VENTURE CAPITAL PROCESS

According to Tyebjee and Bruno (1984), the venture capital investment activity is a sequential process involving five steps: (i) Deal Origination. There are numerous VCFs which have been established in India either by Indians or foreign VCFs. It is essential for the venture capital firm to have a continuous source of deals in order to survive and grow. Deals may be referred to the VCFs by their parent organisations, trade partners, industry associations, friends etc. Due to advancements in information technology, the deal can also flow in by searching through internet, trade fairs, exhibitions, conferences, seminars etc. (ii) Screening. Venture Capital is a service industry, it funds enterprises only in certain industries of service sector like pharmaceuticals, infotech, food processing, software, biotechnology, etc. In sharp contrast to the United States, however, where a VCF can invest in any industry it wishes, in India only six industries have been approved for investment : (a) Software (&) Information Technology (c) Pharmaceuticals ((f) bio-technology (e) agriculture and (f) allied industries. VCFs are private partnerships or closely-held corporations with small staff, they select the best ventures. Out of several projects in their hands, before going for an in-depth analysis of each project, they carry out initial screening of all projects on the basis of some broad criteria. For example, the screening process may limit projects to areas in which venture capitalist is familiar is terms of technology, or product, or market scope. The size of investment, geographical location, competitive advantage of the product and stage of financing could also be used as the broad screening criteria. (iii) Evaluation. Once the proposal has passed through initial screening, it is subjected to a detailed evaluation. Since the venture capitalist is going to finance high-risk venture and its entrepreneur may also lack operational experience, the formal and sophisticated evaluation of the project is neither possible nor desirable. The venture capitalists have to rely on the subjective evaluation. The entrepreneur should prepare a Business Plan which serves as the most important document containing detailed information about the proposed venture. Not only the Business Plan, VCFs also evaluate the quality of the entrepreneur and his management teamtheir integrity, business acumen and entrepreneurial spirit of the team is taken into consideration. VCF may also evaluate the proposal on the basis of characteristics of the product, market or technology. The potential for adequate profitability and attractive returns over a period of four to seven years, large and rapidly-growing market opportunity, competitive advantage of the product in terms of price or cost are various factors which the venture capitalist evaluates.

(iv) Deal Structuring. Once the venture capitalist had evaluated the proposal and found it viable pursue, the venture capitalist and the entrepreneur negotiate the terms of the deal with respect to the amount, form and price of the investment. This process is termed as deal structuring. It is an agreement between both the parties which includes (a) venture capitalist's right to control the investee company (b) board membership (c) right to replace management in case of consistent poor managerial performance (d) buyback agreements and acquisitions (e) making initial public offerings (IPOs) () assuring investment liquidity (g) Earn-out arrangements i.e. specifying the entrepreneur's equity share (h) other covenants etc. Truly, venture capitalists and the investee company have common interests both are working together to achieve a common goal. They should cooperate with each other and follow a structure which protects their interests. (v) Post-investment Activities (Disinvestment) and Exit Disinvestment and exit mechanism are among the most important aspects of VC industry. The success of VC activity largely depends on envisaging efficient exit mechanism from investments and successful implementation of disinvestment. While financing the start-ups, VCFs target to triple the money in three years, or multiply money seven times in five years or earn a compound annual rate of return of 48 percent. In second stage financing, the rate of return of 35 to 40 percent may be expected annually, while in third-stage financing, the rate expected may be 15 percent per annum. Thus, the funds are usually expected to be tied up for three to ten years. Then the venture capitalist is to sell off his investment at substantial gain. Most venture capitalists aim to operate on commercial lines along with satisfying their developmental objectives. They also want to disinvest their holdings at adequate return with a view to recycle their funds. Exit Routes. Venture capitalists are supposed to plan exit from venture at the time of investment itself. The proposed exit plans have least problems and confirm to statutory provisions. Various exit routs are as under.
(i) Initial Public Offers (IPOs). The most preferred exit route for VCFs is the Initial

Public offer. The benefits of disinvestment via the public issue route are, improved marketability, improved liquidity, better prospects for capital gains and widely known status of the venture as well as market control through public share participation. The company can go to the public either through the National Stock Exchange (NSE), Mumbai Stock Exchange, Regional Stock Exchange, or the OTCEI (Over the Counter Exchange of India). However, the promotion of the public issue would be difficult and expensive since the first generation entrepreneurs are not known in the capital markets. Further, difficulties are caused if the entrepreneur's business is perceived to be an unattractive investment proposition by investers.
(ii) Promoter's Buy-back. In this the promoter buys back the venture capitalist's stake at a

predetermined price. The route is suited to Indian conditions because it keeps the ownership and control of the promoter intact. Venture capitalist consider it as an exit option only where promoters are in a position to mobilise funds for buy-back of

equity held by venture investors. But generally, first generation entrepreneur are hard pressed for money and in a majority of cases the market value of shares of the venture firm would have appreciated so much after some years that the promoter would not be in a financial position to buy them back. Thus, this option is normally exercised where growth of venture is low/average and returns from investments are also likely to be low/average.

(vi) Trade sale. Venture capitalist may also disinvest his holdings through offer for sale to public. In this trade sale, the venture capitalist sells his stake to the strategic buyer which already owns a business similar or complementary or plans to enter into target industry. This helps the strategic buyer to produce a synergistic increase in its value. The promoter may or may not sell his stake to the strategic buyer.

LOCATING VENTURE CAPITALISTS

Venture capital is different from traditional sources of financing Venture capitalists finance innovations or ideas which have the potential for high growth but with inherent uncertainties involving high-risk. The venture capitalists invests in recently established firms believed to have the potential to provide a rate of return of ten times or more in less than five years. It is a highly risky deal ; many of the investments fail entirely but, however, the large winners are expected to more than compensate for the failures. Due to their major equity stake in the firm, they demand seats on the board of directors and thus increase chances of survival and rate of growth of new firms. Their interventions connotes providing financial and human capital, helping to recruit key personnel, providing strategic advice, introductions to potential customers, later-stage finances, investment bankers and various other contacts. The venture capital process is complete when the company is sold through either a listing on the stock market or the acquisition of the firm by another, or when a company fails. The firm is a product to be sold and not to be retained. (Kenny & Von Burg 1999). Companies such as Digital Equipment Corporation, Apple, Federal Express. Compaq, Sun Microsystems, Intel and Microsoft are examples of famous companies that received venture capital early in their development. Venture capital is a transitory start up financing in the form of equity capital or loans, with returns linked to profits and managerial control measures. For starting a high risk and highreturn project. venture capital is instrumental and thus, entrepreneurs search for the sources from which venture capital can be obtained. Due to liberalisation and privatization in the economy, a number of companies have established venture capital divisions to assist the entreprer.

Sources of Venture Capital Following are various sources of venture capital : 1. The EXIM Bank. Export-Import Bank of India, set up in 1982, for the purpose of financing, facilitating and promoting international trade of India is the principal institution in the country for ordinating working of institutions engaged in financing exports and imports. EXIM Bank has made an entry into venture capital finance by investing in venture capital Fund which .is the India Technology venture Unit Scheme promoted by Unit Trust of India (UT1). The VC Fund size is Rs. 150 crore. Other co-investors apart from UTI include LIC, Technology Development Board, GIC, New India Assurance, Bank of Baroda and Andhra Bank. The objective of the fund is investment in technology sectors like (i) Information technology, (ii) Internet (iii) Media and entertainment (iv) Telecommunications (v) Biotechnology (vi) Pharmaceuticals and (vii) Health care EXIM Bank finances capital expenditure for setting up software development facilities as also working capital, equity investment in overseas ventures, direct equity participation in Indian ventures overseas, export product development etc. 2. IDBI's venture Fund. IDBFs venture capital Fund (VCF) was started in 1986 with an initial capital of Rs. 10 crore and is a part of technology department of IDBI. It assists high technology, small and medium-sized projects requiring funds between Rs. 0.5 to Rs. 25 million (Rs. 2.5 crore). It is meant primarily to assist projects which promote commercial applications for indigenously developed technology or which adopt imported technology for wider applications. The entrepreneur's project must employ technology that is new and untested in Indian conditions. Financial assistance is provided right from pilot stage and covers almost upto 90 percent of total cost with promotor's stake to be at least 10 percent for ventures below Rs. 50 lakhs and 15 percent for these above Rs. 50 lakhs. The assistance is provided in the form of unsecured loans involving minimum legal formalities. IDBI sanctions funds in various fields like electronics, food products, medical equipment, biotechnology, chemicals, computer software etc. 3. ICICI Venture Funds Management Company Limited. ICICI venture (formerly TDICI limited) was founded in 1988 as a Joint venture with the Unit Trust of India. Then ICICI bought out UTI's stake in 1998 and ICICI venture became a fully owned subsidiary of ICICI. ICICI with a corpus of $ 650 million is largely a private equity find currently, although it provides venture capital as well. AJV Jayachander, President and CEO, ICICI ventures says : "With rapid economic and social changes taking place, the restaurant industry which was largely unorganised is fast getting organised. We are seeing a gradual alignment with global markets. In such a scenario, growth

levels are exponential and this is when VCFs get interested. This is how Pizza major Domino's entered the market and succeded inspite of competition from McDonald and Pizza Hut. (vii) IFCI Venture Capital Funds Ltd. (IVCF). IFCI Venture Capital Funds Ltd. (IVCF) was originally set up by IFCI as a society by the name of Risk Capital Foundation (RCF) in 1975. Its objective was to provide institutional support to first generation professional and technocrats setting up their own ventures in the medium scale sector. The scheme was known as Risk Capital Scheme (RCS). In 1988, RCF was converted into a company, Risk capital and Technology Finance Corporation Ltd. (RCTC). The name of RCTC was further changed to IFCI Venture Capital Fund Ltd. (IVCF) in February 2000. The focus at IVCF is on growth oriented industrial sectors and emerging knowledge based industries such as IT, internet and E- commerce, bio-tehnology, health care, medical etc. While selecting ventures for investment, IVCF critically assesses the competitive advantages which the entrepreneurial venture offers over the other players in the field both within India and abroad. IVCF invests in the form of equity and equity linked instruments such as optionally and fully convertible debentures, preference shares etc. It adopts a flexible financing approach while structuring a deal to suit specific financing requirements of individual projects. 1nvestment range of IVCF is normally between Rs. 10 million Rs. 40 million while equity stake acquired in the companies is from 10-40%. It looks for a time horizon of 3-3 years to exercise the exit option in a venture. The preferred exist routes are by way of Initial Public Offerings (IPOs), strategic sale, buy back by company/promoters. (viii) Gujrat Venture Finance Limited (GVFL). Under venture capital sponsored by state level financial institution. GVFL has primarily focused on financing companies in SME segment. GVFL is a true VC company, focusing on high-risk, and start-up ventures. The company funds the entrepreneurs at the first stage of funding when the venture is just taking off. GVFL mainly finances companies in IT sector and biotechnology. GVFL is widely recognised as pioneer of VC in India. Mr. Vishnu Varshney, founding managing director of GVFL has earned himself sobriquet of the father of venture capital in India. Since its inception, GVFL has provided financial and managerial support to over 56 companies with a high growth potential. GVFL is a true venture capital company, focusing on start-ups and Greenfield ventures, as against many so-called VC companies which actually play safe and fund only existing profitable ventures (as known as private equity players).GVFL is one of the two venture finance companies in India to have a complete investment cycle experience from start up financing to exit. GVFL lays stress on building up of small companies into successful matured companies based on innovative technologies in various sectors including IT and biotech. GVFL has contributed greatly to the overall development of the VC industry in India. It has played an active role in getting a training programme designed by Indian Institute of Capital Market on VC. The company also sends one or two executives abroad for training, brought international trends among the domestic VC industry. GVFL has also helped many state level VC s to take

off like SICOM in Maharashtra, Rajasthan Venture Capital Fund, SIDBI Venture Capital'Limited etc. (ix) SIDBI Venture Fund. Small Industrial Development Bank of India (SIDBI) launched "SME Growth Fund", a new venture capital fund on October 25th!, 2004 with a large corpus of Rs. 500 crore which earlier was Rs. 100 crore. This 8 year life Fund was established with an objective to meet the long-term risk capital requirement of innovative and technology oriented units in this sector. It is a unique initiative sponsored by SIDBI jointly with major public sector banks. Duly registered with SEBI as a venture capital fund, the fund shall invest in domestic small and medium enterprises (SME) units having superior growth potential, rapid scalability, a strong committed team, and enjoying unique and sustainable long term competitive advantage. The fund will identify unlisted SME entities in various growing sectors such as life sciences, retailing, light engineering, food processing, information technology, infrastructure related to services such as health care, logistics and distribution etc. SIDBI, an apex financial institution for the small scale sector, has been investing in several venture capital funds. Recently, SIDBI has partenered with Small Enterprise Assistance Fund, US and Kotak Mahindra Bank Ltd. in setting up India Growth Fund. The Bank has invested in a number of state level VC funds in collaboration with local institutions. The sanctions of the Bank relating to venture capital operations aggregate Rs. 463 crore through various routes, making it one of the largest VC players in the country. SME Growth Fund is the largest VC Fund dedicated to the SME. Management of the SME Growth Fund has been entrusted with SIDBI Venture Capital Limited (SVCL), a wholly owned subsidiary of SIDBI. SVCL has been managing the prestigious Rs. 100 crore National Venture Fund for software and Information Technology (NFSIT). With the setting up of new fund, it shall be able to serve various other focus sectors besides the software and IT. Currently based in Mumbai, the company plans to expand its network by opening its office in Delhi to serve North India and another in Chennai or Bangalore to cater to the South. The SME Growth Fund, being of limited life, targets to exit from its investments within a reasonable period through a variety of avenues such as strategic sale, mergers, acquisitions, an IPO or buy back. SME Growth Fund has invested in companies like Bravo Healthcare and Carzonrent India, a Licencee of Hertz India. SIDBI has another Rs. 100 crore National Venture Fund for software and Information Technology Industry (NFSIT). This Fund has invested in companies like Apnaloan.com and Compulink Software and is making a potential exit in the forthcoming IPO. (x) UTI Venture Funds Management Company. The Venture Capital (VC) and Private Equity (PE) arm of the Unit Trust of India (ITI) Group started off as a pure VC Company. Its 1TVUS, a venture capital fund finances companies which are into technology, life sciences and

outsourcing sectors. ITVUS has made investments in Glenmark labs, Subsex system and Foursoft. Of late, the focus has shifted to PE. The Ascent India Fund of UTI is worth Rs. 700 crore for investing in mid-market companies from sectors like auto ancillary, pharma, textiles, BPO and infotech and convergence technology. (xi) Can Bank Venture Capital Fund. It recently launched Bharat Nirman Fund, which has a corpus of Rs. 55 crore. The Can Bank VC Fund aims to fund start-ups in manufacturing and services sectors. It also has three other funds that were launched in 1989 (Rs. 16.42 crore), 1998 (Rs. 10.5 crore) and 2001 (Rs. 16.42 crore). It is in the process of exiting the first fund while the other two are operational with the corpus almost tied up for investment in start-ups. (xii) Intel Capital. Part of Intel, it is a corporate venture group and invests out of company's belance sheet. The fund in India, has invested in companies like Tejas Networks, Persistent systems and Nipuna. (xiii) Punjab Infotech venture Fund (PIVF) is a Rs. 200 million, 10 year, close-ended venture capital Fund, conceptualised and funded by the Punjab State Industrial Development Corporation (PSIDC), Punjab State Financial Corporation (PFC), Punjab State Electronics Development & Production Corporation Limited (PSED&PC) and Small Industries Development Bank of India (SIDBI). PIVF is dedicated to investing in companies in the Information Technology Sector within the State of Punjab. The Fund's investments in companies will be through the route of equity and quasi equity instruments. The Fund will seek to achieve its returns through dividends and capital gains at the time of divestment through an initial public offering or a negotiated sale of its holding. The Fund is being managed by Punjab venture capitai Limited, an asset management company, promoted by the PSIDC acting as the nodal agency of the Government of Punjab, The Business Plan should indude : * Executive Summary. * Biodata of Promoters and Key Management Team. * Details of associate companies/firms belonging to the Promoters. * capital Outlay proposed and means of funding. * Detailed shareholding pattern, both existing as well as proposed, with details of the extent of interest of each major shareholder/promoter. * Human resources available as well as required in future alongwith details of stock option plans already existing for both Management and Employees. * Financial performance of the company (if applicable) for the past five years. * Financial projections alongwith underlying assumptions. * Technology tie-ups alongwith copies of agreements. * Major clients alongwith details of orders executed for them as well as marketing strategy proposed.

* Details of overseas and domestic site offices, representative offices and subsidiaries/associates set up abroad for marketing/offshore development. * Competitive Strengths as perceived by the Promoters and Management * Implementation schedule. (xiv) VCFs of Commercial Banks. Among the Indian banks and many other banks the subsidiaries of SBI and Canara Bank have floated VCFs. These banks provide VCFs either in the form of equity or conditional loans. SBI invests in equity shares of new and unknown companies. Canara bank has set up a VF through its subsidiaries, Canbank Financial Services (Canfine). The projects assisted by them belong to industries such as watches, cement, ceramics etc. (xv) Private Sector VCFs. a) (ANZ Grindlays Bank) ANZ Grindlays Bank has set up India's first private sector VCF, namely India Investment Fund (IIF) with an initial capital of Rs. 10 crore subscribed by NRI. The fund provides assistance to high-risk projects, to the promotors, fresh issues of established companies with a good performance record. The objective of the fund is to achieve high capital growth for its investors by participating in fast growing companies or high technology companies with potential for high growth. b) Credit capital VF (India) Ltd. (CCVF). CCVF was launched in 1989 and happens to be the second VCF in private sector in India. It is a Joint venture of Credit capital Finance Corporation (a private sector merchant bank in India), Asian Development Bank, and Common wealth Development Corporation of the U.K. It was started with initial capital of Rs. 10 crore subscribed by these institutions and the public. Its thrust areas are small export -oriented units and ancillary units. Apart from capital, it provides, "hands-on" management support to the projects. c) Indus VCF. IVCF was established with a capital of Rs. 210 million subscribed by several Indian and international institutions and companies. The company provides both equity capital as well as management support to entrepreneurs. The company provides venture financing specially to industries such as health care products, electronics, computers and new higher quality sophisticated consumer products. 10. National Venture Fund for Software and information Technology Industry. NFSIT was launched on Dec. 10, 1999 by the then Prime Minister. It is a closeended venture capital Fund for 10 years with an initial corpus, of Rs. 100 crore. The Fund has been contributed by Small Industries Development of India (SIDBI), Ministry of Communication and Information Technology, Government of India (GOI) and Industrial Development Bank of India (IDBI). The main objective of the Fund is to meet the fund requirements of info- tech sector, software industry and related businesses.

NFSIT is being managed by SIDBI Venture Capital Limited (SVCI) which has corpus of Rs. 100 crore. The disbursements has been made in various areas of IT industry namely products, services, internet related business, IT training, IT enabled services etc. Rapidly changing economic scenario, emerging needs of entrepreneurs, high technological explosion indicate that there is tremendous scope for venture capital in India, venture capital can open a new window for the first generation entrepreneurs who have good project ideas but no entrepreneurial history. They can be assisted by VCFs to launch-their projects successfully. VC can act not only as financial catalyst but also provide a strong base for entrepreneurs to give a commercial shape to their innovative ideas. Not only this, VC would go a long way in broadening the industrial base, creation of jobs, provide a thrust to exports and help in overall enrichment of the economy. VC can also turn around the sick units by supplying equity, expertise and competence to improve the sick but viable units. Criteria Adopted VC Firms to provide VC Finance The VCFs usually look for entrepreneurs for VC financing who have business acumen and entrepreneurial spirit which can ensure