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PRAHLADRAI DALMIA LIONS COLLEGE COMMERCE & ECONOMICS

Chapter 1. INTRODUCTION

Venture Capital:

Venture capital is a type of financing provided to privately-held businesses by


investors in exchange for partial ownership of the company.

Venture capitalists (VCs) are more often firms, such as Kleiner Perkins or
Sequoia. But individuals who are VCs are more generally known as “angel
investors,” because they often get involved earlier and take a smaller stake.

VCs identify promising new technology, products, or concepts, and then provide
the funding needed to move the project forward. As payment for their investment,
they typically take an equity, or ownership, stake. While the impression may be
that VC funding is pretty typical, in fact, historically, fewer than 1% of companies
have landed VC money. It’s the exception, not the rule

Definition:

Start up companies with a potential to grow need a certain amount of investment.


Wealthy investors like to invest their capital in such businesses with a long-term
growth perspective. This capital is known as venture capital and the investors are
called venture capitalists.

Description:

Such investments are risky as they are illiquid, but are capable of giving
impressive returns if invested in the right venture. The returns to the venture
capitalists depend upon the growth of the company. Venture capitalists have the
power to influence major decisions of the companies they are investing in as it is
their money at stake.

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Chapter 2. OBJECTIVE OF STUDY

1) Understand the concept of venture capital.


Venture Capital funding is different from traditional sources of financing.
Venture capitalists finance innovation and ideas which have potential for
high growth but with inherent uncertainties. This makes it a high-risk, high
return investment.

2) Study venture capital industry in India.


Scientific, technology and knowledge based ideas properly supported by
venture capital can be propelled into a powerful engine of economic growth
and wealth creation in a sustainable manner. In various developed and
developing economies venture capital has played a significant
developmental role.

3) Study venture capital industry in global scenario.


Venture capital has played a very important role in U.K., Australia and
Hong Kong also in development of technology growth of exports and
employment.

4) Find out opportunities that encourage & threats those hinder


venture capital industry in India.

5) To know the impact of political & economical factors on


venture capital investment

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Chapter 3. HOW IT WORKS ?

The venture capital industry has four main players: entrepreneurs who need
funding; investors who want high returns; investment bankers who need
companies to sell; and the venture capitalists who make money for themselves by
making a market for the other three.

VC firms also protect themselves from risk by converting with other firms.
Typically, there will be a “lead” investor and several “followers.” It is the
exception, not the rule, for one VC to finance an individual company entirely.
Rather, venture firms prefer to have two or three groups involved in most stages
of financing. Such relationships provide further portfolio diversification that is,
the ability to invest in more deals per dollar of invested capital. They also
decrease the workload of the VC partners by getting others involved in assessing
the risks during the due diligence period and in managing the deal. And the
presence of several VC firms adds credibility. In fact, some observers have
suggested that the truly smart fund will always be a follower of the top-tier firms.

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Chapter 4. RESEARCH METHODOLOGY

In India neither venture capital theory has been developed nor are there
many comprehensive books on the subject. Even the number of research papers
available is very limited. The research design used is descriptive in nature. (The
attempt has been made to collect maximum facts and figures available on the
availability of venture capital in India, nature of assistance granted, future
projected demand for this financing, analysis of the problems faced by the
entrepreneurs in getting venture capital, analysis of the venture capitalists and
social and environmental impact on the existing framework.)

The research is based on secondary data collected from the published


material. The data was also collected from the publications and press releases of
venture capital associations in India.

Scanning the business papers filled the gaps in information. The Economic
times, Financial Express and Business Standards were scanned for any article or
news item related to venture capital. Sufficient amount of data about the venture
capital has been derived from this project.

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Chapter 5. NEED AND RELEVANCE OF VENTURE


CAPITAL IN INDIA

In USA given its highly progressive industrial environment and


entrepreneurial culture , it is normal for an entrepreneur or inventor of a new
product /process to set up company to produce and market the product by
obtaining finance through the sale of company shares to Venture Capital Funds
which are readily willing to share the risk in return for future gains .

In India risk financing of this type has yet to pick up in any significant way.
There are large number of financial institutions which provide conventional
finance to business firms. This sort of traditional financing primarily caters to
projects based on proven established processes and technology with minimum
investment risk .it is security oriented and asset based. It involves fixed and
uniform payment of interest and principal and it follows fixed form of financing
e.g. debt equity ratio, promoters contribution security margin etc. The existing
financial institutions are conservative in their approach

A number of people in India feel that financial institutions are not only
conservative but they also have bias for foreign technology and they do not trust
the abilities of entrepreneurs.

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Chapter 6. STAGES OF INVESTMENT


There are 5 Investments stages widely used by the industry to invest. These stages
are defined as under:

1) Seed Stage:
Financing provided to new companies for use in product development and
initial marketing constitutes Seed Stage. Eligible companies may be in the
process of being setup or may have been in business for a short time or
may not have sold their product commercially. This is the fmancing
provided to companies when the Initial Concept of the business is being
formed.

2) Startup :
Financing Provided to new companies, for manufacturing and
commercializing the developed products, represent Startup. The
companies may be in their initial stages of development and finance may
be extended for creation of new infrastructure and meeting the Working
Capital Margin.

3) Other Early Stage:


Financing provided to companies that have completed the commercial
scale implementation and may require further funds to meet initial cash and
further working capital is treated as Other Early Stage. The companies may
have expended their capital and would require additional funds and may
not yet be generating profit.

4) Later Stage:
Financing Capital provided for the growth and expansion of established
companies. Funds may be used to finance increase in production capacity,
market or product development and/ or provide additional working capital.
This would include product diversification, forward/backward integration,
besides creation of additional capacity. Capital could be provided for
companies that are breaking even or profitable or in turnaround situations.

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5) Turnaround:
Financing Capital provided for companies that are in operational or
financial difficulties where the additional funds would help in Turnaround
Situations.

Earlier VC funds use to invest in Seed and Startup stages and very rarely
in Turnaround Stages, but off late the trend is changing and Venture Capitalist
funds are a part of every stage and are also actively participating in Turnaround
Stages through buyouts and takeovers.

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Chapter 7. PROCESS OF VENTURE CAPITAL.


The Following are the process of venture Capital:

 Deal Origination
 Screening
 Evaluation
 Deal Negotiation
 Post Investment Activity
 Exit Plan.

The above-mentioned steps are explained in details below;

1) Deal origination:

Origination of a deal is the primary step in venture capital financing. It is not


possible to make an investment without a deal therefore a stream of deal is
necessary however the source of origination of such deals may be various. One
of the most common sources of such origination is referral system. In referral
system deals are referred to the venture capitalist by their business partners,
parent organisations, friends etc.

2) Screening:

Screening is the process by which the venture capitalist scrutinises all the projects
in which he could invest. The projects are categorised under certain criterion such
as market scope, technology or product, size of investment, geographical
location, stage of financing etc. For the process of screening the entrepreneurs are
asked to either provide a brief profile of their venture or invited for face-to-face
discussion for seeking certain clarifications.

3) Evaluation:
The proposal is evaluated after the screening and a detailed study is done. Some
of the documents which are studied in details are projected profile, track record
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of the entrepreneur, future turnover, etc. The process of evaluation is a thorough


process which not only evaluates the project capacity but also the capacity of the
entrepreneurs to meet such claims. Certain qualities in the entrepreneur such as
entrepreneurial skills, technical competence, manufacturing and marketing
abilities and experience are put into consideration during evaluation. After putting
into consideration all the factors, thorough risk management is done which is then
followed by deal negotiation.

4) Deal negotiation:
After the venture capitalist finds the project beneficial he gets into deal
negotiation. Deal negotiation is a process by which the terms and conditions of
the deal are so formulated so as to make it mutually beneficial. The both the
parties put forward their demands and a way in between is sought to settle the
demands. Some of the factors which are negotiated are amount of investment,
percentage of profit held by both the parties, rights of the venture capitalist and
entrepreneur etc.

5) Post investment activity:


Once the deal is finalised, the venture capitalist becomes a part of the venture and
takes up certain rights and duties. The capitalist however does not take part in the
day to day procedures of the firm; it only becomes involved during the situation
of financial risk. The venture capitalists participate in the enterprise by a
representation in the Board of Directors and ensure that the enterprise is acting as
per the plan.

6) Exit plan:
The last stage of venture capital investment is to make the exit plan based on the
nature of investment, extent and type of financial stake etc. The exit plan is made
to make minimal losses and maximum profits. The venture capitalist may exit
through IPOs, acquisition by another company, purchase of the venture capitalists
share by the promoter or an outsider.

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Chapter 8. ADVANTAGES AND DISADVANTAGES OF


VENTURE CAPITAL FINANCING

The advantages and disadvantages of venture capital financing are various. Some
of the advantages and disadvantages are given below.

 The autonomy and control of the founder is lost as the investor becomes a
part owner.

 The process is lengthy and complex as it involves a lot of risk.

 The object and profit return capacity of the investment is uncertain.

 The investments made based on long term goals thus the profits are
returned late.

 Although the investment is time taking and uncertain, the wealth and
expertise it brings to the investor is huge.

 The sum of equity finance that can be provided is huge.

 The entrepreneur is at a safer position as the business does not run on the
obligation to repay money as the investor is well aware of the uncertainty
of the project.

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Chapter 9. SUGGESTIONS and RECOMMENDATIONS

1. Venture investing is by definition risky. Increased risks due to the environment


correspondingly decrease the likelihood of success. In nations with unpredictable
regulations, corrupt governments and unstable currencies, the probability of
success is decreased and such situations are beyond the control of both the
entrepreneur and the venture capitalist. These environmental risks discourage the
practice of venture capital.

2. The task of offering suggestions for improving the infrastructure of the venture
capital industry, and its role in industrial development of the country, is rendered
difficult on account of the infancy of the industry and the vast problems it faces.

3. From the experience of venture capital activities in the developed countries and
discussion with the officials of venture capital funds and venture capital
entrepreneurs and detailed survey of venture capital undertakings

4. An entrepreneurial tradition must be broad-based and less family based. This


calls for imparting education and training in entrepreneurship.

5. Up-to-date information source for startup entrepreneurs in the form of source


books web portals and one stop shops and widen dissemination of all relevant
information should be created.

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Chapter 10. CONCLUSION

The study provides that the maturity if the still nascent Indian Venture
Capital market is imminent.

Venture Capitalists in Indian have notice of newer avenues and regions to


expand. VCs have moved beyond IT service but are cautious in exploring the
right business model, for finding opportunities that generate better returns for
their investors.

In terms of impediments to expansion, few concerning factors to VCs


include; unfavorable political and regulatory environment compared to other
countries, difficulty in achieving successful exists and administrative delays in
documentation and approval.

In spite of few non attracting factors, Indian opportunities are no doubt


promising which is evident by the large number of new entrants in past years as
well in coming days. Nonetheless the market is challenging for successful
investment.

Therefore Venture capitalists responses are upbeat about the attractiveness of


the India as a place to do the business.

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Chapter 11. BIBLIOGRAPHY & WEBLIOGRAPHY

 BOOKS:

 Taneja Satish, “Venture Capital in India”.


 Chary T Satyanarayana, “Venture Capital – Concepts & Applications ”

 WEBSITE:

 www.ivca.org
 www.indiavca.org.
 www.vcindia.com
 www.ventureintelligence.in
 www.nvca.org
 www.economictimes.indiatimes.com
 www.100ventures.com
 www.google.com

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