Venture Capital in IndiaM

VENTURE CAPITAL IN INDIA
CHAPTER NO. 1
PARTICULARS INTRODUCTION: WHAT IS VENTURE CAPITAL DEFINITION HISTOROCL EVOLUATION
PAGE NO. 2-12
VENTURE CAPITAL IN INDIA: EVOLUATION OF VC IN INDIA CHANDRASHEKHAR VC COMMITTEE VENTURE CAPITAL IN INDIA VETURE CAPITAL STATUS IN INDIA VENTURE CAPITAL FINANCING: VENTURE CAPITAL FINANCING PROSPECTUS OF VENTURE CAPITAL FINANCING METHODS OF VC FIANACINCING IN INDIA VC REGESTRATION IN INDIA PROBLEMS IN VENTURE CAPITAL FINANCING STEPS IN SEEKING VENTURE CAPITAL VENTURE CAPITAL FUND WHO WILL INVEST ELIGIBILITY CRIRERIA PLAYERS OF VC IN INDIA: ICICI VENTURE CASE STUDY SUGESTION AND RECCOMMENDATION BIBLOGRAPHY ANNEXSURE
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VENTURE CAPITAL IN INDIA CHAPTER 1 INTRODUCTION
1. WHAT IS VENTURE CAPITAL?

Venture capital is money provided by an outside investor to finance a new, growing, or troubled business. The venture capitalist provides the funding knowing that theres a significant risk associated with the companys future profits and cash flow. Capital is invested in exchange for an equity stake in the business rather than given as a loan, and the investor hopes the investment will yield a better-thanaverage return. Venture capital is an important source of funding for start-up and other companies that have a limited operating history and dont have access to capital markets. A venture capital firm (VC) typically looks for new and small businesses with a perceived long term growth potential that will result in a large payout for investors. A venture capitalist is not necessarily just one wealthy financier. Most VCs are limited partnerships that have a fund of pooled investment capital with which to invest in a number of companies. They vary in size from firms that manage just a few million dollars worth of investments to much larger VCs that may have billions of dollars invested in companies all over the world. VCs may be a small group of investors or an affiliate or subsidiary of a large commercial bank, investment bank, or insurance company that makes investments on behalf clients of the parent company or outside investors. In any case, the VC aims to use its business knowledge, experience and expertise to fund and nurture companies that [2]
VENTURE CAPITAL IN INDIA will yield a substantial return on the VCs investment, generally within three to seven years. Not all VC investments pay off. The failure rate can be quite high, and in fact, anywhere from 20 percent to 90 percent of portfolio companies may fail to return on the VCs investment. On the other hand, if a VC does well, a fund can offer returns of 300 to 1,000 percent. In additional to a portion of the equity, a VC expects to have a say in how its portfolio company operates. Ideally, the VC fosters growth at the company through its involvement in managerial, strategic, and planning decisions. To do this, the VC relies on the expertise of its general partners who may be former CEOs, bankers, or experts in a particular industry. In most cases, one or more general partners of the VC take Board of Director positions at a portfolio company. They may also help recruit key executives to the portfolio company.
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Definitions Venture capital: Definitions:

Venture Capital Provided By Outside Investor For Financing Or Start Up Venture, Growth Venture Or Struggling Business. Venture Capital Investments Generally A High Risk Investments. At The Same Time Offer The Possibilities Of Extraordinary High Returns.
Venture capitalist: Venture capitalist is a person who makes such investments. Venture capital Fund: It is a partnership or a trust or a
company that primarily invests the financial capital of promoters and other investors in enterprises that are too risky for the standard capital markets or bank loans.
Angel Investor:
An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for ownership equity. Unlike venture capitalists, angels typically do not manage the pooled money of others in a professionally-managed fund. However, angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital.
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Features of venture capital:

1. Venture Capital Usually In the Form Of Equity Or A Mix Of Equity Or Debt. In Some Rare Cases It Could Be Just Long Term Loan Or Convertible Loan. 2. Commercial Success Of Funded Venture Is Not Tested And Hence VC Is A Risk Investment. 3. If Successfully, VCs Can Get Extraordinary Returns. 4. Venture Capitalist Is Not Just A Fund Provider But Also Is Involved In Managing The Envisaged Growth Of The Firm. 5. Investment In Usually In Tiny, Small Or Non-Existence Ventures. 6. Big Established Ventures Neither Are or Funded by VCs. 7. Venture Capitalist Are Interested In Capital Gains And Cash Gains. 8. VCs Generally Exit Business after Achieving Desired Growth and Thereby Booking Capital Appreciation.
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Features of VC firm:
1. Investment in high-risk, high-returns ventures : As VCs invest in untested, innovative ideas the investments entail high risks. In returns, they expect much higher return than usual.(Internal Rate of return expected is generally in the range of 25% to 40 %.) 2. Participation in management: Besides providing finance, venture capitalists may also provide technical, marketing and strategic support. To safeguard their investments, they may also at times expect participation in management. 3. Expertise in managing funds : VCs generally invest in particular type of industries or some of them invest in particular type of businesses and hence have a prior experience and contacts in the specific industry which gives them an expertise in better management of the funds deployed. 4. Raises funds from several sources: Though many venture capitalists are rich individuals who come together in a partnership, all VCs are not necessarily rich and almost always deal with funds raised mainly from others. The various sources of funds are rich individuals, other investment funds, pension funds, endowment funds, et cetera, in addition to their own funds, if any.
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VENTURE CAPITAL IN INDIA 5. Diversification of the portfolio: VCs reduce the risk of venture investing by developing a portfolio of companies and the norm followed by them is same as the portfolio managers, that is, not to put all the eggs in the same basket. 6. Exit after specified time: VCs are generally interested in exiting from a business after a prespecified period. This period may usually range from 3 to 7 years.
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Historical Evolution
The development of the organised venture capital industry in India, as is in existence today, was slow and belaboured, circumscribed by resource constraints resulting from the overall framework of the socialistic economic paradigms. Although funding for new businesses was available from banks and governmentowned development financial institutions, it was provided as collateralbased money on project-financing basis, which made it difficult for most new entrepreneurs, especially those who were technology and services based, to raise money for their ideas and businesses. Most entrepreneurs had to rely on their own financial resources, and those of their families and well wishers or private financiers to realise their entrepreneurial dreams.
Early Beginnings
In 1972, a committee on Development of Small and Medium Enterprises highlighted the need to foster venture capital as a source of funding new entrepreneurs and technology. This resulted in a few incremental steps being taken over the next decade-and-a-half to facilitate venture capital funds into needy technology oriented small and medium Enterprises (SMEs), namely: _ Risk Capital Foundation, sponsored by IFCI, was set-up in 1975 to promote and support new technologies and businesses. _ Seed Capital Scheme and the National Equity Scheme was set up by IDBI in 1976.
_ Programme for Advancement of Commercial Technology (PACT) Scheme was introduced by ICICI in 1985. These schemes provided some succour to a limited number of SMEs but the activity of venture capital industry did not gather momentum as the funding was based on investment evaluation processes that [8]
VENTURE CAPITAL IN INDIA remained largely collateral based, rather than being holistic, and the policy framework remained unaltered, without the instruments to inject dynamism in the VC industry. Also, there was no policy in place to encourage and involve the private sector in the venture capital activity. Setting-up of TDICI and Regional Funds: 1987-1994 For all practical purposes, the organised venture capital industry did not exist in India till almost 1986. The role of venture capitalists till then was played by individual investors and development financial institutions. The idea of venture capital gained momentum after it found mention in the budget of 1986-87. A 5% cess was levied on all know-how imports to create the corpus of the venture fund floated by IDBI in 1987. Later, a study was undertaken by the World Bank to examine the possibility of developing venture capital in the private sector, based on which the Government of India took a policy initiative and announced guidelines for venture capital funds (VCFs) in India in 1988. Soon many other funds followed. The pioneers of the Indian venture capital industry were largely government-owned banks and financial institutions, with some contribution from the financial services companies in the private sector. The following VC funds were the pioneers
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VENTURE CAPITAL IN INDIA which laid the foundations of Indias VC industry:
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Came in India after decades than that in USA, UK, Europe etc.
1973- A committee on Development of Small and Medium enterprises highlighted the need to foster VC as a source of funding new entrepreneurs and technology. 1988-The Government announced Controller of Capital Issues These focused on a very narrow description of Venture Capital and proved to be extremely restrictive and encumbering, requiring investment in innovative technologies started by first generation entrepreneur. This made investment in VC highly risky and unattractive. At about same time World Bank arranged for VC awareness seminar, giving birth to players like: TDICI, GVFL, Canbank and Pathfinder. Along with other reforms Govt decided to liberalise VC industry and abolish CCI Technology Development and Information Company of India Ltd. (TDICI), an equal joint venture of ICICI and UTI, was the first organization to begin its venture capital operations in India. It was called VECAUS ( Venture Capital Units Scheme)- started with an initial corpus of Rs.20 crore and was completely committed to 37 small and medium enterprises. The first project of TDICI was loan and equity to a computer software company called Kale Consultants. 1990- Other VCFs were established like the Gujarat Venture Finance Limited (GVFL), Andhra Pradeshs AP Industrial Development Corporation (APDIC) and the Canara Bank Venture Capital Fund 1993- Venture capital community in India formalized with the formation of the Indian Venture Capital Association. Indian Venture Capital Industry suffered several set-backs as there was no tax pass-through for investors capital gains as was common internationally 1996- The regulatory environment of the industry was defined by the SEBI (Venture Capital Fund) Regulations, 1996. [11]
Entry of Foreign Venture Capital Funds: 1995-1998

Thereafter, the Government of India issued guidelines in September 1995 for overseas investment in venture capital in India. For tax-exemption purposes, guidelines were also issued by the Central Board of Direct Taxes (CBDT) and the investments and flow of foreign currency into and out of India was governed by the Reserve Bank of Indias (RBI) requirements. Further, as a part of its mandate to regulate and to develop the Indian capital markets, the Securities and Exchange Board of India (SEBI) framed the SEBI (Venture Capital Funds) Regulations, 1996. These guidelines were further amended in April 2000 with the objective of fuelling the growth of venture capital activities in India.
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CHAPTER 2 VENTURE CAPITAL IN INDIA:
Evolution of VC Industry in India

The first major analysis on risk capital for India was reported in 1983 [Chitale 1983]. It indicated that new companies often confront serious barriers to entry into capital market for raising equity finance which undermines their future prospects of expansion and diversification. It also indicated that on the whole there is a need to revive the equity cult among the masses by ensuring competitive return on equity investment. This brought out the institutional inadequacies with respect to the evolution of venture capital. The role of venture capital was met initially by the following institutions: Industrial Development Bank of India. Industrial credit and investment corp of India State Finance Corporations and Small Industries Development Bank of India The first origins of modern venture capital in India can be traced to the setting up of a Technology Development Fund in the year 1987-88, through the levy of access on all technology import payments [IVCA, 2000]. Technology Development Fund was started to provide financial support to innovative and high risk technological programmes through the Industrial Development Bank of India. Subsequently, Government of India gave the procedures that can be used for starting venture funding. The growth of VC in India has three separate phases. The first phase was the initial phase in which the concept of VC got wider acceptance. The first period did not really experience any substantial growth of VCs. The 1980s were marked by an increasing disillusionment with the trajectory of the economic system and a belief that liberalization was needed. The liberalization process started in 1985 in a limited way. The concept of venture capital received official recognition in 1988 with the announcement of the venture capital guidelines. During 1988 to 1992 about 9 venture capital institutions came up in [13]
VENTURE CAPITAL IN INDIA India. Though the venture capital funds should operate as open entities, Government of India controlled them rigidly. One of the major forces that induced Government of India to start venture funding was the World Bank. The initial funding has been provided by World Bank. World Bank reported that India will require $67 to 133 million per annum as venture capital. It gave a total of US $45 million for starting VC funds in India. The most important feature of the 1988 rules was that venture capital funds received the benefit of a relatively low capital gains tax rate which was lower than the corporate rate [Dossani and Kenney 2002]. The 1988 guidelines stipulated that VC funding firms should meet the following criteria: _ technology involved should be new, relatively untried, very closely held, in the process of being taken from pilot to commercial stage or incorporate some significant improvement over the existing ones in India _ promoters / entrepreneurs using the technology should be relatively new, professionally or technically qualified, with inadequate resources to finance the project. All these followed the Government of India guidelines for venture capital activities and have primarily supported technology oriented innovative businesses started by first generation entrepreneurs [Verma 1997]. Most of these were operated more like a financing operation. The main feature of this phase was that the concept got accepted. VCs became operational in India before the liberalization process started. The context was not fully ripe for the growth of VCs. Till 1995, the VCs operated like any bank but provided funds without collateral. The first stage of the venture capital industry in India was plagued by in experienced management, mandates to invest in certain states and sectors and general regulatory problems. Many public issues by small and medium companies have shown that the Indian investor is becoming increasingly wary of investing in the projects of new and unknown promoters [Ramesh and Gupta 1995]. The liberation of the economy and toning up of the capital market changed the economic landscape. The decisions relating to issue of stocks and shares was handled by an office namely: Controller of Capital Issues (CCI). According to 1988 VC guideline, any organization requiring to start venture funds have to forward an application to CCI. Subsequent to the liberalization of the economy in 1991, the office of CCI was abolished in May 1992 and the powers were vested in Securities and Exchange Board of India. The Securities and Exchange Board of India Act, 1992 empowers SEBI under section 11(2) thereof to register and regulate the working of venture capital funds. This was done in 1996, through a [14]
VENTURE CAPITAL IN INDIA government notification. The power to control venture funds has been given to SEBI only in 1995 and the notification came out in 1996. Till this time, venture funds were dominated by Indian firms. The new regulations became the harbinger of the second phase of the VC growth.
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Chandrasekhar VC committee:
Major recommendations of the Chandrasekhar VC committee:

The committee came to the conclusion that the venture capital industry in India is still at a nascent stage. It also stated that with a view to promote innovation, enterprise and conversion of scientific technology and knowledge based ideas into commercial production, it is very important to promote venture capital activity in India. The report prepared a vision, identified strategies for growth and how to bridge the gap between traditional means of finance and the capital needs of the high growth start-ups. The committee (The committee is known as Chandrasekhar Committee) identified five critical success factors for the growth of VC in India, namely: the regulatory, tax and legal environment should play an enabling role as internationally venture funds have evolved in an atmosphere of structural flexibility, fiscal neutrality and operational adaptability. resource raising, investment, management and exit should be as simple and flexible as needed and driven by global trends. venture capital should become an institutionalized industry that protects investors and investee firms, operating in an environment suitable for raising the large amounts of risk capital needed and for spurring innovation through start-up firms in a wide range of high growth areas. in view of increasing global integration and mobility of capital it is important that Indian venture capital funds as well as venture finance enterprises are able to have global exposure and investment opportunities infrastructure in the form of incubators and R&D need to be promoted using government support and private management as has successfully been done [16]
VENTURE CAPITAL IN INDIA by countries such as the US, Israel and Taiwan. This is necessary for faster conversion of R&D and technological innovation into commercial products.
A set of major recommendations were suggested that can help in the stimulation of the VC industry in India, some of these are presented here Eliminating multiplicity: There has been a multiplicity of regulations relating to VC. There is a need for harmonization of regulations, as there are three sets of VC regulations, namely: SEBI (Venture Capital Regulations) 1996, Guidelines for Overseas Venture Capital investments issued by Dept. of Economic Affairs (1995), and CBDT Guidelines for Venture capital companies [1996]. To eliminate multiple regulations, the committee proposed that SEBI should become the nodal regulator for VCF so as to provide uniform hassle free, single window regulatory framework. Venture capital funds tax pass: VCFs are a dedicated pool of capital and therefore operates in fiscal neutrality and are treated as pass through vehicles. Once registered with SEBI, it should be entitled to automatic tax pass through at the pool level while maintaining taxation at the investor level without any other requirement under Income Tax Act. Foreign Venture Capital Investors: FIIs registered with SEBI can freely invest and disinvest without taking FIPB (Foreign Investment Promotion Board / RBI (Reserve Bank of India) approvals but FVCIs have to take FIPB / RBI approvals. It was suggested that atleast on par with FIIs, FVCIs should be registered with SEBI and having once registered, they should have the same facility of hassle free investments and disinvestments without any requirement for approval from FIPB / RBI.
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Augmenting the domestic pool of resources: The present pool of funds available for venture capital is very limited and is predominantly contributed by foreign funds to the extent of 80 percent. The pool of domestic venture capital needs to be augmented by increasing the list of sophisticated institutional investors permitted to invest in venture capital funds. Flexibility in Investment and Exit: Eligibility for registration as venture capital funds should be neutral to firm structure. The government should consider creating new structures such as limited partnerships, limited liability partnerships and limited liability Corporations. The IPO norms of three year track record or the project being funded by the banks or financial institutions should be relaxed to include the companies funded by the registered VCF. Those companies which are funded by VCs and their securities are listed on the stock exchanges outside the country, these companies should be permitted to list their shares on the Indian stock exchanges.
The second phase of VC growth was essentially a learning phase. The rapid growth of VC during 1995 to 2000 made government examine the issues in the light of the Chandrasekhar Committee. The second phase growth has been mostly of information technology driven. This was also due to Government of Indias interest in attracting FDI into India. This paved the way for the next phase of VC growth in India. Based on the recommendations of the committee and based on the budget proposals SEBI approved two new regulations: SEBI (Venture Capital) Amendment Regulations, 2000 and SEBI (Foreign Venture Capital Investors) Regulations, 2000. The purpose of these were to change some of the lacunae in the existing regulations. Government considered these changes as far reaching, whereas industry viewed this as marginal changes.
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The major changes brought about by these are many fold: VCF is defined as fund established in the form of a Trust, a company including a body corporate and registered with SEBI which as a dedicated pool of capital raised in the manner specified under the Regulations; to invest in venture capital undertakings in accordance with the Regulations. The minimum size of the fund from any investor will not be less than INR 500,000 and the minimum corpus of the fund at the start has to be atleast INR 50 million. The new regulations stipulated that the maximum investment in single venture capital undertaking is not to exceed 25% of the corpus of the fund. The new regulations allowed VCF to participate in a companys initial public offering through the book building route as a Qualified Institutional Buyer. The new regulations allowed Foreign Venture Capital Investor to register with SEBI. Also, SEBI registered Foreign Venture Capital Investors will be permitted to make investment pursuant to the automatic route within the overall sectoral ceiling of foreign investment without having to obtain the prior approval of the Foreign Investment Promotion Board (FIPB). Along with this, with effect from June 1, 2000 foreign investment in Indian securities is controlled by the provisions of the Foreign Exchange Management Act 2000. This required that an offshore VCF investing in India will need to consider the requirements under the FEMA which Inter alia requires certain categories of offshore / foreign investors to seek the prior approval of the Foreign Investment Promotion Board constituted by the Government of India, before they invest in Indian securities. The changes had a salutory effect on venture capital industry and this is the third phase of VC growth. Though the dot.com problem and global economic slowdown affected VC funding, the software exports continued to surge. The growth of IT exports over the year show that IT exports and VC growth has a strong correlation. Unlike that in US, Government of India did not permit pension fund to flow into VC. One of the basic differences between US SBIC and Indian pre venture entrepreneurship has been that in that case of India there was no relationship between entrepreneurship financing and VC financing. In the next section a detailed analysis of VC trends are presented. [19]
Venture Capital in India
Research and Development Cess Act, 1986 introduced in the fiscal budget for the year 1986-87, is the precursor of the concept of venture capital as a new financial service in India. This Act imposed 5 per cent cess on all know-how import payments to create a pool of funds for, inter alia, venture capital activities. Technology Development Fund (TDF) was set up in the year 1987 -88, through the levy of this cess on all technology import payments. TDF was meant to provide financial assistance to innovative and high-risk technological programs through the Industrial Development Bank of India. This measure was followed up in November 1988, by the issue of guidelines by the (then) Controller of Capital Issues (CCI). These stipulated the framework for the establishment and operation of funds/companies that could avail of the fiscal benefits extended to them. However, another form of venture capital which was unique to Indian conditions also existed. That was funding of green field projects by the small investor by subscribing to the Initial Public Offering (IPO) of the companies. Companies like Jindal Vijaynagar Steel, which raised money even before they started constructing their plants, were established through this route. In March 1987, Industrial Development Bank of India (IDBI) had become the first to introduce Venture Capital Fund (VCF) scheme for financing ventures seeking development of indigenous technologies / adapta tion of foreign technology to wider domestic applications. Thereafter, Industrial Credit and Investment Corporation of India (ICICI) started financing technology-oriented innovative companies. ICICI in association with Unit Trust of India (UTI) formed a venture capital subsidiary called TDICI - Technology Development and Information Company of India - with headquarters at Bangalore, for taking up venture capital activity. Industrial Finance Corporation of India (IFCI) formed Risk Capital and Technology Finance Corporation (RCTC), with headquarters at New Delhi. TDICI is now known as ICICI Venture Funds Management Company Ltd. or ICICI Venture; and RCTC is now known as IFCI Venture Capital Funds Ltd. (IVCF). Their main focus is on development and commercialisation of viable indigenous, often, untried technologies. Almost at the [20]
VENTURE CAPITAL IN INDIA same time, Credit Capital Venture Finance Limited was started in the private sector. This has mobilised funding from global funding agencies, with the joint sponsorship of Commonwealth Development Corporation, London (U.K.), Credit Capital Finance Corporation, Asian Development Bank (ADB), and Bank of India, a public sector bank in India. Government of India, in November 1988, announced the first venture capital guidelines in the Parliament. These guidelines provided venture financing of technology start-ups, promoted primarily by first generation entrepreneurs. Soon thereafter in 1989, four institutions were selected by the World Bank under its Industrial Technology Development Project to start venture capital activities in different parts of the country. ICICI at Mumbai, Gujarat Industrial Investment Corporation (GIIC) in Ahmedabad, Andhra Pradesh Industrial Development Corporation (APIDC) in Hyderabad, and Canara Bank in Bangalore were selected under this scheme. IFCI at New Delhi, and Infrastructure Leasing and Financial Services Ltd. (IL & FS) at Mumbai were added later under the scheme. These institutions formed separate companies for handling venture capital activity and have been following Government of India guidelines. Venture Capital Funds promoted under the scheme and their parent organization are tabulated below.
The venture capital industry has grown manifold over the last decade and a half. The number of venture capital funds increased from 12 in 1990 to 31 in 1997, and 45 in 2000. The total corpus increased from Rs.200 crore in 1990 to Rs.4, 000 crore in 1997, and Rs.5, 000 crore in 2000. There has been very slowgrowth in the domestic funds, whereas 19 offshore private equity funds have started making investment in Indian companies. Inflow of venture capital from offshore funds has been quite substantial from 2001 onwards. This may be the effect of the implementation of the recommendations of the Report of the Working Group on Structure of Venture Capital Funds, chaired by K.B. Chandrasekhar, a NRI (Non[21]
VENTURE CAPITAL IN INDIA Resident Indian) from Silicon Valley, U.S.A. State Bank of India (SBI) and Canara Bank took the lead in promoting venture financing among the public sector banks. SBI Capital Markets, promoted by SBI is operating VCF. Later several PSU Banks started venture financing. From 1996, there has been an increased level of activity in the venture capital industry. More funds have been set up both by existing companies and by new ones in the public and private sectors. There has also been an increased availability of foreign funds for Indian venture capital investments. World Bank has been instrumental in the development of Venture Capital industry in the country. It provided initial support by providing funds as well as giving international exposure. Further it contributed in developing manpower resources and networking among venture capital companies in India to foster cohesiveness. This resulted in professionalisation of venture capital companies. The venture capital industry started maturing and in 1992, twelve domestic VCFs formed the Indian Venture Capital Association (IVCA). The association took vigorous steps and influenced Government of India to streamline the guidelines for venture capital industry in the country. The Indian Venture Capital Association (IVCA) became the nodal center for all venture activity in the country.
It has built up an impressive database. According to the IVCA, the pool of funds available for investment to its 20 members in 1997 was Rs25.6 billion. Out of this, Rs10 billion had been invested in 691 projects. Certain venture capital funds are Industry specific i.e. they fund enterprises only in certain industries such as pharmaceuticals, infotech or food processing whereas others may have a much wider spectrum. Again, certain funds may have a geographic focus like Uttar Pradesh, Maharashtra, Kerala, etc whereas others may fund across different territories. The funds may be either close-ended schemes (with a fixed period of maturity) or open-ended.
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VENTURE CAPITAL STATUS IN INDIA

1. The Indian venture capital sector has been active despite facing a challenging external environment in 2001 and a competitive market scenario. 2. There was 63 VCFs 30 Foreign VCFs registered with SEBI in May 2005 3. According to a survey conducted by Thomson Financial and Prime Database, in 2003, India ranked as the fifth most active VC market in Asia Pacific (excluding Japan). 4. It recorded 56 deals in 2003 with average investment per deal amounting to US$ 8.24 million. VCFs invested US$ 469.76 million in Indian companies during 2003. 5. In 2003 VC fund received $ 206 million in new commitments and are estimated to reach US$ 10 billion by 2007. 6. There is an increased interest in India: 70 VC funds operate in India with the total assets under managements worth about US$6 billion. 7. 85 exits were achieved, including 40 After IPO divestments.
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USD Million
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0 96 97 98 99 0 1 2 3 4
Graph shows VC investments in India
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CHAPTER 3: VENTURE CAPITAL FINANCING:
Venture Capital Financing:

It generally involves start up financing to help technically sound, globally competitive and potential projects to compete in the international markets with the high quality and reasonable cost aspects. The growth of South East Asian economies especially Hong Kong, Singapore, South Korea, Malaysia along with India has been due to the large pool of Venture Capital funds from domestic / offshore arenas. Venture Capitalists draw their investment funds from a pool of money raised from public and private investors. These funds are deployed generally as equity capital (ordinary and preference shares) and some times as subordinated debt which is a semi secured investment in the company (through debenture) ranking below the secured lenders that often requires periodic repayment. Today, a VC deal can involve common equity, convertible preferred equity and subordinated debt in different proportions. The Venture Capital funding varies across the different stages of growth of a firm.
The various stages are

1. Pre seed Stage: Here, a relatively small amount of capital is provided to an entrepreneur to conceive and market a potential idea having good future prospects. The funded work also involves product development to some extent 2. Seed Stage: Financing is provided to complete product development and commence initial marketing formalities. 3. Early Stage / First Stage: Finance is provided to companies to initiate commercial manufacturing and sales. 4. Second Stage: [25]
VENTURE CAPITAL IN INDIA In the Second Stage of Financing working capital is provided for the expansion of the company in terms of growing accounts receivable and inventory. 5. Third Stage: Funds provided for major expansion of a company having increasing sales volume. This stage is met when the firm crosses the break even point. 6. Bridge / Mezzanine financing or Later Stage Financing: Bridge / Mezzanine Financing or Later Stage Financing is financing a company just before its IPO (Initial Public Offer). Often, bridge finance is structured so that it can be repaid, from the proceeds of a public offering. There are basically four key elements in financing of ventures which are studied in depth by the venture capitalists. These are : 1. Management: The strength, expertise & unity of the key people on the board bring significant credibility to the company. The members are to be mature, experienced possessing working knowledge of business and capable of taking potentially high risks. 2. Potential for Capital Gain: An above average rate of return of about 30 - 40% is required by venture capitalists. The rate of return also depends upon the stage of the business cycle where funds are being deployed. Earlier the stage, higher is the risk and hence the return. 3. Realistic Financial Requirement and Projections: The venture capitalist requires a realistic view about the present health of the organization as well as future projections regarding scope, nature and performance of the company in terms of scale of operations, operating profit and further costs related to product development through Research & Development. 4. Owner's Financial Stake: The financial resources owned & committed by the entrepreneur/ owner in the business including the funds invested by family, friends and relatives play a very important role in increasing the viability of the business. It is an important avenue where the venture capitalist keeps an open eye.
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Venture capital is sought at following stages:
stage
Concept & idea development stage
Capital concept
Seed capital
Purpose
For product development and pilot plant. Commercial possibilities are tested in this stage For commercial pant development and full fledged operations rollout To scale up operation this stage product is almost tested success in limited market.
implementation
Start-up finance
expansion
Growth capital
Other forms Term around financing Business processesengineering bail-out package. Urgent need before completing formalities of public issue, term loan etc.
Stop-gap or intermediate stage
Mezzanine financing
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Prospects of Venture Capital Financing:

With the advent of liberalization, India has been showing remarkable growth in the economy in the past 10 - 12 years. The government is promoting growth in capacity utilization of available and acquired resources and hence entrepreneurship development capital. While only eight domestic venture capital funds were registered with SEBI during 1996-1998, 14 funds have already been registered in 1999-2000. Institutional interest is growing and foreign venture investments are also on the rise. Many state governments have also set up venture capital funds for the IT sector in partnership with the local state financial institutions and SIDBI. These include Andhra Pradesh, Karnataka, Delhi, Kerala and Tamil Nadu. The other states are to follow soon. In the year 2000, the finance ministry announced the liberalization of tax treatment for venture capital funds to promote them & to increase job creation. This is expected to give a strong boost to the non resident Indians located in the Silicon Valley and elsewhere to invest some of their capital, knowledge and enterprise in these ventures. A Bangalore based media company, Graycell Ltd., has recently obtained VC investment totaling about $ 1.7 mn. The company would be creating and marketing branded web based consumer products in the near future. The following points can be considered as the harbingers of VC financing in India:(i) Existence of a globally competitive high technology. (ii) Globally competitive human resource capital. (iii) Second Largest English speaking, scientific & technical manpower in the world. (iv) Vast pool of existing and ongoing scientific and technical research carried by large number of research laboratories. (v) Initiatives taken by the Government in formulating policies to encourage investors and entrepreneurs. (vi) Initiatives of the SEBI to develop a strong and vibrant capital market giving the adequate liquidity and flexibility for investors for entry and exit. [28]
VENTURE CAPITAL IN INDIA In a recent survey it has been shown that the VC investments in India's I.T. Software and services sector (including dot com companies) - have grown from US $ 150 million in 1998 to over US $ 1200 million in 2002. The credit can be given to setting up of a National Venture Capital Fund for the Software and I.T. Industry (NFSIT) in association with various financial institutions of Small Industries and Development Bank of India (SIDBI). The facts reveal that VC disbursements as on September 30, 2002 made by NFSIT totaled Rs 254.36 mn. Whopping investments of over USD 8.5 billion is expected in Indian from Venture Capitalists (VCs) and Private Equities (PEs) in next five years in at least five identified areas such as Biotechnology and Life Sciences, Logistics, Clean technology, Film Production and Education, Quoting the findings of the ASSOCHAM & Deloitte paper, president ASSOCHAM, Sajjan Jindal said that India has large opportunities in Biotechnology and Life Sciences on lines of retail and Real Estate. The Life Sciences sector in India has been attracting specialists Venture Capitalists from global and local funds. According to information received by the ASSOCHAM, US based Life Sciences Fund has recently invested approximately USD 20 million in a Hyderabad based pharmaceutical company. Devices and diagnostics are other areas where investors are active. It is anticipated that the Biotechnology and Life Sciences will alone attract about USD 1.5 billion investments from VCs 2012.
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METHODS OF VC FINANCING IN INDIA Four forms

1. Equity participation 2. Conventional Loan 3. Conditional loan 4. Income Notes 1. Equity Participation:VC firms participate through direct purchase of shares but their stake does not exceed 49%. Retained the shares till the projects making profit. Sold the shares either to the promoters at negotiated price under buy back agreement or to the public in the secondary market at a profit. 2. Conventional Loan:A lower fixed rate of interest is charged till the assisted units become commercially operational, after which the loan carries normal or higher rate of interest . The loan has to be repaid according to a predetermined schedule as per the agreement. 3.Conditional Loan:An interest free loan is provided during the implementation period but it has to pay royalty on sales. The loan has to be repaid as per the agreement as soon as the company is able to generate income.
4.Income Notes:Combination of conventional and conditional loans. Interest as well as royalty are payable at much lower rates than in case of conditional loans.
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VENTURE CAPITAL REGULATIONS IN INDIA:

Important provisions of Securities and Exchange Board of India Regulations, 1996 are: 1. Any company or trust or a body corporate or a foreign VC Fund to carry on any activity as a venture capital fund should apply to SEBI. 2. The venture capital fund shall not carry on any other activity other than that of a venture capital fund.
3. A venture capital fund may raise monies from any investor whether Indian, foreign and non resident Indians by way of issue of units. 4. Minimum some acceptable by VC fund from any investors is Rs.5 lakh.
5. Each scheme launch or fund set up by a venture capital fund shall have firm commitment from the investor for contribution of an amount of at least Rupees 5 crores before the start of operations by the venture capital fund. 6. On investment: Venture capital fund should disclose the investment strategy at the time of application for registration. Venture capital fund should not invest more than 25% corpus of the fund in one venture. VC should not invest in the associated companies. At least 75% of the investible fund should be invested in unlisted equity share or equity linked instruments. Not more than 25% of the investible funds may be invested by way of subscription to initial public offer of a venture capital undertaking whose share are proposed to be listed subject to lock-in period of one year or by way of debt or debt instrument of a venture capital undertaking in which the venture capital fund has already made an investment by way of equity. [31]
Problems of Venture Capital Financing: VCF is in its nascent stages in India. The emerging scenario of global competitiveness has put an immense pressure on the industrial sector to improve the quality level with minimization of cost of products by making use of latest technological skills. The implication is to obtain adequate financing along with the necessary hi-tech equipments to produce an innovative product which can succeed and grow in the present market condition. Unfortunately, our country lacks on both fronts. The necessary capital can be obtained from the venture capital firms who expect an above average rate of return on the investment. The financing firms expect a sound, experienced, mature and capable management team of the company being financed. Since the innovative project involves a higher risk, there is an expectation of higher returns from the project. The payback period is also generally high (5 - 7 years).
The various problems are as follows: (i) Requirement of an experienced management team. (ii) Requirement of an above average rate of return on investment. (iii) Longer payback period. (iv) Uncertainty regarding the success of the product in the market. (v) Questions regarding the infrastructure details of production like plant location, accessibility, relationship with the suppliers and creditors, transportation facilities, labour availability etc. (vi) The category of potential customers and hence the packaging and pricing details of the product. (vii) The size of the market. (viii) Major competitors and their market share. (ix) Skills and Training required and the cost of training. (x) Financial considerations like return on capital employed (ROCE), cost of the project, the Internal Rate of Return (IRR) of the project, total amount of funds required, ratio of owners investment (personnel funds of the entrepreneur), borrowed capital, mortgage loans etc. in the capital employed. [32]
VENTURE CAPITAL IN INDIA The Indian venture capital (VC) industry has witnessed considerable turmoil in the last two years. Consider this: At least seven VC funds (VCFs) shut shop. Many others simply ran out of funds. A few set up high-cost Indian operations, with no funds raised or allocated for investment. The rest of the industry appears to be busy, `restructuring' their investment focus, making very few new investments. After a period of hectic investing, from 1998 to 2000, the Indian VC industry appears to be going through difficult times. This is a time for the industry to engage in some serious reflection. Managers in the industry may possibly disagree with me. They might argue that the developments in the Indian industry are a mere reflection of a larger global phenomenon. After all, have the American and European VC industries not slowed down? That comparison though, is inappropriate. The slow down and the poor performance of many funds in the Western world are part of a cyclical phenomenon. The Indian industry, on the contrary, faces issues of a fundamental nature. Let us examine four issues of concern. First, there is a serious mismatch between the kind of venture capital available in India and what the market demands. Almost all VCFs in India have been targeting their capital at companies in the information technology, pharmaceuticals and some services industries, looking for expansion financing of Rs 15 crores or more. Now, this is a limited market segment. Most of the industries mentioned above are relatively young. There are very few firms in these sectors, seeking large amounts of capital for expansion financing. At the same time, a large number of aspiring entrepreneurs, start-ups, early- stage companies and Old Economy firms, which are fundamentally sound businesses, are unable to attract the VC financing that they badly need in order to grow. Apart from the relatively smaller amounts of funding that they seek, on average start-ups require considerable post-funding support from the investor to grow their businesses. That is painstaking work, for which Indian VCF managers have demonstrated neither experience nor training nor temperament. Old Economy firms do not provide the quick or glamorous exits that VCFs often desire. Second, most VCFs in India are an extended arm or a division of global investment institutions. International funds represent more than 95 per cent of the VC invested in India. Two consequences follow from this near-total dependence on foreign capital. One, the investment mandates of these VCFs are often driven by the parent [33]
VENTURE CAPITAL IN INDIA institutions' global world view, which often ignores local market needs. The homogenous investment preferences of VCFs outlined earlier follow from the parent institutions' global investment strategies. Two, at a portfolio level, every international VC investor in India has been a victim of the depreciation of the rupee against the dollar. The returns produced by Indian VCFs, measured in US dollars or other Western currencies, turn out to be considerably less attractive than that measured in Indian currency. Many nations such as the Netherlands, Portugal, Finland, Norway and Israel recognized the limitations of depending on foreign funds at the time of evolving a policy for developing a local VC industry. Their first step was to kick start VCFs in the private sector with funds from domestic institutions. Over a decade, or even less, they succeeded in creating a local VC industry that depended less and less on government support and international investors. The third issue is the poor quality of corporate governance and lack of sensitivity among entrepreneurs and investors, to each other's legitimate business aspirations. This is a universal problem and not unique to India. What is however unique to India is the hopeless system of legal redress of grievances when partners renege on contractual obligations. Often, aggrieved parties in India agree to settlements that are unfair to them, apprehending that litigation in Indian courts could be dysfunctional. This situation may not change in the foreseeable future. The alternative to litigation and unfair bad investments would be to invest more effort in better identification and selection of investments and supervision of the portfolio. Indian VCF managers need to ask themselves if they are prepared to put in that extra effort to minimize prospects for litigation in the first place. Last, but not the least, the industry lacks a broad-based and effective trade association. The Indian Venture Capital Association (IVCA) does not represent a large proportion of the VCFs who are active in India. I am not sure of the IVCA's contributions to the VC industry either, in the ten years since it was formed. For some years initially, the IVCA used to produce a delightfully uninformative annual report, many months after the end of the year.
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Steps in Seeking Venture Capital:

VC investor makes detailed evaluation of the quality of people,quality of business and the quality of investment involved. A decision to invest is reached after several rounds of presentations and negotiations. The most difficult to assess is however the quality of people.
Following stages are involved in seeking VC funding:

Study of VCs Details: Most of the organized VCs have a website. They spell out their investment objectives and philosophy on the portal. Steps to approach them and criteria for selection are also displayed.
Submission of business plan:

Portals also indicate what VC would require in business plan to be submitted. Business plan should be prepared accordingly and should be submitted through the portal. Note : many Indian VCs do not have these online features. In such case forms should be collected from their office and business plan should be submitted to them.
Scrutiny of business plan:

VC studies the business plan and forms his primary view. If he doesnt click well with the plan at all, he rejects it in toto. There is no further consideration. If VC finds some worth to consider it further, he may send some queried and demand some details from the applicant. Applicant would try to fulfill the demands.
Preliminary Meeting:
The initial meeting provides an opportunity for the venture capitalist to meet the entrepreneur and key members of the management team to review [35]
VENTURE CAPITAL IN INDIA the business plan and conduct initial due diligence on the project. It is an important time for the management team to demonstrate their understanding of their business and ability to achieve the strategies outlined in the plan. Negotiating Investment: This involves negotiations on terms of possible agreement between the venture capitalist and management. The venture capitalist will then study the viability of the market to estimate its potential. Often they use market forecasts that have been independently prepared by industry experts who specialized in estimating the size and growth rates of markets and market segments. The due diligence continues with reports from accountants and other consultants.
Approvals:
The process involves exhaustive due diligence and disclosure of all relevant business information. Final terms can then be negotiated and an investment proposal submitted to the board of directors.
Legal and other Procedures:

A shareholders agreement is prepared containing the rights and obligations of each party. This could include, for e.g. veto rights by the investor on remuneration and loans to executives, acquisition or sale of assets, audit, listing of the company, rights of co-sale and warranties relating to the accuracy of information enclosed. The investment process can take up to three months, and sometimes longer. It is important, therefore, not to expect a speedy response. It is advisable to plan the business financial needs early on to allow appropriate time to secure the required funding.
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Venture capital fund

Venture Capital provides long-term, committed share capital, to help unquoted companies grow and succeed. If an entrepreneur is looking to start-up, expand, buy-into a business, buyout a business in which he works, turnaround or revitalize a company, venture capital could help do this. Obtaining venture capital is substantially different from raising debt or a loan from a lender. Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of a business. As a shareholder, the venture capitalist's return is dependent on the growth and profitability of the business. This return is generally earned when the venture capitalist "exits" by selling its shareholding in the business. 1997 VC Regulations got considerable boosted by IT Revolution as the Venture Capitalist became prominent founders of IT and telecom Industry. 2000- With the recommendations of the Chandrasekhar committee and SEBI (Foreign Venture Capital Investor) Regulations, 2000 VCF fostered growth in the Industry. Introduction of the Finance Act, 2000 fuelled the growth of VCF by giving it a pass through status by insertion of section 10(23FB) and 115U in Income Tax Act. 2000-2007- VCF industry has had an upswing. The VCF investments in India amounted to US$1 billion in 2000 and investments of US$ 7.5 billion by 2006 and the first nine months of 2007 has seen investment of US$ 7.77 billion. 2004- VCF/FVCI permitted to invest in NBFC registered with RBI and engaged in equipment leasing
[37]
Who will invest in Venture Capital? Venture Capital raises money both domestically and across the world Kinds of Investors Angel Investors- High networth investors having appetite for high risk and higher returns Institutions with diversified portfolios like pension funds, insurance companies etc Fund of Funds
ELIGILBILITY CRITERIAS Company: -Main object as business of VC in MoA -prohibition to make invitation for public subscription -director/principal officer/employee not to be involved in any litigation in securities market -as the same will have a bearing on the applicant - director/principal officer/employee not being convicted of any offence -if it is a fit and proper person -To check the criterias specified in Schedule II of SEBI (Intermediaries) Regulations, 2008 as Trust: -the trust deed duly registered under the Registration Act, 1908 -main object to carry on the business of VC -the directors of trustee company or its trustee not to be involved in any litigation in securities market -the directors of trustee company or its trustee not being convicted of any offence
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-if it is a fit and proper person -To check the criterias specified in Schedule II of SEBI (Intermediaries) Regulations, 2008 Body Corporate: -set up or established under laws of Central or State Legislature -applicant permitted to carry on the business of VC -Same as in case of company/trust
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CHAPTER 4: PLAYERS OF VC IN INDIA:
Players of VC in India
Classified into Four1.Companies promoted by All India Financial Institutions:a.VC division of IDBI b. Risk Capital and Technology Finance Corporation Ltd.-RCTC- Subsidiary of IFCI c. Technology Development and Information Company of India Ltd.-TDICIpromoted by ICICI and UTI 2. Companies promoted by State Financial Institutions:a. Gugarat Venture Finance Ltd. b. Andhra Pradesh Industrial Development Corporation Venture Capital Ltd. 3. Companies promoted by Banks:a. Can Bank VCF ( Canara Bank) b. SBI Venture Capital Fund c. Indian Investment Fund (Grindlays Bank) d. Infrastructure Leasing (Central Bank Of India) 4. Companies in private sector:a. Indus VCF(promoted by Mafatlal & Hindustan Liver) b. Credit Capital VF(India Ltd. c. 20th Century VC Corporation Ltd. d. VCF promoted by V.B.Desai & Co
[40]
ICICI Venture Private equity in India and ICICI Venture

India is rapidly becoming a leading emerging markets destination for private equity, with total investments increasing almost 700% between 2004 and 2006, from $1.1 billion to $7.46 billion.1 This growth has been fostered by a number of factors, including an economy that has been growing at an average annual rate of 6% since 1980 (see Exhibit 1A for Indias GDP growth between 1980 and 2006), an established legal system, wide spread use of English, a deep pool of expatriates experienced in Western businesses, a world-class higher education system especially in engineering, health sciences and technology, and one of the oldest, most stable democratic governments in the region. Moreover, with more than one billion inhabitants and a rapidly growing middle class of consumers, the domestic Indian market is especially appealing. As these factors have attracted a surge of private equity activity in the country, not surprisingly competition for deals has intensified apace. (See Exhibit 1B for private equity investments in Indian companies from 1990 to 2006.) But ICICI Venture is endowed with a number of advantages over its foreign competitors. First, it enjoys very strong local brand recognition. Founded in 1987, ICICI Venture is one of the oldest private equity groups in India and benefits from being a whollyowned subsidiary of ICICI Bank Indias largest private sector financial services group. Second, like other local players, it benefits from the protective Indian regulatory environment that restricts foreign investment in many sectors, including retail. Finally, ICICI Ventures team is entirely Indian, resulting in an important cultural and linguistic fit with local entrepreneurs and regulators compared with foreign funds. Bala Deshpande, director of Investments at ICICI Venture, explained its importance: It is not about being Indian per se, but about knowing the unique challenges of doing business in India. These internal and external factors helped make ICICI Venture one of the largest and most successful private equity firms in India with assets under management in excess of $2 billion. While ICICI Ventures limited partners are global, its current investment portfolio consists entirely of Indian companies and is strategically well positioned to continue capitalizing on the Indian growth story. [41]
VENTURE CAPITAL IN INDIA ICICI Ventures larg sector exposures include retail, domestic services, healthcare, energy, infrastructure and real estate. The group also claims a number of firsts in the Indian private equity industry, including Indias first leveraged buyout (Infomedia), the first real estate investment (Cyber Gateway), the first mezzanine financing for an acquisition (Arch Pharmalabs) and the first royaltybased structured deal in Pharma Research & Development (Dr Reddys).2 As the private equity market in India has taken off in recent years, ICICI Ventures investment strategy has become increasingly sectorfocused, which has resulted in the largest exposure of any private equity group to the Indian retail.
[42]
A case study on VC investment

Sector: Pharmaceuticals Investors: Swisstec, ICICI Ventures, IIML Transaction Summary: Has raised $36 million in four rounds in as many years. Arch Pharma was founded by a group of professionals in 1999. The founders identified Hyderabad-based Merven Drug Products, a company that was under bankruptcy protection (under the Indian Governments Board for Industrial and Financial Reconstruction, BIFR), for the manufacture of pharmaceutical intermediates. Arch manufactures various drug intermediates and APIs 70% of which is exported to reputed multinational pharma companies - at six locations across India. Three of these manufacturing facilities came in through acquisitions an activity for which Arch has creatively leveraged Private Equity financing. VC Investment In late 2003 and early 2004, Arch quickly raised two rounds of Private Equity funding $2 million in October 2003 from Swisstec and $3 million in January 2004 from ICICI Ventures that helped it acquire Merven Drugs (through a reverse merger). In January 2005, Arch raised another round $9 million from IIML. The new funds were used to finance the acquisition of the pharmaceuticals business of a larger company. Success of VC funding Ajit Kamath, Arch Pharmas Chairman & Managing Director ICICI Venture was willing to back us to acquire a sick company. Please remember that this was at a time when there was no asset reconstruction company in India and the financial landscape was very different. In November 2006, Arch raised $22 million from existing investor, ICICI Ventures. Interestingly, the company chose to go in for another round of PE financing when it had the option of going to the public markets. Apart from providing strategic direction and financial advice, PE investors have helped Arch improve its systems and corporate governance standards very significantly. Kamath feels another key benefit of PE financing is the enhanced visibility that it provides for the company especially in the media. Thanks to our PE-backing, we get more visibility in the media compared to other companies of our size, he says. Importantly, this positive rub-off also increases the confidence of various stakeholders including customers in the company.
[43]
Icici bank and subhiksha

Indias rapid economic growth in the last decade has lifted millions of people out of poverty and stimulated the expansion of a middle class with increasing amounts of disposable income. Indias consumer market, already the twelfth largest in the world, is forecast to rise to fifth place by 2025 and the middle class is expected to soar from about 50 million in 2006 to more than half a billion in that time. However, the Indian retail market is still extremely fragmented and underdeveloped, with large chain stores accounting for only 3% of the total retail market. With foreign investments continuing to be severely restricted by government regulation, an enormous opportunity exists for talented Indian entrepreneurs and investors. This case describes the investment made by one of Indias largest and most successful domestic private equity groups, ICICI Venture, in Subhiksha, one of Indias leading retailers in the discount food and groceries business. During its sevenyear relationship with the company, ICICI Venture has provided not only capital, but much needed nonfinancial valueadded such as strategic advice and management team-building that contributed to transforming Subhiksha into a market leader. The case illustrates that, as with all successful venture capital and middle market private equity investments, one key success factor is the ability to first recognize genuine entrepreneurial talent, and then forge a relationship that capitalizes on the strengths and expertise of both investor and entrepreneur. 2.BACKGROUND OF THE INDUSTRY In the last decade, one of the most admired institutions among industrialists and economic policy makers around the world has been the US venture capital industry [Dossani and Kenney 2002]. The sensitivity of venture capital process to government policies and other factors that influence entrepreneurship and innovation was highlighted in a study by the US General Accounting office on behalf of the Joint Economic Committee [Premus 1985]. Venture capital entrepreneurship and innovation have been closely connected. Entrepreneurs [44]
VENTURE CAPITAL IN INDIA have long had ideas that require substantial capital to implement but lacked the funds to finance these projects themselves [Gompers and Lerner 2002]. Venture capital evolved as a response to this felt need. Venture capital represent one solution to financing the high risk, potentially highreward projects [Gompers and Lerner 2002]. The experience of US, Taiwan and Israel show that technological innovation and the growth of venture capital markets are closely interrelated [Premus 1985]. It has been reported that capital markets overlook small business opportunities because of high information and transaction costs, generally known as capital gap problem [Premus 1985, Smith and Smith 2002]. Though venture capital can meet this gap to some extent, venture capital is a special form of venture financing. In the case of venture capital, the capital market has to be conducive for supporting venture funding. At some level, entrepreneurship occurs in nearby every society, but venture capital can only exist when there is a constant flow of opportunities that have great upside.
TEJAS NETWORKS INDIA PVT. LTD. The vision of Tejas Networks is to create state of the art products and solutions in the telecommunications and optical networking arena. Tejas Networks was founded in 2000. Tejas Networks developed software differentiated optical networking products that provide high price / performance in their class, enabling carriers to maximize revenue generating services while optimizing their overall network costs. Tejas Networks also partners with leading third party equipment vendors to build intelligent optical networks for its customers. Founders and their experience: Sanjay Nayak is the Cofounder and Chief Executive Officer. He worked as the Managing Director of Synopsys India. He had experience in working with Synopsys, View logic Systems and Cadence Design Systems, in US. Dr. K.N.Sivarajan is the cofounder and Chief Technology Officer of Tejas. He was a professor at Indian Institute of Science. He worked prior to this in IBM Watson [45]
VENTURE CAPITAL IN INDIA Research centre. He received his PhD from California Institute of Technology. Arnob Roy is the third co-founder and earlier he worked with Synopsis India. The Tejas team consists of outstanding professionals with a wealth of experience in deploying carrier class optical networks in India and USA. Origin of the idea: Mr. Nayak and Dr. Sivarajan decided to create something new for self-actualization. The wanted to create a world class Product Company, as they wanted India to develop innovative telecom products. Mostly, Indian firms were in software services. They wanted to create products from India. This urge made them seek venture capital as they had innovative ideas. Venture Investors: There were three venture investors for Tejas Networks in the first round, and they are Mr. Gururaj Deshpande, Chairman of Sycamore Sycamore Networks, a publicly held corporation and ASG Omni LLC, a financial agency. In the first round the three investors funded US$ 5 million. In the second round Mr. Deshpande, Intel Capital and ILFS invested US$ 6.7 million. Intel Capital is the strategic investment arm of Intel.
Products:
The main products of Tejas are cost effective SDH Multiplexer equipments designed to manage bandwidth and derive services from the optical core to access. Innovation in optical networking requires high levels of software and hardware integration capabilities. Tejas has undertaken the design and deployment of optical networks. Through innovation and learning Tejas is able to compete with global firms like CISCO, Nortel and Lucent. Tejas combines the cost advantage of India and the innovative strength of its founders. The optical products are based on the dense wave diversion multiplexing and optical amplification to transmit data optically at aggregate rates exceeding one terabit per second over distances of a few thousand kms on a single strand of fibre. Tejas Networks India Ltd, an optical networking start-up launched its intelligent optical access product in India in less than year after its start. Intel Capital announced funding after the product was [46]
VENTURE CAPITAL IN INDIA announced. The nine month company got immediately its first customer, Tata Power to deploy the TJ-100 access product. This is the first intelligent optical network in India. The system leverages the capacity creation of DWDM technology and innovative networking software. With the Internet infrastructure market growing at about 20 percent per annum Tejas Networks hopes to market its TJ 100 family of products in the global market. Venture funding and value addition: Tejas Network is a knowledge integrator. The firm essentially develops network software and markets Sycamores optical networking products in India and the Asia Pacific. It also develops some regionally specific networking products: The venture capital firms supported Tejas in a number of ways: The name of Deshpande added reputation and acted as a non-traded externality to attracted VCFs Intel capital helped in wetting the business plans ILFS helped in co-funding through its private equity arm and ASG-Omni helped in developing business contacts.
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CHAPTER 5: RECOMMENDATION AND SUGGESTION
[48]
BIBLIOGRAPHY:
REFERENCE BOOKS:
FINANCIAL SERVICE MANAGEMENTMR.DIPAK ABHYANKAR.
WEBSITE:
www.google.co.in www.investopedia.com www.IVCA.com www.SEBI.com

WWW.ICICI.COM
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Annexures
1. How many investmentshave you made in your current fund? 2. Which pension funds and other investors have invested in your funds? 3. What (relevant) sector experience do your General Partners have? 4. What is the value of your total funds under management? 5. How many investmentshave you made todate? 6. Do you have any geographic limitations onyour investments? Investment Style 7. How do you differentiate between theopportunities that you see? 8. What sort of deals do you look at? 9. How many deals do youlook at in a year? 10. How many deals do you do in a year? 11. Do you make minority investments? 12. How hands on are youwith your investments? Deal Flow 13. What is the average size of each investment? 14. What is your min/max equity cheque? 15. How much do you expect to keep for follow on investments? 16. How much leverage do you bring into your deals? 17. Where do you find your deals? 18. Do you work on cash multiples or IRRs? 19.Who will invest in Venture Capital?
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VENTURE CAPITAL IN INDIA

PARTICULARS INTRODUCTION: WHAT IS VENTURE CAPITAL DEFINITION HISTOROCL EVOLUATION

PAGE NO. 2-12

VENTURE CAPITAL IN INDIA CHAPTER 1 INTRODUCTION

1. WHAT IS VENTURE CAPITAL?