market) finding and understanding the target customers and their needs. &t the seed stage) the entrepreneur continue to fund the venture with his own funds. &t this stage) the funds are needed to solicit the consultants4 service in formulation of usiness plan) meeting potential customers and technology

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partners. Ae-t the fund would e re/uired for the development of the product=process) hiring key people and uilding up the management team. This is followed y funds for assem ling the manufacturing and marketing facilities in that order. +inally the funds are needed to e-pand the usiness for more profits. Venture Capitalist cater to the need of the entrepreneurs at the different stages of their enterprise. :epending upon the stage they finance) venture capitalist are called angel investors) venture capitalist or private e/uity supplier*investor. Venture capital was started as early stage financing of relatively small ut growing companies. (owever various reasons forced venture capitalist to e more and more involved in e-pansion financing to support the development of e-isting portfolio companies. Bith increasing demand of capital for newer usiness) Venture capitalist egan to operate across a roader spectrum of investment interest. This diversity of opportunities ena led Venture capitalists to alance their activities in term of time involvement) risk acceptance and reward potential) while providing on going assistance to developing usiness. :ifferent venture capital firms have different attri utes and aptitudes for different types of Venture capital investments. (ence there are different stages of entry for different venture capitalist and they can identify and differentiate etween types of venture capital investments) each appropriate for the given stage of the investee company. These are6 1. "arly !tage +inance !eed capital !tart up capital "arly=+irst stage capital >ater=Third !tage Capital

2. >ater !tage +inance "-pansion=:evelopment stage capital ;eplacement finance 7anagement #uyouts and #uy ins Turnarounds 7e55anine=#ridge +inance

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Aot all usiness firms pass all of these stages in a se/uential manner. +or instance seed capital is not re/uired y service ased ventures. It implies largely to manufacturing or research ased activities. !imilarly second round finance does not always follow early stage finance. If the usiness grows successfully) it is likely to develop sufficient cash to fund its own growth) so does not re/uire venture capital for growth.

The ta le elow shows risk perception and time orientation for different stages of venture capital financing.

+inancing stage "arly stage finance seed !tart D up

8eriod ,funds locked in years. C D 1?

;isk perception "-treme

$DE

Very high

+irst stage !econd stage >ater stage

32C 3D$ 1D3

(igh !ufficiently high 7edium

#uy out2in Turnaround 7e55anine

12 3 3D$ 1D3

7edium 7edium to high >ow

&ctivity to e financed +or supporting a concept or idea or ;%: for product development Initiali5ing operations or developing prototypes !tart commercial production and marketing "-pand market and growing capital need 7arket e-pansion) ac/uisition % product development for profit making company &c/uisition financing Turning around a sick company +acilitating pu lic issue

Ve!t)re %apita0 #i!a!%i!( "ta(e"

2.*.1 See6 Capita0

It is an idea or concept as opposed to a usiness. "uropean Venture capital association defines seed capital as 0The financing of the initial product development or capital provided to an entrepreneur to prove the feasi ility of a pro'ect and to /ualify for start up capital1.

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The characteristics of the seed capital may e enumerated as follows6 & sence of ready product market & sence of complete management team 8roduct* process still in ; % : stage Initial period * licensing stage of technology transfer #roadly speaking seed capital investment may take C to 1? years to achieve reali5ation. It is the earliest and therefore riskiest stage of Venture capital investment. The new technology and innovations eing attempted have e/ual chance of success and failure. !uch pro'ects) particularly hi2tech) pro'ects sink a lot of cash and need a strong financial support for their adaptation) commencement and eventual success. (owever) while the earliest stage of financing is fraught with risk) it also provides greater potential for reali5ing significant gains in long term. Typically seed enterprises lack asset ase or track record to o tain finance from conventional sources and are largely dependent upon entrepreneur4s personal resources. !eed capital is provided after eing 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 y venture capitalists. V 0)me # I!4e"tme!t A%ti4it3 It has een o served that Venture capitalist seldom make seed capital investment and these are relatively small y comparison to other forms of venture finance. The a sence of interest in providing a significant amount of seed capital can e attri uted to the following three factors6 2 a. !eed capital pro'ects y their very nature re/uire 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 ut the smallest venture capitalist4s portfolio. >arger venture capitalists avoid seed capital investments. This is ecause the small investments are seen to e cost inefficient in terms of time re/uired to analy5e) structure and manage them. . The time hori5on to reali5ation for most seed capital investments is typically C21? years which is longer than all ut most long2term oriented investors will desire. c. The risk of product and technology o solescence increases as the time to reali5ation is e-tended. These types of o solescence are particularly likely to occur with high technology investments particularly in the fields related to Information Technology.

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2.*.2 Start )p Capita0

It is stage 2 in the venture capital cycle and is distinguisha le from seed capital investments. &n entrepreneur often needs finance when the usiness is 'ust starting. The start up stage involves starting a new usiness. (ere in the entrepreneur has moved closer towards esta lishment of a going concern. (ere in the usiness concept has een fully investigated and the usiness risk now ecomes that of turning the concept into product. !tart up capital is defined as6 0Capital needed to finance the product development) initial marketing and esta lishment of product facility. 0 The characteristics of start2up capital are62 i. "sta lishment of company or usiness6 The company is either eing organi5ed or is esta lished recently. Aew usiness activity could e ased on e-perts) e-perience or a spin2off from ; % :. "sta lishment of most ut not all the mem ers of the team6 The skills and fitness to the 'o and situation of the entrepreneur4s team is an important factor for start up finance. :evelopment of usiness plan or idea6 The usiness plan should e fully developed yet the accepta ility of the product y the market is uncertain. The company has not yet started trading.

ii.

iii.

In the start up preposition venture capitalists4 investment criteria shifts from idea to people involved in the venture and the market opportunity. #efore committing any finance at this stage) Venture capitalist however) assesses the managerial a ility and the capacity of the entrepreneur) esides the skills) suita ility and competence of the managerial team are also evaluated. If re/uired they supply managerial skills and supervision for implementation. The time hori5on for start up capital will e typically F or G years. +ailure rate for start up is 2 out of 3. !tart up needs funds y way of oth first round investment and su se/uent follow2up investments. The risk tends t e lower relative to seed capital situation. The risk is controlled y initially investing a smaller amount of capital in start2ups. The decision on additional financing is ased upon the successful performance of the company. (owever) the term to reali5ation of a start up investment remains longer than the term of finance normally provided y the ma'ority of financial institutions. >onger time scale for using e-it route demands continued watch on start up pro'ects. V 0)me # I!4e"tme!t A%ti4it3 :espite potential for spectacular returns most venture firms avoid investing in start2ups. 9ne reason for the paucity of start up financing may e high discount rate that venture capitalist applies to venture proposals at this level of risk and maturity. They often prefer

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to spread their risk y sharing the financing. Thus syndicates of investor4s often participate in start up finance.

2.*.& Ear03 Sta(e ,i!a!%e

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 e-pansion) de2risking and ac/uisition costs. &t this stage the company passed into early success stage of its life cycle. & proven management team is put into this stage) a product is esta lished and an identifia le market is eing targeted. #ritish Venture Capital &ssociation has vividly defined early stage finance as6 0+inance provided to companies that have completed the product development stage and re/uire further funds to initiate commercial manufacturing and sales ut may not e generating profits.1 The characteristics of early stage finance may e6 2 >ittle or no sales revenue. Cash flow and profit still negative. & small ut enthusiastic management team which consists of people with technical and specialist ackground and with little e-perience in the management of growing usiness. !hort term prospective for dramatic growth in revenue and profits. The early stage finance usually takes 4 to F years time hori5on to reali5ation. "arly stage finance is the earliest in which two of the fundamentals of usiness are in place i.e. fully assem led management team and a marketa le product. & company needs this round of finance ecause of any of the following reasons6 2 8ro'ect overruns on product development. Initial loss after start up phase. The firm needs additional e/uity funds) which are not availa le 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 e-ternal to the firm ,competitive pressures) in sufficient will of financial institutions to provide ade/uate capital) risk of product o solescence etc..

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&t this stage) capital needs) oth fi-ed and working capital needs are greatest. +urther) since firms do not have foundation of a trading record) finance will e difficult to o tain and so Venture capital particularly e/uity investment without associated de t urden is key to survival of the usiness. The following risks are normally associated to firms at this stage6 2 a. The early stage firms may have drawn the attention of and incurred the challenge of a larger competition. . There is a risk of product o solescence. This is more so when the firm is involved in high2tech usiness like computer) information technology etc.

2.*.* Se% !6 Sta(e ,i!a!%e

It is the capital provided for marketing and meeting the growing working capital needs of an enterprise that has commenced the production ut does not have positive cash flows sufficient to take care of its growing needs. !econd stage finance) the second trench of "arly !tate +inance is also referred to as follow on finance and can e defined as the provision of capital to the firm which has previously een in receipt of e-ternal capital ut whose financial needs have su se/uently e-ploded. This may e second or even third in'ection of capital. The characteristics of a second stage finance are6 & developed product on the market & full management team in place !ales revenue eing generated from one or more products There are losses in the firm or at est there may e a reak even ut the surplus generated is insufficient to meet the firm4s needs.

!econd round financing typically comes in after start up and early stage funding and so have shorter time to maturity) generally ranging from 3 to C years. This stage of financing has oth positive and negative reasons. Aegative reasons include6 I. Cost overruns in market development. II. +ailure of new product to live up to sales forecast. III. Aeed to re2position products through a new marketing campaign. IV. Aeed to re2define the product in the market place once the product deficiency is revealed. 8ositive reasons include6 I. !ales appear to e e-ceeding forecasts and the enterprise needs to ac/uire assets to gear up for production volumes greater than forecasts.

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II. (igh growth enterprises e-pand faster than their working capital permit) thus needing additional finance. &im is to provide working capital for initial e-pansion of an enterprise to meet needs of increasing stocks and receiva les. It is additional in'ection of funds and is an accepta le part of venture capital. 9ften provision for such additional finance can e included in the original financing package as an option) su 'ect to certain management performance targets.

2.4.$

Later Sta(e ,i!a!%e:

It is called third stage capital is provided to an enterprise that has esta lished commercial production and asic marketing set2up) typically for market e-pansion) ac/uisition) product development etc. It is provided for market e-pansion of the enterprise. The enterprises eligi le for this round of finance have following characteristics6 I. II. III. "sta lished usiness) having already passed the risky early stage. "-panding high yield) capital growth and good profita ility. ;eputed market position and an esta lished formal organi5ation structure.

0+unds are utili5ed for further plant e-pansion) marketing) working capital or development of improved products.1 Third stage financing is a mi- of e/uity with de t or su ordinate de t. &s it is half way etween e/uity and de t in <! it is called 0me55anine1 finance. It is also called last round of finance in run up to the trade sale or pu lic 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 ecause firms at this stage have a past performance data) track record of management) esta lished procedures of financial control. The time hori5on for reali5ation is shorter) ranging from 3 to $ years. This helps the venture capitalists to alance their own portfolio of investment as it provides a running yield to venture capitalists. +urther the loan component in third stage finance provides ta- advantage and superior return to the investors. There are four su divisions of later stage finance. "-pansion * :evelopment +inance ;eplacement +inance #uyout +inancing Turnaround +inance

&n enterprise esta lished in a given market increases its profits e-ponentially y achieving the economies of scale. This e-pansion can e achieved either through an

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E8pa!"i ! 9 De4e0 pme!t ,i!a!%e:

organic growth) that is y e-panding production capacity and setting up proper distri ution system or y way of ac/uisitions. &nyhow) e-pansion needs finance and venture capitalists support oth organic growth as well as ac/uisitions for e-pansion. &t this stage the real market feed ack is used to analy5e competition. It may e found that the entrepreneur needs to develop his managerial team for handling growth and managing a larger usiness. ;eali5ation hori5on for e-pansion * development investment is one to three years. It is favored y venture capitalist as it offers higher rewards in shorter period with lower risk. +unds are needed for new or larger factories and warehouses) production capacities) developing improved or new products) developing new markets or entering e-ports y enterprise with esta lished usiness that has already achieved reak even and has started making profits. Rep0a%eme!t ,i!a!%e: It means su stituting 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 ena ling them to reduce their shareholding in unlisted companies. They also uy ordinary shares from non2promoters and convert them to preference shares with fi-ed dividend coupon. >ater) on sale of the company or its listing on stock e-change) these are re2converted to ordinary shares. Thus Venture capitalist makes a capital gain in a period of 1 to $ years. B)3 - )t 9 B)3 - i! ,i!a!%i!( : It is a recent development and a new form of investment y venture capitalist. The funds provided to the current operating management to ac/uire or purchase a significant share holding in the usiness they manage are called management uyout. 7anagement #uy2in refers to the funds provided to ena le a manager or a group of managers from outside the company to uy 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 usiness. The funds are provided for ac/uiring and revitali5ing an e-isting product line or division of a ma'or usiness. 7#9 ,7anagement uyout. has low risk as enterprise to e ought have e-isted for some time esides having positive cash flow to provide regular returns to the venture capitalist) who structure their investment y 'udicious com ination of de t and e/uity. 9f late there has een a gradual shift away from start up and early finance to wards 7#9 opportunities. This shift is ecause of lower risk than start up investments.

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T)r!ar )!6 ,i!a!%e :

It is rare form later stage finance which most of the venture capitalist avoid ecause of higher degree of risk. Bhen an esta lished enterprise ecomes sick) it needs finance as well as management assistance foe a ma'or restructuring to revitali5e growth of profits. <n/uoted company at an early stage of development often has higher de t than e/uityH its cash flows are slowing down due to lack of managerial skill and ina ility to e-ploit the market potential. The sick companies at the later stages of development do not normally have high de t urden ut lack competent staff at various levels. !uch enterprises are compelled to relin/uish control to new management. The venture capitalist has to carry out the recovery process using hands on management in 2 to $ years. The risk profile and anticipated rewards are akin to early stage investment. Bri6(e ,i!a!%e: It is the pre2pu lic offering or pre2merger*ac/uisition finance to a company. It is the last round of financing efore the planned e-it. Venture capitalist help in uilding a sta le and e-perienced management team that will help the company in its initial pu lic offer. 7ost of the time ridge finance helps improves the valuation of the company. #ridge finance often has a reali5ation period of F months to one year and hence the risk involved is low. The ridge finance is paid ack from the proceeds of the pu lic issue.

2.: .hat 6 e" a Ve!t)re Capita0i"t 0

1 i! a Ve!t)re Capita0;

Venture Capitalists are high risk investors and) in accepting these risks) they desire a higher risks) they desire a higher return on their investment. The Venture Capitalist manages the risk2return ratio y only investing in usinesses that fit their investment criteria and after having completed e-tensive due diligence. Venture capitalists have differing operating approaches. These differences may relate to the location of the usiness) the si5e of the investment) the stage of the company) industry speciali5ation) structure to the investment and involvement of the venture capitalists in the company4s activities. The entrepreneur should not e discouraged if one venture capitalist does not wish to proceed with an investment in the company. The re'ection may not e a reflection of the /uality of the usiness) ut rather a matter of the usiness not fitting with the venture capitalist4s particular investment criteria. Venture capital is not suita le for all usinesses) as a venture capitalist typically seeks6 S)peri r 5)"i!e""e"6 Venture capitalists look for companies with superior products or services targeted at fast2growing or untapped markets with a defensi le strategic position. &lternatively) for leveraged management uyouts) they are seeking companies with high orrowing capacity) sta ility of earnings and an a ility to generate surplus cash to /uickly repay de t.

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<)a0it3 a!6 6epth # ma!a(eme!t6 Venture capitalists must e confident that the firm has the /uality and depth in the management team to achieve its aspirations. Venture capitalists seldom seek managerial controlH rather) they want to add value to the investment where they have particular skills including fundraising) mergers and ac/uisitions) international marketing and networks. C rp rate ( 4er!a!%e a!6 "tr)%t)re6 In many ways the introduction of a venture capitalist is preparatory to a pu lic listing. The venture capitalist will want to ensure that the investee company has the willingness to adopt modern corporate governance standards) such as non2e-ecutive directors) including a representative of the venture capitalist. Venture capitalists are put off y comple- corporate structures without a clear ownership and where personal and usiness assets are merged. Appr priate i!4e"tme!t "tr)%t)re6 &s well as the re/uirement of eing an attractive usiness opportunity) the venture capitalist will also e seeking to structure a satisfactory deal to produce the anticipated financial returns to investors. E8it p0a!6 >astly) venture capitalists look for clear e-it routes for their investments such as pu lic listing or a third2party ac/uisition of the investee company.

2.= The Ve!t)re Capita0 Pr %e""

The venture capital investment activity is a se/uential process involving five steps6 1. 2. 3. 4. $. :eal 9rigination !creening "valuation or due diligence :eal structuring 8ost2investment activities and e-it

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The Ve!t)re Capita0 I!4e"tme!t Pr %e""

The Ve!t)re Capita0 I!4e"tme!t Pr %e""

1. Dea0 ri(i!ati !6 & continuous flow of deals is essential for the venture capital usiness. :eals may originate in various ways. ;eferral system is an important source of deals. :eals may e referred to the VCs through their parent organi5ations) trade partners) industry associations) friends etc. The venture capital industry in India has ecome /uite proactive in its approach to generating the deal flow y encouraging individuals to come up with their usiness plans. Consultancy firms like 7ckinsey and &rthur &nderson have come up with usiness plan competitions on an all India asis through the popular press as well as direct interaction with premier educational and research institutions to source new and innovative ideas. The short listed plans are provided with necessary e-pertise through people who have e-perience in the industry. 2. S%ree!i!(6 VC+s carry out initial screening of all pro'ects on the asis of some road criteria. +or e-ample the screening process may limit pro'ects to areas in which the

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venture capitalist is familiar in terms of technology) or product) or market scope. The si5e of investment) geographical location and stage of financing could also e used as the road screening criteria. 3. E4a0)ati ! r 6)e 6i0i(e!%e6 9nce a proposal has passed through initial screening) it is su 'ected to a detailed evaluation or due diligence process. 7ost ventures are new and the entrepreneurs may lack operating e-perience. (ence a sophisticated) formal evaluation is neither possi le nor desira le. The VCs thus rely on a su 'ective ut comprehensive) evaluation. VC+s evaluate the /uality of the entrepreneur efore appraising the characteristics of the product) market or technology. 7ost venture capitalists ask for a usiness plan to make an assessment of the possi le risk and e-pected return on the venture. &ccording to a study conducted y 8rofessor I7 8andey of Indian Institute of 7anagement) &hmeda ad a venture capital fund places most importance on the following eleven parameters in the same order of importance while evaluating a venture for possi le funding6 Integrity) urge to grow) long2term vision) commercial orientation) critical competence vis2I2vis venture) a ility to evaluate and react to risk) well2thought out strategy to remain ahead of competition) high market growth rate) e-pected return over 2$@ p.a. in five years) managerial skills) marketing skills. Investment Valuation The investment valuation process is aimed at ascertaining an accepta le price for the deal. The valuation process goes through the following steps6

8ro'ections on future revenue and profita ility "-pected market capitali5ation :eciding on the ownership stake ased on the return e-pected on the proposed investment

The pricing thus calculated is rationali5ed after taking in to consideration various economic scenarios) demand and supply of capital) founderJs*management teamJs track record) innovation* uni/ue selling propositions ,<!8s.) the product*service si5e of the potential market) etc 4. Dea0 Str)%t)ri!(6 9nce the venture has een evaluated as via le) the venture capitalist and the investment company negotiate the terms of the deal) i.e. the amount) form and price of the investment. This process is termed as deal structuring. The agreement also includes the protective covenants and earn2out arrangements. Covenants include the venture capitalists right to control the investee company and to change its management if needed) uy ack arrangements) ac/uisition) making initial pu lic offerings ,I89s. etc) "arn2out arrangements specify the entrepreneurJs e/uity share and the o 'ectives to e achieved.

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Venture capitalists generally negotiate deals to ensure protection of their interests. They would like a deal to provide for6

& return commensurate with the risk Influence over the firm through oard mem ership 7inimi5ing ta-es &ssuring investment li/uidity The right to replace management in case of consistent poor managerial performance.

The investee companies would like the deal to e structured in such a way that their interests are protected. They would like to earn reasona le return) minimi5e ta-es) have enough li/uidity to operate their usiness and remain in commanding position of their usiness. There are a num er of common concerns shared y oth the venture capitalists and the investee companies. They should e fle-i le) and have a structure) which protects their mutual interests and provides enough incentives to oth to cooperate with each other. The instruments to e used in structuring deals are many and varied. The o 'ective in selecting the instrument would e to ma-imi5e ,or optimi5e. venture capitalJs returns*protection and yet satisfy the entrepreneurJs re/uirements. The different instruments through which a Venture Capitalist could invest a company include6 "/uity shares) preference shares) loans) warrants and options. $. P "t-i!4e"tme!t A%ti4itie" a!6 E8it6 9nce the deal has een structured and agreement finali5ed) the venture capitalist generally assumes the role of a partner and colla orator. (e also gets involved in shaping of the direction of the venture. This may e done via a formal representation of the oard of directors) or informal influence in improving the /uality of marketing) finance and other managerial functions. The degree of the venture capitalists involvement depends on his policy. It may not) however) e desira le for a venture capitalist to get involved in the day2to2day operation of the venture. If a financial or managerial crisis occurs) the venture capitalist may intervene) and even install a new management team. Venture capitalists typically aim at making medium2to long2term capital gains. They generally want to cash2out their gains in five to ten years after the initial investment. They play a positive role in directing the company towards particular e-it routes. & venture capitalist can e-it in four ways6

Initial 8u lic 9fferings ,I89s. &c/uisition y another company ;epurchase of the venture capitalist4s share y the investee company 8urchase of the Venture CapitalistJs share y a third party.

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2.> -eth 6" # Ve!t)re ,i!a!%i!(

Venture capital is typically availa le in three forms in India) they are6 E2)it36 &ll VC+s in India provide e/uity ut generally their contri ution does not e-ceed 4E percent of the total e/uity capital. Thus) the effective control and ma'ority ownership of the firm remains with the entrepreneur. They uy shares of an enterprise with an intention to ultimately sell them off to make capital gains. C !6iti !a0 L a!6 It is repaya le in the form of a royalty after the venture is a le to generate sales. Ao interest is paid on such loans. In India) VC+s charge royalty ranging etween 2 to 1$ percentH actual rate depends on other factors of the venture such as gestation period) cost2flow patterns) riskiness and other factors of the enterprise. I!% me N te6 It is a hy rid security which com ines the features of oth conventional loan and conditional loan. The entrepreneur has to pay oth interest and royalty on sales) ut at su stantially low rates. Other ,i!a!%i!( -eth 6"6 & few venture capitalists) particularly in the private sector) have started introducing innovative financial securities. The participating de entures is an e-ample of innovative venture financial. !uch security carries in three phases6 In the start2up phase) efore the venture attains operations to a minimum level) no interest is charged. &fter this) a low rate of interest is charged up to a particular level of operation. 9nce the venture starts operating on full commercial asis) a high rate of interest is re/uired to e paid. & variation could e in terms of paying a certain share of the post2ta- profits instead of royalty. VC+s in India provide venture finance through partially of fully converti le de entures and cumulative converti le preference shares ,C88.. C88 could e particularly attractive in the Indian conte-t since C88 shareholders do not have the right to receive dividend consecutively for two years In the developed countries like <!& and the <K) the venture capital firms are accustomed to using a wide range of financial instruments. They include6 1. De#erre6 Share"6 where ordinary share rights are deferred for a certain num er of years 2. C !4erti50e L a! St %16 which is unsecured long term loan converti le into ordinary shares and su ordinated to all creditors 3. Spe%ia0 Or6i!ar3 Share"6 with voting rights ut without a commitment towards dividend. 4. Pre#erre6 Or6i!ar3 Share"6 Bith voting rights and a modest fi-ed dividend right and a right to share in profits.

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2.? Di"i!4e"tme!t -e%ha!i"m:

The true o 'ective of a true venture capitalist is to sell of his investment at su stantial capital gains. #ut most venture funds in India aim to operate on commercial lines along with satisfying their developmental o 'ectives. & venture capitalist is generally not in a position to reali5e his investment efore five to seven years. The disinvestment options generally availa le to venture capitalist are6 1. Pr m ter" B)35a%1: The most important disinvestments route in India is the promoter4s uy ack. This route is suited to Indian condition ecause it keeps the ownership and control of the promoter intact. The o vious limitation) however) is that in the ma'ority of cases the market value of the shares of the venture firm would have appreciated so much after some years that the promoter would not e in a position to uy them ack. In India) promoters are invaria ly given the option to uy ack the e/uity of their enterprises. +or e-ample) ;CTC participates in the assisted firm4s e/uity with suita le agreement for the promoter to repurchase it. !imilarly) Canfina2VC+ offers an opportunity to promoters to uy ack the shares of the assisted firm within an agreed period at a predetermined price. If the promoter fails to uy ack the shares within the stipulated time) Canfina2VC+ would have the discretion to divest them in any manner it deemed appropriate. !#I capital market ensures through e-amining the personal assets of the promoters and their associates) which uy ack) would e a feasi le option. 2. I!itia0 P)50i% O##eri!(" @IPO"A: The enefits of the disinvestments via the pu lic issue route are improved marketa ility and li/uidity) etter prospects for capital gains and widely known status of the venture as well as market control through pu lic share participation. The option has certain limitations in Indian conte-t. The promotion of the pu lic issue would e difficult and e-pensive since the first generation entrepreneurs are not known in the capital market. +urther) difficulties will e caused if the entrepreneur4s usiness is perceived to e an unattractive investment proposition y investors. &lso the emphasis of the Indian investors on the short term profits and dividends may tend to make the market price unattractive. Let another difficulty in India until recently was the Controller of Capital Issues ,CCI. guidelines for determining the premium on shares took into account the ook value and the cumulative average "8! till the date of the new issue. This formula failed to give due weight age to the e-pected stream of earning of the venture firm. Thus) the formula would underestimate the premium. The Movernment has now a olished the Capital Issues Control &ct) 1E4C and conse/uently) the office of the controller of Capital Issues. The e-isting companies are now free to fi- the premium on their shares. The initial pu lic issue for disinvestments of VC+s4 holding can involve high transaction

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costs ecause of the inefficiency of the secondary market in a country like India. &lso) this option has ecome far less feasi le for small ventures on account of the higher listing re/uirement of the stock e-changes. In +e ruary 1EGE) the Movernment of India raised the minimum capital for listing on the stock e-changes from ;s 1? million to ;s 3? million and the minimum pu lic offer from ;s F million to ;s 1G million. &. Sa0e ! the OTC -ar1et &n active secondary capital market provides the necessary impetus to the success of the venture capital. VC+s should e a le to sell their holdings) and investors should e a le to trade shares conveniently and freely. In the <!&) there e-ist well2developed 9TC markets where dealers trade in shares on telephone*terminal and not on an e-change floor. This mechanism ena les new) small companies which are not otherwise eligi le to e listed on the stock e-change) to enlist on the 9TC markets and provides li/uidity to investors. The Aational &ssociation of !ecurities :ealers &utomated Nuotation !ystem ,A&!:&N. in the <!& daily /uotes over G??? stock prices of companies acked y venture capital. The 9TC "-change in India was esta lished in Oune 1EE2. The Movernment of India had approved the creation for the "-change under the !ecurities Contracts ,;egulations. &ct in 1EGE. It has een promoted 'ointly y <TI) ICICI) !#I Capital 7arkets) Can ank +inancial !ervices) MIC) >IC and I:#I. !ince this list of market2makers ,who will decide daily prices and appoint dealers for trading. includes most of the pu lic sector venture financiers) it should pick up fast) and it should e possi le for investors to trade in the securities of new small and medium si5e enterprises. The other disinvestments mechanisms such as the management uyouts or sale to other venture funds are not considered to e appropriate y VC+s in India.

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2.B The P0a3er"

The p0a3er":
There are following group of players6 &ngels and angel clu s Venture Capital funds !mall 7edium >arge Corporate Venture +unds +inancial service venture groups

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A!(e0" a!6 a!(e0 %0)5":

&ngels are wealthy individuals who invest directly into companies. They can form angel clu s to coordinate and undle their activities. #esides the money) angels often provide their personal knowledge) e-perience and contacts to support their investees. Bith average deals si5es from <!: 1??)??? to <!: $??)??? they finance companies in their early stages. "-amples for angel clu s are 7edia Clu ) :inner Clu ) &ngelJs +orum

Sma00 a!6 Up"tart Ve!t)re Capita0 ,)!6":

These are smaller Venture Capital Companies that mostly provide seed and start2up capital. The so called P#outi/ue firmsP are often specialised in certain industries or market segments. Their capitalisation is a out <!: 2? to <!: $? million ,is this deals si5e or total money under management or money under management per fundQ.. "-amples are6 &rtemis Comaford & ell Venture +und &cacia Venture 8artners

-e6i)m Ve!t)re ,)!6":

The medium venture funds finance all stages after seed stage and operate in all usiness segments. They provide money for deals up to <!: 2$? million. !ingle funds have up to <!: $ illion under management. &n e-ample is &ccel 8artners

Lar(e Ve!t)re ,)!6":

&s the medium funds) large funds operate in all usiness sectors and provide all types of capital for companies after seed stage. They often operate internationally and finance deals up to <!: $?? mio. "-amples are6 &IM &merican International Mroup Cap Vest 7an 3i

C rp rate Ve!t)re ,)!6":

These Venture Capital funds are set up and owned y technology companies. Their aim is to widen the parent companyJs technology ase in an win2win2situation for oth) 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 si5e is etween <!: 2 million and <!: $ million. "-amples are6 9racle

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 &do e :ell Kyocera &s an e-ample) &do e systems launched a R4?m venture fund in 1EE4 to invest in companies strategic to its core usiness) such as Cascade !ystems Inc and >antana ;esearch Corporation2 has een successfully oosting demand for its core products) so that &do e recently launched a second R4?m fund.

,i!a!%ia0 #)!6":
& solution for financial funds could e a shift to a higher security of Venture Capital activities. That means that the parent companies shift the risk to their customers y creating new products such as stakes in an Venture Capital fund. (owever) the success of such products will depend on the overall climate and e-pectations in the economy. &s long as the sownturn continues without any sign of recovery customers might prefer less risky alternatives.

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CHAPTER + & VENTURE CAPITAL IN INDIA

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&.1 E4 0)ti ! # VC I!6)"tr3 i! I!6ia

The ma'or analysis on risk capital on India was reported in 1EG3. It indicated that new companies often confront serious arriers to entry into capital markets for raising e/uity finance which undermines their future prospects of e-pansion % diversification. It also indicated that on the whole there is the need to revive the e/uity cult among the masses y ensuring competitive return on e/uity investment. This rought out the institutional inade/uacies with respect to evolution of the Venture Capital. In India) Industrial +inance Corporation of India ,I+CI. initiated the idea of VC when it esta lished the ;isk Capital +oundation in 1EC$ to provide seed capital to small and risky pro'ects. (owever the concept of VC financing got statutory recognition for the first time in the +iscal #udget for the year 1EGF D GC. The Venture Capital companies operating at present can e divided into 4 groups6 8romoted y &ll India :evelopment +inancial Institutions 8romoted y !tate >evel +inancial Institutions 8romoted y Commercial #anks 8rivate Venture Capitalists

Pr m te6 53 A00 I!6ia De4e0 pme!t ,i!a!%ia0 I!"tit)ti !" The I:#I started a VC fund in 1EGC as per the long term fiscal policy of government of India) with an initial capital of 1? crores which raised y imposing a cess of $@ on all payment made for the import of Technology know2how pro'ects re/uiring funds from ;s $ >acs to ;s 2.$ Crores were considered for financing. 8romoters contri ution ranged from this fund was availa le at a concessional interest rate of E@ ,during gestation period. which could e increased at later stages. The ICICI provides the re/uired impetus to VC activities in India) 1EGF) it started providing VC finance on 1EEG it promoted) along with the <nit Trust of India ,<TI. Technology :evelopment % Information Company of India ,T:ICI. as the first VC company registered under companies act) 1E$F. The T:ICI may provide financial assistance to Venture Capital undertakings which are set up y technocrat entrepreneurs or technology information % guidance services. The ;isk Capital +oundation esta lished y the Industrial +inance Corporation of India ,I+CI. in 1EC$) was converted in 1EGG into the ;isk Capital % Technology +inance Company ,;CTC. as a su sidiary company of I+CI. The ;CTC provides assistance in the form of conventional loans) interest free conditional loans on profit and risk sharing asis or e/uity participation in e-tends financial support to high technology pro'ects for

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technological up2gradation. The ;CTC has een renamed as I+CI Venture Capital +unds >td ,IVC+.. Pr m te6 53 State Le4e0 ,i!a!%ia0 I!"tit)ti !" In India) the !tate >evel +inancial Institutions in some states such as 7adhya 8radesh) Mu'arat) <ttar 8radesh etc have done an e-cellent 'o and have provided VC to a small scale enterprises. !everal successful entrepreneurs have een the eneficiaries of the li eral funding environment. In 1EE?) the Mu'arat Industrial Investment Corporation) promoted the Mu'arat Venture +inancial >td ,MV+>. along with other promoters such as I:#I) the Borld #ank etc. The MV+> provides assistance to usinesses in the form of e/uity ) conditional loans or income notes for technological development and product innovation. It also provides financial assistance to entrepreneurs. The Movernment of &ndhra 8radesh has also promoted the &ndhra 8radesh Industrial :evelopment Corporation ,&8I:C. Venture Capital >td to provide VC financing in &ndhra 8radesh. Pr m te6 53 C mmer%ia0 Ba!1" Can ank Venture Capital +und) !tate ank Venture Capital +und and Mrindlays #ank Venture Capital +unds have een set up y respective commercial anks to undertake VC activities. The !tate ank Venture Capital +und provides financial assistance for ought2out deal as well as new companies in the form of e/uity which it disinvests after the commerciali5ation of the pro'ect. Can ank Venture Capital +und provides financial assistance for proven ut yet to e commercially e-ploited technologies. It provides assistance oth in the form of e/uity and conditional loans. Pri4ate Ve!t)re Capita0i"t" !everal private sector Venture Capital +unds have een esta lished in India such as the 2?th Centure Venture Capital Company) Indus venture Capital +und) Infrastructure >easing and +inancial services >td. !ome of the companies that have received funding through this route includes6 7astek) one of the oldest software house in India ;uskan !oftware) 8une ased software consultancy !N> !tar) (ydera ad ased training and software development consultancy !atyam Infoway) the first private I!8 in India (inditron) makers of em edded software !electia) provider of interactive software selectior

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Lantra) IT>infosy4s <! su sidiary) solution for supply chain management ;ediff on the net) Indian we site featuring electronic shopping) news) chat etc.

&.2 I!6)"tr3 Li#e C3%0e:

+rom the industry life cycle we can know in which stage we are standing. 9n the asis of this management can make future strategies of their usiness. The growth of VC in India has four separate phases6 &.2.1 Pha"e I - +ormation of T:ICI in the G?4s and regional funds as MV+> % &8I:C in the early E?s. The first origins of modern venture capital in India can e traced to the setting up of a Technology :evelopment +und in the year 1EGC2GG) through the levy of access on all technology import payments. Technology :evelopment +und was started to provide financial support to innovative and high risk technological programs through the Industrial :evelopment #ank of India. The first phase was the initial phase in which the concept of VC got wider acceptance. The first period did not really e-perience any su stantial growth of VCs4. The 1EG?4s were marked y an increasing disillusionment with the tra'ectory of the economic system and a elief that li erali5ation was needed. The li erali5ation process started in 1EG$ in a limited way. The concept of venture capital received official recognition in 1EGG with the announcement of the venture capital guidelines. :uring 1EGG to 1EE2 a out E venture capital institutions came up in India. Though the venture capital funds should operate as open entities) Movernment of India controlled them rigidly. 9ne of the ma'or forces that induced Movernment of India to start venture funding was the Borld #ank. The initial funding has een provided y Borld #ank. The most important feature of the 1EGG rules was that venture capital funds received the enefit of a relatively low capital gains ta- rate which was lower than the corporate rate. The 1EGG guidelines stipulated that VC funding firms should meet the following criteria6 Technology involved should e new) relatively untried) very closely held) in the process of eing taken from pilot to commercial stage or incorporate some significant improvement over the e-isting ones in India 8romoters * entrepreneurs using the technology should e relatively new) professionally or technically /ualified) with inade/uate resources to finance the pro'ect.

#etween 1EGG and 1EE4 a out 11 VC funds ecame operational either through reorgani5ing the usinesses or through new entities.

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&ll these followed the Movernment of India guidelines for venture capital activities and have primarily supported technology oriented innovative usinesses started y first generation entrepreneurs. 7ost of these were operated more like a financing operation. The main feature of this phase was that the concept got accepted. VCs ecame operational in India efore the li erali5ation process started. The conte-t was not fully ripe for the growth of VCs. Till 1EE$H the VCs operated like any ank ut provided funds without collateral. The first stage of the venture capital industry in India was plagued y in e-perienced management) mandates to invest in certain states and sectors and general regulatory pro lems. 7any pu lic issues y small and medium companies have shown that the Indian investor is ecoming increasingly wary of investing in the pro'ects of new and unknown promoters. The li eration of the economy and toning up of the capital market changed the economic landscape. The decisions relating to issue of stocks and shares was handled y an office namely6 Controller of Capital Issues ,CCI.. &ccording to 1EGG VC guideline) any organi5ation re/uiring to start venture funds have to forward an application to CCI. !u se/uent to the li erali5ation of the economy in 1EE1) the office of CCI was a olished in 7ay 1EE2 and the powers were vested in !ecurities and "-change #oard of India. The !ecurities and "-change #oard of India &ct) 1EE2 empowers !"#I under section 11,2. thereof to register and regulate the working of venture capital funds. This was done in 1EEF) through a government notification. The power to control venture funds has een given to !"#I only in 1EE$ and the notification came out in 1EEF. Till this time) venture funds were dominated y Indian firms. The new regulations ecame the har inger of the second phase of the VC growth. &.2.2Pha"e II - "ntry of +oreign Venture Capital funds ,VC+. etween 1EE$ 21EEE The second phase of VC growth attracted many foreign institutional investors. :uring this period overseas and private domestic venture capitalists egan investing in VC+. The new regulations in 1EEF helped in this. Though the changes proposed in 1EEF had a salutary effect) the development of venture capital continued to e inhi ited ecause of the regulatory regime and restricted the +:I environment. To facilitate the growth of venture funds) !"#I appointed a committee to recommend the changes needed in the VC funding conte-t. This coincided with the IT oom as well as the success of !ilicon Valley start2ups. In other words) VC growth and IT growth co2evolved in India &.2.& Pha"e III - ,2??? onwards. 2 VC ecomes risk averse and activity declines6 Aot surprisingly) the investing in India came 0crashing down1 when A&!:&N lost F?@ of its value during the second /uarter of 2??? and other pu lic markets ,including those in India. also declined su stantially. Conse/uently) during 2??122??3) the VCs started investing less money and in more mature companies in an effort to minimi5e the risks. This decline roadly continued until 2??3.

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&.2.* Pha"e IV + 2??4 onwards 2 Mlo al VCs firms actively investing in India !ince India4s economy has een growing at C@2G@ a year) and since some sectors) including the services sector and the high2end manufacturing sector) have een growing at 12@214@ a year) investors renewed their interest and started investing again in 2??4. The num er of deals and the total dollars invested in India has een increasing su stantially.

&.& Cr 7th # 4e!t)re %apita0 i! I!6ia:

The venture capital is growing 43@ C&M;. (owever) in spite of the venture capital scenario improving) several specific VC funds are setting up shop in India) with the year 2??F having een a landmark year for VC funding in India. The total deal value in 2??C is 14234 <!: 7illion. The Ao. of deals are increasing year y year. The no. of deals in 2??F only $F and now in 2??C it touch the 3GC deals. The introduction stage of venture capital industry in India is completed in 2??3 after that growing stage of Indian venture capital industry is started. There are 1F? venture capital firms*funds in India. In 2??F it is only ut in 2??C the num er of venture capital firms are 14F. The reason is good position of capital market. #ut in 2??G no. of venture capital firms increase y only 14. the reason is crash down of capital market y $1@ from Oanuary to Aovem er 2??G. The Ao. of venture capital funds are increasing year y year. 2??? G41 2??1 CC 2??2 CG 2??3 G1 2??4 GF 2??$ GE 2??F 1?$ 2??C 14F 2??G 1F?

www.nasscom.org) strategic review 2??G pu lished y ,Aational &ssociation of !oftware and !ervice Companies. Venture capital growth and industrial clustering have a strong positive correlation. +oreign direct investment) starting of ;%: centers) availa ility of venture capital and growth of entrepreneurial firms are getting concentrated into five clusters. The cost of monitoring and the cost of skill ac/uisition are lower in clusters) especially for innovation. "ntry costs are also lower in clusters. Creating entrepreneurship and stimulating innovation in clusters have to ecome a ma'or concern of pu lic policy makers. This is essential ecause only when the cultural conte-t is conducive for risk management venture capital will take2of clusters support innovation and facilitates risk earing. VCs prefer clusters ecause the information costs are lower. 8olicies for promoting dispersion of industries are ecoming redundant after the economic li erali5ation.

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The venture capital firm invest their money in most developing sectors like health care) IT2IT"!) telecom) #io2technology) 7edia% "ntertainment) shipping % logistics etc.

Venture capital is nascent stage in India. Aow due to growth of this sector) the venture capital industry is also grow. The top most player in the industries are ICICI venture capital fund) &vishhkar venture capital fund) I>%+! venture capital fund) Can ank.

&.* Ve!t)re Capita0 i!4e"tme!t <&D 2EE?:

Venture Capital firms invested R2C4 million over 4E deals in India during the three months ending !eptem er 2??G. The VC investment activity during the period was significantly higher compared to the same /uarter last year ,which had witnessed 3F investments worth R2$2 million. as well as the immediate previous /uarter ,R1F$ million invested across 2G deals.. The latest num ers take the total VC investments in the first nine months of 2??G to RFF1 million ,across 1?G deals. as against the RF4G million ,across EC deals. during the corresponding period in 2??C.

&.*.1 T p I!4e"tme!t" :
The largest investment reported during N3 2??G was the R1G million raised y online tutoring services provider TutorVista from e-isting investors !e/uoia Capital India and >ight!peed Ventures. Company Tutor Vista Connectiva !ystems !eventymm !ector 9nline servicing ,;emote Tutoring. Communications Tech ,;evenue &ssurance 9nline !ervices ,Video ;ental. &mount ,<!R 7. 1G.? 1C.? 12.? Investors !e/uoia Capital India) >ightspeed Ventures I+C) A"&2I<V) !&8 Ventures) 9thers A"&2I<V) e8lanet Ventures) 7atri8artners India):+O #ellwether) 9thers 9rigo !ino2India) <nilever Tech Ventures

"/uitas 7icro +inance (alo!ource

7icrofinance Bater 8urifiers

12.? 11.$

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T p 4e!t)re %apita0 i!4e"tme!t"

&.*.2 I!4e"tme!t" 53 I!6)"tr3:

Information Technology and IT2"na led !ervices ,IT % IT"!. industry retained its status as the favorite among VC investors during N3 4?G. Industry IT % IT"! #+!I "ngineering % Construction (ealthcare % >ife !ciences "ducation 9ther !ervices 7anufacturing 7edia "nergy Travel % Transport ;etail Telecom Volume N34 ?G 2$ $ 3 F 2 1 2 2 2 1 2 2 Ao of :eals LT: $G G 4 12 3 F 2 $ F 2 1 1 Value N34 ?G 14C 34 23 4 1C 1$ 13 11 F 4 2 2 <!R 7 LT: 3F1 $4 33 $2 23 2E 13 1E 4G 14 1? $

Ve!t)re %apita0 i!4e"tme!t 53 i!6)"tr3 >ed y the R12 million investment y #ellwether and others into Chennai2 ased microfinance firm "/uitas) #+!I emerged as the second largest ,in value terms. for VC investments during the period. 9ther microfinance firms that attracted investments during N3 4?G included Kolkata2 ased &rohan +inancial !ervices ,which raised funding from >ok Capital and others. and Muwahati2 ased &somi +inance ,I+C and &avishkaar Moodwell..

&.*.& I!4e"tme!t B3 Sta(e:

& out FC@ of VC investments during N3 3?G were in the early stage segment. !tage of Company :evelopment "arly Mrowth Volume N34 ?G LT: 33 FC 1F 41 I!4e"tme!t 53 Sta(e Value N34 ?G 1C2 1?2 LT: 33E 322

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&.: Nee6 # r (r 7th # 4e!t)re %apita0 i! I!6ia

In India) a revolution is ushering in a new economy) wherein entrepreneurs mind set is taking a shift from risk averse usiness 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 re/uirement of entrepreneurs and thus it needs venture capital industry to grow in India. +ew reasons for which active Venture Capital Industry is important for India include6 I!! 4ati ! : needs risk capital in a largely regulated) conservative) legacy financial system J 5 %reati !: large pool of skilled graduates in the first and second tier cities Patie!t %apita0 : Aot flighty) unlike +IIs Creati!( !e7 i!6)"tr3 %0)"ter": 7edia) ;etail) Call Centers and ack office processing) trickling down to organi5ed effort of support services like office services) catering) transportation

&.= Re()0at r3 a!6 0e(a0 #rame7 r1

De#i!iti ! # Ve!t)re Capita0 ,)!6 : The Venture Capital +und is defined as a
fund esta lished in the form of a Trust) a company including a ody corporate and registered with !"#I which6 &. (as a dedicated pool of capitalH #. ;aised in the manner specified under the regulationsH and C. To invest in venture capital undertakings in accordance with the regulations.P

De#i!iti !

# Ve!t)re Capita0 U!6erta1i!(: Venture Capital <ndertaking

means a domestic company62 a. Bhose shares are not listed on a recogni5ed stock e-change in India . Bhich is engaged in usiness including providing services) production or manufacture of articles or things) or does not include such activities or sectors which are specified in the negative list y the #oard with the approval of the Central Movernment y notification in the 9fficial Ma5ette in this ehalfQ The negative list includes real estate) non2 anking financial services) gold financing) activities not permitted under the Industrial 8olicy of the Movernment of India.

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-i!im)m % !tri5)ti ! a!6 #)!6 "iFe: The minimum investment in a Venture Capital +und from any investor will not e less than ;s. $ lacs and the minimum corpus of the fund efore the fund can start activities shall e at least ;s. $ crores. I!4e"tme!t Criteria: The earlier investment criteria has een su stituted investment criteria which has the following re/uirements 6 :isclosure of investment strategyH ma-imum investment in single venture capital undertaking not to e-ceed 2$@ of the corpus of the fundH Investment in the associated companies not permittedH &t least C$@ of the investi le funds to e invested in unlisted e/uity shares or e/uity linked instruments. Aot more than 2$@ of the investi le funds may e invested y way of6 a. !u scription to initial pu lic offer of a venture capital undertaking whose shares are proposed to e listed su 'ect to lock2in period of one yearH . :e t or de t instrument of a venture capital undertaking in which the venture capital fund has already made an investment y way of e/uity It has also een provided that Venture Capital +und seeking to avail enefit under the relevant provisions of the Income Ta- &ct will e re/uired to divest from the investment within a period of one year from the listing of the Venture Capital <ndertaking. Di"%0 ")re a!6 I!# rmati ! t I!4e"t r": In order to simplify and e-pedite the process of fund raising) the re/uirement of filing the 8lacement memorandum with !"#I is dispensed with and instead the fund will e re/uired to su mit a copy of 8lacement 7emorandum* copy of contri ution agreement entered with the investors along with the details of the fund raised for information to !"#I. +urther) the contents of the 8lacement 7emorandum are strengthened to provide ade/uate disclosure and information to investors. !"#I will also prescri e suita le reporting re/uirement from the fund on their investment activity. <IB "tat)" # r Ve!t)re Capita0 ,)!6": The venture capital funds will e eligi le to participate in the I89 through ook uilding route as Nualified Institutional #uyer su 'ect to compliance with the !"#I ,Venture Capital +und. ;egulations. y a new

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Re0a8ati ! i! Ta1e 4er C 6e: The ac/uisition of shares y the company or any of the promoters from the Venture Capital +und under the terms of agreement shall e treated on the same footing as that of ac/uisition of shares y promoters*companies from the state level financial institutions and shall e e-empt from making an open offer to other shareholders. I!4e"tme!t" 53 -)t)a0 ,)!6" i! Ve!t)re Capita0 ,)!6": In order to increase the resources for domestic venture capital funds) mutual funds are permitted to invest upto $@ of its corpus in the case of open ended schemes and upto 1?@ of its corpus in the case of close ended schemes. &part from raising the resources for Venture Capital +unds this would provide an opportunity to small investors to participate in Venture Capital activities through mutual funds. C 4er!me!t # I!6ia C)i6e0i!e": The Movernment of India ,79+. Muidelines for 9verseas Venture Capital Investment in India dated !eptem er 2?) 1EE$ will e repealed y the 79+ on notification of !"#I Venture Capital +und ;egulations. The # 00 7i!( 7i00 5e the "a0ie!t #eat)re" I!4e"t r"A Re()0ati !"D 2EEE : # SEBI @, rei(! Ve!t)re Capita0

De#i!iti ! # , rei(! Ve!t)re Capita0 I!4e"t r : &ny entity incorporated and esta lished outside India and proposes to make investment in Venture Capital +und or Venture Capital <ndertaking and registered with !"#I. E0i(i5i0it3 Criteria : "ntity incorporated and esta lished outside India in the form of investment company) trust) partnership) pension fund) mutual fund) university fund) endowment fund) asset management company) investment manager) investment management company or other investment vehicle incorporated outside India would e eligi le for seeking registration from !"#I. !"#I for the purpose of registration shall consider whether the applicant is regulated y an appropriate foreign regulatory authorityH or is an income ta- payerH or su mits a certificate from its anker of its or its promoters4 track record where the applicant is neither a regulated entity nor an income ta- payer. I!4e"tme!t Criteria: :isclosure of investment strategyH 7a-imum investment in single venture capital undertaking not to e-ceed 2$@ of the funds committed for investment to India however it can invest its total fund committed in one venture capital fundH &tleast C$@ of the investi le funds to e invested in unlisted e/uity shares or e/uity linked instruments. Aot more than 2$@ of the investi le funds may e invested y way of6

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a. !u scription to initial pu lic offer of a venture capital undertaking whose shares are proposed to e listed su 'ect to lock2in period of one yearH

. :e t or de t instrument of a venture capital undertaking in which the venture capital fund has already made an investment y way of e/uity. Ha""0e ,ree E!tr3 a!6 E8it: The +oreign Venture Capital Investors proposing to make venture capital investment under the ;egulations would e granted registration y !"#I. !"#I registered +oreign Venture Capital Investors shall e permitted to make investment on an automatic route within the overall sectoral ceiling of foreign investment under &nne-ure III of !tatement of Industrial 8olicy without any approval from +I8#. +urther) !"#I registered +VCIs shall e granted a general permission from the e-change control angle for inflow and outflow of funds and no prior approval of ;#I would e re/uired for pricing) however) there would e e-2post reporting re/uirement for the amount transacted. Tra6i!( i! )!0i"te6 e2)it3 : The #oard also approved the proposal to permit 9TC"I to develop a trading window for unlisted securities where Nualified Institutional #uyers ,NI#. would e permitted to participate. 9ver the last few years Indian venture capital has evolved its own set of procedures and practices. The foremost of these practices is the manner in which Indian venture firms choose their investments. >ike their counterparts in <! and "urope venture capitalists here look for investments with a characteristic of high risk and high return. The choice of investment is the function of the venture capitalists policy with regards to the preferred industries and the stage of the investee company) yet the e-act choice of investment vary from one venture capital fund to another.

&.> /e3 % !"i6erati !"

, r i!4e"t r94e!t)re %apita0i"t I6ea0 e!trepre!e)r
& venture capital ,VC. who is financing the firm would as the first necessity assess and gauge the promoters. #ecause in the case of start2up where the product or the technology is yet to e tested) the only thing they can trust and their investment on the people ehind it. Bhile investing in a company what a VC is essentially looking for is a partnership and therefore the first decision making criterion is the character and personality of the promoters. (owever from a venture capitalist4s perspective) the ideal entrepreneur) Is /ualified in a 3hot4 area of interest :elivers sales or technical advances such as +:& approval with reasona le pro a ility Tells a compelling story and is presenta le to outside investors) ;ecogni5es the need for speed to an Initial 8u lic 9ffering ,I89. for li/uidity) (as a good reputation and can provide references that show competences and skill) <nderstand the need for a team with a variety of skill and therefore sees why e/uity has to e allocated to other people Borks diligently toward a goal ut maintains fle-i ility

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 Met along with the investor group <nderstands the cost of capital and typical deal structures and is not offended y them Is sought after y many VCs (as a realistic e-pectation a out process and outcome. #esides the ideal entrepreneur) the investor tries to ensure the following for himself. ;easona le reward given in the level of risk. !ufficient influence on the management of the company through oard representation. 7inimi5ation of ta-es. "ase in achieving future li/uidity on the investment. +le-i ility of structure that will allow room to ena le additional investment later) incentives for future management and retention of stocks if management leaves #alance2sheet attractiveness to suppliers and de t financier ;etention of key employees through ade/uate e/uity participation

&.? Ve!t)re #i!a!%i!( pra%ti%e" a!6 pr %e6)re":

,a%t r" I!#0)e!%i!( Ve!t)re Capita0i"t" Ch i%e # I!4e"tme!t
The venture capitalists usually take into account the following factors while deciding on the investment. 1. Track record of the promoters and the management team is the single most important factor. It is often said that three most important considerations in selecting the venture capital investment are 07anagement1) 07anagement1 and 07anagement1. Venture capitalists look for a track record in terms of the successes of the promoters in their previous vocations) whatever these might have een. They put their ets on successful people and avoid those who have tasted failures earlier. & venture capital fund manager does not take more than ten minutes to decide if the management /uality is not okay. The two key points a venture capital manager sees are weather the entrepreneur has a vision and whether the management team is cohesive. (ere he looks for various /uestions like6 (ow do entrepreneurs work togetherQ (ow compati le is the venture capital fund with the teamQ (ow complete is the management e-pertise in the area of usinessQ This means) do the team have mem ers with e-pertise in various aspects of usiness. (ow is the chemistry etween various mem ers of the teamQ

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They also check on the softer issues like temperament of team mem ers) past record and overall management competence. 2. The nature of the usiness and the promoters e-perience in the proposed or related usiness is an important consideration. Venture capitalists are the firm eliever of the Corridor 8rincipal1 that states that the pro a ility of the venture3s success is high when the usiness falls in the corridor of the entrepreneur3s previous vocation or education. 3. The usiness should meet the investment o 'ectives of the venture capitalist in terms of risk profile) the return and the time hori5on of the fund. In case of closed ended funds) if the venture capital has earned a su stantial return in the first round of investments) it is more open to investments with comparatively higher risk. In the initial investment rounds of a fund the venture capitalist is normally willing to take a longer term e-posure as compared the later rounds when the fund is nearing maturity. In the later rounds the venture capitalist goes in for alancing investments. 4. The funds normally invest in select industries where they have the knowledge and e-pertise. This helps then in providing value added services to the investee companies. $. 8ro'ect cost) scheme for financing and financial pro'ections over ne-t few years) including details of underlying assumptions are closely studied) The resultant Internal rate of return ,I;;. must meet the minimum fi-ed y the venture capitalist as the hurdle rate. The I;; is ad'usted for any protection) the venture might e en'oying in the form of su sidy or any other concession from any government or statutory ody. This is to ensure the inherent earning potential of the investment in spite of policy changes y the government. F. 7arketing strategy) including target market) market survey) marketing effort) market si5e and growth potential also effect the decision. C. Technology and technology colla oration if any are looked at carefully. G. 7iscellaneous factors looked at include raw material availa ility) pollution clearances) government policy) rules and regulations S controlling the industry) location) water and electricity needs etc.. 7ost of the venture capital firms do not want an introduction from any one. & usiness proposal that is well prepared is the est introduction that one can ha3ye. 7ost venture capital firms are interested in good investments and not in social contacts and introductions. & detailed and well2organi5ed usiness plan is the only way to gain a venture capitalist attention and o tain funding. VCs do not invest in a two page summery. The summary is needed as a start ut not as a su stitute for a sound plan. & well prepared usiness plan serves two functions. +irstly it informs the venture capitalists a out the entrepreneur3s

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ideas) secondly it shows that the entrepreneur has seriously thought a out the intended usiness) knows the industry and has thought through all the potential pro lems. The summary should contain the name) address and telephone num er of the contact persons in a conspicuous location. #riefly the type of usiness or nature of industry should e discussed. This should e followed y a thum nail sketch of the company3s up to date history. The e-perience of the entrepreneurs and the top management personal should e mentioned. & short description of product or service is re/uired. The amount of funds and the form in which re/uired should also e given. !ummary of five years financial pro'ections and five years history of e-isting group companies should e appended. #esides the e-it plan should also e mentioned. The detailed proposal must cover the following issues6

I.

B)"i!e"" a!6 it" ,)t)re

1. Aature of #usiness 2. #usiness (istory 3. +uture 8ro'ections 4. <ni/ueness $. Target Customers F. Competition C. 8roduction 8rocess G. 7arket E. >a or and "mployees 1?. !uppliers 11. !u 2contractors 12. 8lant and "/uipment 13. 8roperty and +acilities 14. 8atents and Trademark 1$. ;esearch % :evelopment 1F. >itigations 1C. Movernment ;egulations 1G. Conflict of Interest 1E. 9rders outstanding 2?. Insurance 21. Ta-es 22. Corporate !tructure

II. -a!a(eme!t
1. 2. 3. 4. $. F. :irectors and 9fficers Key "mployees ;emunerations Conflict of Interest 8rincipal !hare (olders Consultants) >awyers &ccountants) % #ankers

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III. ,i!a!%i!(
1. 2. 3. 4. $. F. C. G. E. 8roposed +inancing Collaterals Condition of +inancing 8roposed ;eporting and 7I! Investor Involvement Capital !tructure Muarantees <se of 8roceeds +ees 8aid

IV.
1. 2. 3. 4. $. F. C. G.

Ri"1 ,a%t r"

>imited 9perating (istory >imited ;esources >imited 7anagement "-perience 7arket <ncertainties 8roduction <ncertainties >i/uidation :ependence on Key 7anagement 8ersonal Bhat Could Mo BrongQ

V. A!a03"i" # Operati !" a!6 Pr $e%ti !"

1. +inancial 8ro'ections 2. ;atio &nalysis 3. Contingent >ia ility

VI. Pr 6)%t Literat)reD Pr %e6)re a!6 Arti%0e"

Venture capital firms in India usually have either a fi-ed format or guidelines on how to present a proposal and the information they are looking for. I:#I has prescri ed a preliminary application format) to include) rief details of performance of industrial concerns if e-isting) nature and advantages of the proposed process * product) development content in the process) proposal for scheme including nature of up2scaling and appropriate cost of venture. &fter e-amining the prima facie eligi ility of the proposal a detailed application form is send y I:#I. In case of I:#I the factors taken into account while appraising the pro'ect include the technology development content. The commercial aspects such as cost advantage of the proposed technology) market potential) demand supply gap) and the availa ility of management team well versed in various disciplines. Indus venture capital fund usually accepts the pro'ect report prepared as per the format prescri ed y the financial institutions as in most cases the pro'ect will have een received and appraised y the institution efore it comes to Indus Investment +und.

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Customer is asked to ear the transaction cost relating to investment y +und including any professional fee of accountants) solicitors etc. In the 2 proposal or pro'ect report) they look for the ackground and performance record of promoters) nature of promoters usiness) summary of the pro'ect cost and the amount of money sought) information on loan and ank facilities) other e/uity participants) details of government approvals re/uired for the pro'ect and their current status) details of management team and its e-perience) outline of product) market si5e) strategy and marketing plan) summary of premises) production and general operations) financial pro'ections covering five years period) cash flow forecasts. :etails of financial operations of the e-isting group companies for last five years particularly audited figures and forecast for the current year are also sought. I+CI Venture also has a detailed Techno "conomic evaluation and takes help of outside e-perts whenever re/uired. The format prescri ed y them includes name and address of the organi5ation) write up on promoters and their ackground) particulars of the company structure) ; % : set up) pro'ect * feasi ility report) market survey report) production process * technology) status * stage of development of technology) advantages of the proposed pro'ect over e-isting products) scope of commercial e-ploitation) proposed strategy for achieving the o 'ective including specific approach for such tasks) as technology inputs) design) development) prototype development and production) large scale production) testing) evaluation) manufacturing arrangement for up gradation to commercial scald economic scale of production) manpower development) market penetration and also likely constraints and how these are proposed to e overcomeH details of government3s consents) cost of pro'ect and proposed means of financing) organi5ation chart for the company and the pro'ect) responsi ility centers) io2data of key personals) sales forecasts) profita ility pro'ections) cash flow statements and amount and type of assistance re/uired from I+CI Ventures. ICICI venture considers investment on the asis of four important aspects. +irst is the sound management team whose mem ers have esta lished track records with displayed a ility) dedication and integrity. !econd is the large and rapidly growing market opportunity. !cope for international marketing of the product or service is considered an added advantage. Third is the long term competitive advantage that would pose entry arriers to competition. This could e in terms of /uality) performance or cost over su stitute and competitive products. +inally it is the potential for a ove average profita ility leading to attractive return over a longer period. The criterions used y &8I:C Venture Capital +und in selecting the investee company include several factors. The /uality) depth) maturity and e-perience of management or e-posure in the industry in which the assisted concern proposes to implement the pro'ect are factored in. In case of pro'ect y first generation entrepreneur) the e-perience) /ualification and depth of knowledge of the relevant lines and the efforts put in y the entrepreneur are considered. The other factors are innovativeness of the technology * process) its advantage over the e-isting technology * process) the resultant enefits that may accrue on account of the new technology and processH in case of e-isting products) the potential si5e of the market with long term growth prospects) e-istence of clear

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demand supply gap over the period of investment or advantage availa le to the assisted concern for marketing its product over its competitorsH in case of innovative product the competitive advantage of such product over e-isting products) the potential for replacement and estimate of such replacement demandH in case of new products its uni/ueness and innovation to give competitive edge over the e-isting products. I>%+! Venture Corporation considers market growth potential) management skills) technology) /uality consciousness) e-perience in the related field) commitment to the usiness and usiness ethics in the order of priority. Their investment in a particular industry is ased upon its growth potential) technical innovation and rate of o solescence. Bith the maturity of venture capital industry the decision to invest now hinges on four criteria) each of which must e satisfied efore the venture capitalist commits his funds. & host of new reed private sector and offshore funds during due diligence follow a four point criteria as under6 1. +undamental analysis as to the soundness of the usiness. 2. +inancial analysis of the prospect for the value of the usiness to grow. 3. 8ortfolio analysis is to determine whether the investment will fit into the venture capitalists 0 asket1 of investments. 4. :isinvestment analysis to determine the mean time and a pro a le value of the investment upon e-it. 1. ,)!6ame!ta0 A!a03"i" & detailed fundamental analysis of the enterprise and the industry is considered essential. The fundamental analysis at the minimum should consider the following6 & rief history of the company including date of incorporation and summery of progress to date. The /uality) e-perience) strategy and motivation of the management) directors and e-isting shareholders. & complete description of company3s products or services. This considers the distinctive advantage or uni/ue selling points which is likely to lead to the company3s success. The market which the company services) including si5e and nature of the industry) the si5e) location and characteristics of customer ase) potential competition and distinctive or any uni/ue selling point. 7anufacturing and operational aspects of usiness) including a description of technology employed) access to sources of supply) manufacturing capacity and the premises owned or occupied. &n o 'ective analysis of the fundamental risk and the management3s plan to cope with these.

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2. ,i!a!%ia0 A!a03"i" Indian venture capital firms use financial analysis to look at the financial implications of the company3s strategy and to measure its performance. Venture capitalists use this to determine6 The earning growth potential of the company. The sensitivity of these earnings to fluctuations in sales % margins and thus the risk associated with the returns. The likely time lag etween investments ,e.g. Capital e/uipments) marketing etc). and returns. The likely impact on cash flows) and possi ility of having to make second or third round financing into the Investee Company) which do not live up to their pro'ections. The e-pected value of the company at the time of disinvestment. &n o 'ective analysis of the financial risk and management3s plans to cope with them. &. P rt# 0i A!a03"i" The initial investment decision also depends upon the venture capitalist3s portfolio alance at the time the investment proposal is eing considered. That is the proposed investment must e an accepta le addition to venture capitalist3s portfolio in terms of its si5e) its stage of development) its geographic location and its industry sector. 7any venture capital firms avoid seed startup or early stage propositions for fundamental reasons) while a growing num er of venture capitalists are wary of irrational and depressed I89 markets in India and hence avoid #uyout * #uying. *. Di"i!4e"tme!t A!a03"i" It is vital that the venture capitalist keeps his mind on e-it at all timesH clear idea as to the method) the timing and the valuation of the company upon disinvestment. Indian venture capital funds have faced ma-imum pro lem in this respect. 8resently the e-it plan is finali5ed and agreed upon efore the venture capital fund commits investment. Till 1EEG foreign venture capital funds were not convinced that money could e made in India and concerns e-isted on the e-it options) The successful e-it of ICICI ventures and some other domestic funds have acted as a trigger in attracting a num er of foreign venture capital funds to India.

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The other important practices relate to use of financing instrument and the process of monitoring and value addition.

Str)%t)ri!( A Dea0
:uring structuring a deal venture capital in India has faced two specific pro lems) namely6 Pr m ter "hare: &s venture capital is to finance growth) venture capital investment should ideally e used for financing e-pansion of the ventures ,eg. Aew plant) capital e/uipment) additional working capital etc... 9n the other hand) entrepreneurs may want to sell away a part of their own interests in order to ook2in a profit for their work in uilding up the company. In such case) the structuring often includes some vendor shares) with the ulk of financing going to uying new shares to finance growth. Ha!60i!( 6ire%t rG" a!6 "hareh 06erG" 0 a!": In India a company often has an e-isting director3s and shareholder3s loans prior to inviting a venture capitalist to invest. &s the money from venture capital is put into the company to finance growth) it is prefera le to secure the deal to re/uire these loans to e repaid ack to the shareholders * directors only upon I89s * e-its or at some mutually agreed period ,say 1 9r 2 years after investment. This increases the financial commitment of the entrepreneurs and the shareholders of the enterprise.

,i!a!%i!( I!"tr)me!t"
The type of financing availa le from the Indian venture capitalists was mainly e/uity or de t or a com ination of oth. :ue to the rigid rules in India) the Indian venture capital firms do not have the fle-i ility that <K or <! venture capitalists have in innovating new investment instruments. 8&CT and T:ICI ,earlier versions of ICICI Ventures. were first to use 0royalty on sales1 in Indian venture capital. (erein the investee company is provided conditional loan that is serviced through a percentage of sales as royalty if the venture succeeds and the amount is written off if it fails. 9f late with the rela-ation of the regulation and the maturity of the venture capital industry innovative financing instruments are now availa le. ICICI venture has introduced optionally and partially converti le de entures. !hare warrants have een used to ring down prices. ICICI and some other funds have provided ridge finance to the assisted companies. 9ver the last five years Indian venture capitalists have ecome more fle-i le. In the five year period 1EE32EG venture capital investment in the form of non converti le de t has reduced from 3F percent to C percent. !ome funds invest using only one or two instrumentsH others use a variety of instruments In India only 2? percent venture capital firms use 'ust one type of instrument) while 3? percent use two types of instruments. & few funds use even five types of investment instruments.

- !it ri!(

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&ll venture capitalists in India practice hands on active monitoring. 1C venture capital firms provided information a out their monitoring practice. 1$ respondents claimed active monitoring while one called its monitoring approach as proactive. 9nly one fund is elieved to e following a passive * hands off approach. ICICI Ventures follows a mid way approach. &lmost all the domestic funds nominate their representatives on the #oard of :irectors of the investee companies. 9ffshore funds are not that particular a out their nominee on the #oard of the investee company) however they are very particular on regular monitoring. In terms of value added services most of the Indian venture capital funds provide only financial advice and a few of them provide management inputs. &ccording to the views of the assisted entrepreneurs the contri ution of the nominee directors particularly from the pu lic sector funds is lacklustre e-cept in the area of financial management. Very few funds are a le to provide a real value addition through networking. (owever some of the state sector venture funds do provide good support in interfacing with state agencies and are helpful in arranging additional funds from state industrial development and financial institutions. Mu'arat Venture +inance >td. supported !araf +oods) an investee company in many ways S y arranging for finance when the company was in need of it) getting technical pro lems sorted out when the pilot pro'ect had teething pro lems. It stood ehind !uresh !araf) the promoter of !araf +oods even while the company was not making profits in the first couple of years. It also encouraged the company to e-pand.3 :(> decided to go in for venture capital funding) its aim was not only to correct the de t e/uity structure of the company ut also find a partner who could help them introduce the est practices in financial management. It wanted to hive off its international travel usiness and wanted to choose a partner to do due diligence for it. It chose #ankers Trust as its venture capitalist which also helped :(>) in L2K compliance and in its financial management.

&.B .here are VCG" I!4e"ti!( I! I!6ia;

T IT and IT ena led services T !oftware 8roducts ,7ainly "nterprise2focused. T Bireless*Telecom*!emiconductor T #anking T 8!< :isinvestments T 7edia*"ntertainment T #io Technology*#io Informatics T 8harmaceuticals T "lectronic 7anufacturing T ;etail

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Chapter + * C mprehe!"i4e St)63

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*.1 A0ter!ati4e" t VC ,)!6i!(

V"AT<;" C&8IT&> % &>T";A&TIV" +IA&ACIAM C978&;I!9A

8rivate 8lacement) I89) vendor financing) state funding) strategic alliance) parent company finance Venture Capital

&ngel investment) licensing self funding) friends) family) Community ank

#ootstrapping,factoring) trade credit) leasing .) micro loans) financing de t) sell some assets) usiness credit card

>ow >"V"> 9+ ;I!K

(igh

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Ve!t)re Capita0 ' A0ter!ati4e ,i!a!%i!( % mpari" !

If we4 are struggling to find success in our /uest for venture capital) may e we are looking in the wrong place. Venture capital is not for every ody. +or starters) venture capitalists tend to e very picky a out where they invest. They are looking for something to dump a lot of money into ,usually no less than R1 million. that will pour even more money right ack at them in a short amount of time ,typically 32C years.. Be may e planning for a steady growth rate as opposed to the ooming) overnight success that venture capitalists tend to gravitate toward. Be may not e a le to turn around as large of a profit as they are looking for in /uick enough time. Be may not need the amount of money that they offer or our usiness may simply not e ig enough. !imply put) venture capital is not the right fit for our usiness and there are plenty of other options availa le when it comes to finding capital.

*.1.1 S)5"tit)te i! Ear03 "ta(e

1. A!(e0" 7ost venture capital funds will not consider investing in anything under R1 million to R2 million. &ngels) however) are wealthy individuals who will provide capital for a startup usiness. These investors have usually earned their money as entrepreneurs and usiness managers and can serve as a prime resource for advice on top of capital. 9n the other hand) due to typically limited resources) angels usually have a shorter investment hori5on than venture capitalists and tend to have less tolerance for losses. 2. Pri4ate P0a%eme!t &n investment ank or agent may e a le to raise e/uity for our company y placing our unregistered securities with accredited investors. (owever) you should e aware that the fees and e-penses associated with this practice are generally higher than those that come with venture and angel investors. Be will likely receive little or no usiness counsel from private investors who also tend to have little tolerance for losses and under2performance. &. I!itia0 P)50i% O##eri!( If we are somehow a le to gain access to pu lic e/uity markets than an initial pu lic offering ,I89. can e an effective way to raise capital. Keep in mind that) while the pu lic market4s high valuations) a undant capital and li/uidity characteristics make it attractive) the transaction costs are high and there are ongoing legal e-penses associated with pu lic disclosure re/uirements.

*.1.2 Later Sta(e ,i!a!%i!(

1. B t"trap ,i!a!%i!(

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This method is intended to develop a foundation for your usiness from scratch. +inancial management is essential to make this work. Bith ootstrap financing you4re uilding a usiness from nothing) which means there is little to no margin for error in the finance department. Keep a rigid account of all transactions and don4t stray from your udget. & few different methods of ootstrapping include 6 ,a%t ri!() which generates cash flow through the sale of your accounts receiva le to a 0factor1 at a discounted price for cash. Tra6e Cre6it is an option if you are a le to find a vendor or supplier that will allow you to order goods on net 3?) F? or E? day terms. If you can sell the goods efore the ill comes due then you have generated cash flow without spending any money. Customers can pay you up front our services. >easing your e/uipment instead of purchasing it outright. 2. ,)!6 ,r m Operati !" >ook for ways to tweak your usiness in order to reduce the cash flowing out and increase the cash flowing in. +unding found in usiness operations come free of finance charges) can reduce future financing charges and can increase the value of your usiness. 7onth2 y2month operating and cash pro'ections will show how well we have planned) how you can optimi5e the elements of your usiness that generate cash and allow you to plan for new investments and contingencies. &. Li%e!"i!( !ell licenses to technology that is non2essential to our company or grant limited licensing to essential technology that can e shared. Through out licensing we can generate revenue from up2front fees) access fees) royalties or milestone payments. *. Ve!6 r ,i!a!%i!( !imilar to the trade credit related to ootstrap financing) vendors can play a ig role in financing your new usiness. "sta lish vendor relationships through our trade association and strike deals to offer their product and pay for it at a date in the near future. !elling the product in time is up to us. In hopes of keeping you as a customer) vendors may also e willing to work out an arrangement if we need to finance e/uipment or supplies. Oust make sure to look for sta ility when you research a vendor4s credentials and reputation efore you sign any kind of agreement. &nd keep in mind that many ma'or suppliers ,M" !mall #usiness !olutions) I#7 Mlo al +inancing. own financial companies that can help you. :. Se0# ,)!6i!(

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!earch etween the couch cushions and in old 'acket pockets for whatever e-tra money you might have lying around and invest it into your usiness. 9 viously loose change will not e enough for e-tra usiness funding) ut take a look at your savings) investment portfolio) retirement funds and employee uyout options from your previous employer. Lou won4t have to deal with any creditors or interest and the return on your investment could e much higher. (owever) make sure that you consider the risks involved with using your own resources. (ow competitive is the market that you are a out to enter intoQ (ow long will it take to pay yourself ackQ Bill you e a le to pay yourself ackQ Can you afford to lose everything that you are investing if your usiness were to failQ It4s important that your pro'ected returns are more than enough to cover the risk that you will e taking. =. SBIR a!6 STTR Pr (ram" Coordinated y the !#&) !#I; ,!mall #usiness Innovation ;esearch. and !TT; ,!mall usiness Technology Transfer. programs offer competitive federal funding awards to stimulate technological innovation and provide opportunities for small usinesses. Lou can learn more a out these programs at !#I;world.com. >. State ,)!6i!( If you4re 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 usinesses on & out.com. ?. C mm)!it3 Ba!1" These smaller anks may have fewer products than their financial institution counterparts ut they offer a great opportunity to uild anking relationships and are generally more fle-i le with payment plans and interest rates. B. -i%r 0 a!" These types of loans can range from hundreds of dollars to low si-2figure amounts. &lthough some lenders regard microloans to e a waste of time ecause the amount is so low) these can e a real oon for a startup usiness or one that 'ust needs to add some e-tra cash flow. 1E. ,i!a!%e De5t

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It may e more e-pensive in the long run than purchasing) ut financing your e/uipment) facilities and receiva les can free up cash in the short term or reduce the amount of money that you need to raise. 11. ,rie!6" &sk your friends if they have any e-tra money that they would like to invest. &ssure them that you will pay them ack with interest or offer them stock options or a share of the profits in return. 12. ,ami03 7ay e you have a rich uncle or a wealthy cousin that would e willing to lend you some money get your usiness running or send it to the ne-t level. &gain) make it worth their while y offering interest) stocks or a share of the profits. 1&. , rm a Strate(i% A00ia!%e &ligning your usiness with a corporation can produce funding from upfront or access fees to your service) milestone payments and royalties. In addition) corporate partners may e a le to provide research funding) loans and e/uity investments. 1*. Se00 S me A""et" +ind an interested party to uy some of your assets ,computers) e/uipment) real estate) etcU. and then lease them ack to you. This provides an instant source of cash and you will still e a le to use whatever assets you need. 1:. B)"i!e"" Li!e" O# Cre6it If your usiness has positive cash flow and has proven that it will cover its de ts then you may e eligi le for a usiness line of credit. This type of financing is a common service offered y most usiness anks and serves as usiness capital) up to an agreed upon amount) that you can access at any time. 1=. Per" !a0 Cre6it Car6" <sing personal credit cards to finance a usiness can e risky ut) if you take the right approach) they can also give your usiness a lift. Lou should only consider using this type of financing for ac/uiring assets and working capital. Aever consider this to e a long2term option. 9nce your company reaks even or moves into the lack) ditch the credit cards and move toward traditional ank financing or lease agreements.

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1>. B)"i!e"" Cre6it Car6" #usiness credit cards carry similar risks as personal credit cards ut tend to e a safer alternative. Bhile the activity on this card goes toward your credit report) a usiness credit card can help you to uild usiness credit) keep your usiness e-penses separate from your personal e-penses and can make ta- season easier to manage.

*.2 /e3 ")%%e"" #a%t r # r 4e!t)re %apita0 i!6)"tr3 i! I!6ia

Knowledge ecome the key factor for a competitive advantage for company. Venture Capital firms need more e-pert knowledge in various fields. The various key success factor for venture capital industry are as follow6 /! 70e6(e a5 )t C 4t. %ha!(i!( p 0i%ie": Investment) management and e-it should provide fle-i ility to suit the usiness re/uirements and should also e driven y glo al trends. Venture capital investments have typically come from high net worth individuals who have risk taking capacity. !ince high risk is involved in venture financing) venture investors glo ally seek investment and e-it on very fle-i le terms which provides them with certain levels of protection. !uch e-it should e possi le through I89s and mergers*ac/uisitions on a glo al asis and not 'ust within India. In this conte-t the 'udgement of the 'udiciary raising dou ts on treatment of ta- on capital gains made y firms registered in 7auritius gains significance 2 changing policies with a retrospective effect is undou tedly acting as a dampener to fresh fund raising y Venture capital firms. <)i%1 Re"p !"e time : The company have flat organi5ation structure results in /uicker decision making. The entrepreneur is relieved of the trauma that one normally goes through in an interface with a funding institution or a development agency. They follow a clearly defined decision making process that works with clock like precision) which means that if they agree on a funding schedule entrepreneur can count on them to stick it. /! 70e6(e a5 )t C0 5a0 E!4ir !me!t Bith increasing glo al integration and mo ility of capital it is important that Indian venture capital firms as well as venture financed enterprises e a le to have opportunities for investment a road. This would not only enhance their a ility to generate etter returns ut also add to their e-perience and e-pertise to function successfully in a glo al environment.

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 C 6 H)ma! Re" )r%e : Venture capital should ecome an institutionali5ed industry financed and managed y successful entrepreneurs) professional and sophisticated investors. Mlo ally) venture capitalist are not merely finance providers ut are also closely involved with the investee enterprises and provide e-pertise y way of management and marketing support. This industry has developed its own ethos and culture. Venture capital has only one common aspect that cuts across geography i.e. it is risk capital invested y e-perts in the field. It is important that venture capital in India e allowed to develop via professional and institutional management. Ba0a!%e 5et7ee! three #a%t r" Venture Capital acked companies can provide high returns. (owever) despite of success stories like &pple) +ed"- of 7icrosoft) a lot of these deals fail. It is said that only one out of ten companies succeed. ThatJs why every deal has an element of potential profit and an element of risk) depending on the deals si5e. To e successful) a Venture Capital Company must manage the alance etween these three factors.

,rame 7 r1 # r 1e3 ")%%e"" #a%t r

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Knowledge is key) to get the alance in this P7agic TriangleP. Bith knowledge we mean knowledge a out the financial markets and the industries to invest in) risk management skills and contacts to investors) possi le investees and e-ternal e-pertise. (igh profits)

achieva le y larger deals) are not only important for the financial performance of the Venture Capital company. &s a good track record they are also a vital argument to attract funds which are the asis for larger deals. (owever) larger deals imply higher risks of losses. 7any Venture Capital companies try to share and limit their risks. !olutions could e alliances and careful portfolio management. There are Venture Capital firms that refuse to invest in e2start2upJs ecause they perceive it as too risky to follow todayJs type.

*.& A64a!ta(e" # Ve!t)re Capita0:

1. It in'ects long term e/uity finance which provides a solid capital ase for future growth. 2. The venture capitalist is a usiness partner) sharing oth the risks and rewards. Venture capitalists are rewarded y usiness success and the capital gain. 3. The venture capitalist is a le to provide practical advice and assistance to the company ased on past e-perience with other companies which were in similar situations. 4. 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 co2 investments with other venture capital firms when additional rounds of financing are re/uired. $. The venture capitalist may e capa le of providing additional rounds of funding should it e re/uired to finance growth.

*.* Di"a64a!ta(e" # Ve!t)re Capita0:

7ost venture capitalists seek to reali5e their investment in a company in three to five years. If an entrepreneur3s usiness plan contemplates a longer timeta le efore providing li/uidity) venture capital may not e appropriate. "ntrepreneurs should also consider this.

*.: Opp rt)!itie" a!6 Threat":

*.:.1 Opp rt)!itie":
I!itiati4e" ta1e! 53 the C 4er!me!t i! # rm)0ati!( p 0i%ie" t e!% )ra(e i!4e"t r" a!6 e!trepre!e)r"

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The emerging scenario of glo al competitiveness has put an immense pressure on the industrial sector to improve the /uality level with minimi5ation of cost of products y making use of latest technological skills. The implication is to o tain ade/uate financing

along with the necessary hi2tech e/uipments to produce an innovative product which can succeed and grow in the present market condition. <nfortunately) our country lacks on oth fronts. The necessary capital can e o tained from the venture capital firms who e-pect an a ove average rate of return on the investment. Movernment of India understands this. &lso) The Movernment of India in an attempt to ring the nation at par and a ove the developed nations has een promoting venture capital financing to new) innovative concepts % ideas) li erali5ing ta-ation norms providing ta- incentives to venture firms) giving an opportunity for the creation of local pools of capital and holding training sessions for the emerging VC investors. In the year 2???) the finance ministry announced the li erali5ation of ta- treatment for venture capital funds to promote them % to increase 'o creation. This is e-pected to give a strong oost to the non resident Indians located in the !ilicon Valley and elsewhere to invest some of their capital) knowledge and enterprise in these ventures. VC) to e a le to contri ute to developing entrepreneurship in India) needs to concentrate its investment in small and medium enterprises. & 08ackage for 8romotion of 7icro and !mall "nterprises1 was announced in +e ruary 2??C. This includes measures addressing concerns of credit) fiscal support) cluster2 ased development) infrastructure) technology) and marketing. Capacity uilding of 7!7" &ssociations and support to women entrepreneurs are the other important features of this package. !7"s have een allowed to manage their direct*indirect e-posure to foreign e-change risk y looking*canceling*roll over of forward contracts without prior permission of ;#I. To oost the micro and small enterprise sector) the ank has decided to refinance an amount of C??? crore to the !mall Industries :evelopment #ank of India) which will e availa le up to 7arch 31) 2?1?. The Central #ank said that it is also working on a similar refinance facility for the Aational (ousing #ank ,A(#. of an amount of ;s 4) ??? crore.

The Indian economy is growing at G2E@ so the there is a development of all sector like manufacturing) services sector. !o there is a great opportunities for Venture Capital firms. #ecause mostly invest their money in this sectors. India amongst leading entrepreneurial (ot eds glo ally City competencies emerging #angalore T &ll I82led companiesH IT and IT2ena led services :elhi ,AC;. T !oftware services) IT ena led services) Telecom

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7um ai T !oftware services) IT ena led services) 7edia) Computer Mraphics) &nimation) #anking 9ther emerging Centers T Chennai) (ydera ad) and 8une Emer(i!( "e%t r" # r i!4e"tme!t" &s the venture industry continues to accelerate) a num er of trends that cross geographies can e seen. The industry is ecoming even more glo ali5ed .&s a result) innovation in clean tech) IT) and healthcare) pharmaceutical are having a glo al impact. This changing landscape is driving new approaches in how large corporations are interacting with the venture community.

*.:.2 Threat":
Ve!t)re Capita0 -ar1et i! I!6ia Cetti!( O4erheate6 The Venture Capital market in India seems to e getting as hot as the country4s famous summers. (owever) this potential over2e-u erance may lead to some stormy days ahead) ased on so ering research compiled y glo al research and analytics services firm) "valueserve. "valueserve research shows an interesting phenomenon is eginning to emerge6 9ver 44 <!2 ased Venture capital firms are now seeking to invest heavily in start2ups and early2stage companies in India. These firms have raised) or are in the process of raising) an average of <! R1?? million each. Indeed) if these 4?2plus firms are successful in raising money) they would garner appro-imately R4.4 illion to e invested during the ne-t 4 to $ years. Taking Indian 8urchasing 8ower 8arity ,888. into consideration) this would e e/uivalent to R22 illion worth of investment in the <!. !ince a out R1.C$ illion ,or appro-imately 4?@ of R4.4 illion. has een already raised) even if only R2.2 illion is raised y :ecem er 2??F) "valueserve cautions that there will e a glut of Venture Capital money for early stage investments in India. This will e especially true if the VCs continue to invest only in currently favorite sectors such as IT) #89) software and hardware products) telecom) and consumer Internet. Miven that a typical start2up in India would re/uire RE million during the first three years ,i.e.) R3 million per year. and even assuming that the start2up survives for three years) investing R2.2 illion during 2??C22?1? would imply investing in 1$? to 1G? start2ups every year during this period) which simply does not seem practical if the VCs continue to focus only on their current favorite sectors.

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 U!pr 6)%ti4e 7 r1# r%e: & glo al survey y 7cKinsey % Company revealed that Indian usiness leaders are much more optimistic a out the future than their international peers. !o Indian employees are tardy in their 'o so it will effect reversely on the economic condition of the country. #ecause they are unproductive to the economy of the country. E8it r )te 5arrier" : :ue to crash down of market y $1@ from Oanuary to Aovem er 2??G. It create a pro lem for venture capital firms. #ecause Ao ody is trying to come up with I89 and I89 is the e-it route for Venture Capital. Ta8e" ! emer(i!( "e%t r : &s per <nion #udget 2??C and its road guidelines) Movernment proposed to limit pass2 through status to venture capital funds ,VC+s. making investment in nine areas. These nine areas are iotechnology) information technology) nanotechnology) seed research and development) ;%: for pharmaceuticals sectors) dairy industry) poultry industry and production of io2fuels. 8ass2through status means that the incomes earned y funds are ta-a le now.

*.= C !temp rar3 I"")e i! Ve!t)re Capita0 I!6)"tr3

II72& "yes venture capital to fund its incu ators #uoyed y the growing tri e of students wanting to go solo with their own entrepreneurial venture) the Indian Institute of 7anagement) &hmeda ad ,II72&. is looking to attract venture capital funds to the campus. The premier management institute is also in talks with several corporates to provide seed capital to udding entrepreneurs from its incu ation la . 0The num er of students starting up their own venture is increasing in every atch. In a atch of 2$? students) at least 1?21$ are starting their own ventures. !ource6 #usiness :aily from T(" (IA:< group of pu lications !unday) Oan 2C) 2??G

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 Angel investors betting big on Indian start Amid a slowdown in global venture capital investments, Indian start-up firms are emerging as clear favorites for seed capital among global angel investors. During the first quarter of !!", #$-based venture capitalists invested %&'! million in &" deals in India, a ( per cent )ump from the previous quarter, when % (6 million was invested in && companies. In the case of *hina, the funding b+ #$-based ,enture *apital firms dipped ( per cent to % '! million invested in & firms during the first quarter of !!", down from the %&&1 million invested in &- deals in the previous quarter, according to data from the .one+ /ree report from Pricewaterhouse*oopers and the #$-based 0ational ,enture *apital Association $ource1 2usiness Dail+ from /34 3I0D# group of publications $aturda+, Apr 6, !!"

*.> ,)t)re pr "pe%t" # Ve!t)re Capita0

Venture Capital can play a more innovative and development role in developing country like India. It could help the reha ilitation of sick units through people with ideas an turnaround management skills. & large num er of enterprises in India ecome sick even efore the commencement of 8roduction. Venture Capitalists could also assists small ancillary units to upgrade their technologies so that they could e in line with the development taking place in their parent companies. Let another area where VC+s can play a significant role in developing countries is the service sector including tourism) pu lishing) healthcare etc. They could also provide assistance to people coming out of the universities) technical institutes etc. who wish to start their own venture with or without high2tech content) ut involving high risk. This would encourage entrepreneurial spirit.

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It is not the initial funding which is needed from venture capitalist) ut they should also simultaneously provide management and marketing e-pertise2 a real critical aspect of venture capital in developing countries. VC+s can improve their effectiveness y setting

up venture capital cells in ;%: and other scientific organi5ations) providing syndicated or consortium financing and acting as usiness incu ators. In sum) venture capital) y com ining risk financing with management and marketing assistance) could ecome an effective instrument in fostering development of entrepreneurship and transfer of technology in developing countries. The e-periences of developed countries and the detailed case study of venture capital in India) however indicate that that the following elements are needed for the success of venture capital in any country. "ntrepreneurial tradition6 & road2 ased ,and less family ased. entrepreneurial tradition and societal and government for innovations) creativity and enterprise. <nregulated economic environment6 & less regulated and controlled usiness and economic environment where attractive customer opportunities e-ist and could e created for high2tech and /uality products. :isinvestments avenues6 "-istence of disinvestments mechanism) particularly) over the counter stock e-change catering to the needs of !7"s +iscal incentives6 +iscal incentives which render the e/uity investment more and develop e/uity cult in investors. #road2 ased education6 & more general) usiness and entrepreneurship oriented education system where scientists and engineers have knowledge of accounting) finance and economics and accountants understand engineering or physical sciences. Venture Capital managers6 &n effective management education and training program for developing professionally competent and committed venture capital mangers H they should e trained to evaluate and manage high2tech) high risk ventures. 8romotion efforts6 & vigorous marketing thrust) promotional efforts and development strategy) employing new concepts such as venture fairs) venture clu s) venture networks) usiness incu ators etc. for the growth of venture capital. Institute2industry linkage6 >inkage etween universities*technology institutions) ;%: organi5ations) industry and financial institutions including venture capital firms.

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;%: activities6 "ncouragement and funding of ;%: y private and pu lic sector companies and the government for ensuring technological competitiveness.

IV.G

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 e-pand. VCs have moved eyond IT service ut are cautious in e-ploring the right usiness model) for finding opportunities that generate etter returns for their investors. In terms of impediments to e-pansion) few concerning factors to VCs includeH unfavora le political and regulatory environment compared to other countries) difficulty in achieving successful e-ists and administrative delays in documentation and approval. In spite of few non attracting factors) Indian opportunities are no dou t promising which is evident y the large num er of new entrants in past years as well in coming days. Aonetheless the market is challenging for successful investment. Therefore Venture capitalists responses are up eat a out the attractiveness of the India as a place to do the usiness.

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Bi50i (raph3
B 1"

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777.E% ! mi%time".i!6iatime".% m 777.1EE4e!t)re".% m 777.m"me.% m 777.p0a!!i!(% mmi""i !.!i%.i!

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