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ASPECT
A
DISSERTATION REPORT
ON
STUDY OF VENTURE CAPITAL IN INDIA
AND ITS ASPECT
Submitted to:
Submitted by:
SUBMITTED BY: TANMAY TONDON, MBA (GENERAL)
Page 1
MBA
DECLARATION
I declare
(a)That the work presented for assessment in this dissertation Report is my own, that it has not
previously been presented for another assessment and that my debts (for words, data, arguments
and ideas) have been appropriately acknowledged
(b)That the work conforms to the guidelines for presentation and style set out in the relevant
documentation.
Date:
TANMAY TANDON
ACKNOWLEDGMENT
Dissertation report is a combined effort, so one should thank to all who have helped in making
report purposeful. Hence, I take this opportunity to thank all those who have been instrumental in
preparing this report. I am immensely grateful to Dr. Shibu John, Head of Department,
Department of Management Studies, FMIT, Jamia Hamdard, for providing us every opportunity
to bring up our talent.
I also want to thank all my teachers, Staff members, library members and friends for their
valuable advices and guidance which helped me to make this report purposeful.
TANMAY TANDON
MBA (GEN) FINANCE
Table of Content
Page no.
1. Introduction.
2. Objective of Study
3. Literature Review
4. Research Methodology..
5. Data Analysis & Interpretation
6. Findings....
7. Conclusion
8. Limitation
9. Suggestions
Bibliographies.
Annexure..
SUBMITTED BY: TANMAY TONDON, MBA (GENERAL)
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Chapter 1- Introduction
A number of technocrats are seeking to set up shop on their own and capitalize on opportunities.
In the highly dynamic economic climate that surrounds us today, few traditional business
models may survive. Countries across the globe are realizing that it is not the conglomerates and
the gigantic corporations that fuel economic growth any more. The essence of any economy
today is the small and medium enterprises. For example, in the US, 50% of the exports are
created by companies with less than 20 employees and only 7% are created by companies with
500 or more employees. This growing trend can be attributed to rapid advances in technology in
the last decade. Knowledge driven industries like InfoTech, health-care, entertainment and
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.
A Brief History
The concept of venture capital is not new. Venture capitalists often relate the story of Christopher
Columbus. In the fifteenth century, he sought to travel westwards instead of eastwards from
Europe and so planned to reach India. His far-fetched idea did not find favor with the King of
Portugal, who refused to finance him. Finally, Queen Isabella of Spain decided to fund him and
the voyages of Christopher Columbus are now empanelled in history.
The modern venture capital industry began taking shape in the post World War II years. It is
often said that people decide to become entrepreneurs because they see role models in other
people who have become successful entrepreneurs. Much the same thing can be said about
venture capitalists. The earliest members of the organized venture capital industry had several
role models, including these three:
American Research and Development Corporation, formed in 1946, whose biggest success
was Digital Equipment. The founder of ARD was General Georges Doroit, a French-born
military man who is considered "the father of venture capital." In the 1950s, he taught at the
Harvard Business School. His lectures on the importance of risk capital were considered quirky
by the rest of the faculty, who concentrated on conventional corporate management.
J.H. Whitney & Co also formed in 1946, one of whose early hits was Minute Maid juice. Jock
Whitney is considered one of the industrys founders.
The Rockefeller Family, and in particular, L S Rockefeller, one of whose earliest investments
was in Eastern Airlines, which is now defunct but was one of the earliest commercial airlines.
The Second World War produced an abundance of technological innovation, primarily with
military applications. They include, for example, some of the earliest work on micro circuitry.
Indeed, J.H. Whitneys investment in Minute Maid was intended to commercialize an orange
juice concentrate that had been developed to provide nourishment for troops in the field.
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These teams are adept at dealing with risk because of their impeccable past experience.
Attention to details
Market share
Profits.
Evaluating risk seems to be an area where unsuccessful venture fail. Since successful
teams focus on established markets and meticulously pursue these markets to gain
market share, they achieve desired profits.
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RESEARCH DESIGN:
Acc. to Kerlinger, Research design is the plan structure & strategy of investigation
conceived so as to obtain answers to research questions and to control variance.
Acc. to Green and Tull, A research design is the specification of methods and
procedures for acquiring the information needed. It is the overall operational pattern or
framework of the project that stipulates what information is to be collected from which sources
by what procedures.
Its found that research design is purely and simply the framework for a study that guides the
collection and analysis of required data.
This research is a Exploratory research. The major purpose of this research is description of
state of affairs as it exists at present.
DATA COLLECTION
Secondary data
Secondary data is the data which is already collected by someone and complied for different
purposes which are used in research for this study. It includes:
Internet
Magazine
Journal
Newspaper
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Screening:
VCFs, before going for an in-depth analysis, 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 the venture capitalist is familiar in terms of technology, or product, or market scope. The
size of investment, geographical location and stage of financing could also be used as the broad
screening criteria.
Due Diligence:
Due diligence is the industry jargon for all the activities that are associated with evaluating an
investment proposal. The venture capitalists evaluate the quality of entrepreneur before
appraising the characteristics of the product, market or technology. Most venture capitalists ask
for a business plan to make an assessment of the possible risk and return on the venture. Business
plan contains detailed information about the proposed venture. The evaluation of ventures by
VCFs in India includes;
Preliminary evaluation: The applicant required to provide a brief profile of the proposed venture
to establish prima facie eligibility.
Detailed evaluation: Once the preliminary evaluation is over, the proposal is evaluated in greater
detail. VCFs in India expect the entrepreneur to have:- Integrity, long-term vision, urge to grow,
managerial skills, commercial orientation.
Issues
Loan
Clean vs secured
Interest bearing vs non interest bearing
convertible vs one with features (warrants)
1st Charge, 2nd Charge,
loan vs loan stock
Maturity
Preference shares
Common shares
In India, straight equity and convertibles are popular and commonly used. Nowadays, warrants
are issued as a tool to bring down pricing.
A variation that was first used by PACT and TDICI was "royalty on sales". Under this, the
company was given a conditional loan. If the project was successful, the company had to pay a
% age of sales as royalty and if it failed then the amount was written off. In structuring a deal, it
is important to listen to what the entrepreneur wants, but the venture capital comes up with his
own solution. Even for the proposed investment amount, the venture capital decides whether or
not the amount requested, is appropriate and consistent with the risk level of the investment. The
risks should be analyzed, taking into consideration the stage at which the company is in and
other factors relating to the project. (eg exit problems, etc).
Exit:
Venture capitalists generally want to cash-out their gains in five to ten years after the initial
investment. They play a positive role in directing the company towards particular exit routes. A
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.
4. Second Stage: 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 breakeven point.
Equity: All VCFs in India provide equity but generally their contribution does not exceed 49
percent of the total equity capital. Thus, the effective control and majority ownership of the firm
remains with the entrepreneur. They buy shares of an enterprise with an intention to ultimately
sell them off to make capital gains.
Conditional Loan: It is repayable in the form of a royalty after the venture is able to generate
sales. No interest is paid on such loans. In India, VCFs charge royalty ranging between 2 to 15
percent; actual rate depends on other factors of the venture such as gestation period, cost-flow
patterns, riskiness and other factors of the enterprise.
Income Note: It is a hybrid security which combines the features of both conventional loan
and conditional loan. The entrepreneur has to pay both interest and royalty on sales, but at
substantially low rates.
Other Financing Methods: A few venture capitalists, particularly in the private sector, have
started introducing innovative financial securities like participating debentures, introduced by
TCFC is an example.
positions of due diligence and formal legal responsibility, enabling others to rob stockholders blind.
Only a tiny portion of venture capitalists, however, have been found liable in the large scale
frauds that rocked American (mostly) finance in 2000 and 2001.
Venture capitalists expect to be able to sell their stock, warrants, options, convertibles, or other
forms of equity in three to ten years: this is referred to as harvesting. Venture capitalists know
that not all their investments will pay-off. The failure rate of investments can be high; anywhere
from 20% to 90% of the enterprises funded fail to return the invested capital.
Many venture capitalists try to mitigate this problem through diversification. They invest in
companies in different industries and different countries so that the systematic risk of their total
portfolio is reduced. Others concentrate their investments in the industry that they are familiar
with. In either case, they work on the assumption that for every ten investments they make, two
at firms similar to those which the partnership funds. Investors in venture capital funds
are typically large institutions with large amounts of available capital, such as state and private
pension funds,
Most venture capital funds have a fixed life of ten yearsthis model was pioneered by some of
the most successful funds in Silicon Valley through the 1980s to invest in technological trends
broadly but only during their period of ascendance, to cut exposure to management and
marketing risks of any individual firm or its product.
In such a fund, the investors have a fixed commitment to the fund that is "called down" by the
VCs over time as the fund makes its investments. In a typical venture capital fund, the VCs
receive an annual "management fee" equal to 2% of the committed capital to the fund and 20%
of the net profits of the fund. Because a fund may run out of capital prior to the end of its life,
larger VCs usually have several overlapping funds at the same timethis lets the larger firm
keep specialists in all stage of the development of firms almost constantly engaged. Smaller
firms tend to thrive or fail with their initial industry contactsby the time the fund cashes out, an
entirely new generation of technologies and people is ascending, whom they do not know well,
and so it is prudent to re-assess and shift industries or personnel rather than attempt to simply
invest more in the industry or people it already knows
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SUBMITTED BY: TANMAY TONDON, MBA (GENERAL)
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Chapter 6- Findings
During the preparation of my report I have analyzed many things which are following:
A number of people in India feel that financial institution are not only conservatives but they
also have a bias for foreign technology & they do not trust on the abilities of entrepreneurs.
Some venture fails due to few exit options. Teams are ignorant of international standards. The
team usually a two or three man team. It does not possess the required depth In top
management. The team is often found to have technical skills but does not possess the overall
organization building skills team is often short sited.
Venture capitalists in India consider the entrepreneurs integrity &urge to grow as the most
critical aspect or venture evaluation.
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Chapter 7- Conclusion
Venture capital can play a more innovation and development role in a developing country like
India. It could help the rehabilitation of sick unit through people with ideas and turnaround
management skill. A large number of small enterprises in India because sick unit even before the
commencement of production of production. Venture capitalist could also be in line with the
developments taking place in their parent companies.
Yet another area where can play a significant role in developing countries is the service sector
including tourism, publishing, healthcare etc. they could also provide financial assistance to
people coming out of the universities, technical institutes etc. who wish to start their own venture
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Chapter 9- Suggestions
The investment should be in turnaround stage. Since there are many sick industries in
India and the number is growing each year, the venture capitalists that have specialized
knowledge in management can help sick industries. It would also be highly profitable if
the venture capitalist replace management either good ones in the sick industries.
It is recommended that the venture capitalists should retain their basic feature that is
tasking high risk. The present situation may compel venture capitalists to opt for less
risky opportunities but is against the spirit of venture capitalism. The established fact is
big gains are possible in high risk projects.
There should be a greater role for the venture capitalists in the promotion of
entrepreneurship. The Venture capitalists should promote entrepreneur forums, clubs and
institutions of learning to enhance the quality of entrepreneurship.
References
Coopers & Lybrand - Eighth Annual Economic Impact of Venture Capital Study
Steven P. Galante, Editor and Publisher, The Private Equity Analyst newsletter - An
Overview of the Venture Capital Industry and Emerging Changes
The Securities and Exchange Board of India - SEBI (Venture Capital Funds)
Regulations Various newspapers and magazines
1. The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis
2. Jump up^ The Consequences of Entrepreneurial Finance: A Regression Discontinuity
Analysis
3. Jump up^ See Reference: Authors: Ruhnka, J.C., Young, J.E
BOOKS
Google.com
Indiainfoline.com
ANNEXURE I
Venture capital firms
Examples of venture capital firms include:
Accede Partners
Austin Ventures
Atlas Venture
Battery Ventures
Benchmark Capital
Fidelity Ventures
Health Cap
Hummer Wimbled
Sequoia Capital
Trelys
ANNEXURE II
Some important Venture Capital Funds in India
1. APIDC Venture Capital Limited, , Babukhan Estate, Hyderabad 500 001
2. Canbank Venture Capital Fund Limited, IInd Floor, Kareem Towers, Bangalore.
3. Gujarat Venture Capital Fund 1997, Ashram Road, Ahmedabad 380 009
4. Industrial Venture Capital Limited, Thyagaraya Road, Chennai 600 017
5. Gujarat Venture Capital Fund 1995 Ashram Road Ahmedabad 380 009
6. Karnataka Information Technology Venture Capital Fund Cunningham Rd Bangalore
7. India Auto Ancillary Fund Nariman Point, Mumbai 400 021
8. Information Technology Fund, Nariman Point, Mumbai 400021
9. Tamilnadu InfoTech Fund Nariman Point, Mumbai 400021
10. Orissa Venture Capital Fund Nariman Point Mumbai 400021
11. Uttar Pradesh Venture Capital Fund Nariman Point, Mumbai 400021
12. SICOM Venture Capital Fund Nariman Point Mumbai 400 021