Venture Capital

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2. 6. Growth of Venture Capital Finance in India and Role of Business Confidence Index | 6
PREFACE The research project report Growth of Venture Capital Finance in India and role
of Business Confidence Index is undertaken as a part of MBA curriculum at Kurukshetra
University. Venture Capital Finance is a mode of financing a high risk and new business
ventures and is no more in the dormant stage in India. The academic research study has
been undertaken in order to know the current scenario of venture capital finance in India and
to predict it near future rate of growth. The report also lookouts for market share of different
economic sectors in terms of Venture Capital Investments and analyses growth of venture
capital investment in these sectors. The research project report further analyse whether
values Business Confidence Index can predict growth rate of Venture Capital Investments.
For this reason Business Confidence Index by Confederation of Indian Industry (CII) has
been used. The report starts with Introduction to the topic i.e. Venture Capital Financing. It
then throws light of this Industry in India. The report than provides objectives of this project,
reviews of literature done and Research methodology used. It then provides details of
Analysis and Interpretation followed by findings and conclusion.
3. 7. Growth of Venture Capital Finance in India and Role of Business Confidence Index | 7 1
INTRODUCTION TO VENTURE CAPITAL FINANCE 1.1 Venture Capital Financing Business
requires capital, and getting it at the right time is very important. There are several
alternatives to fund the business. A brief heading to name a few would be: Owner or
proprietors capital Equity partner Debt Finance These can further be branched to many
options giving entrepreneur several options to chooseamong. In this study the focus would
be more on financing by venture capital which comes under equity financing. Venture capital
is a risk financing in the form of equity or quasi-euity. It gives the business funds based on
their potential and their interest as perceived by the investor. Funds might be required for
seed stage funding, expansion/development funding or for acquisition financing. Venture
capital is established among developed countries and is developing in third world countries
because of its impact on encouraging entrepreneurial activities within a nation. Venture
Capital firms invest funds on any business with a professional outlook; they focus on their
primary segment which varies among different specializations (e.g. e-commerce, Oil & Gas,
Healthcare, Manufacturing, Health/life sciences, etc.). 'Venture Capital' is an important
source of finance for those small and medium-sized firms which have very few avenues for
raising funds.
Although such a business firm may possess a huge potential for earning large profits in the
future and establish itself into a larger enterprise. But the common investors are generally
unwilling to invest their funds in them due to risk involved in these types of investments. In
order to provide financial support to such entrepreneurial talent and business skills, the
concept of venture capital emerged. In a way, venture capital is a commitment of capital, or
shareholdings, for the formation and setting up of small scale enterprises at the early stages
of their life cycle.1 Venture capitalists comprise of professionals of various fields. They
provide funds (known as Venture Capital Fund) to these firms after carefully scrutinizing the
projects. Their main aim is to earn huge returns on their investments, but their concepts are
totally different from the traditional moneylenders. They know very well that if they may suffer
losses in some project, the others will compensate the same due to high returns. They take
active participation in the management of the company as well as provide the expertise and
qualities of a good banker, technologist, planner and managers. Thus, the venture capitalist
and the entrepreneur literally act as partners. 1 Venture Capital, accessed February 18,
2014 http://business.gov.in/business_financing/venture_capital.php
5. 9. Growth of Venture Capital Finance in India and Role of Business Confidence Index | 9 1.2
Benefits of VC over other Funding Methods Venture capital has a number of advantages over
other forms of finance: It injects long term equity finance which provides a solid capital
base for future growth. The venture capitalist is a business partner, sharing both the risks
and rewards. Venture capitalists are rewarded by business success and the capital gain.
The venture capitalist is able to provide practical advice and assistance to the company
based on past experience with other companies which were in similar situations. The
venture capitalist also has a network of contacts in many areas that can add value to the
company, such as in recruiting key personnel, providing contacts in international markets,
introductions to strategic partners, and if needed co-investments with other venture capital
firms when additional rounds of financing are required.
1.3 A Brief History One of the first steps toward a professionally-managed venture capital
industry was the passage of the Small Business Investment Act of 1958. The 1958 Act
officially allowed the U.S. Small Business Administration (SBA) to license private "Small
Business Investment Companies" (SBICs) to help the financing and management of the
small entrepreneurial businesses in the United States. It is commonly noted that the first
venture-backed startup is Fairchild Semiconductor (which produced the first commercially
practical integrated circuit), funded in 1959 by what would later become Venrock Associates.
During the 1960s and 1970s, venture capital firms focused their investment activity primarily
on starting and expanding companies. More often than not, these companies were exploiting
breakthroughs in electronic, medical, or data-processing technology. As a result, venture
capital came to be almost synonymous with technology finance. The public successes of the
venture capital industry in the 1970s and early 1980s (e.g., Digital Equipment Corporation,
Apple Inc., Genentech) gave rise to a major proliferation of venture capital investment firms.
The number of firms multiplied, and the capital managed by these firms increased ten folds
over the course of the decade. Growth in the venture capital industry remained limited
throughout the 1980s and the first half of the 1990s.
The late 1990s were a boom time for venture capital. Initial public offerings of stock for
technology and other growth companies were in abundance, and venture firms were reaping
large returns. The NASDAQ crash and technology slump that started in March 2000 shook
virtually the entire venture capital industry as valuations for startup technology companies
collapsed. Over the next two years, many venture firms had been forced to write-off large
proportions of their investments, and many funds were significantly "under water" (the values
of the fund's investments were below the amount of capital invested). The revival of an
Internet-driven environment in 2004 through 2007 helped to revive the venture capital
environment. Currently, Venture Capital Environment is at all time high leading to emergence
of all together new businesses. Innovations are sprouting at fast speed and VC investments
are helping them for realizing full potential of Entrepreneurs.
1.4 Venture capital financing process There are typically six stages of venture round
financing offered in Venture Capital that roughly correspond to these stages of a company's
development. Seed funding: Low level financing needed to prove a new idea, often
provided by angel investors. Crowd funding is also emerging as an option for seed funding.
Start-up: Early stage firms that need funding for expenses associated with marketing and
product development Growth (Series A round): Early sales and manufacturing funds
Second-Round: Working capital for early stage companies that are selling product, but not
yet turning a profit Expansion: Also called Mezzanine financing, this is expansion money for
a newly profitable company Exit of venture capitalist: Also called bridge financing, 4th round
is intended to finance the "going public" process Between the first round and the fourth
round, venture-backed companies may also seek to take venture debt.
1.5 What do VCs look for? Venture capitalists are higher risk investors and, in accepting
these risks, they desire a higher return on their investment. The venture capitalist manages
the risk/reward ratio by only investing in businesses which fit their investment criteria and
after having completed extensive due diligence. Venture capitalists have differing operating
approaches. These differences may relate to location of the business, the size of the
investment, the stage of the company, industry specialization, structure of the investment and
involvement of the venture capitalists in the companys activities. The venture capital firm will
ask prospective investee companies for information concerning the product or service, the
market analysis, how the company operates, the investment required and how it is to be
used, financial projections, and importantly questions about the management team. All the
above questions should be answered in the Business Plan. Assuming the venture capitalist
expresses interest in the investment opportunity, a good business plan is a pre-requisite.
VENTURE CAPITAL IN INDIA AND BUSINESS CONFIDENCE 2.1 Industry Overview India
currently has more than about 400 Venture capital firms. The Venture Capital industry has
shown an exponential upward curve from investments of about USD 57 billion in 2008 to
USD 140 billion in 2013. Unlike before as observed in the early stages of the industrys
growth the investments were inclined largely towards the Real Estate and IT sector, but
within 7 years of success stories now in 2014 venture capital firms are now interested in
nearly all sectors. With developing Indian entrepreneurship standards, government support,
policies and globalization policies there are vast opportunities for private equity investors to
capitalize on. Among cities, companies headquartered in Bangalore and Mumbai were the
favourite among VC investors during 2013 attracting 49 investments each, followed by Delhibased companies that accounted for 24 investments and Chennai-based companies with 21
investments. Gurgaon and Hyderabad followed with 15 deals and 8 deals respectively
Preferred regions for VC investments are Mumbai, Delhi & NCR, and Bangalore, followed by
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Chennai and Hyderabad. Tier-2 cities like Lucknow and Chandigarh are slowly catching up in
attracting VC Investments.
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2.2 Strengths and Challenges ofIndia India is an attractive market with a challenging
business environment. Its appeal lies in its competitive labor costs, lucrative domestic
market, and its skilled workforce. Foreign investors also applaud its strong management and
business education system, as well as its improving telecommunications infrastructure.
However, the countrys weaknesses are its under-developed infrastructure and a restrictive
operative environment. Key Strengths Local Labor Costs Domestic Market Business
and Management Education Skilled Services Workforce Telecommunications
Infrastructure Key Challenges Legislative and administrative environment Transport and
logistics infrastructure Corporate Taxation Ease of doing business
2.3 Growth of Venture Capital Industry Up to 1996: The Early Years: Funds that were
mobilized for venture investment were small in value. The venture capitalists in those times
were mostly from a banking background. Banks approached the subject of venture funding
much likely they approached debt financing of a project. The accent was on the asset-side
of the balance sheet. And the focus on innovation and business building was low. Value
creation as a focus had not yet been fully discovered, and exit strategies were being thought
more around the life-term of the fund. Valuations were low. No competition between VCs.
Indian entrepreneurs had not yet discovered the venture capital route to funding and growth
and it reflected in the small amounts that were invested. There was little or no active
participation of venture capitalists in entrepreneurial activities such as financial structuring,
business strategy. Business enhancement through networks. 1997 to 2000: The Rock n
Roll Years: The SEBI guidelines of 1996 acted as huge incentive for domestic and foreign
venture capital companies to focus their attention on India.
The range of venture capitalists now spanned incubators, angel investors, classic venture
capitalists and even private equity players. And the lines between them had begun to blur.
Venture capitalists were instrumental in introducing risk taking too many, members of the
professional class. 2001 Onwards: The Reality Years: The number of people who had got
in to venture capital game was truly impressive. In addition to the seasoned players, there
were finance and noon finance professionals of different hues entering the industry and
people with little or no experience running the companies. Venture capital community is
finally recognizing that the evolution and business is an on-going process. This added to the
return of the business maturation cycle of five to seven years, portends a less frenetic and
more sustained pace of venture activity. Domestic Venture Capital firms have realised the
potential of Indian Entrepreneurs. Legislative support has seen tremendous reforms.
According to surveys by International agencies like Deloitte, EY; Foreign Investors
attractiveness among India is increasing.
2.4 Business Confidence Index About Business Confidence Index Business Confidence
Index (BCI) is an economic indicator that measures the amount of optimism or pessimism
that business/investment managers feel about the prospects of business in their
countries/organisations. It also provides an overview of the state of the economy. It is usually
based on survey of such managers. BCI is usually given by industrial organisations
conducting such economic surveys. In India, Business Confidence is given by Confederation
of Indian Industries. About CII The Confederation of Indian Industry (CII) is an association of
Indian businesses which works to create an environment conducive to the growth of industry
in the country. CII is a non-government, not-for-profit, industry-led and industry-managed
organization, playing a proactive role in India's development process. Founded in 1895, CII
has over 7100 members, from the private as well as public sectors, including SMEs and
MNCs, and an indirect membership of over 90,000 enterprises from around 257 national and
regional sectoral industry bodies.
CII works closely with Government on policy issues, interfacing with thought leaders, and
enhancing efficiency, competitiveness and business opportunities for industry through a
range of specialized services and strategic global linkages. About CIIs Business Confidence
Index Every quarter CII provides Business Confidence survey results in the form of Index for
forthcoming quarters. The CIIs Business Confidence Index is an indicator designed to
measure the degree of optimism on the state of the economy in India that business owners
are expressing through their activities of investing and spending. Decreasing business
confidence often implies slowing economic growth because business owners are likely to
decrease their investment. The idea is that the more confident business owners and
managers feel about the economy, their companies, their jobs and incomes, the more likely
they are to make investments and purchases. Business Confidence in India increased to
54.90 in the fourth quarter of 2013 from 45.70 in the third quarter of 2013. Business
Confidence in India is reported by the Confederation of Indian Industry (CII). From 2005 until
2013, India Business Confidence averaged 59.3 reaching an all time high of 71.8 in March of
2007 and a record low of 45.7 in September of 2013. In India, the Business Confidence
Index (BCI) is based on a sample size of around 300 companies covering all industry
sectors, including small, medium and large enterprises from different regions. BCI is
calculated as a weighted average of the Current Situation Index (CSI) and the Expectation
Index (EI), with greater weight given to EI as compared to CSI. These indices are based on
three questions on the performance of the economy,
respondents industry and respondents company. Respondents are asked to rate the current
and expected performance on a scale of 0 to 100. A score above 50 indicates positive
confidence while a score above 75 would indicate strong positive confidence.
INTRODUCTIONTO THE STUDY 3.1 Backgroundof the Study Today due to the economic
crisis and the change in job market, Entrepreneurship has gained interest. A number of
young people in India today, plans to setup their own ventures and capitalize this
opportunities. In todays highly dynamic economic climate with regular technological
inventions, few traditional business models may survive but margin lies more towards more
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innovative business ideas. Now, along with conglomerates that fuel economic growth SMEs
and other innovative businesses have gained the momentum towards contribution in it.
Starting and expanding an enterprise has its own risk and is never easy. There are number
of parameters that contribute to its success or downfall. Some of these include: Should one
choose Venture Capital or any other mode of finance? Which sector one should start its
venture in? What array of businesses are points of attraction among Venture Capitalists?
What is possible near future growth in sector of ones choice? The study helps in providing
answers to these questions by analysing status of Venture Capital in India, Which sectors are
on rise, what is the confidence level of Indian and Foreign investors.
3.2 Needfor the Study The need of study has following facets: The study has been
conducted for gaining the practical knowledge about Venture Capital Finance in India The
study has been undertaken as a part of MBA curriculum for the partial fulfilment of the
requirement of MBA degree by Kurukshetra University, Kurukshetra. There is a limited
Academic Literature available regarding Venture Capital Finance in India.
3.3 Objectives of Study As we know Venture Capital Finance is no more in the dormant stage
in India. But there is a dearth of academic research on the topic. In order to fill the gap the
study has been undertaken. The main objectives of study are: To know the current scenario
of venture capital finance in India To predict the future rate of growth of Venture Capital
Finance To lookout for market share of different economic sectors in terms of Venture
Capital Investments To analyse growth of venture capital investment in different sectors of
economy To analyse whether Business Confidence Index can predict growth rate of
Venture Capital Investments
3.4 Scope of Study The study is about Venture capital Finance in India. So any kind of
financing other than Venture Capital is out of scope. Also, data of any country other than
India is out of scope of this study. This study has used CIIs Business Confidence. Any
other Business Confidence Survey doesnt hold in scope of the study. Only studies of
Venture Capital Investments are in scope. Factors responsible for such investments are out
of scope.
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LITERATURE REVIEW Although there is limited literature available for Venture Capital
Finance in Indian context, there are extensive texts available on Venture capital all over the
world. Following are some insightful work done by different academicians and researchers in
the same line. I M Panday The process of developing venture capital in India Technovation, Volume 18, Issue 4, April 1998 This study investigates the process of
developing venture capital in a developing country India. The discussion documents the
experiences of the largest venture capital firm in India (TDICI) in initiating and developing the
concept of venture capital as well as learning the venture capital business. The history of
modern venture capital in India is of recent origin; it only goes back to the mid-eighties. In the
initial years, venture capital firms (VCFs) in India encountered a number of problems in
developing their businesses. From the in-depth case study of TDICI, it is found that the firm
went through the initial constraint of not knowing the venture capital business well, and learnt
through experience. It faced problems in raising funds and evaluating prospective ventures. It
initially focused its investment in the high-technology business, but gradually shifted the
focus towards other potentially high-growth, high-profitable businesses, not just high-tech
businesses. It is also noticed that TDICI undertook a number of business development
initiatives to popularise the venture capital business in India. It introduced a simple
organisational structure for facilitating quick decision- making, and developed innovative
funding and financing mechanisms.
Dossani, R. and Kenney Creating an Environmentfor Venture Capital in India- M. World
Development, 30 (2) 227253 (2002) The institution of venture capitalism is a difficult one to
initiate through policy intervention, particularly in developing countries with unstable
macroeconomic environments and histories of state involvement in the use of national capital
and in the composition of production. India has all these constraints. The emergence of a
thriving software services industry after 1985 created the raw material that venture capital
could finance, thus achieving a critical precondition for venture capital's growth. It was
followed by efforts to create a venture capital industry. After several setbacks, some success
has been achieved largely due to a slow process of moulding the environment of rules and
permissible institutions. The process was assisted by the role of overseas Indians in Silicon
Valley's success in the 1990s. Yet, in terms of what is needed, most of the work remains to
be done. Inevitably, this will be the result of joint work by policymakers and practitioners.
Asim Mishra Indian Venture Capitalists (VCs): Investment Evaluation Criteria - ICFAI
Journal of Applied Finance, Vol. 10, No. 7, pp. 71-93, July 2004 This paper analyses the
validity of venture evaluation model in India by directly comparing the relative importance of
evaluation criteria on the funding decision with the relative importance to factors influencing
venture's empirical performance. In the light of the differences in investment opportunities
around India, and the nature of industrial development in
South East Asia in general, the author anticipated that the investment criteria employed by
Venture Capital Firms (VCFs) in India would differ. A questionnaire was administered to
venture capitalists (regular members of Indian Venture Capital Association) to determine the
criteria they use to decide on funding new ventures. The response rate was 100%. A list of
forty two criteria was developed on previously developed lists. The criteria fell into six groups:
the entrepreneur's personality, the entrepreneur's experience, characteristics of the product
or service, characteristics of the market, financial consideration and characteristics of venture
management team. Answers were given on a four point rating scales. The results reveal that
criteria adopted by Indian VCs are different from those adopted by VCs in other countries
including US. The results also confirm that the Sayed Ahmed Naqi and Samanthala
Hettihewa Venture capital or private equity? The Asian experience- Business Horizons
Volume 50, Issue 4, JulyAugust 2007 Venture capital in Asia has exhibited remarkable
growth over the last two decades. Researchers and practitioners have, however, expressed
doubts as to whether what is being reported as venture capital in Asia can really be classified
as such. Authors of scholarly studies often avoid this debate and, consequently, fail to
caution readers about the applicability of their research findings. Through an exploration of
the history, development, and composition of venture capital in Asia, this article not only
confirms significant differences between Asian and traditional venture capital, but also finds
that venture capital in Asia differs little from what is commonly called private equity. As such,
a need exists within the venture capital
literature to recognize this peculiarity of the Asian venture capital market. Moreover, venture
capitalists considering expansion into Asia must comprehend the nature of the Asian market
in order to avoid disillusionment and frustrations which may result from inadequate
understanding. A. Thillai Rajan Venture capital and efficiency of portfolio companies - IIMB
Management Review, Volume 22, Issue 4, December 2010 Venture Capital (VC) has
emerged as the dominant source of finance for entrepreneurial and early stage businesses,
and the Indian VC industry in particular has clocked the fastest growth rate globally.
Academic literature reveals that VC funded companies show superior performance to non VC
funded companies. However, given that venture capitalists (VCs) select and fund only the
best companies, how much credit can they take for the performance of the companies they
fund? Do the inherent characteristics of the firm result in superior performance or do VCs
contribute to the performance of the portfolio company after they have entered the firm? A
panel that comprised VCs, an entrepreneur and an academic debated these and other
research questions on the inter-relationships between VC funding and portfolio firm
performance. Most empirical literature indicates that the value addition effect dominates the
selection effect in accounting for the superior performance of VC funded companies. The
panel discussion indicates that the context as well as the experience of the General Partners
in the VC firms can influence the way VCs contribute to the efficiency of their portfolio
companies.
RESEARCHMETHODOLOGY Research Methodology is a way to systematically solve the
research problem. In it, step-by-step methods are followed to solve a particular problem. It
refers to a search for knowledge. It can also be defined as a scientific and systematic search
for pertinent information on a specific topic. The study is carried out around different sources
of data regarding Venture Capital Finance in India. The data is analysed using different
functions of Microsoft Office Excel 2007 and Microsoft Office Word 2007. The main statistical
tools used are Correlation, Exponential Growth and Linear Forecast. 5.1 Data Collection The
study is based on secondary data on Venture Capital Investments. The data is collected from
different publications and online resources including SEBIs Handbook of Statistics on
Indian Securities Markets SEBIs website Indian Venture Capital Association reports
Bain & Companys reports CII, Deloitte and E&Y survey results Trading Economics
website and many other books, publications, reports and articles
5.2 ResearchDesign Research Design is the way in which the research is carried out. It
works as a blue print. Research Design is the arrangement of conditions for the collection
and analysis of data in a manner that aims to combine relevance to the research purpose
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with economy in procedure. The Research design for the study is descriptive in nature. The
research is done with analog observations. Predictive analysis is done in order to know
pattern of near future investment patterns. 5.3 Limitations of Study The Study is based on the
data provided by different sources, any incorrectness or biasness in same might also have
been resulted in same for this study.
ANALYSIS AND INTERPRETATION 6.1 Analysing Growth of Venture Capital Finance in
India and Forecasting VC Investments in near future To understand the scenario of venture
capital investments in India, firstly we looked at the Total Investment Details of SEBI
Registered Venture Capital Funds (VCF) and Foreign Venture Capital Investors (FVCI) as of
Dec 31 of each year starting 2007. Year Total VC Investments (in Rs. Crores) 2007 28260
2008 33939 2009 42059 2010 47859 2011 56868 2012 55542 2013 69520 Table 1:
Cumulative Total Investment Details of SEBI Registered Venture Capital Funds (VCF) and
Foreign Capital Investors (FVCI) as of Dec 31 of each year
With the help MS Word Excel, Growth Rate is determined for given values from year 20072013 and prediction for next two years is made using following GROWTH function:
GROWTH(known_Ys, known_ Xs, New_Xs, constant) Here, Ys = Known Values of Total
Investments Xs = Year corresponding to known Ys (2007-2013) New Xs = Year for which
Value to be forecasted (2014), (2015) Constant = None Following are the Forecasted Values
of Total Investment in 2014 and 2015 using Growth function. Year Expected Total VC
Investments (in Rs. Crores) 2014 80988 2015 93383 Table 2: Forecasted values of Total
Investments by Venture Capital Funds as of Dec 31 of 2014 and 2015
When values of Venture Capital Investments in India from 2007 to 2013 and their forecasted
values for 2014 and 2015 are plotted on a Line Graph, following curve is obtained: Fig 1.
Line Graph of Total Venture Capital (VC) investments from year 2007 to 2013 along with
forecasted values for year 2014 and 2015 Interpretation Fig. 1 shows the Line Graph of Total
Venture Capital (VC) investments from year 2007 to 2013 along with forecasted values for
year 2014 and 2015. The black curve shows Exponential Growth curve for same. We can
infer that Venture Capital Investments in India have grown exponentially. If 0 10000 20000
30000 40000 50000 60000 70000 80000 90000 100000 2007 2008 2009 2010 2011 2012
2013 2014 2015 Total VC Investments (inRs. Crores) Total Investments (in Rs. Crores)
Expon. (Total Investments (in Rs. Crores))
same trend continues, the investments by VC in India will be increasing in near future. Also,
Investments have been slow in one year dropping from Rs. 56868 crores in 2011 to Rs.
55542 crores in 2012 but they have gained their momentum back in 2013 by increasing more
that 25%. The Value of Investments in 2014 and 2015 is predicted to be near Rupees 81 and
93 thousand crores respectively.
6.2 Analysis of Venture Capital Investments in different sectors of economy Now we look at
the different sectors of Economy details Venture Capital Investments of SEBI Registered
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Venture Capital Funds (VCF) and Foreign Capital Investors (FVCI) as of Dec 31 of each year
(FVCFs) >Year v Sectors of Economy 2007 2008 2009 2010 2011 2012 2013 Information
technology 2169 2520 2864 3319 4322 4481 5325 Telecommunications 990 1076 4268
7469 7516 7086 7798 Pharmaceuticals 1076 1229 1478 1325 1132 1151 1006
Biotechnology 385 634 461 289 283 278 326 Media/ Entertainment 470 906 1434 1006 1124
739 1406 Services Sector 2475 2976 3529 2677 2973 2809 3697 Industrial Products 2047
1951 2344 1355 2014 2107 2377 Real Estate 6348 6311 8185 9783 10831 9987 12048
Others 16749 24413 27158 20637 26673 26903 35535 Table 3: Cumulative Total Investment
Details of SEBI Registered Venture Capital Funds (VCF) and Foreign Capital Investors
(FVCI) as of Dec 31 of each year
Table 3 shows Annual Venture Capital Investments data for different sectors of economy.
Different sectors of economy for which data has been obtained are Information Technology,
Telecommunications, Pharmaceuticals, Biotechnology, Media/Entertainment, Services
Sector, Industrial Products and Real Estate. Now in order to analyse percent share of
Venture Capital Investment in 2013 for each different sector following pie chart is obtained.
Fig 2. Total VC Investment Share of different sector of Economy in India 8% 11% 2% 1% 2%
5% 3% 17% 51% Sector-wise Venture Capital Investments in India in 2013 Information
technology Telecommunications Pharmaceuticals Biotechnology Media/ Entertainment
Services Sector Industrial Products Real Estate Others
Interpretation In 2013, Real Estate is the biggest sector of Venture Capital Investments,
followed by Telecommunications and Information Technology. Services Sector stands at 4th
position followed by Industrial Products sector and Media/Entertainment sector.
Pharmaceutical and Biotechnology sector has least share of Venture Capital Funds among 8
sectors.
To understand the scenario of growth in each sector, line graphs have been obtained using
values from Table 3. In each graph, a black coloured trend line is obtained which shows
forecasted linear trend of respective sector. Fig 3. Total Venture Capital (VC) investments
curve from year 2007 to 2013 in Information Technology Sector. It also shows forecasted
linear trend line. Information Technology (IT) has been high growth factor all these years.
According to Bain India Private Equity report 20142, IT is expected to be one of the most
attractive sectors for PE and VC investments in the next two years. We can infer that IT is
going to be one of the high growth sectors attracting large amount of Venture Capital in year
2014 and 2015. 2 INDIA PRIVATE EQUITY REPORT 2014 - Bain & Company and IVCA 0
1000 2000 3000 4000 5000 6000 7000 8000 2007 2008 2009 2010 2011 2012 2013
Informationtechnology Information technology Linear (Information technology)
Fig 4. Total Venture Capital (VC) investments curve from year 2007 to 2013 in Real Estate
Sector. It also shows forecasted linear trend line. As India is developing country and Real
Estate is an utmost important need of any developing nation. Real Estate sector has always
seen reasonable growth and is still attracting investment. It can be inferred that this sector
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will be growing in 2014 and 2015 in terms of Venture Capital Investment. 0 2000 4000 6000
8000 10000 12000 14000 16000 2007 2008 2009 2010 2011 2012 2013 Real Estate
40. Growth of Venture Capital Finance in India and Role of Business Confidence Index | 40 .
Fig 5. Total Venture Capital (VC) investments curve from year 2007 to 2013 in
Telecommunication Sector. It also shows forecasted linear trend line. Telecommunication
sector has seen some of the biggest investments in 2009 and 2010 making it Hot Favorite
sector of Venture Capital Investment in those years. Following bad news of scams and
cancelation of 2G licenses the sector has not attracted much investment from year 2010.
Although Forecasted Linear 7 year trend line projects it as high growth sectors but when we
look at data from last 4 years, Telecommunications has been laggard leading to very slow
growth in upcoming years. 0 2000 4000 6000 8000 10000 12000 14000 2007 2008 2009
2010 2011 2012 2013 Telecommunications
Media/Entertainment Sector. It also shows forecasted linear trend line. Media/Entertainment
Sector has seen moderate growth in past years. In 2013, Venture Capitalists have shown
significant interest. There were good numbers of deals in the sector. The sector is further
going to show moderate growth depending upon current factors affecting the sector. 0 200
400 600 800 1000 1200 1400 1600 2007 2008 2009 2010 2011 2012 2013
Media/Entertainment
Fig 7. Total Venture Capital (VC) investments curve from year 2007 to 2013 in Services
Sector. It also shows forecasted linear trend line. 2009 and 2013 are the only years of high
growth for Services Sector. Because of less inclined forecasted linear trend of the
investments in the sector, there will be moderate growth in venture capital investments in
India in upcoming years. 0 500 1000 1500 2000 2500 3000 3500 4000 2007 2008 2009 2010
2011 2012 2013 Services Sector
Fig 8. Total Venture Capital (VC) investments curve from year 2007 to 2013 in Industrial
Products Sector. It also shows forecasted linear trend line. Industrial Products sector is a
source of high employment opportunities for less skilled labor. The sector has not seen much
growth in terms of venture capital investments. Because of less inclined forecasted linear
trend of the investments in the sector, there will be slow growth in venture capital investments
in India in upcoming years. 0 500 1000 1500 2000 2500 2007 2008 2009 2010 2011 2012
2013 Industrial Products
Pharmaceutical Sector. It also shows forecasted linear trend line. Fig 10. Total Venture
Capital (VC) investments curve from year 2007 to 2013 in Biotechnology Sector. It also
shows forecasted linear trend line. Fig. 9 and Fig. 10 shows Total Venture Capital (VC)
investments curve from year 2007 to 2013 and forecasted linear trend in Pharmaceutical and
0 200 400 600 800 1000 1200 1400 1600 2007 2008 2009 2010 2011 2012 2013
Pharmaceuticals 0 100 200 300 400 500 600 700 2007 2008 2009 2010 2011 2012 2013
Biotechnology
Biotechnology Sector. These sectors have been sectors of declining growth since 2009.
There is not much growth expected in 2014 and 2015 from these sectors. Interpretation
There are different sectors of Economy in India. Out of all above mentioned Economic
Sectors, few sectors are attracting more Venture Capital Funds than others. With analysis of
each sector we can categorize them by rate of growth of investments over 7 years.
Information Technology and Real Estate have continuously seen High Growth and are
predicted to do so in coming years. For Entrepreneurs these sectors can be fruitful to start
their venture in. Telecommunication and Media/Entertainment have been areas of
Moderate Growth and may do better in coming years. For Entrepreneurs these sectors can
be fruitful but they must keep caution while starting their venture in. Services Sector and
Industrial Products Sector are areas of very Slow Growth in terms of VC investments in these
areas. One must have strong know how of these sectors while starting any business.
Pharmaceuticals and Biotechnology are Sectors of Declining Growth in VC Investments. One
may have hurdles in getting investments for ventures in these sectors.
6.3 CIIs Business Confidence Index and Venture Capital Investment Growth Confederation
of Indian Industry (CII) provides Business Confidence Index about confidence among
industry about doing business in India. Here we do comparative study of Business
Confidence and Percent change in total investments, VCFs Investments and FVCFs
investment in each quarter starting June 2011. Quarter CII Busine ss Confid ence Index
Chang e in Busine ss Confid ence Total invest ment % chang e in total invest ment VCFs
invest ment % chang e in VCFs invest ment FVCF investm ent % change in FVCFs investme
nt Jun-11 54844 26222 37098 Sep-11 66.2 55536 1.26 26896 2.57 37635 1.45 Dec-11 66.7
0.5 56868 2.4 27592 2.59 38730 2.91 Mar-12 62.5 -4.2 59408 4.47 28920 4.81 39815 2.8
Jun-12 53.6 -8.9 61056 2.77 29238 1.1 41277 3.67 Sep-12 48.6 -5 53574 -12.25 29924 2.35
33291 -19.35 Dec-12 52.9 4.3 55542 3.67 31556 5.45 33773 1.45 Mar-13 55 2.1 62866
13.19 31336 -0.7 41174 21.91 Jun-13 51.3 -3.7 63310 0.71 31669 1.06 40848 -0.79 Sep-13
49.9 -1.4 64336 1.62 30975 -2.19 43140 5.61 Dec-13 51.3 1.4 69520 8.06 35400 14.29
44889 4.05 Correlation Coefficient 0.48 0.3 0.41 Mar-14 51.2 Jun-14 45.7 Sep-14 54.9 Table
4: CIIs Business Confidence Index values, Change in Business Confidence, Percentage
Change in VCFs, FVCFs and Total Venture Capital Investment in each Quarter from June
2011
Here, Change in Business Confidence = Business Confidence Current year - Business
Confidence in Previous year Percent Change in investment = (
Investment in previous year ) 100 Correlation Coefficient
has been derived using MS Excels CORREL Function on given values of data.
CORREL(array1,array2) For our analysis here, Array 1 = Array of values Change in Business
Confidence Array 2 = Array of values of Percentage Change in VCFs, FVCFs and Total VC
Investments % change in total investment % change in VCFs investment % change in FVCFs
investment Correlation Coefficientwith change in CIIsBCI 0.48 0.3 0.41 Table 5: Correlation
Coefficient between Change in CIIs Business Confidence Index values and Percentage
Change in VCFs, FVCFs and Total Venture Capital Investment in each Quarter from Jun
2011 to Dec 2013 Interpretation Table 4 shows data of CIIs Business Confidence Index
values, Change in Business Confidence, Percentage Change in VCFs, FVCFs and Total
Venture Capital Investment in each Quarter from June 2011. In table 5, Correlation
Coefficient is used to measure the significance of Business
Confidence survey by CII in case of Venture Capital Investments in the country. The
correlation coefficient between Change in Business Confidence and percent change in Total
Investment, VCFs Investments and FVCFs Investments comes out to be 0.48, 0.3 and 0.41
respectively. The correlation coefficient turns out to be positive between the index values and
investment data. Although not significant at precision levels of 0.01 and 0.05, we can infer
that there is Positive Relation between Index and Venture Capital Investment Rate. For
forthcoming (March 2014 51.2 and June 2014 45.7) quarters CII Business Confidence
Index shows a decrease in confidence values, therefore we can infer that Venture Capital
Investment in these quarters can be less than Investments in last quarter of 2013. But as we
can see Business Confidence for September 2014 is going significantly up (54.9), we can
infer that there will be increase in Venture Capital Investments in that quarter.
Findings and Conclusion 7.1 Findings There was an exponential increase in Venture capital
from 2007 till date It is predicted that there will be good amount of Venture Capital
Investments about to occur in 2014 and 2015. Around Rs. 81000 crores of VC investments
will be made in 2014 2015 will see VC investments of around Rs 93400 Crores. Real
Estate Sector gets maximum share of Total Venture Capital Investments among different
sectors of Economy in 2013, followed by Telecommunications and Information Technology.
Among different sectors of economy, Information Technology and Real Estate are sectors
with high growth rate of Venture Capital Investment and is expected to do well in comings
years as well. In terms of Venture Capital investments made Telecommunications and
Media/Entertainment sectors are growing at medium pace. Telecommunications have seen
decline only in recent years, the most obvious reason for it is the policy paralysis and scams
around this sector in India. Services Sector and Industrial Products Sectors are not
attracting much VC investments and growing very slow. Sectors of Pharmaceuticals and
Biotechnology have been left quite far in attracting VC investments. They have shown
declining trend and there is less hope from these sectors in upcoming years.
Every Quarter, CII provides values Business Confidence Index based on the perception of
investors. When these values are correlated with Investment details SEBI registered Venture
Capital Funds (VCFs) and Foreign Venture Capital Funds (FVCFs), they showed a positive
Correlation. The CIIs Business Confidence Index for First two quarters of 2014 i.e. March
2014 and June 2014 has decreased from their previous quarters. This will have negative
effect on Venture Capital Investments i.e. The Total Venture Capital investments will
decrease in these quarters. For 3rd Quarter of 2014 i.e Sep 2014, The Business
Confidence is quite high and has increased sharply. This increase in confidence in 3rd
quarter signifies the increase in Venture Capital Investments in India towards end of this year.
Business Confidence Surveys like CIIs can predict the flow of Venture Capital Investments
in Long Term but cannot surely predict small term movements in Investments Values.
7.2 Conclusion Venture capital financing has become a part of the popular business in India.
VC investments are growing at an exponential rate and one who is starting or expanding his
business can look it as a good option of financing its venture. For predicting the scenario of
Venture Capital Investments in India in upcoming years, analysts can look at Business
Confidence Index by CII. Our study shows that values of the Index and amount of
Investments are correlated. With our analysis we can infer that there will be an increase in
Venture Capital Investments in 3rd quarter of 2014. In India, Information Technology and
Real Estate are sectors with High Growth in VC Investments whereas Pharmaceuticals and
Biotechnology are sectors with Declining Growth in VC Investments.
REFERENCES 8.1 Bibliographic References Bloomfield, Stephen. 2005. Venture Capital
Funding - A practicle guide to raising funds. s.l. : Kogan Page Limited, 2005. Brigham,
Eugene F. and Houston, Joel F. 2009. Fundamentals of Financial Management. s.l. : SouthWestern Cengage Learning, 2009. Vol. 12. CII Business Confidence Index Falls Sharply in
Q2FY14. 2013. s.l. : Confederation of Indian Industries, 2013, Economy Matters. Economic
and business prospects for 2014. Affairs, Policy and Public. 2014. 2014, CII. Empirical Study
on Venture Capital and Private Equity Investments: US & India. Pandey, Dheeraj and Rajan,
Thillai A. 2011. 2011. International Conference on Technology and Business Management.
2012. Handbook of Statistics on Indian Securities Market. : SEBI, 2012. 2013. Handbooks of
Statistic on the Indian Economy : Reserve Bank of India, 2013. 2014. INDIA PRIVATE
EQUITY REPORT. : Bain & Company and Indian Venture Capital Association, 2014. Venture
Capital and Private Equity in India: An Analysis of Investments and Exits. Rajan, Thillai A and
Deshmukh, Ashish. IIT Madras Journal.
8.2 Web References Report of K B Chandrasekhar Committee on Venture Capital, SEBI
http://www.sebi.gov.in/commreport/sebicomm.html Venture Capital, Business Portal of
Government of India http://business.gov.in/business_financing/venture_capital.php Venture
Capital for MSMEs, SIDBI Ventures http://www.sidbiventure.co.in/ Venture capital, Wikipedia
http://en.wikipedia.org/wiki/History_of_private_equity_and_venture_capital Search Results
on Venture Capital, Business Today http://businesstoday.intoday.in Venture capital
investments in India slide to $1.4 bn: Ernst & Young, Indian Express
http://indianexpress.com/article/news-archive/web/venture-capital-investments-in-india- slideto-1-4-bn-ernst-young/ VC Industry to grow in India: Deloitte, Indian Express
http://indianexpress.com/article/news-archive/web/vc-industry-to-grow-in-india-deloitte/ 2014
to be year of adjustments; investment cycle may take time to revive, Team VCC
http://www.vccircle.com/news/alternative-investment/2014/02/19/2014-be-year- adjustmentsinvestment-cycle-may-take-time Should you take seed funding from a VC ?, Yourstory India
50.
51.
52.
53.
54.
http://www.yourstory.com/2014/03/seed-funding-vc/ $1.6 Billion invested in Indian Startups in

around 300 deals in 2013, YourStory India http://www.yourstory.com/2013/12/1600mninvested-in-indian-startups-in-2013/
SUGGESTEDREADINGS How to get registered as a Venture Capital Fund - SECURITIES
AND EXCHANGE BOARD OF INDIA Impact of Budget 2014-15 on Startup Companies YOURSTORY.COM India Private Equity Report 2014 BAIN & COMPANY
APPENDIX Appendix I - Data Sets Data Set 1: Industry wise Cumulative Investment Details
of SEBI Registered Venture Capital Funds (VCF) and Foreign Capital Investors (FVCI)
Particulars as on December 31, 2013 (Rs. in Crore) Sectors of Economy VCF FVCI Total*
Information Technology 954 4499 5325 Telecommunication 1468 7013 7798
Pharmaceuticals 420 646 1006 Biotechnology 222 142 326 Media/Entertainment 1148 827
1406 Services Sector 2428 2353 3697 Industrial Products 1252 1444 2377 Real estate
11482 1758 12048 Others 16026 26209 35535 Total 35400 44889 69520 *excludes
Rs.10769 crore of FVCI investments through VCFs Note: 1. The above report is compiled on
the basis of quarterly information submitted to SEBI by registered Venture Capital Funds and
Foreign Venture Capital Investors. 2. Due to change in reporting format with effect from the
quarter ended 31st March 2010, the investment details for the March '10 and December '09
quarter are not strictly comparable.
Data Set 2: Cumulative Investment Details of SEBI Registered Venture Capital Funds (VCF)
and Foreign Capital Investors (FVCI) Quarter Cumulative net investments by all VCFs as at
the end of the quarter Cumulative net investments by all FVCIs at the end of the quarter Total
investment (*) Mar-07 11270 7856 17621 Jun-07 12868 10706 20310 Sep-07 14264 13401
23218 Dec-07 17325 15384 28260 Mar-08 19955 16705 31682 Jun-08 20128 16926 32379
Sep-08 22488 16165 34772 Dec-08 21216 19800 33939 Mar-09 22771 23047 37578 Jun-09
22192 24151 37151 Sep-09 24102 25849 40560 Dec-09 24893 26827 42059 Mar- 10 18273
28894 39051 Jun-10 21500 30722 43686 Sep-10 22977 33102 47843 Dec-10 23023 33241
47859 Mar-11 25576 35593 52688 Jun-11 26222 37098 54844 Sep-11 26896 37635 55536
Dec-11 27592 38730 56868 Mar-12 28920 39815 59408 Jun-12 29238 41277 61056 Sep-12
29924 33291 53574 Dec-12 31556 33773 55542 Mar-13 31336 41174 62866 Jun-13 31669
40848 63310 Sep-13 30975 43140 64336 Dec-13 35400 44889 69520
Data Set 3: CII Business Confidence Index from Economy Matters Data Set 4: Indias
Business Confidence from Trading Economies
Appendix II - Glossary of Terms and Abbreviations Abbreviations BCI Business Confidence
Index CII Confederation of Indian Industries CSI Current Situation Index EI Expectation Index
E&Y Ernst & Young FVCI Foreign Venture Capital Investors IT Information Technology MBA
Masters of Business Administration NASDAQ National Association of Securities Dealers
Automated Quotations NCR Nation Capital Region SBA Small Business Administration
SBICs Small Business Investment Companies SEBI Securities and Exchange Board of India
SME Small and Medium scale Enterprise TDICI Technology Development and Information
Company of India VC Venture Capital VCF venture capital firms VCs Venture Capitalists
Terms Acquisition The establishment of control in one business entity by another, often with
the assistance of private equity. Third party acquisition is a common Exit Mechanism for
private equity funds. Acquisition Financing Capital provided to a company to finance its
controlling interest in another entity for growth purposes. Angel A wealthy individual who
invests in entrepreneurial firms. Although angels perform many of the same functions as
venture capitalists, they invest their own capital rather than that of institutional or other
individual investors.
Bridge Financing Capital provided on a short-term basis to a company prior to its going
public or its next major private equity transaction. Capital Gains The proceeds obtained on
the sale of assets Deal Each transaction involving a private equity fund or funds in a given
portfolio company represents one round of financing. Each financing is made up of one or
more investments, depending on the presence of co-investors. Financings are also known as
deals Due Diligence The process of assessing the business and financial viability of a
potential investment target, as well as the potential terms and conditions of an investment
agreement. Financings and Investments Each transaction involving a private equity fund or
funds in a given portfolio company represents one round of financing. Each financing is
made up of one or more investments, depending on the presence of co-investors. Financings
are also known as deals Fund A pool of capital raised periodically by a venture capital
organisation. Usually in the form of limited partnerships, venture capital funds typically have
a ten-year life, though extensions of several years are often possible. Institutional Investor
Pension funds, insurance companies, endowments, charitable foundations, mutual funds and
other non-bank financial institutions that are often key suppliers to private equity funds. In
Canada, certain large institutional investors also have in-house progra
Institutional Venture Capital The organized market for venture activity, based on an industry
of management firms and funds, as distinct from the informal investment mark. Internal rate
of return (IRR) The discount rate equating the present value of cash outflows with the
present value of cash inflows. Investment adviser A financial intermediary who assists
investors, particularly institutions, with investments in venture capital and other financial
assets. Advisers assess potential new venture funds for their clients and monitor the
progress of existing investments. In s Investment banks Financial institutions that organise
the provision of medium to longer-term loans, usually for larger amounts than clearing banks.
Later they can play an important role in the process of going public by advising on the
terms and price of public issues a Merger The strategic combination of one business entity
with another, often with the assistance of private equity. Mezzanine Capital A specialized
form of private equity, characterized chiefly by use of Subordinated Debt, or preferred stock
with an equity kicker, to invest largely in the same realm of companies and deals as buyout
funds Refinancing The purchase of the venture capital investors' or others' shareholdings by
another investment institution.
Rescue/turnaround To finance a company in difficulties or to rescue it from receivership.
Restructuring/ Turnaround Financing Capital provided to a established firm, usually in a
traditional sector, that is undergoing financial distress or a major re-organization, but is
perceived as having long-term commercial viability. Seed Financing Capital provided to
facilitate commercialization of new product concepts, often from laboratories, research
centres or entrepreneurs. If successful, a seed financing may result in a Start-up. Start-up
Financing Capital provided to facilitate the first-time establishment of a legal company
structure around a marketable product concept Venture capitalist A general partner or
associate at a venture capital organisation. Write-off The write-down of a portfolio asset to
the value of zero, with the result that the private equity investor or investors go without
proceeds upon disposition.

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