VENTURE CAPITAL FINANCING

[Document subtitle]
 CHAPTER 1: INTRODUCTION
Venture capital refers to the financial support provided by the venture capitalists to the new, budding
companies or startups which have a great potential to grow and transform into a profitable venture.
Venture capital is the money which is invested in businesses which are in its initial stage but have a high
potential to grow big. It is characterized by high risk and high return. Therefore, it plays an important
role entrepreneurs who have new ideas. One can say that venture capital is most suitable for those
companies and startups which require a huge amount of capital at the start and does not have any cheap
alternatives in front of them.
Evolution of Indian VC industry
Venture investing in India can be traced back to the establishment of the risk capital foundation, which
was the result of Government’s initial efforts to provide risk capital. There have been many other such
efforts to provide risk funding such as creation of Technology Development Fund (TDF) which was
formed from the chess levied on all the technology imports in the Government’s budget in 1986 and
other quasi market-based initiatives like Programmed for Advancement of Commercial Technology
(PACT). The start of institutional VC in India is deeply connected with the creation of the Technology
Development and Information Company of India which was a joint fund management venture between
ICICI Bank and Unit Trust of India.
The development of the venture capital industry in India in those days can be broadly classified into four
phases. In the phase 1, the main players were the domestic fund management entities. In the second
phase foreign funds were introduced. It is also referred as the “Internationalization” of venture capital in
India. Draper International was the first international venture fund management enterprise to bring
international fund management practices and international investment capital in India. The market was
introduced to more international players during the third phase and the fourth phase marked the
rationalization of the industry after the technology boom period. There was a rejuvenated investment
interest in India from 2004 as a result of high rate of growth of the Indian economy and certain sectors
such as tech manufacturing etc.
Fig 1.1 Venture capital evolution in India

Phase I Phase II Phase III Phase IV

Pre-1995 1995-97 1998-2001 2002-2005
Total Funds: ($ m) 30 125 2847 5239
Number of Funds 8 20 50 75
Primary Stages and Seed, Early-stage and Development – Early-stage and Growth/Maturity –
Sectors Development – Diversified Development– Diversified
Diversified Telecom & IT
Primary Sources of World Bank, Government Overseas Overseas Institutional
Funds Government Institutional
Advantages of Venture Capital:
Venture capital institutions plays an important part in converting the knowledge of the entrepreneur into
viable projects with their valuable assistance.
 Venture capital helps in new products to become commercially feasible.
 There is no obligation on small businesses and startups to repay the investor. Investor takes the
entire risk as they believe in its future success which will earn them huge returns.
 Venture capitalist holds a certain percentage of equity in the company which enables them to be
a part of the decision making. So it provides the startups who are new in the industry with good
managing support.
 It also plays an important part in strengthening the capital market.
 Chapter 2 : Theoritical Framework
Venture Capital Investment Process
The venture capital activity is a sequential process involving the following six steps:
1. Deal Origination
2. Screening
3. Due Diligence Evaluation
4. Deal Structuring
5. Post-Investment Activity
6. Exit
Deal Origination:
In generating a deal flow, the venture capital investor creates investment opportunities where he is willing
to invest in. The deal can be derived in various ways and they are referral system, active search system
and intermediaries. Referral system is an important source of deal. Parent organizations, trade partners,
industry association refer to venture capital funds as their deals. Another way of dealing is through active
search networks, trade fairs, conferences, seminars, foreign visits.
Screening:
Venture Capitalists before investing will do initial screening of all the projects and then go for detailed
analysis based on some predetermined criteria. The criteria could be geographical location, size of the
investment and stage of investing.
Due Diligence:
Due diligence means all the activities that are associated with assessing an investment proposal. The
venture capitalists assess the quality of work before considering the attributes of the product, technology
or market. Most venture capitalists want to know about the business plan to make an analysis about the
possible risk and return. The business plan contains in-depth information about the proposed venture.
Following is the evaluating criteria by venture capitalists:
i. Preliminary Evaluation: The applicant is required to provide a brief profile of the proposed
venture to establish eligibility in all probability.
ii. Detailed Evaluation: Once the first round of evaluation is over, the proposal is assessed in
detail. The venture capitalists look forward to qualities like integrity, long term vision, urge
to grow, managerial skills and commercial orientation in the entrepreneur.
Also, the venture capitalists conduct risk analysis of the proposed ventures which includes the following:
a. Product Risk
b. Market Risk
c. Technological Risk
d. Entrepreneurial Risk
Deal Structuring:
It refers to laying together the financial characteristics of the deal and negotiating with the entrepreneur
to accept the proposal and finally sealing the deal. The instruments to be used in structuring deals are
many. The purpose of selecting the instrument is to optimize the venture capitalist’s returns and
satisfying the investors requirements. The instruments are as follows:
Fig 2.1 Instruments used by venture capitalist’s

Instrument Issues
Loans Clean and secured
Interest bearing and non-interest bearing
Convertible and Warrants.
Maturity

Preference Shares Redeemable

Participating
Par Value
Nominal Shares

Warranty Exercise price, Expiry period

Common Shares New or vendor shares

Par value
Partially-paid shares

Straight Equity and Convertibles are most used instrument in India. Also, the warrants are issued as a tool
to bring the price down.
Post-Investment Activities:
After the deal has been structured and finalized, the venture capitalist plays the role of a partner and
collaborator. He also gets involved in shaping the organization. The degree of involvement in the company
depends on the policy of venture capitalist. The venture capitalist does not get involved in the day to day
operation of the organization but if there are any financial problems occur, he may intervene and bring in
a new team.
Exit:
The Venture capitalists want their investment back in 5-10 years after the initial investment. A venture
may exit in the following ways:
a. Initial Public Offering (IPO)
b. Acquisition
c. Purchase of venture capitalists shares by the promoter.
d. Purchase of venture capitalists shares by an outsider.
Stages in Venture Capital
Seed Stage:
In this stage, a small amount of capital is provided to an entrepreneur to market a better idea having future
prospects. The investor investigates into the business plan before making any investment and, if he is not
satisfied with the idea or he does not see any potential in the idea/product, then the investor may not
consider financing the idea. But in case if the part of the idea is worth, then the investor may spend some
time and money further on the idea. At this stage, the risk factor is very high because there are many
uncertain factors.
Startup Stage:

If the idea is fit for further investigation, then the process moves on to the second stage, also known as the
Start-up stage. At this stage Venture Capital has to submit a business plan which must include the
following:-

 Executive summary of the business plan,

 Review of current competitive scenario,
 In-detailed financial projections,
 Details of the management of the company,
 Description of the size and potential of the market.

All the above analysis needs to be submitted, in order to decide, whether or not, Venture Capital to take
the project or not. This type of financing is provided to complete product development and commence
initial market strategies.

Second Stage:

At this stage, the idea transforms into a product and is being sold. The main goal at this stage is that
Ventures tries squeezing between the rests and getting some market shares from the competitors. The
management is being monitored by the Venture Capital firms in order to know the capability of the team
just to ensure the development process of the product and how they respond to the competitors. If the
firms find out that the capabilities are against the competition. Then the Venture Capital might not go to
the next stage. At this stage of financing, working capital is provided for the expansion of the business in
terms of growing accounts and inventory. At this stage, risk factor decreases as the product is not
developing at the former start-up stage. But it concentrates on the promotion and sales of the product.
Third Stage:

This stage is also called as later stage finance. Capital is provided to an enterprise that has basic marketing
set-up, typically for market expansion, acquisition product development etc. At a later stage, ventures try
to multiply market shares by increasing the sales of the product and having better marketing promotion.
Venture Capital monitors objectives of earlier stages i.e. second stage and also of the current stage to
evaluate whether the team has made the expected cost reduction or not. Venture Capitalists prefer this
stage than any other stages as the rate of failure in the later stage is low. It is also because firms at this
stage have a track record of the management, past performance data and established the procedure for
financial data. Risk at this stage is still decreasing because venture relies on the income from the sales of
the current product.

IPO Stage:

This stage is also known as a bridge finance stage. It is the last round of financing before exit. The Ventures
at this stage gain a certain amount of shares which gives them opportunities, such as merger and
acquisition, eliminating the competitors, keeping away new companies from the market. At this stage,
Venture has to determine the product position, and if possible, reposition it attract the new market.
 Chapter 3 : Company Profile
Blume Ventures
Blume Venture Advisors is a venture capital firm specializing in early-stage, seed stage, start-ups, pre-
series A, series B, and late stage investments in the Fintech sector. The firm prefers to invest in 80 percent
in technology ventures including internet and software sectors, data infrastructure, biotechnology, mobile
application, telecommunications equipment, media, consumer internet, research and development,
mobile, and 20 percent in alternative technology sector including clean technology and robotics. It
provides seed funding between $0.05 million and $0.3 million in seed stage and doubles its investment
size where it co-invests. The firm also makes follow-on investments to its portfolio companies, ranging
between $0.5 million and $1.5 million. It seeks to co-invest with angel investors, syndicates, and venture
capital firms. The firm also provides mentoring and support to its portfolio companies. Blume Venture
Advisors was founded in 2010 and is based in Mumbai, India.
Sequoia Capital
Sequoia Capital India is a venture capital firm specializing in investments in startup, seed, early, mid,
late, series-A, expansion stage, public and growth stage companies. The firm prefers to invest in
maturing startups in the information technology sector with a focus on the emerging India-US cross
border companies in the big data analytics, enterprise software, and semiconductors sectors. It seeks to
invest in the consumer services, energy, financial services, infrastructure, healthcare services, internet,
mobile applications, and outsourcing, wireless and technology sectors. In consumer services it invests in
agriculture, distribution, education, hospitality, media, retail, packaged goods, and enabling technology.
Within energy it focuses on alternative energy, conventional energy, energy efficiency, energy storage,
and energy services markets. In financial services it focuses on banking, brokerage, payments, and
enabling and financial technology. Within healthcare it focuses on diagnostic services, healthcare
Information Technology, pharmaceuticals, genetics services, lab services, patient services, product
development services, and enabling technology. Within internet it focuses on advertising,
communications, cloud computing, ecommerce, gaming, media, search, social networking and enabling
technology. Within mobile it focuses on advertising, applications, communications, devices, gaming,
monetization, and enabling technology. Within outsourcing it focuses on business process outsourcing,
hosting services, managed services, professional services and software development services. Within
technology it focuses on engineer carrier infrastructure, data, enterprise infrastructure, open source,
SaaS, security, semiconductors, services and storage. The firm will also invest in companies outside
India that can leverage or can potentially leverage India's technology resources. It seeks to invest
between $0.1 million and $100 million in its portfolio companies. The firm invests between $100,000
and $1 million in seed stage, between $1 million and $10 million in early stage, and between $10 million
and $100 million in growth stage companies. It prefers to act as the lead investor in most transactions. In
selected situations the firm partners with other leading venture firms and acts as a co-lead investor. It
prefers to take a seat on the board of directors of its portfolio companies. Sequoia Capital India was
formed in 2000 and is based in Bengaluru, India with additional offices in Mumbai and New Delhi,
India; Singapore, Menlo Park, California, Herzliya, Israel, Hong Kong, and Beijing, Shanghai, China.
Sequoia Capital India operates as a subsidiary of Sequoia Capital.
 Chapter 4 : Objectives
 To study the current scenario of venture capital finance in India.
 To analyse the growth of venture capital investment in different sectors of economy.
 To lookout for market share of different economic sectors in terms of venture capital
investments.
 Chapter 5: Case research methodology

Data collection:
The research report is based on the secondary data available on venture capital investments. The data is
collected from different reports and other online resources.

Research design:
Descriptive research design was used for the present case research. A descriptive study is one in which
information is collected without changing the environment (i.e., nothing is manipulated). It is used to
obtain information concerning the current status of the phenomena to describe "what exists" with respect
to variables or conditions in a situation.

Research objective:
To study the evolution and growth of venture capital industry at national (India) level.
 Chapter 6 : Limitations
 The data required was secondary which was not easily available.
 The study is based on the data provided by different sources, any incorrectness or biasness in
same might also have been resulted in same for this study.
 Chapter 7: Data analysis and interpretation

Snapshot of venture capital activity in India:

In 2017, both the investments and the exits in venture capital recorded an all-time high. There was increase
of 35% in the venture capital investments (US$ 26.5 billion) in India as compared to the previous high in
2015 and 63% more than the previous year. Compared to 2016, the venture capital exits in 2017 almost
doubled in value from US$ 6.6 billion to US$ 13.0. One of the main drivers in the rapid growth in both
investments and the exits are the large sized deals. From the sector perspective all the sectors performed
well in 2017 as compared to the 2016.

Table 4.1: Top 10 venture capital investment deals in 2017

 Fig 4.1: Deals greater than US$ 100 million

Fund raising by the venture capitals in 2017 increased by 33% from US$ 4.3 billion in 2016 to US$ 5.8
billion which further added to the already high levels of dry powder available with these venture capital
funds.

Table 4.2: venture capital activity 2017

In quarter 1 of 2018 also, the venture capital investments in India looked pretty strong and amounted to US$ 7.9
billion, eclipsing the previous four year quarter 1 high by over 83%. Quarter I of 2018 is the second best quarter
in last four years in venture capital investments as there was a total of 13 deals which valued more than US$ 100
million against 6 deals in 2017.
 Fig 4.3: Venture capital investment in India – Quarterly trend
Quarter 1 of 2018 saw comparatively muted level of venture capital exits as compared to quarter 4 of 2017. There
was a decline of 53% in the venture capital exits in quarter 1 of 2018 as compared to quarter 4 of 2017. This does
not come as a surprise as there is a lot of volatility in the Indian as well as global markets due to a number of
factors such as geopolitical tensions, fed rate hikes and recent position of American government on trade tariffs.

Fig 4.4: Venture capital exits in India

Venture capital investments in various sectors:

There was a significant increase in the value of investment by the venture capital in all the major sectors
in 2017 as compared to the previous year. Sectors like financial services, real estates, e-commerce,
technology, retail and consumer products, and healthcare received the highest ever investments by a
venture capital in India, these sector together accounted for 74% of the total investments in 2017. Except
technology sector which saw a decline of 10%, all the above mentioned sectors saw a growth of more than
50% in their values. In addition to these sectors, sectors like food and agriculture, logistics, power and
utilities also witnessed good investment activities.
Fig 4.5: Deal value (US$ billion) by sector in 2017 and % contribution to overall value
 Chapter 8: Conclusion
The world market is getting more and more competitive day by day, this increased competitiveness has
made it extremely necessary to choose the right access to human capital to guide and monitor along with
the financial support required for the new project. Venture capitalists have found new avenues and
expansions in India. Large sectors of the economy like Pharma, IT and other service industries in India
are ready for the venture capitalists. This gives a positive indication to the venture capitalists to invest in
Indian markets. As there is risk factor involved one should always do a thorough study of the markets
before getting into the process.
 Chapter: Recommendations
 In order to promote and develop the venture capital business in India, the government should
provide fiscal relief by exempting the dividend paid to venture capital fund investors from income
 tax.
 Venture Capital funds should be made easier by establishing Private Venture Capital funds. It
allows funds independently rather than a Joint Venture with banks and financial institution.
 There is a perception that venture capital is only for the high-tech industry. The venture capitalist
should cash-in the opportunities such as biotechnology, food processing, call centers, BPO’s.
 The Venture capitalist identifies the exit route before it plans to invest in any company.
 The role of individual venture capital association should be strengthened. It should build a database
on the Venture Capital industry so as to enable, to disseminate information for those who are
interested.
 It is crucial to create coordinating bodies among technology institutes efficient manpower which
is essential to the success of the industry.
 Chapter 10: References

https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/early-stage-venture-capital-
investments-in-india-plunge-to-3-year-low-in-2017/articleshow/62235948.cms
https://www.investopedia.com
https://www.ey.com/Publication/vwLUAssets/ey-pe-vc-agenda-india-trend-book-2018/$File/ey-pe-vc-
agenda-india-trend-book-2018.pdf
https://www.thehindubusinessline.com/specials/emerging-entrepreneurs/the-look-and-feel-of-the-
indian-vc-fund/article9844564.ece