CONTENTS

SR.
1.

NO.

PARTICULARS
INTRODUCTION TO THE PROJECT
Background of the study
Objectives of the study
Limitations of the study
Review of Literature

2.

CONCEPTUAL FRAMEWORK
Concept of Venture Capital
Features of Venture Capital
Methods of Venture Financing
Difference between Venture Capital and other Funding
methods.

PAGE NO.

INTRODUCTION

BACKGROUND :Today due to the economic crisis and change in job market, entrepreneurship has gained
interest. A number of young people in India today, plan to set up their own ventures and
capitalize these opportunities. In today's highly dynamic economic climate with regular
technological inventions, few traditional business models may survive but margin lies more
towards more 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 an expanding and 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 if one should
choose venture capital over other modes of Finance, on which sector should it started venture,
and what possible near future growth might occur. this study helps in providing answers to
these questions by analysing the status of Venture Capital in India.

OBJECTIVES :Understand the concept of venture capital. Venture Capital funding is different from
traditional sources of financing. Venture capitalists finance innovation and ideas which have
potential for high growth but with inherent uncertainties. This makes it a high-risk, high
return investment.
Study venture capital industry in India. Scientific, technology and knowledge based ideas
properly supported by venture capital can be propelled into a powerful engine of economic
growth and wealth creation in a sustainable manner. In various developed and developing
economies venture capital has played a significant developmental role.

Study venture capital industry in global scenario. Venture capital has played a very important
role in U.K., Australia and Hong Kong also in development of technology growth of exports
and employment.
Study the evaluation & need of venture capital industry in India. India is still at the level of
knowledge. Given the limited infrastructure, low foreign investment and other transitional
problems, it certainly needs policy support to move to the next stage. This is very crucial for
sustainable growth and for maintaining Indias competitive edge
Understand the legal framework formulated by SEBI to encourage venture capital activity in
Indian economy. Promoting sound public policy on issues related to tax, regulation and
securities through representation to the Securities and Exchange Board of India (SEBI),
Ministry of Finance (MoF), Reserve Bank of India (RBI) and other Government departments
Find out opportunities that encourage & threats those hinder venture capital industry in India.
To know the impact of political & economical factors on venture capital investment.

LIMITATIONS :A study of this type cannot be without limitations. It has been observed that venture
capitalists are very secretive about their investments. This attitude is a major hindrance for
data collection. However venture capital funds/companies that are members of Indian venture
capital association are to be included in the study.

CONCEPTUAL FRAMEWORK

CONCEPT OF VENTURE CAPITAL:The term venture capital comprises of two words that is, Venture and capital. Venture
is a course of processing the outcome of which is uncertain but to which is attended the risk
or danger of Loss. Capital 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 based enterprises. It is
said that Venture capital involves investment in new or relatively untried technology, initiated
by relatively new and professionally or technically qualified entrepreneurs with inadequate
funds. The conventional financiers, unlike Venture capitals mainly finance proven

technologies and established markets. However, high technology need not be prerequisite for
venture capital.
The most flexible Definition of Venture Capital is:The support by investors of entrepreneurial talent with finance and business skills to
exploit market opportunities and thus obtain capital gains.
Venture capital commonly describes not only the provision of start up finance or seed corn
capital but also development capital for later stages of business. A long term commitment of
funds is involved in the form of equity investments, with the aim of eventual capital gains
rather than income and active involvement in the management of customers business.

FEATURES OF VENTURE CAPITAL:High Risk

By definition the Venture capital financing is highly risky and chances of failure are high as it
provides long term start-up capital to high risk- high reward ventures. Ventures capital
assumes four type of risks, these are:
Management risk - Inability of management teams to work together.
Market risk - Product may fail in the market.
Product risk - Product may not be commercially viable.
Operation risk - Operation may not be cost effective resulting in increased cost decreased
gross margin.
High Tech
As opportunities in the low technology area tend to be few of lower order, and hi-tech
projects generally offer higher returns than projects in more traditional area, venture capital
investments are made in high tech. areas using new technologies or producing innovative
goods by using new technology. Not just high technology, any high risk ventures where the
entrepreneur has conviction but little capital gets venture finance. Venture capital is available
for expansion of existing business or diversification to a high risk area. Thus technology
financing had never been the primary objective but incidental to venture capital.

Equity Participation & Capital Gains

Investments are generally in equity and quasi equity participation through direct purchase of
share, options, convertible debentures where the debt holder has the option to convert the
loan instruments into stock of the borrower or a debt with warrants to equity investment. The
funds in the form of equity help to raise term loans that are cheaper source of funds. In the
early stage of business, because dividends can be delayed, equity investment implies that
investors bear the risk of venture and would earn a return commensurate with success in the
form of capital gains.
Participation In management
Venture capital provides value addition by managerial support, monitoring and follow up
assistance. It monitors physical and financial progress as well as market development
initiative. It helps by identifying key resource person. They want one seat on the companys
board of directors and involvement, for better or worse, in the major decision affecting the
direction of company. This is a unique philosophy of hand on management where Venture
capitalist acts as complementary to the entrepreneurs. Based upon the experience other
companies, a venture capitalist advice the promoters on project planning, monitoring,
financial management, including working capital and public issue. Venture capital investor
cannot interfere in day today management of the enterprise but keeps a close contact with the
promoters or entrepreneurs to protect his investment.

Length of Investment
Venture capitalist help companies grow, but they eventually seek to exit the investment in
three to seven years. An early stage investment may take seven to ten years to mature, while
most of the later stage investment takes only a few years. The process of having significant
returns takes several years and calls on the capacity and talent of venture capitalist and
entrepreneurs to reach fruition.
Illiquid Investment
Venture capital investments are illiquid, that is not subject to repayment on demand or
following a repayment schedule. Investors seek return ultimately by means of capital gain
when the investment is sold at market place. The investment is realized only on enlistment of

security or it is lost if enterprise is liquidated for unsuccessful working. It may take several
years before the first investment starts too locked for seven to ten years. Venture capitalist
understands this illiquidity and factors this in his investment decision.

METHODS OF VENTURE CAPITAL FINANCING:Venture Capital is typically available in three forms in India, they are:
Equity: All VCFs in India provide equity but generally their contribution does not exceed
49% of the total equity capital. Thus, the effective control and majority ownership of the firm
remains with the entrepreneur. They buy shares of an enterprise with an intention to
ultimately sell them off to make capital gains.
Conditional Loan: it is repayable in the form of a royalty after the venture is able to generate
sales. No interest is paid on such loans. In India, VCFs change royalty ranging between 2% to
15%; actual rate depends on other factors of the venture such as gestation period, cost flow
patterns, riskiness and other factors of the enterprise.
Income Note: it is a hybrid security which combines the features of both conventional loan
and conditional loan. The entrepreneur has to pay both interest and royalty on sales, but at
substantially low rates.
Participating Debenture: such security carries charges in 3 phases. In the start up phase,
before the venture attains operations to a minimum level, no interest is charged, after this,
low rate of interest is charged, up to a particular level of operation. Once the venture is
commercial, a high rate of interest is required to be paid.
Quasi Equity: quasi equity instruments are converted into equity at a later date. Convertible
instruments are normally converted into equity at the book value or at certain multiple of
EPS, i.e. at a premium to par value at a later date. The premium automatically rewards the
promoter for their initiative and hand work. Since it is performance related, it motivates the
promoter to work harder so as to minimize dilution of their control on the company. The
different quasi equity instruments are follows:
Cumulative convertible preference shares.
Partially convertible debentures.

Fully convertible debentures.

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

DIFFERENCE BETWEEN VENTURE CAPITAL AND OTHER FINANCING

METHODS:-

Venture Capital Vs Development Funds

Venture capital differs from development funds as latter means putting up of industries
without much consideration of use of new technology or new entrepreneurial venture but
having a focus on underdeveloped areas (locations). In majority cases it is in the form of loan
capital and proportion of equity is very thin. Development finance is security oriented and
liquidity prone. The criteria for investment are proven track record of company and its
promoters, and sufficient cash generation to provide for returns (principal and interest). The
development bank safeguards its interest through collateral.
They have no say in working of the enterprise except safeguarding their interest by having a
nominee director. They do not play any active role in the enterprise except ensuring flow of
information and proper management information system, regular board meetings, adherence
to statutory requirements for effective management information system, regular board
meetings, adherence to statutory requirements for effective management control where as
Venture capitalist remain interested if the overall management of the project account of high
risk involved I the project till its completion, entering into production and making available
proper exit route for liquidation of the investment. As against this fixed payments in the form
of installment of principal and interest are to be made to development.
Venture Capital Vs Seed Capital & Risk Capital
It is difficult to make a distinction between venture capital, seed capital, and risk capital as
the latter two form part of broader meaning of Venture capital. Difference between them
arises on account of application of funds and terms and conditions applicable. The seed
capital and risk funds in India are being provided basically to arrange promoters contribution

to the project. The objective is to provide finance and encourage professionals to become
promoters of industrial projects. The seed capital is provided to conventional projects on the
consideration of low risk and security and use conventional techniques for appraisal. Seed
capital is normally in the form low interest deferred loan as against equity investment by
Venture capital. Unlike Venture capital, Seed capital providers neither provide any value
addition nor participate in the management of the project. Unlike Venture capital Seed capital
provider is satisfied with low-normal returns and lacks any flexibility in its approach.
Risk capital is also provided to established companies for adapting for new technologies.
Herein the approach is not business oriented but developmental. As a result on one hand the
success rate of units assisted by seed capital/risk.
Finance has been lower than those provided with venture capital. On the other hand the return
to the seed/risk capital financier had been very low as compared to venture capitalist.
Venture Capital Vs Bought Out Deals
The important difference between the venture capital and bought out deals is that bought outs
are not based upon high risk- high reward principal. Further unlike venture capital they do not
provide equity finance at different stages of the enterprise. However both have a common
expectation of capital gains yet their objectives and intents are totally different.