CHAPTER I - INTRODUCTION

INTRODUCTION
The Venture capital sector is the most vibrant industry in the financial market today.
Venture capital is money provided by professionals who invest alongside management in
young, rapidly growing companies that have the potential to develop into significant
economic contributors. Venture capital is an important source of equity for start-up
companies. Venture capital can be visualized as your ideas and our money concept of
developing business. Venture capitalists are people who pool financial resources from high
networth individuals, corporates, pension funds, insurance companies, etc. to invest in
high risk - high return ventures that are unable to source funds from regular channels like
banks and capital markets.
Five critical success factors have been identified 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 by

countries such as the US, Israel and Taiwan. This is necessary for faster conversion of
R&D and technological innovation into commercial products.

NEED OF THE STUDY

The venture capital industry in India has really taken off in. Venture capitalists not only
provide monetary resources but also help the entrepreneur with guidance in formalizing
his ideas into a viable business venture. With technology and knowledge based ideas set to
drive the global economy in the coming millennium, and given the inherent strength by
way of its human capital, technical skills, cost competitive workforce, research and
entrepreneurship, India can unleash a revolution of wealth creation and rapid economic
growth in a sustainable manner. However, for this to happen, there is a need for risk
finance and venture capital environment which can leverage innovation, promote
technology and harness knowledge based ideas.

OBJECTIVES OF THE STUDY

To understand the concept and importance of Venture Capital in developing

countries like India.

To study the trend of Venture Capital deals in India over the last five years.

To study the Top Sectors, Top Companies attracting Venture Capital in 2013 and
review the major institutions providing Venture Capital in India.

To suggest measures for increasing the growth of Venture Capital in India

SCOPE OF THE STUDY

The study of Venture Capital trends in India will be helpful in understanding the concept
of Venture Capital and to understand the importance of Venture Capital in developing
countries like India. The study will also throw light on the major institutions providing
Venture Capital in India. The review of trend of Venture Capital deals in India will help
the VC firms to identify the developing sectors in the country. The report will also help the
start up companies in identifying the Venture Capital firms which can provide financing
for their growth.

METHODOLOGY
Methodology is a systematic procedure of collecting information in order to
analyze and verify a phenomenon. The collection of information is done through
two principal sources.
1. Primary Data.
2. Secondary Data.
PRIMARY DATA
It is the information collected directly from operations team for further studies. It was
mainly through interviews with concerned officers and staff, either individually or
collectively, sum of the information has been verified or supplemented with personal
observation. Primary data for the project is collected from the interaction with
management and employees at ANGEL BROKING.
SECONDARY DATA

This is taken from the annual reports, websites, company journals, magazines
and other sources of information.

LIMITATIONS

Though the project is completed successfully a few limitations may be there.

Since the procedure and policies of the company will not allow disclosing
confidential financial information, the project has to be completed with the
available data given to us.

The period of study that is 6 weeks is not enough to conduct detailed study
of the project.

The study is carried basing on the information and documents provided by

the organization and based on the interaction with the various employees.

CHAPTER II - REVIEW OF LITERATURE

INTRODUCTION TO VENTURE CAPITAL

Venture Capital is defined as providing seed, start-up and first stage finance to companies
and also funding expansion of companies that have demonstrated business potential but do
not have access to public securities market or other credit oriented funding institutions.

Venture Capital is generally provided to firms with the following characteristics:

Newly floated companies that do not have access to sources such as equity capital
and/or other related instruments.

Firms, manufacturing products or services that have vast growth potential.

Firms with above average profitability.

Novel products that are in the early stages of their life cycle.

Projects involving above-average risk.

Turnaround of companies.

Venture Capital derives its value from the brand equity, professional image, constructive
criticism, domain knowledge, industry contacts, they bring to table at a significantly lower
management agency cost.
A Venture Capital Fund (VCF) strives to provide entrepreneurs with the support they need
to create up-scalable business with sustainable growth, while providing their contributors
with outstanding returns on investment, for the higher risks they assume.

The three primary characteristics of venture capital funds which make them
eminently suitable as a source of risk finance are:
that it is equity or quasi equity investment
it is long term investment and
it is an active form of investment.

Difference between a Venture Capitalist and Bankers/Money Managers

Banker is a manager of other people's money while the venture capitalist is basically
an investor.

Venture capitalist generally invests in new ventures started by technocrats who

generally are in need of entrepreneurial aid and funds.

Venture capitalists generally invest in companies that are not listed on any stock
exchanges. They make profits only after the company obtains listing.

The most important difference between a venture capitalist and conventional investors
and mutual funds is that he is a specialist and lends management support and also
Financial and strategic planning
Recruitment of key personnel
Obtain bank and other debt financing
Access to international markets and technology
Introduction to strategic partners and acquisition targets in the region
Regional expansion of manufacturing and marketing operations
Obtain a public listing

Difference between Venture Finance & Debt Finance

Objective

Venture Finance
Maximize Return

Debt Finance
Interest payment

Holding Period

2-5 years

Instruments

Common shares, Convertible bonds,

Short/Long term
Loan, Factoring,leasing

Pricing
Collateral
Ownership
Control

Options, Warrants
Price earnings ratio, net tangible assets
Very Rare
Yes
Minority shareholders, rights protection,

Interest spread
Yes
No
Covenants

board members
Impact on B/S
Reduced Leverage
Exit Mechanism Public offering, Sale to third party, Sale to
entrepreneur

CATEGORIZATION OF VC INVESTORS
The "venture funds" available could be from
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Increased Leverage
Loan repayment

Incubators

Angel Investors

Venture Capitalists (VCs)

Private Equity Players

Incubators

An incubator is a hardcore technocrat who works with an entrepreneur to develop a

business idea, and prepares a Company for subsequent rounds of growth & funding.
eVentures, Infinity are examples of incubators in India.

Angel Investors
An angel is an experienced industry-bred individual with high net worth.
Typically, an angel investor would:

invest only his chosen field of technology

take active participation in day-to-day running of the Company

invest small sums in the range of USD 1 - 3 million

not insist on detailed business plans

sanction the investment in up to a month

help company for "second round" of funding

Venture Capitalists (VCs)

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VCs are organizations raising funds from numerous investors & hiring experienced
professional mangers to deploy the same. They typically:

invest at second stage

invest over a spectrum over industry/ies

have hand-holding mentor approach

insist on detailed business plans

invest into proven ideas/businesses

provide brand value to investee

invest between USD 2 5 million

Private Equity Players

They are established investment bankers. Typically:

invest into proven/established businesses

have financial partners approach

invest between USD 5 100 million

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CLASSIFICATION OF VENTURE FUNDS

Venture funds in India can be classified on the basis of

Base formation
Financial Institutions
1. Private venture funds like Indus, etc.
2. Regional funds like Warburg Pincus, JF Electra (mostly operating out of Hong
Kong).
3. Regional funds dedicated to India like Draper, Walden, etc
4. Offshore funds like Barings, TCW, HSBC, etc.
5. Corporate ventures like Intel.
To this list we can add Angels like Sivan Securities, Atul Choksey (ex Asian Paints)
and others. Merchant bankers and NBFCs who specialized in "bought out" deals also
fund companies. Most merchant bankers led by Enam Securities now invest in IT
companies.

Invested Amount
The amount invested is generally between US$1mn or US$10mn. As most funds are of
a private equity kind, size of investments has been increasing. IT companies generally
require funds of about Rs30-40mn in an early stage which fall outside funding limits
of most funds and that is why the government is promoting schemes to fund start ups
in general, and in IT in particular.

Investment Philosophy
Early stage funding is avoided by most of the venture capital firms since the amount of
risk associated with it is higher and private capital cannot be invested. So to bring
down this gap the seed capital or the early stage financing is provided by ICICI,
Draper, and SIDBI etc.
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Value Addition
The infusion of funds by overseas funds, private individuals, angel investors and a
host of financial intermediaries and the total pool of Indian Venture Capital today,
stands at Rs50bn, according to industry estimates. In the last two years, there have
been just 74 initial public offerings (IPOs) at the stock exchanges, leading to an
investment of just Rs14.24bn. Thats less than 12% of the money raised in the previous
two years. That makes the conservative estimate of Rs36bn invested in companies
through the Venture Capital/Private Equity route all the more significant.

Consortium Financing
Where the project cost is high (Rs 100 million or more) and a single fund is not in a
position to provide the entire venture capital required then venture funds may act in
consortium with other funds and take a lead in making investment decisions. This
helps in diversifying risk but however it has not been very successful in the India case.
Some of the companies that have received funding through this route include:
Mastek one of the oldest software houses in India
Geometric Software a producer of software solutions for the CAD/CAM market
SQL Star, Hyderabad based training and software development company
Satyam Infoway, the first private ISP in India
Rediff on the Net, Indian website featuring electronic shopping, news, chat, etc
Planetasia.com, Microlands subsidiary, one of Indias leading portals
Torrent Networking, pioneer of Gigabit-scaled IP routers for inter/intra nets
Selectica, provider of interactive software selection
Yantra, ITLInfosys US subsidiary, solutions for supply chain management.

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The infotech companies are the most favored by venture capitalists, companies from other
sectors also feature equally in their portfolios. The other sectors such as pharmaceutical,
medical appliances and biotechnology industries also get much preference. With the
deregulation of the telecom sector, telecommunications industries have joined the list of
favorites. However, recent developments have shown that India is maturing into a more
developed marketplace, unconventional investments in a gamut of industries have sprung
up all over the country.

VENTURE CAPITAL INVESTMENT PROCESS

In generating a deal flow, the venture capital investor creates a pipeline of deals or
investment opportunities that he would consider investing in. This is achieved primarily
through plugging into an appropriate network. The most popular network obviously is the
network of venture capital funds/investors. It is also common for venture capitals to
develop working relationships with R&D institutions, academia, etc, which could
potentially lead to business opportunities.
Understandably the composition of the network would depend on the investment focus of
the venture capital funds/company. Thus venture capital funds focussing on early stage
technology based deals would develop a network of R&D centers working in those areas.
The network is crucial to the success of the venture capital investor. It is almost imperative
for the venture capital investor to receive a large number of investment proposals from
which he can select a few good investment candidates finally.
First, you need to work out a business plan. The business plan is a document that outlines
the management team, product, marketing plan, capital costs and means of financing and
profitability statements.
1. Initial Evaluation: This involves the initial process of assessing the feasibility of the
project.

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2. Due diligence: In this stage an in-depth study is conducted to analyse the feasibility of
the project.
3. Deal structuring and negotiation: Having established the feasibility, the instruments
that give the required return are structured.
4. Investment valuation
5. Documentation: This is the process of creating and executing legal documents to
protect the interest of the venture.
6. Monitoring and Value addition: In this stage, the project is monitored by executives
from the venture fund and undesirable variations from the business plan are dealt with.
7. Exit: This is the final stage where the venture capitalist devises a method to come out of
the project profitably.

1. Initial Evaluation:
Before any in depth analysis is done on a project, an initial screening is carried out to
satisfy the venture capitalist of certain aspects of the project. These include

Competitive aspects of the product or service

Outlook of the target market and their perception of the new product

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Abilities of the management team

Availability of other sources of funding

Expected returns

Time and resources required from the venture capital firm

Through this screening the venture firm builds an initial overview about the

Technical skills, experience, business sense, temperament and ethics of the promoters

The stage of the technology being used, the drivers of the technology and the
direction in

which it is moving.

Location and size of market and market development costs, driving forces of the
market, competitors and share, distribution channels and other market related
issues

Financial facts of the deal

Competitive edge available to the company and factors affecting it significantly

Advantages from the deal for the venture capitalist

Exit options available

2. Due diligence
Due diligence is term used that includes all the activities that are associated with
investigating an investment proposal to assess feasibility. It includes carrying out indepth reference checks on the proposal related aspects such as management team,
products, technology and market. Additional studies and collection of project-based data
are done during this stage. The important feature to note is that venture capital due
diligence focuses on the qualitative aspects of an investment opportunity.

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Areas of due diligence would include

General assessment

Business plan analysis

Contract details

Collaborators

Corporate objectives

SWOT analysis

Time scale of implementation

People

Managerial abilities, past performance and credibility of promoters

Financial background and feedback about promoters from bankers and previous
lenders

Details of Board of Directors and their role in the activities

Availability of skilled labour

Recruitment process

Products/services, technology and process

In this category the type of questions asked will depend on the nature of the industry into
which the company is planning to enter. Some of the areas generally considered are
Technical details, manufacturing process and patent rights
Competing technologies and comparisons
Raw materials to be used, their availability and major suppliers, reliability of these
suppliers
Machinery to be used and its availability
Details of various tests conducted regarding the new product
Product life-cycle

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 Environment and pollution related issues

Secondary data collection on the product and technology, if so available

Market
The questions asked under this head also vary depending on the type of product. Some
of the main questions asked are
Main customers
Future demand for the product
Competitors in the market for the same product category and their strategy
Pricing strategy
Potential entrants and barriers to entry
Supplier and buyer bargaining power
Channels of distribution
Marketing plan to be followed
Future sales forecasts

Finance

Financial forecasts for the next 3-5 years

Analysis of financial reports and balance sheets of firms already promoted or run
by the promoters of the new venture
Cost of production
Wage structure details
Accounting process to be used
Financial report of critical suppliers
Returns for the next 3-5 years and thereby the returns to the venture fund
Budgeting methods to be adopted and budgetary control systems
External financial audit if required

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Sometimes, companies may have experienced operational problems during their early
stages of growth or due to bad management. These could result in losses or cash flow
drains on the company. Sometimes financing from venture capital may end up being used
to finance these losses. They avoid this through due diligence and scrutiny of the business
plan.
3. Structuring a deal:
Structuring refers to putting together the financial aspects of the deal and negotiating with
the entrepreneurs to accept a venture capitals proposal and finally closing the deal. Also
the structure should take into consideration the various commercial issues (i.e. what the
entrepreneur wants and what the venture capital would require to protect the investment).
The instruments to be used in structuring deals are many and varied. The objective in
selecting the instrument would be to maximize (or optimize) venture capitals
returns/protection and yet satisfy the entrepreneurs requirements.
The instruments could be as follows:
Instrument
Equity shares

Preference shares

Issues
New or vendor shares
Par value
Partially-paid shares
Redeemable (conditions under Company Act)
Participating
Par value
Nominal shares

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Loan

Clean v/s Secured

Interest bearing v/s Non interest bearing
convertible v/s one with features (warrants)
1st Charge, 2nd Charge,
Loan v/s Loan stock

Warrants
Options

Exercise price, Exercise period

Exercise price, Exercise period, call, put

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 percentage 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.
(e.g. exit problems, etc).

A typical proposal may include a combination of several different instruments listed

above. Under normal circumstances, entrepreneurs would prefer venture capitals to invest
in equity, as this would be the lowest risk option for the company. However from the
venture capitals point of view, the safest instrument, but with the least return, would be a
secured loan. Hence, ultimately, what you end up with would be some instruments in
between which are sold to the entrepreneur. A number of factors affect the choice of
instruments, such as

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Categories
Company specific

Factors influencing the choice of Instrument

Risk, current stage of operation, expected profitability, future
cash flows, investment liquidity options.

Promoter specific

Current financial position of promoters, performance track

record, willingness of promoters to dilute stake.

Product/Project specific

Future market potential, product life cycle, gestation period.

Macro environment

Tax options on different instruments, legal framework, policies

adopted by competition.

4. Investment valuation:
The investment valuation process is an exercise aimed at arriving at an acceptable
price for the deal. Typically in countries where free pricing regimes exist, the
valuation process goes through the following steps:
1) Evaluate future revenue and profitability
2) Forecast likely future value of the firm based on experienced market capitalization or
expected acquisition proceeds depending upon the anticipated exit from the investment.
3) Target ownership positions in the investee firm so as to achieve desired appreciation
on the proposed investment. The appreciation desired should yield a hurdle rate of return
on a Discounted Cash Flow basis.
4) Symbolically the valuation exercise may be represented as follows:
NPV = [(Cash)/(Post)] x [(PAT x PER)] x k,
Where
a) NPV = Net Present Value of the cash flows relating to the investment comprising
outflow by way of investment and inflows by way of interest/dividends (if any) and

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realization on exit. The rate of return used for discounting is the hurdle rate of return set
by the venture capital investor.
b) Post = Pre + Cash
c) Cash represents the amount of cash being brought into the particular round of
financing by the venture capital investor.
d) Pre is the pre-money valuation of the firm estimated by the investor. While
technically it is measured by the intrinsic value of the firm at the time of raising capital. It
is more often a matter of negotiation driven by the ownership of the company that the
venture capital investor desires and the ownership that founders/management team is
prepared to give away for the required amount of capital
e) PAT is the forecast Profit after tax in a year and often agreed upon by the founders and
the investors (as opposed to being arrived at unilaterally). It would also be the net of
preferred dividends, if any.
f) PER is the Price-Earning multiple that could be expected of a comparable firm in the
industry. It is not always possible to find such a comparable fit in venture capital
situations. That necessitates, therefore, a significant degree of judgement on the part of the
venture capital to arrive at alternate PER scenarios.
g) k is the present value interest factor (corresponding to a discount rate r) for the
investment horizon.

It is quite apparent that PER time PAT represents the value of the firm at that time and the
complete expression really represents the investors share of the value of the investee firm.

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In reality the valuation of the firm is driven by a number of factors. The more significant
among these are:

Overall economic conditions: A buoyant economy produces an optimistic long- term

outlook for new products/services and therefore results in more liberal pre-money
valuations.

Demand and supply of capital: when there is a surplus of venture capital of venture
capital chasing a relatively limited number of venture capital deals, valuations go up.
This can result in unhealthy levels of low returns for venture capital investors.

Specific rates of deals: such as the founders/management teams track record,

innovation/ unique selling propositions (USPs), the product/service size of the
potential market, etc affects valuations in an obvious manner.

The degree of popularity of the industry/technology in question also influences the

pre-money. Computer Aided Skills Software Engineering (CASE) tools and Artificial
Intelligence were one time darlings of the venture capital community that have now
given place to biotech and retailing.

The standing of the individual venture capital: Well established venture capitals
who are sought after by entrepreneurs for a number of reasons could get away with
tighter valuations than their less known counterparts.

Investors considerations could vary significantly: A study by an American venture

capital, Venture One, revealed the following trend. Large corporations who invest for
strategic advantages such as access to technologies, products or markets pay twice as
much as a professional venture capital investor, for a given ownership position in a
company but only half as much as investors in a public offering.

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Valuation offered on comparable deals around the time of investing in the deal.

Quite obviously, valuation is one of the most critical activities in the investment process. It
would not be improper to say that the success for a fund will be determined by its ability
to value/price the investments correctly. Sometimes the valuation process is broadly based
on thumb rule metrics such as multiple of revenue. Though such methods would appear
rough and ready, they are often based on fairly well established industry averages of
operating profitability and assets/capital turnover ratios.

Such valuation as outlined above is possible only where complete freedom of pricing is
available. In the Indian context, where until recently, the pricing of equity issues was
heavily regulated, unfortunately valuation was heavily constrained.
5. Documentation
It is the process of creating and executing legal agreements that are needed by the venture
fund for guarding of investment. Based on the type of instrument used the different types
of agreements are

Equity Agreement

Income Note Agreement

Conditional Loan Agreement

Optionally Convertible Debenture Agreement etc.

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There are also different agreements based on whether the agreement is with the promoters
or the company. The different legal documents that are to be created and executed by the
venture firm are

Shareholders agreement: This agreement is made between the venture capitalist, the
company and the promoters. The agreement takes into account
Capital structure
Transfer of shares: This lays the condition for transfer of equity between the equity
holders. The promoters cannot sell their shares without the prior permission of the
venture capitalist.
Appointment of Board of Directors
Provisions regarding suspension/cancellation of the investment. The issues under
which such cancellation or suspension takes place are default of covenants and
conditions, supply of misleading information, inability to pay debts, disposal and
removal of assets, refusal of disbursal by other financial institutions, proceedings
against the company, and liquidation or dissolution of the company.

Equity subscription agreement: This is the agreement between the venture capitalist
and the company on
Number of shares to be subscribed by the venture capitalist
Purpose of the subscription
Pre-disbursement conditions that need to be met
Submission of reports to the venture capitalist
Currency of the agreement

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Deed of Undertaking: The agreement is signed between the promoters and the
venture capitalist wherein the promoter agrees not to withdraw, transfer, assign,
pledge, hypothecate etc their investment without prior permission of the venture
capitalist. The promoters shall not diversify, expand or change product mix without
permission.

Income Note Agreement: It contains details of repayment, interest, royalty,

conversion, dividend etc.

Conditional Loan Agreement: It contains details on the terms and conditions of the
loan, security of loan, appointment of nominee directors etc.

Deed of Hypothecation, Shortfall Undertaking, Joint and Several Personal Guarantee,

Power of Attorney etc.

Whenever there is a modification in any of the agreements, then a Supplementary

Agreement is created for the same.

6. Monitoring and follow up:

The role of the venture capitalist does not stop after the investment is made in the project.
The skills of the venture capitalist are most required once the investment is made. The
venture capitalist gives ongoing advice to the promoters and monitors the project
continuously. It is to be understood that the providers of venture capital are not just
financiers or subscribers to the equity of the project they fund. They function as a dual
capacity, as a financial partner and strategic advisor.

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Venture capitalists monitor and evaluate projects regularly. They are actively involved in
the management of the of the investor unit and provide expert business counsel, to ensure
its survival and growth. Deviations or causes of worry may alert them to potential
problems and they can suggest remedial actions or measures to avoid these problems. As
professional in this unique method of financing, they may have innovative solutions to
maximize the chances of success of the project. After all, the ultimate aim of the venture
capitalist is the same as that of the promoters the long term profitability and viability of
the investor company.

The various styles are:

Hands-on Style suggests supportive and direct involvement of the venture capitalist in the
assisted firm through Board representation and regularly advising the entrepreneur on
matters of technology, marketing and general management. Indian venture capitalists do
not generally involve themselves on a hands-on basis bit they do have board
representations.
Hands-off Style involves occasional assessment of the assisted firms management and its
performance with no direct management assistance being provided. Indian venture funds
generally follow this approach.
Intermediate Style venture capital funds awe entitled to obtain on a regular basis
information about the assisted projects.
7. Exit:

One of the most crucial issues is the exit from the investment. After all, the return to the
venture capitalist can be realized only at the time of exit. Exit from the investment varies
from the investment to investment and from venture capital to venture capital. There are
several exit routes, buy-buck by the promoters, sale to another venture capitalist or sale at

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the time of Initial Public Offering, to name a few. In all cases specialists will work out the
method of exit and decide on what is most profitable and suitable to both the venture
capitalist and the investor unit and the promoters of the project.

At present many investments of venture capitalists in India remain on paper, as they do not
have any means of exit. Appropriate changes have to be made to the existing systems in
order that venture capitalists find it easier to realize their investments after holding on to
them for a certain period of time. This factor is even more critical to smaller and mid sized
companies, which are unable to get listed on any stock exchange, as they do not meet the
minimum requirements for such listings. Stock exchanges could consider how they could
assist in this matter for listing of companies keeping in mind the requirement of the
venture capital industry.

To provide the lenders with additional security, a Special Purpose Vehicle (SPV) can be
created, which would hold the shares bought back from the venture capitalist firm in a
trust until the firm achieves a certain targeted rate of return. Meanwhile a certain
proportion of the firms sale proceeds can be funneled directly to the SPV amortize the
debt.
An exit via the capital market is certainly less expensive but this option is open only to the
more established firms. A listing on a stock exchange, which would enable the venture
capitalist to easily off-load his stake, is obviously a far more feasible proposition for a firm
already in existence for a few years than for a new venture.

There are stiff capital requirements for listing on either the BSE or the NSE, the minimum
capital requirement is RS. 10 Crore. While the OTCEI would have been an ideal solution
for a young company contemplating listing, since its inception in 1992, the Exchange has
been plagued by poor liquidity, negative returns and a general lack of investor interest.

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Even if the OTCEI does manage to perk up, it cannot be expected that small startups will
enlist. Global experience indicates that, despite liberal admission requirements, OTCEs for
unlisted securities tend to be dominated by fast growing or medium size companies.

Special Purpose Vehicle:

An account, administered by a third party, that holds shares bought back by the
management in trust.

Advantages of SPV
Greater security for lenders

Improves credit rating

Lowers the cost of capital

Better management of debt repayment

Enables new ventures to raise funds

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Disadvantage of SPV
Less control over cash flows generated by project

Tax treatment of SPV still unclear

Administration fees can be high

Requires intensive monitoring by trustee

ACCESSING VENTURE CAPITAL

There is a surge in the number of venture funds and the amount of funding available in the
last one year. The rejection ratio is very high, with very few of the proposals going beyond
even the pre-evaluation stage. Choosing a venture capital fund to match your requirement
is a difficult decision. Venture capital funds are broadly of two kinds - generalists or
specialists. It is critical for the company to access the right type of fund, i.e. who can add
value. This backing is invaluable as focused/ specialized funds open doors, assist in future
rounds and help in strategy. Hence, it is important to choose the right venture capitalist.
1. The Business Plan
The first step towards accessing venture capital funding is the preparation of the business
plan. The business plan should be able to provide information regarding the promoters,
amount of funding needed and the time period for which it is needed and how this funding
is going to be paid back to the VC. To answer the above fundamental queries of a venture
capital firm the business plan is to be structured with the necessary information.

BUSINESS PLAN COVERAGE

1. Executive summary

A brief description of the company and the type of business

A summary of the business nature
A description of the experience and expertise of the management team

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A summary of the product/service and competition

A summary of financial history and projections
Funds required and equity offered to the investors
A description of use of proceeds
The timing of returns on investment and exit routes offered to the investor

2. Business background

A brief history and nature of the business

The industry details of the business involved in
A summary of the future of the business

3. Product/service

A description of the product or service

The uniqueness of the product
The present status of the product, that is a concept, prototype or product ready for
market

4. Market analysis

The size of the potential market and market niche being pursued
A projection of the trends and future size of the market place
The estimated market share
A description of the competition
The marketing channel
A summary of the potential customers
The possibility of related or new markets that can be developed

5. Sales and marketing strategy

The specific marketing techniques planned to be used

The pricing plans and comparisons with pricing adopted by competitors
The planned sales force and selling strategies for various accounts and markets
The specific approaches for capitalizing on each m marketing channel and comparison
with other practices within the industry

31

Details of advertising and promotional plans

A description of customer service-which markets will be covered by direct sales force,
which by distributors, representative or resellers

6. Production/operations

A description of the production process

Details of the production costs, including labour force, equipment, technology
involved, extent of subcontract or outsourcing, supplier

7. Management

An organization chart showing the corporate structure

A summary of the board of directors and key employees and details of their skills and
experience A list of the remuneration for all levels of staff
A proposed plan of how to retain key staff

8. Risk factors

A description of the major problems and risks relating to the industry, the company
and the products market

9. Funds requested

A description of the type of financing, such as equity only or a combination of equity

and loan, and stock options to the investor
The capital structure and ownership before and after the financing

10. Return on investment and exit

Details of the timing and expected return of the investment

A summary of the exit strategies, such as initial public offering, sale to a third party or
management buyout

11. Use of proceeds

Specify how the capital will be spent, i.e. what amount of capital will go to which
items

12. Financial summaries

32

A summary of the companys financial history and projections of three to five year
period
Details of the principal accounting policies of the company and the major assumptions
made about the projections

Appendices

Resumes of key management and employees

Detailed financial forecast and assumptions
Market research report
Company literature and brochures and pictures of the product

A good business plan shows investors the quality and depth of a companys corporate
leadership and indicates managements ability to reach stated goals. These factors lie at the
heart of the decision of a venture capitalist to invest in the companys future.
2. Selection of Venture Capital Fund
After the business plan is completed, the next step is to select the venture capital fund,
which is suitable to your proposal. The entrepreneur should first ascertain as to the
investment strategy of the VC with regards to the sector in which the VC is interested as
well as the stage at which he chooses to fund the project. Based on this information the
entrepreneur should shortlist the suitable VCs who match his requirement and then
approach them.
Financing from venture capital funds is available at various stages and different VCs
provide funding in some or all of the stages. The various stages of financing are detailed
below.

Stages of Financing
Venture capital can be provided to companies at different stages. These include:
I.

Early-stage Financing

33

Seed Financing: Seed financing is provided for product development &

research and to build a management team that primarily develops the business
plan.

Startup Financing: After initial product development and research is through,

startup financing is provided to companies to organise their business, before
the commercial launch of their products.

First Stage Financing: Is provided to those companies that have expended

their initial capital and require funds to commence large-scale manufacturing
and sales.

II.

Expansion Financing

Second Stage Financing: This type of financing is available to provide

working capital for initial expansion of companies, that are experiencing
growth in accounts receivable and inventories, and is on the path of
profitability.

Mezzanine Financing: When sales volumes increase tremendously, the

company, through mezzanine financing is provided with funds for further plant
expansion, marketing, working capital or for development of an improved
product.

Bridge Financing: Bridge financing is provided to companies that plan to go

public within six to twelve months. Bridge financing is repaid from
underwriting proceeds.

34

III. Acquisition Financing

As the term denotes, this type of funding is provided to companies to acquire another
company. This type of financing is also known as buyout financing. It is normally
advisable to approach more than one venture capital firm simultaneously for funding
as there is a possibility of delay due to the various queries put by the VC. If the
application for funding is finally rejected then approaching another VC at that point
and going through the same process would cause delay. If the business plan is
reviewed by more than one VC this delay can be avoided as the probability of
acceptance will be much higher. The only problem with the above strategy is the
processing fee required by a VC along with the business plan. If you are applying to
more than one VC then there would be a cost escalation for processing the application.
Hence a cost benefit analysis should be gone into before using the above strategy.

Normally the review of the business plan would take a maximum of one month and
disbursal for the funds to reach the entrepreneur it would take a minimum of 3 months to a
maximum of 6 months. Once the initial screening and evaluation is over, it is advisable to
have a person with finance background like a finance consultant to take care of details like
negotiating the pricing and structuring of the deal. Of course alternatively one can involve
a financial consultant right from the beginning particularly when the entrepreneur does not
have a management background.

35

CHAPTER III - INDUSTRY PROFILE

36

The story of venture capital is very much like the history of mankind. In the fifteenth
century, Christopher Columbus sought to travel westwards instead of eastwards from
Europe and so planned to reach India. His far fetched idea did not find favour 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.
And thus evolved the concept of Venture Capital.
The modern venture capital industry began taking shape in the post World War 2. 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 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:
L S Rockefeller, one of whose earliest investments was in Eastern Airlines, which is now
defunct but was one of the earliest commercial airlines.

37

VENTURE CAPITAL IN INDIA

Most of the success stories of the popular Indian entrepreneurs like the Ambanis and Tatas
had little to do with a professionally backed up investment at an early stage. In fact, till
very recently, for an entrepreneur starting off on his own personal savings or loans raised
through personal contacts/financial institutions.

Traditionally, the role of venture capital was an extension of the developmental financial
institutions like IDBI, ICICI, SIDBI and State Finance Corporations (SFCs). The first
origins of modern Venture Capital in India can be traced to the setting up of a Technology
Development Fund (TDF) in the year 1987-88, through the levy of a 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.
The industrys growth in India can be considered in two phases. The first phase was
spurred on soon after the liberalization process began in 1991. According to former
finance minister and harbinger of economic reform in the country, Manmohan Singh, the
government had recognized the need for venture capital as early as 1988. That was the
year in which the Technical Development and Information Corporation of India (TDICI,

38

now ICICI ventures) was set up, soon followed by Gujarat Venture Finance Limited
(GVFL).
Both these organizations were promoted by financial institutions. Sources of these funds
were the financial institutions, foreign institutional investors or pension funds and high
net-worth individuals. Though an attempt was also made to raise funds from the public
and fund new ventures, the venture capitalists had hardly any impact on the economic
scenario for the next eight years.
However, it was realized that the concept of venture capital funding needed to be
institutionalized and regulated. This funding requires different skills in assessing the
proposal and monitoring the progress of the fledging enterprise. In 1996, the Securities
and Exchange Board of India (SEBI) came out with guidelines for venture capital funds
has to adhere to, in order to carry out activities in India. This was the beginning of the
second phase in the growth of venture capital in India. The move liberated the industry
from a number of bureaucratic hassles and paved the path for the entry of a number of
foreign funds into India. Increased competition brought with it greater access to capital
and professional business practices from the most mature markets.
There are a number of funds, which are currently operational in India and involved in
funding start-up ventures. Most of them are not true venture funds, as they do not fund
start-ups. What they do is provide mezzanine or bridge funding and are better known as
private equity players. However, there is a strong optimistic undertone in the air. With the
Indian knowledge industry finally showing signs of readiness towards competing globally
and awareness of venture capitalists among entrepreneurs higher than ever before, the
stage seems all set for an overdrive.
The Indian Venture Capital Association (IVCA) is the nodal center for all venture activity
in the country. The association was set up in 1992 to co-ordinate the activities of venture
capital financing in India and it has over the last few years, has built up an impressive
database.

39

IVCA members function under different categories:

As companies involved in investment and fund management

As companies which set up funds and manage assets.

As companies which manage domestic funds, offshore funds, and sometimes both.

In India, venture funds are governed by the Securities and Exchange Board of India
(SEBI) guidelines. For accessing venture capital funding the venture should be typically
started by a first generation entrepreneur with high growth potential and an innovative
concept. Normally these types of ventures do not have any assets to offer as collateral,
which is needed to get funding from the conventional sources. Venture capital funding
may be by way of investment in the equity of the new enterprise or a combination of debt
and equity, though equity is the most preferred route.
There are a number of funds currently operational in India and involved in funding startup ventures. Most of them are not true venture funds, as they do not fund start-ups. What
they do is provide mezzanine or bridge funding and are better known as private equity
players. However, all this has changed in the last one year. With the Indian knowledge
industry finally showing signs of readiness towards competing globally and awareness of
venture capitalists among entrepreneurs higher than ever before, venture capitalists are
really venturing out in funding new ideas and concepts particularly in internet related
areas. 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.

40

REGULATORY SYSTEM
The venture capital operations in India are regulated by The Securities Exchange
Regulation Board of India (SEBI). The following legal instruments are in operation:

SEBI Act 1992.

SEBI (venture capital funds)Regulations 1996

New sector regulations issued in September 2000

Highlight of Policy and Legal Framework

VCFs can be constituted as trust fund or Company. Separate vehicle for

constitution and operation of venture funds such as limited liability partnership is
yet to be introduced in the country

Any company or trust proposing to undertake venture capital investments is

required to obtain certificate of registration from SEBI.

VCFs before raising any funds for investment are required to file placement
memorandum with SEBI. Private placement memorandum can be issued only after
expiry of 21 days from submission to SEBI.

VCFs can raise funds for investment through private placement route. Individual
investor is required to invest minimum of Rs. 5 lakhs in venture capital fund.
Raising of funds from public is restricted.

VCFs are required to invest 80 percent of funds raised in equity or equity related
securities issued by companies whose securities are not listed or which are
financially weak.

41

 VCFs are barred from investing in company or institutions providing financial services
venture capital funds which desire to claim exemption from income tax are required
to follow rules given hereunder:
Registration with SEBI.
Claiming Income tax exemption in respect of dividend and capital gains income.
Not more than 40 percent of equity in a venture
80 percent of monies raised for investment are required to be invested in equity
shares of

domestic companies whose shares are not listed on recognised stock

exchange
Shares of investee companies are required to be held for a period of at least 3 years.
However, these shares can be sold either if they are listed on recognised stock
exchange in India.
Under the SEBI's venture capital rules:

VCFs can be either company or trust.

There is no minimum capital adequacy requirement for venture capital funds.

Are allowed to take loans, donations or issue securities.

VCFs cannot be public companies - they need to contain a restriction on inviting

the public to subscribe to securities.

VCFs are only allowed to carry the business of venture capital fund - cannot
engaged in any other business.

Every VCF investor has to contribute at least Rs. 5 lacs.

VCFs shall not invest in the equity capital of a financial services company. This
still allows investment in financial services companies, other than by way of equity
capital.

42

Venture capital investments are required to be restricted to domestic companies engaged in

business of
(i)

software

(ii)

Information Technology

(iii)

Production of basic drugs in pharmaceuticals sector,

(iv)

Bio-technology and

(v)

Agriculture and allied other sectors etc.

43

SWOT ANALYSIS OF INDIAN VENTURE CAPITAL

Strengths

Weakness

An effort initiated from within Home grown Faddish

Increased awareness of venture capital
More capital under management by VCFs
Industry crossed learning curve
More

experienced

Venture

Capitalists,

Growing

number

of

foreign

Limited exit option

Uncertainties
-

Political

Policy repatriation, Taxation

Bureaucratic meddling and rigid official

attitude

Intermediaries, and Entrepreneurs.

trained

Industry fragmented and polarized

Mixed V.C culture.

professionals.

Global competition growing.

Smaller funds with illiquid investments

Moving towards international standards.

Domestic fund raising difficult

Offshore funds bring strong foreign ties

Lack of transparency & corporate

Matured capital market system

Electronic trading - through NSE & BSE

Valuation addition

Irreversible reform

Regulatory framework evolving

governance
Accounting standards
Poor legal administration
Difficult due diligence
Inadequate management depth
Valuation expectations unrealistic
Technical

and

Market

evaluation

difficult
Negligible minority protection rights
Inadequate corporate laws

44

 Poor infrastructure

Opportunities

Threats

Growth capital for strong companies and

Buyouts of weak companies due to growing

Change in government politics with

respect to

global competition.

Structuring

Financial restructuring of over leveraged

Taxation

companies taking place.

Acquisition of quoted small / medium cap

companies.

Threats from within

Explositive expansion and Over

Pre money valuations low

Vast potential exists in turn around, MBO,

Exuberance of Investors.

MBI.

45

Greed for very high returns

ISSUES FACING THE INDIAN VENTURE CAPITAL

INDUSTRY
The Indian venture capital industry, at the present, is at crossroads. Following are the
major issues faced by this industry.
1. Limitations on structuring of Venture Capital Funds (VCFs):
VCFs in India are structured in the form of a company or trust fund and are required to
follow a three-tier mechanism-investors, trustee company and AMC. A proper taxefficient vehicle in the form of Limited Liability Partnership Act which is popular in
USA, is not made applicable for structuring of VCFs in India. In this form of
structuring, investors liability towards the fund is limited to the extent of his
contribution in the fund and also formalities in structuring of fund are simpler.

2. Problem in raising of funds:

In USA primary sources of funds are insurance companies, pensions funds, corporate
bodies etc; while in Indian domestic financial institutions, multilateral agencies and
state government undertakings are the main sources of funds for VCFs. Allowing
pension funds, insurance companies to invest in the VCFs would enlarge the possibility
of setting up of domestic VCFs. Further, if mutual funds are allowed to invest upto 5
percent of their corpus in VCFs by SEBI, it may lead to increased availability of fund
for VCFs.

3. Lack of Inventive to Investors:

Presently, high net worth individuals and corporates are not provided with any
investments in VCFs. The problem of raising funds from these sources further gets

46

aggravated with the differential tax treatment applicable to VCFs and mutual funds.
While the income of the Mutual Funds is totally tax exempted under Section 10(23D)
of the Income Tax Act income of domestic VCFs which provide assistance to small and
medium enterprise is not totally exempted from tax. In absence of any inventive, it is
extremely difficult for domestic VCFs to raise money from this investor group that has
a good potential.
4. Absence of angel investors:
In Silicon Valley, which is a nurturing ground for venture funds financed IT companies,
initial/seed stage financing is provided by the angel investors till the company becomes
eligible for venture funding. There after, Venture capitalist through financial support
and value-added inputs enables the company to achieve better growth rate and facilitate
its listing on stock exchanges. Private equity investors typically invest at expansion/
later stages of growth of the company with large investments. In contrast to this
phenomenon, Indian industry is marked by an absence of angel investors.
5. Limitations of investment instruments:
As per the section 10(23FA) of the Income Tax Act, income from investments only in
equity instruments of venture capital undertakings is eligible for tax exemption;
whereas SEBI regulations allow investments in the form of equity shares or equity
related securities issued by company whose shares are not listed on stock exchange. As
VCFs normally structure the investments in venture capital undertakings by way of
equity and convertible instruments such as Optionally/ Fully Convertible Debentures,
Redeemable Preference shares etc., they need tax breaks on the income from equity
linked instruments.
Harmonization of SEBI regulations and income tax rules of CBDT would provide
much required flexibility to VCFs in structuring the investment instruments and also
availing of the tax breaks. Thus investments by VCFs by instruments other than equity
can also be qualified for Tax exemption.

47

6. Domestic VCFs vis--vis Offshore Funds:

The domestic VCFs operations in the country are governed by the regulations as
prescribed by SEBI and investment restrictions as placed by CBDT for availing of the
tax benefits. They pay maximum marginal tax 35percent in respect of non-exempt
income such as interest through Debentures etc., while off-shore Funds which are
structured in tax havens such as Mauritius are able to overcome the investment
restriction of SEBI and also get exemption from Income Tax under Tax Avoidance
Treaties. This denies a level playing field for the domestic investors for carrying out the
similar activity in the country.
7. Limitations on industry segments:
In sharp contrast to other countries where telecom, services and software bag the
largest share of venture capital investments, in India other conventional sectors
dominate venture finance. Opening up of restrictions, in recent time, on investing in
the services sectors such as telecommunication and related services, project
consultancy, design and testing services, tourism etc, would increase the domain and
growth possibilities of venture capital.
8.

Anomaly between SEBI regulations and CBDT rules:

CBDT tax rules recognize investment in financially weak companies only in case of
unlisted companies as venture investment whereas SEBI regulations recognize
investment in financially weak companies which offers an attractive opportunity to
VCFs. The same may be allowed by CBDT for availing of tax exemption on capital
gains at a later stage. Also SEBI regulations do not restrict size of an investment in a
company. However, as per Income tax rules, maximum investment in a company is
restricted to less than 20 per cent of the raised corpus of VCF and paid up share capital
in case of Venture Capital Company. Further, investment in company is also restricted
upto 40 per cent of equity of investee company. VCFs may place the investment

48

restriction for VCFs by way of maximum equity stake in the company, which could be
upto 49 per cent of equity of the Investee Company.

9.

Limitations on Exit Mechanism:

The VCFs which have invested in various ventures have not been able to exit from
their investments due to limited exit routes and also due to unsatisfactory performance
of OTCEI. The threshold limit placed by various stock exchanges acts as deterrent for
listing of companies with smaller equity base. SEBI can consider lowering of
threshold limit for public/listing for companies backed by VCFs. Buy-back of equity
shares by the company has been permitted for unlisted companies, which would
provide exit route to investment of venture capitalists.

10. Limitation on application of sweet equity and ESOP:

In the US, an entrepreneur can declare that he has nothing much to contribute except
for intellectual capital and still he finds venture capitalists backing his idea with
their money. And when they come together, there is a way to structure the investment
deal in such a manner that the entrepreneur can still ensure a controlling stake in the
venture. In the US, the concept of par value of shares does not exist that allows the
different par value shares. Absence of such mechanism puts limitations in structuring
the deals. Further, as per present tax structure in India, sweet equity and ESOP issued
to entrepreneur and employees gets taxed twice at the time of acquisition and
divestment. Tax incidence at two points involving undue hassles to allottees of sweat
equity of individual, as a perquisite in its income, to the extent of 33 per cent defeats
the entire purpose of its issue.
11. Legal framework:
Lack of requisite legal framework resulting in inadequate penalties in case of
suppression of facts by the promoters-results in low returns even from performing
companies. This has bearing on equity investments particularly in unlisted companies.

49

CHAPTER IV - COMPANY PROFILE

50

company Profile

Angel Broking Limited is one of the leading and professionally managed stock broking
firm involved in quality services and research. Angel Broking Limited is a corporate
member of The Stock Excange, Mumbai.
The membership of the company with The Stock Exchange Mumbai was originally in
the name of Mukesh R. Gandhi, which was eventually turned into a corporate
membership in the name of Angel Broking Limited.
Angel Broking Limited is managed by Mr. Dinesh Thakkar and he is well supported by
Mr. Mukesh Gandhi, a fifteen years veteran in the market.
The group is well supported by a professional and qualified research team and efficient
operations and back office team, which comprises of highly dedicated and qualified
individuals. Angel has an in-house, state of art research department.
Angel believes in reaching out to the customer at the farthest end rather than by reaching
out to them. The company in its endeavour to give its client the best has opened up
several branches all over Mumbai, which are efficiently integrated with the Head Office.
Angel Broking Limited is primarily into retail stock broking, with a customer base of
retail investors, which has been increasing at a compounded growth rate of 100% every
year. The company has huge network sub-brokers in Mumbai and other places outside
Mumbai, registered with SEBI, who act as chanel partners for the company. The
company presently has a total staff strength of around 150 employees who are spread
accordingly across the head office and all the branches.
Angel has empowered its physical presence throughout India through various strategies
which it has been adopting efficiently and effectively over a period of time, like opening

51

up of branches at various places, tie-ups with various agencies and sales agents, buy-outs
of smaller regional outfits and appointment of sub-brokers and franchisees. Moreover
Angel has been tapping and including high net-worth and self-employed individuals it its
vast array of clients.
Angel has always strived in the direction of delivering ultimate client satisfaction and
developing stronger bonds with its customers and chose partners. Angel has a vision to
introduce new and innovative products and services regularly. Moreover Angel has been
one among the pioneers to introduce the latest technological innovations and integrate it
efficiently within its business.

Angel Broking's tryst with excellence in customer relations began in 1987. Today, Angel
has emerged as one of the most respected Stock-Broking and Wealth Management
Companies in India. With its unique retail-focused stock trading business model, Angel is
committed to providing Real Value for Money to all its clients.
The Angel Group is a member of the Bombay Stock Exchange (BSE), National Stock
Exchange (NSE) and the two leading Commodity Exchanges in the country: NCDEX &
MCX. Angel is also registered as a Depository Participant with CDSL.
Our Business

Equity Trading

Commodities

Portfolio Management Services

Mutual Funds

Life Insurance

IPO

Depository Services

52

Investment Advisory

Angel Group

Angel Broking Ltd.

Angel Commodities Broking Ltd.

Angel Securities Ltd.

Features
Angel SpeedPro is extremely user friendly and perspectively designed.
Intuitive Home Menu has a host of frequently used features like Market Watch,
Orders Book, Trade Book and Funds View.

Dedicated Research area which provides Angel calls, Daily Report and Reaserch
Reports.
My Account Tab gives access all account related information like My Portfolio,
Trade Report, Funds Management and Backoffice Report.

Multi Desktop Options which gives freedom to arrange preferred windows/tools in

multiple desktop screens and conveniently toggle between them.
Customizable Tool Bar to Control ribbon style menus and quick links.

Enriched features like News Flash, Open in Excel (Live market in excel with rate
refresh), Combined Best Five,Heat Map Analysis, Intraday, Historic and
Continuous Charts.

53

 Other features like Online fund transfer (39 banks), Streaming Quotes and
Multiple Exchanges.

Switch between Angel SpeedPro and Angel Diet with ease through Easy Product
Switch.

Derivatives Trading
Commodities Derivative market has emerged as a new avenue for investors to create
wealth. Today, Commodities have evolved as the next best option after stocks and bonds
for diversifying the portfolio.

The Angel Advantage

Angel provides user-friendly online platforms for commodity trading in the leading
commodity exchanges.

Online Trading
Three different online products tailored for traders & investors
Single screen customized Market-Watch for MCX & NCDEX with BSE & NSE
Streaming quotes
Top quality Research
In house research on more than 25 commodities
Highly skilled Analysts with professional industry experience
Daily, Weekly and Monthly Research Reports
Pro-active Relationship Management

54

 Active advisory desk

Efficient & nationwide network
Seminars, workshops and investment camps for investors

Financial Industry
Financial Industry Post 1991 liberalization & integration of Indian economy with global
peers, we have witnessed a shift in Indias growth trajectory. Service sector leads the pack
with 65% contribution in Indian GDP. Financial sector is a true reflection of the service
sector and is primarily driven towards domestic opportunities.

The financial industry is likely to grow exponentially due to multiple factors .

India has the second largest population (122 cr) with a median age of 26.7 years (a young
nation ready to explode!!!)
Indian per capita incomeis likely to grow to almost 5 times by the year 2020 (proj) as the
median age progresses (on similar trends of developed nations)
We believe that interest rates shall henceforth enter into lower interest rate cycle phase,
which in turn will lead to an increase in consumption. This has in turn had cascading effect
on all sectors of economy namely commodities, Agriculture, Infrastructure, Banking, Auto
& ancillary and IT & IT enabled services.
Indian corporates are likely to grow by at least 16%. Over the years, we have observed
that there is a very high correlation between EPS growth and index growth.
With financial literacy of the youth, we are likely to see a shift towards Equities, which
deliver higher returns over a longer horizon.

55

With more inclusion, the capital market industry is likely to see quantum jump in demat
accounts (an estimate of 12.5% CAGR growth over the decade leading to a base of
approx. 10.5 cr user base by 2020).
We have witnessed an active interest by entrepreneurs in tapping this potential. The
industry has seen a growth in member base (NSE listed SBs) of 33% CAGR over the last
10 years
The above factors shall ensure that the financial industry shall witness spectacular growth
over the coming few years

56

CHAPTER V
DATA ANALYSIS & INTERPRETATIONS

57

1.

Venture Capital Trends in India, 2009 - 2013

Table 1:

Venture Capital Trends in India, Number Of Deals, 2009 2013

Year

No. of Deals

2009

83

2010

109

2011

126

2012

141

2013

153

Source: Secondary Data

Interpretation
Venture Capital deals have witnessed a gradual increase in the number of deals over the last
five years. 153 deals were reported in 2013 compared to 141 deals in 2012 and 83 deals in
2009.

Figure 1:

Venture Capital Trends in India, Number Of Deals, 2009 2013

58

No of Deals

Venture Capital Trends in India

200
150

126

109
100

141

153

83

50
0
2009

2010

2011

2012

Year

Source: Secondary Data

2.

Venture Capital Deals by Major Sectors, 2013

Table 2:

Venture Capital Deals by Major Sectors 2013

Sector
Internet Software and Services
Internet and Catalog Retail
Software
Education
Diversified Consumer Services
IT Services
Healthcare Providers and Services
Professional Services
Consumer Finance
Media
Road and Rail
Textiles, Apparel and Luxury Goods
Others

No. of Deals
45
20
18
7
6
5
4
4
3
3
3
3
32

59

2013

Source: Secondary Data

Interpretation
Venture Capital deals were led by the Internet Software and Services sector with 45 deals
followed by Internet and Catalog Retail with 20 deals and Software with 18 deals in 2013.
Figure 2:

Mergers and Acquisitions, Number Of Deals, by Major Sectors, 2013

Source: Secondary Data

3.

Active VC Firms by Number of Deals - 2013

Table 3:

Active VC Firms By Number Of Deals 2013

Sector
Accel Partners
Blume Ventures
Sequoia Capital India
Nexus Venture Partners
Helion
Inventus Capital
Norwest Venture Partners
Acumen Fund
IndoUS Venture Partners
Omidyar Network
Source: Secondary Data

No. of Deals
14
13
12
10
9
7
7
6
5
5

60

Interpretation :
Accel Partners is the most active venture capital firm in 2013 followed closely by Blume
Ventures (13 deals) and Sequoia Capital (12 deals). Other active firms include Nexus Venture
Partners (10 deals), Helion (9 deals), Inventus Capital and Norwest Venture Partners (7 deals
each), Acumen Fund (6 deals) and IndoUS Venture Partners and Omidyar Network (5 deals
each).
Active VC Firms By Number Of Deals 2013

No of Deals

Figure 3:

VC Firm

Source: Secondary Data

Top Venture Capital Deals of 2013 by Deal Value

61

Consumer internet continues to get most of the venture capital dollars. Here is a look at
the top VC deals of the year.
Flipkart raises $150 million from Naspers, ICONIQ Capital: India's largest consumer
e-commerce firm Flipkart Online Services Pvt Ltd raised its much-anticipated mega
round, led by two new investors - MIH (part of the Naspers Group) and ICONIQ Capital besides participation from existing investors Tiger Global and Accel Partners. The e-tailer
had earlier raised $31 million from Tiger Global Management and Accel Partners in three
rounds of funding. While Naspers has backed businesses like Goibibo and
BuyThePrice.com in India, this was the first investment in the country by ICONIQ
Capital, a multi-family office that manages the wealth of Facebook founder Mark
Zuckerberg and Zynga's Mark Pincus, among others.
Just Dial raises $57M from Sequoia, SAP Ventures: Mumbai-based Just Dial Ltd,
which runs an India-specific local business listings site Justdial, has pushed back its
proposed initial public offering (IPO) and raised Rs 327 crore ($57 million) in one of the
largest ever pre-IPO round of VC funding. The money has been raised from existing
investors Sequoia Capital and SAP Ventures. While Sequoia Capital brought in Rs 305
crore, SAP Ventures invested Rs 22 crore in the latest round of funding.
Educomp raise $50M from IFC, Proparco & Mount Kellett Capital: Indias largest
listed education company, Educomp Solutions Ltd has raised $155 million in financing
through a mix of private equity, external commercial borrowings (ECBs) and foreign
currency convertible bonds (FCCBs). The transaction includes a preferential allotment of
up to $50 million to Mount Kellet Capital, Proparco and International Finance Corporation
(IFC).

PubMatic raises $45M in mezzanine financing led by August Capital : PubMatic, the
digital media platform for publishers has announced that it has raised $45 million in

62

mezzanine financing. New investor, August Capital, is leading the financing with
participation from all existing investors including Draper Fisher Jurvetson, Nexus Venture
Partners, Helion Ventures and Silicon Valley Bank. The funds will be used to continue
PubMatic's targeted acquisition strategy and strengthen the company's balance sheet.
Vertex, Sherpalo & KPCB invest $40M in Reverse Logistics Company: Delhi-based
reverse supply chain solution provider, Reverse Logistics Company Pvt Ltd (RLC), which
operates under the Greendust brand, has received $40 million (Rs 171 crore) funding from
Vertex Venture Holdings Ltd and existing investors Kleiner Perkins Caufield Byers
(KPCB) and Sherpalo Ventures.
Komli Media raises $39 million: Norwest Venture Partners led another round of capital
infusion in Mumbai-based online ad network and audience measurement provider Komli
Media India Pvt Ltd as it continues its aggressive inorganic strategy. Other investors in
this round included Nexus Venture Partners, Helion Venture Partners, Draper Fisher
Jurvetson and Western Technology Investment. With this round of funding, Komli has
raised a total of $62 million across four rounds. Funding from the latest round will be used
for the acquisition of Admax Network, a South-east Asian digital media network, besides
product enhancement, hiring and expansion across the Asia-Pacific region.
Warburg Pincus backs Quikr: In its first internet-related investment in the country in
more than a decade, Warburg Pincus led a $32 million investment in Quikr Mauritius
Holding Pvt Ltd, the parent company of Quikr India Pvt Ltd that runs the online
classifieds site Quikr. The fifth round of funding takes the total money raised by the firm
to $50 million. Other investors in Quikr include Matrix Partners India, Norwest Venture
Partners, Omidyar Network, Nokia Growth Partners and eBay Inc.
Bangalore MFI Ujjivan Raises Rs 128Cr From Wolfensohn Cap, FMO, Others :
Bangalore-based microfinance firm Ujjivan Financial Services Pvt Ltd has raised Rs 127.9
crore ($25.5 million) in its fifth round of equity funding, led by Wolfensohn Capital

63

Partners and FMO (Netherlands

Development

Finance

Company or

Nederlandse

Financierings-Maatschappij voor Ontwikkelingslanden N.V.).

Nexus-backed Kaltura, Aryaka also raise $25 million rounds: Two companies, backed
by Nexus Venture Partners and headquartered in the US, have raised $25 million rounds.
OpenOffice-based online video platform Kaltura Inc raised $25 million in Series D from
Mitsui Global Investment and Orix Ventures, with participation from existing investors
Intel Capital, 406 Ventures and Avalon Ventures besides Nexus Venture Partners.
Aryaka Networks Inc, a cloud-based WAN optimisation services provider with offices in
the US and India, also raised $25 million in Series C. The round was led by InterWest
Partners and Presidio Ventures, with participation from existing investors Nexus Venture
Partners, Trinity Ventures and Mohr Davidow Ventures.
Myntra raises $20 million from Tiger Global: Bangalore-based Myntra Designs Pvt
Ltd, which runs the fashion and lifestyle e-commerce site Myntra.com, raised $20 million
in Series C funding, led by Tiger Global. The funding was raised to grow its logistics
services and expand into new categories. Earlier, the company raised $14 million in its
second round of funding from Tiger Global and existing investors IDG Ventures and
Kalaari Capital. Myntra repositioned itself as a lifestyle portal from a gifts and
merchandise portal last year.

64

CHAPTER VI
FINDINGS, SUGGESTIONS & CONCLUSION

65

FINDINGS

Venture Capital deals have witnessed a gradual increase in the number of deals over the
last five years. 153 deals were reported in 2013 compared to 141 deals in 2012 and 83
deals in 2009.

Venture Capital deals were led by the Internet Software and Services sector with 45 deals
followed by Internet and Catalog Retail with 20 deals and Software with 18 deals in 2013.

Accel Partners is the most active venture capital firm in 2013 followed closely by Blume
Ventures (13 deals) and Sequoia Capital (12 deals). Other active firms include Nexus
Venture Partners (10 deals), Helion (9 deals), Inventus Capital and Norwest Venture
Partners (7 deals each), Acumen Fund (6 deals) and IndoUS Venture Partners and Omidyar
Network (5 deals each).

The prospects for the Indian VC industry are no less humongous. It is up to the industry to
reflect on its current predicament and evolve a strategy to seize the opportunity. With due
emphasis being given to the industry, there is lot of scope for development. Trying to put
the domestic market on par with that in the U.S. may not be justified. Capital markets in
India are still growing to maturity through transparency, liquidity and accountability of
promoters.

With this maturity, the venture capital market would also attain its maturity. Until such
time, it is not fair or easy to compare markets in India to those in the U.S. Despite the
slump in the new economy sectors and the collapse of the dotcoms, venture capital
companies are still buoyant about the Indian technology sector and a large sum of money is
waiting to be invested.

According to VCs, the Indian market is one of the preferred markets in this part of the
world right now. Things are poised for change over the next 3-6 months since the valuation
gap between entrepreneur expectations and VC pricing has fallen when compared to last
year. As far as the areas of investment and deal sizes are concerned, most VCs feel that the

66

market will favour large sized deals and probably even management buyouts. Growth or
mezzanine stage capital will continue to occupy centre stage according to most VCs.

As for startup funding--the views are mixed. Some VCs believe that startup stage funding
is likely to surface again though a larger share of the capital will possibly be invested in
listed companies, others will continue to remain bearish on startups since scaling up
startups is a tough business. Thus venture funds have been an engine for economic growth
for over a decade in countries like USA, Israel, Taiwan. The situation is now ripe to be
replicated in India.

To foster innovation, new ventures have to work in a competitive & supportive

environment which also needs financial backing from venture capitalists (VCs) and angel
investors who will provide the venture not just with funds, but also with strategic
management support.

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SUGGESTIONS
From the experience of Venture Capital activities in the developed countries and detailed
case study of venture capital in India we can derive that the following measures needs to
be provided to boost Venture Capital industry in India.
1.

Social Awareness: Lack of social awareness of the existence of venture capital

industry has been observed. Hardly few know about the principal objectives and functions
of the existing venture capital funds in the country and thus banking of the media is
required to bridge the gulf between the society and the existing venture capital funds.
2. Deregulated Economic Environment: A less regulated and controlled business and
economic environment where an attractive customer opportunity exists or could be created
for high-tech and quality products.
3. Fiscal Incentives: Though Venture Capital funds like Mutual funds are exempted
from paying tax on dividend income and long-term capital gains, from equity
investment, unlike Mutual funds there are pre-conditions attached to the tax shelter. So
it is imperative that the Government streamlines its guidelines on tax exemption for
Venture Capital Funds.
4. Entrepreneurship And Innovation: A broad-based (and less family based)
entrepreneurial traditions and societal and governmental encouragement for innovation
creativity and enterprise.
5. Marketing Thrust: A vigorous marketing thrust, promotional efforts and
development strategy employing new concepts such as venture fairs, venture clubs
venture networks, business incubators etc., for the growth of venture capital.

68

6. A Statutory Co-ordination Body: A harmonious co-ordination needs to be

maintained among the technology institutes, professional institutes and universities
who are the producers of future venture capital managers. The coordinating organ so
formed is expected to ventilate an outline of the latest requirements of the venture
capital funds management. Central Government should come forward to promote the
referred coordination organ in the form of a statutory body. The coordination organ
would not only maintain link with the domestic professional institutions, technology
institutes and universities but also with the global venture capital funds in order to
exchange the novel ideas that can help in standardizing Indian practice on venture
capital funds.
7. Technological Competitiveness: Encouragement and funding of R&D by private and
public

sector

companies

and

the

government

for

ensuring

technological

competitiveness.
8. Training and Development of Venture Capital Managers: For the success of venture
capital fund, be it privately owned or public sector financial institutions, strategies need to
be found to promote entrepreneurship. For this, venture capital funds need professionals
with initiative, drive and vision to identify such entrepreneurs who have sound & ideas
and innovative vision. Unfortunately, such professionals are not easily available
particularly in developing countries like India. Therefore management schools need to
develop social training programs to train venture capital mangers in which risk taking and
entrepreneurial attitude needs to be incubated.
9.

Broad Knowledge Base: A more general, business and entrepreneurship oriented

education system where scientist and engineers have knowledge of accounting, finance
and economics and accountants understand engineering or the physical sciences.
10. Exit Routes: For venture capital funds, exits are crucial; going public is one way for
the investors to be paid back. Current rules of companies going public in India insist on

69

sustained track record of profits. For entrepreneur driven companies where value creation
is through intellectual property patents, methodologies and processes, such norms are
archaic. Venture capitalists earn through value creation leading to exits and not through
dividends. Venture funds would prefer the company to invest back dividends into the
business. As such the question of stream of dividends pay outs prior to IPO over three
years as is required in India is a hindrance.
Another exit route can be repurchases of shares by promoters but it is an expensive way of
assuring investors an exit bank roll. Inter accruals alone may not be adequate to backroll
the repurchases and institutional funding for such buyouts is rarely forthcoming. Though
there is no legal bar on such funding, but the risk of extending against the shares of newly
established company have kept away most of the bank and financial institutions. Creative
financial engineering can find a way around this problem. To provide the lenders with an
additional degree of security, a special purpose vehicle (SPV) can be created which would
hold the shares bought back from the venture capital firms in trust until the firm achieves a
certain rate of return. Meanwhile, a certain proportion of the firms sales proceeds can be
funneled directly to the SPV to amortize debt.

70

CONCLUSION
The Indian Venture Capital (VC) industry is just about a decade old industry as compared
to that in Europe and US. In this short span it has nurtured close to 1000 ventures, mostly
in SME segment and has supported budding technocrat /professionals all through. The VC
industry, through its investments in high growth companies as well as companies adopting
newer technologies backed by first generation entrepreneurs, has made a substantial
contribution to economy. In India, however, the potential of venture capital investments is
yet to be fully realized.

The Indian venture capital industry is dominated by public sector financial institutions. A
few private sector venture capital firms have been set up recently. VCFs in India are not
pure venture capitalists. They pursue both commercial as well as developmental
objectives. Venture finance is made available to high-tech as well as non-tech businesses.
About two-thirds of the venture capital is invested in non-tech businesses. A large number
of high-tech ventures financed by VCFs are in thrust areas of national priority such as
energy conservation, quality upgradation, advanced materials, bio-technology, reduced
material consumption, environment protection, improved international competitiveness,
development of indigenous technology etc. Yet another feature of venture financing in
India is that it is not readily available for development of prototypes or setting up of pilot
plants at the laboratory stage.

Venture capital can play a more innovative and developmental role in a developing
country like India. It could help the rehabilitation of sick units through people with ideas
and turnaround management skills. A large number of small enterprises in India become
sick even before the commencement of production. Venture capitalists could also assist
small ancillary units to upgrade their technologies so that they could be in line with the
developments taking place in their parent companies.

71

Yet another area where Venture Capital Funds (VCFs) can play a significant role in
developing countries is the service sector, including tourism, publishing, health-care etc.
They could also provide financial assistance to people coming out of the universities,
technical institutes involving high risk. This would encourage the entrepreneurial spirit. It
is not only initial funding which is needed from the venture capitalists but they also should
simultaneously provide management and marketing expertise, which is the real critical
aspect of venture capital in developing countries. Hence, the Government of India and
Venture Capital firms/funds are required to strive hard to create the favourable
environment needed to take-off the venture capital finance in India.

72

BIBLIOGRAPHY

I.M Panday, Venture Captial: The Indian Experience

Annual Report of Indian Venture Capital Association-1998
Hashank Rajurkar: Issues Facing the Indian Venture Capital Industry, Productivity.

The Securities and Exchange Board of India - SEBI (Venture Capital Funds)
Regulations, 1996
NVCA and Venture Economics - 2002 National Venture Capital Yearbook
Various newspapers and magazines
www.nasscom.org

www.indiainfoline.com

www.icfaipress.org

www.thehindubusinessline.com

www.gvfl.com

www.vcline.com

ANNEXURES:
73

List of Venture Capital Deals in 2013

Date
5-Jan-12
5-Jan-12
11-Jan-12

Portfolio

Investors

Undisclosed
BASIX Sub-K iTransactions Limited

Inventus Capital
Michael & Susan Dell Foundation
Sequoia Capital India ;Omidyar
Network

24-Feb-12
6-Mar-12
14-Mar-12
22-Mar-12
22-Mar-12
27-Mar-12
31-Mar-12
3-Apr-12

Prime HealthChakra Private Ltd.

Gramalaya Urban and Rural
Development Initiatives and Network
Knowlarity Communications Pvt. Ltd.
Netcraft Retail Solutions Private Limited
Jewels Online Distribution India Pvt Ltd
Accelyst Solutions Pvt. Ltd.
Ujjivan Financial Services Pvt Limited
IndiaHomes
Hippocampus Learning Centres Pvt Ltd
Milaap Social Ventures
Bodhicrew Services Pvt. Ltd
Myntra Designs Private Limited
BrainBees Solutions Pvt Ltd.
Manthan Software Services Pvt. Ltd.
Bakers Circle (India) Pvt. Ltd.
Edusys Services Pvt Limited
BrizzTV Media Lab Pvt. Ltd.
Anudip Foundation
Green India Building Systems and
Services Private Ltd
Birds Eye Systems Pvt Ltd
actoserba active retail Private Limited
EnglishHelper Technologies Pvt. Ltd
Akshara Foundation
Games2win India Pvt Ltd.
IFMR Rural Finance Pvt. Ltd.
Savaari Car Rentals Private Limited

5-Apr-12
5-Apr-12
5-Apr-12
11-Apr-12
12-Apr-12
12-Apr-12
12-Apr-12
20-Apr-12
25-Apr-12
27-Apr-12

HMS Infotech Pvt Ltd

Sloka Telecom Pvt. Ltd.
Nevales Networks Pvt. Ltd.
Vienova Technology Private Limited
Unmetric Inc.
Villgro Innovation Marketing Pvt Ltd
Insieve Technologies Private Limited
PropTiger Realty Pvt Ltd
Talent Sprint Pvt. Ltd.
Forus Health Pvt. Ltd.

17-Jan-12
19-Jan-12
20-Jan-12
24-Jan-12
25-Jan-12
1-Feb-12
3-Feb-12
6-Feb-12
6-Feb-12
6-Feb-12
10-Feb-12
12-Feb-12
15-Feb-12
15-Feb-12
16-Feb-12
20-Feb-12
23-Feb-12

Acumen Fund
Sequoia Capital India
Seedfund
Accel Partners;Silicon Valley Bank
Sequoia Capital India
Wolfensohn Cap;FMO
Helion;Foundation Capital
Unitus Seed Fund
Unitus Seed Fund
Unitus Seed Fund
Tiger Global
IDG Ventures;SAIF Partners
Norwest Venture Partners
GEM India;Haystack
Sequoia Capital India
Ojas
Omidyar Network
Hyderabad Angels
CIIE
IndoUS Venture Partners
Omidyar Network
Omidyar Network
Nirvana Venture
Lok Capital;Proparco
Inventus Capital
Accel Partners;Blume
Ventures; Mumbai Angels
KITVEN
Seedfund
Bamboo Finance
Nexus Venture Partners
Unitus Seed Fund
Ojas;Blume Ventures
SAIF Partners;Accel Partners
Nexus Venture Partners
IDG Ventures;Accel Partners

List of Venture Capital Funds in India

74

2i Capital PCC
3i India Infrastructure Investment Ltd
Aavishkaar India Micro Venture Capital Fund
Aboyne India Trust
ACA Private Equity Trust
Accel India Venture II (Mauritius) Ltd
Actis Infrastructure India PCC Limited
Adharshila Venture Capital Fund
Aditi Investment Holdings Limited
Aditya Birla Private Equity Trust
Aditya Birla Real Estate Fund
AIF III Sub Pvt. Ltd (sponsered by UTI)
AIRRO (Mauritius) Holdings II
Akruti City Venture Capital Fund
Ambadevi Mauritius Holding Ltd
Ambit Pragma Fund
Americorp Ventures Limited
AMIF II Ltd
AMP Capital Finance Mauritius Limited
Anand Rathi Realty Fund
AOC Partners APGF
AOF HS Mauritius Ltd
APF Coinvest I Limited
APIDC
Apollo Asia Opportunity Gamma Mauritus Limited
Aquarius Capital (Mauritius) Limited
Ares Investments
Argonaut Capital
Ariston IET Fund
Ascendas Property Pte (India) Ltd
Ascent India Limited
Ashoka Investment Holdings Ltd
ASK Real Estate Special Opportunities Fund
Athena India Opportunities
Ativir Venture Capital Trust

75