VENTURE CAPITAL (A COMPARITIVE STUDY ON DEVELOPMENT ON VENTURE CAPITAL IN INDIA) PROJECT REPORT (A Report Submitted in Partial Fulfillment of the

Requirements for the Degree of Master of Business Administration in Pondicherry University)

Submitted by Mr. S.SATHISH KUMAR Enrollment No.:0209370245 MBA: FINANCE

DIRECTORATE OF DISTANCE EDUCATION PONDICHERRY UNIVERSITY PONDICHERRI 605 014 (2011)

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CERTIFICATE OF THE GUIDE

This is to certify that the Project Work titled VENTURE CAPITAL is a bonafide work of Mr. S.SATHISH KUMAR Enroll No.:0209370245 carried out in partial fulfillment for the award of degree of MBA (FINANCE) of Pondicherry University under my guidance. This project work is original and not submitted earlier for the award of any degree / diploma or associate ship of any other University / Institution.

Signature of the Guide

Name and Official Address of the Guide Mr.Joseph 16/20 Nalanda Study Centre, Sowrasthra Nagar 2nd Street Choolaimedu-94

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Guides Academic Qualifications, Designation and Experience M.com, M.Phil, MBA, PhD. Associate Professor Department of Commerce (20 years)

Place: Date:

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Students Declaration

I, Mr. S.SATHISH KUMAR hereby declare that the Project Work titled VENTURE CAPITAL is the original work done by me and submitted to the Pondicherry University in partial fulfillment of requirements for the award of Master of Business Administration in FINANCE) is a record of original work done by me under the supervision of Dr. T. Joseph of Loyola College .

Enroll No.:0209370245 Date: 05.06.2011

Signature of the Student

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ACKNOWLEDGEMENT

One of the pleasant aspects of preparing a project report is the opportunity to thank those who have contributed to make the project completion possible. I sincerely thank the Pondicherry University for introducing the course of Master of Business Administration (M.B.A).I convey my deep sense of gratitude and sincere thanks and regard to Coordinator PROF. A. Xavier Mahimairaj whose active interest in the project and his insights helped us formulate, redefine and implement our approach towards the project. I also express my thanks to the department of Master of Administration professor and guide Mr. Joseph M.com, M.Phil, MBA, manner. We are also thankful to all those seen and unseen hands and heads, which have been of direct or indirect help in the completion of this project. PhD. Associate Professor Department of Commerce to bring out my project successfully in a fruitful

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EXECUTIVE SUMMARY

Venture Capital is a growing business of recent origin in the area of industrial financing in India. The various financial institution set-ups in India to promote industries have done commendable work. However, these institutions do not come up to the benefit risky ventures when they are undertaken by new or relatively unknown entrepreneurs. They contend to give debt finance, mostly in the form of term loans to the promoters and their functioning has been more akin to that of commercial banks. Starting and growing a business always require capital. There are a number of alternative methods to fund growth. These include the owner or proprietors own capital, arranging debt finance, or seeking an equity partner, as is the case with private equity and venture capital. Venture capital is a means of equity financing for rapidly-growing private companies. Finance may be required for the start-up, development / expansion or purchase of a company. Venture Capital firms invest funds on a professional basis, often focusing on a limited sector of specialization (E.g., IT, Infrastructure, Health / Life Sciences, Clean Technology, etc.). Indian Venture Capital and Private Equity Association (IVCA) is a member based national organization that represents venture capital and private equity firms, promotes the industry within India and throughout the world and encourages investment in high growth companies. IVCA member comprise venture capital firms, institutional investors, banks, incubators, angel groups, corporate advisors, accountants, lawyers, government bodies, academic institutions and other service providers to the venture capital and private equity industry.
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Members represent most of the active venture capital providers and private equity firms in India. These firms provide capital for seed venturers, early stage companies, later stage expansion, and growth finance for management buyouts, buy-ins of established companies. Venture capitalists have been catalytic in bringing forth technological innovation in USA. A similar act can also be performed in India. As venture capital has good scope in India for three reasons: First: The abundance of talent is available in the country. The low cost high quality Indian workforce that has helped the computer users worldwide in Y2K project is demonstrated asset. Second: A good number of successful Indian Entrepreneurs in Silicon Valley should have a demonstration effect for venture capitalists to invest in Indian talent at home. Third: The opening up of Indian economy and its integration with the world economy is providing a wide variety of niche market for Indian entrepreneurs to grow and prove themselves.

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TABLE OF CONTENTS
PAGE
Acknowledgement Executive Summary CHAPTER: I. INTRODUCTION i ii - iii

I.1 Brief Introduction I.2.Problem of the Study I.3. Objectives of the Study I.4. Scope of the Project I.5. Limitation of the Project I.6. Methodology and Sample I.7. Period of the Study I.8. Sources of Data I.9. Chapter Plan II. PROFILE OF THE VENTURE CAPITAL INSDUSTRY II.1. An Overview II.2. ISSUES FACING THE INDIAN VENTURE CAPITAL INDUSTRY II.2.1. Limitations on Structuring of Venture Capital Funds (VCFs)

1 4 5 6 6 6 7 7 8

11

16 16

II.2.2. Problem in raising of Funds II.2.3. Lack of Inventive to Investors II.2.4. Absence of Angel Investors II.2.5. Limitations of Investment Instruments II.2.6. Domestic VCFs vis- -vis Offshore Funds II.2.7. Limitations on Industry Segments II.2.8. Anomaly between SEBI regulations and CBDT rules II.2.9. Limitations on Exit Mechanism II.2.10. Limitation on application of sweat equity and ESOP II.2.11. Legal Framework

17 17 18 19 19 19 20 20 20

III.

Venture Capital in India III.1. Venture Capital in India III.2. Difference between a Venture Capitalist and Bankers\Money Managers III.3.Difference between venture finance and debt finance III.4. Categorization of VC Investors III.4.1. Incubators III.4.2. Angel Investors III.4.3. Venture Capitals (VCs) III.4.4. Private Equity Players III.5. CLASSIFICATION OF VENTURE FUNDS 27 28 28 28 29 29 30 30 22 26

III.5.1. Base Formation III.5.2. Invested Amount III.5.3. Investment Philosophy III.5.4. Value Addition III.5.5. Consortium Financing

30 31 31 31 33

III.6. VENTURE CAPITAL INVESTMENT PROCESS III.6.1. Initial Evaluation III.6.2. Due Diligence III.6.3. Structuring a Deal III.6.4.Investment Valuation III.6.5. Documentation III.6.6. Monitoring and Follow up III.6.7. Exit III.7. SPECIAL PURPOSE VEHICLE III.8. ACCESSING VENTURE CAPITAL III.8.1. The Business Plan

34 35 37 40 43 45 46 47 48 48

49 49 III.9. BUSINESS PLAN COVERAGE III.9.1. Executive Summary III.9.2. Business Background III.9.3. Product / Service 49 49 50 50

III.9.4. Market Analysis III.9.5. Sales and Marketing Strategy III.9.6. Production / Operations III.9.7. Management III.9.8. Risk Factors III.9.9. Funds Requested III.9.10. Return on Investment and Exit III.9.11. Use of Proceeds III.9.12. Financial Summaries III.10. SELECTION OF VENTURE CAPITAL FUND III.10.1. Stages of Financing III.10.2. Early Stage Financing III.10.3. Expansion Financing III.10.4. Acquisition Financing III.10. REGULATORY SYSTEM IV. ANALYSIS AND INTERPRETATION IV.1. SWOT ANALYSIS OF INDIAN VENTURE CAPITAL IV.2. VALUE CHAIN ANALYSIS IV.2.1. Primary Activities IV.2.1.1. Deal Origination IV.2.1.2. Screening IV.2.1.3. Deal Structuring

50 51 51 51 51 52 52 53 53 53 54 54 55

59

61 62 62 63 63 64

IV.2.1.4. Pricing of Deal IV.2.1.5. Due Diligence IV.2.1.6. Post Investment Activities IV.2.2. Secondary Activities IV.2.2.1. Human Resource Department IV.2.2.2. Asset Manager IV.2.2.3. MIS System

66 68 69 69 69 69 69

IV.3. PEST ANALYSIS IV.3.1. Political Factors IV.3.2. Economic Factors IV.3.3. Social Factors IV.3.4. Geographic Factor IV.4. FUTURE OF VENTURE CAPITAL INDUSTRY IN INDIA V. SUMMARY AND CONCLUSION V.1. FINDINGS V.1.1. ORIGIN OF IMMIGRANT ENTREPRENEUR V.1.2. UNEMPLOYEMENT RATE V.1.3. REPO RATE V.1.4. EXPORT AND IMPORT V.1.5. CURRENCY RISK V.1.6. SENSEX CRASHDOWN V.1.7. CONTRIBUTION OF SECTOR IN GDP

69 76 92 97 99

102 102 102 103 103 103 104 104

V.1.8. DEVELOPMENT OF SMALL SCALE INDUSTRIES V.2. MEASURES TO BE PROVIDED/SUGGESTIONS V.2.1. Social Awareness V.2.2. Deregulated Economic Environment V.2.3. Fiscal Incentives V.2.4. Entrepreneurship and Innovation V.2.5. Marketing Thrust V.2.6. A Statutory Co-ordination Body V.2.7. Technological Competitiveness V.2.8. Training and Development of Venture Capital Managers V.2.9. Broad Knowledge Base V.2.10. Exit Routes V.3. CONCLUSION ANNEXURE 1 ANNEXURE 2 BIBLIOGRAPHY 110 ii vi - vii 105 105 105 105 106 106 106 106 107 107 107 108

LIST OF TABLES
TABLE NO. III.3 III.6.3.(i) III.6.3.(ii) IV.1.(i) TITLE OF THE TABLES
Difference between Venture Capital and Debt Finance Capital Deal instruments and related Issues Factors Influencing the selection of Instruments Strengths and Weaknesses of VC in India

PAGE NO.
27 38 39 60

IV.1.(ii) IV.3.2.(i) IV.3.2.(ii) IV.3.2.(iii) IV.3.2.(iv) IV.3.2.(v) IV.3.3.(i) IV.3.3.(ii) IV.3.4.(i) IV.3.4.(ii)

Opportunities and Threats of VC in India Venture backed liability events by year 2004 - 2010 Number of IPOs during 2004-2010 Growth in Industrial Sector Growth in Service Sector Result of Economic Factors Population Demographic Shift Result Of Demographic Factors Top Cities Attracting Venture Capital Investment City Wise Sectorial Investment By Venture Capital

60 77 80 84 84 91 92 96 97 98

Annexure 1 Table 1 Table 2

Indian Scenario A Statistical Snapshot Financing By investment Stage 110 ii-v

LIST OF CHARTS
CHART NO. III.7 IV.2 IV.3.1 IV.3.2.(i) IV.3.2.(ii) IV.3.2.(iii) IV.3.2.(iv) IV.3.2.(v) IV.3.2.(vi) IV.3.2.(vii) IV.3.2.(viii) IV.3.2.(ix) IV.3.3.(i) IV.3.3.(ii) IV.3.3.(iii) TITLE OF THE CHART
Working for Special Purpose vehicle Primary Activities and Costs of VCA Major Regulatory Framework for VC Industry Venture Backed M&A Deals. Inflation versus Venture Capital Growth Rate GDP v/s Venture Capital Growth Rate Contribution of various sectors in GDP SENSEX in 2010 Number of Deals v/s. No of SMEs Interest Rate Exchange Rate (INR/US$) Value of Export and Import Population Demographic Shift Between 15-59 years Unemployment Rate Origin Of Immigrant Entrepreneur

PAGE NO.
47 61 70 78 81 82 83 85 86 87 88 89 92 93 95

INTRODUCTION

BRIEF 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 net worth 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. 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.

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. 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.

I.1. 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.

I.2. PROBLEM OF THE STUDY

Venture Capital is in its nascent stages in India. The emerging scenario of global

competitiveness has put an immense pressure on the industrial sector to improve the quality level with minimization of cost of products by making use of latest technological skills. The financing firms expect a sound, experienced, mature and capable management term of the company being financed. Since the innovative project involves a higher risk, there is an expectation of higher returns from the project. The payback period is also generally high (5 7 years).

The various problems/ queries can be outlined as follows: Problems regarding the infrastructure details of production like plant location, accessibility, relationship with the suppliers and creditors, transportation facilities, labor availability etc. The limited infrastructure, low foreign investment and other transitional problems, because of above three reasons availability of fund is very low in market. Uncertainty regarding the success of the product in the market. As there is requirement of an experienced management team, Due to unavailability of experienced and skilled people it is difficult to analyze the future growth of the product in the market. Government has taken all the initiatives in formulating policies to encourage investors and entrepreneurs. A government policy has many rules and regulation that can create problems in allocating the fund to the Organizations.

Initiatives of the SEBI to develop a strong and vibrant capital market giving the adequate liquidity and flexibility for the investors for entry and exit. Due to many rules and regulations from SEBI organization face lots of difficulties at the time of entering in the market.

Problem regarding requirement of an above average rate of return on investment, also longer payback period. The returns on investment are high but the probability of fund return is depending on the product success in future.

I.3. OBJECTIVES OF THE STUDY

To know about concept of the 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.

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.

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.

Study the evaluation & need of venture capital industry in India: India is still at the level of knowledge. Given the limited infrastructure, low foreign investment and other transitional problems, it certainly needs policy support to move to the next stage. This is very crucial for sustainable growth and for maintaining Indias competitive edge.

Understand the legal framework formulated by SEBI to encourage venture capital activity in Indian economy: Promoting sound public policy on issues related to tax,

regulation and securities through representation to the Securities and Exchange Board of India (SEBI), Ministry of Finance (MoF), Reserve Bank of India (RBI) and other Government departments. Find out opportunities that encourage & threats those hinder venture capital industry in India: To know the impact of political & economical factors on venture capital investment:

I.4. SCOPE OF THE PROJECT

The scope of the research includes all types of venture capital firms set up as a company & funds irrespective of the fact that they are registered with SEBI of India or not part of this study.

I.5. LIMITATION OF PROJECT

A study of this type cannot be without limitations. It has been observed those venture capitals are very secretive about their investments. This attitude is a major hindrance for data collection. However venture capital funds companies that are members of Indian venture capital association are to be included in the study.

I.6. METHODOLOGY AND SAMPLE

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.)

I.7. PERIOD OF THE STUDY The study has been conducted over the period of 9 years based on the available information. The following depicts the period of study taken: IV.3.2.(i) IV.3.2.(ii) IV.3.2.(ii) IV.3.2.(iii) IV.3.2.(iii) IV.3.2.(iv) IV.3.2.(vii) IV.3.2.(ix)
Venture backed liability events by year 2004 - 2010 Number of IPOs during 2004-2010 Inflation Vs Growth Rate (2006-2009) GDP Growth Rate(2006-2009) Impressive Growth In Industry Sector (2006-2010) Impressive Growth In Service Sector (2006-2010) Interest Rate (2008-2010) Export and Import (2004-2010)

I.8.SOURCE OF DATA
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.

I.9. CHAPTER PLAN

I.9.1. CHAPTER 1- In this chapter a brief introduction about venture capital Objectives, Scope and Limitation of conducting the project Sources used to collect data And the period of study has been discussed

I.9.2. CHAPTER 2- In this chapter the discussion is about Overview of the Industry Issues facing the Venture Capital Industry

I.9.3. CHAPTER 3- In this chapter we have discussed about Categorization of Venture Capital Investors Various Types of Venture Funds Venture Capital Investment process Selection of Venture Capital Fund

I.9.4. CHAPTER 4- In this chapter we have discussed about following tools: SWOT Analysis
Value Chain Analysis

PEST Analysis
And Future of Venture Capital Industry in India

I.9.5. CHAPTER 5 - In this chapter we covered the following Findings of the study Suggestions Conclusion

PROFILE OF VENTURE CAPITAL INDUSTRY

II.1.AN OVERVIEW History

With few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals and families. The Vanderbilts, Whitneys, Rockefellers, and Warburgs were notable investors in private companies in the first half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines and Douglas Aircraft and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg founded E.M. Warburg & Co. in 1938, which would ultimately become Warburg Pincus, with investments in both leveraged buyouts and venture capital.

Origins of modern private equity

Before World War II, money orders (originally known as "development capital") were primarily the domain of wealthy individuals and families. It was not until after World War II that what is considered today to be true private equity investments began to emerge marked by the founding of the first two venture capital firms in 1946: American Research and Development Corporation. (ARDC) and J.H. Whitney & Company. ARDC was founded by Georges Doriot, the "father of venture capitalism"(former dean of Harvard Business School and founder of INSEAD), with Ralph Flanders and Karl Compton (former president of MIT), to encourage private sector investments in businesses run by soldiers who were returning from World War II. ARDC's significance was primarily that it was the first institutional private equity investment firm that raised capital from sources other than wealthy families although it had several notable investment successes as well.ARDC is credited with the first trick when its 1957 investment of $70,000 in Digital Equipment Corporation (DEC) would be valued at over $355 million after the company's initial public offering in 1968 (representing a return of over 1200 times on its investment and an annualized rate of return of 101%).

Former employees of ARDC went on and established several prominent venture capital firms including Greylock Partners (founded in 1965 by Charlie Waite and Bill Elfers) and Morgan, Holland Ventures, the predecessor of Flagship Ventures (founded in 1982 by James Morgan). ARDC continued investing until 1971 with the retirement of Doriot. In 1972, Doriot merged ARDC with Textron after having invested in over 150 companies. J.H. Whitney & Company was founded by John Hay Whitney and his partner Benno Schmidt. Whitney had been investing since the 1930s, founding Pioneer Pictures in 1933 and acquiring a 15% interest in Technicolor Corporation with his cousin Cornelius Vanderbilt Whitney. By far Whitney's most famous investment was in Florida Foods Corporation. The company developed an innovative method for delivering nutrition to American soldiers, which later came to be known as Minute Maid orange juice and was sold to The Coca-Cola Company in 1960. J.H. Whitney & Company continues to make investments in leveraged buyout transactions and raised $750 million for its sixth institutional private equity fund in 2005.

Early venture capital and the growth of Silicon Valley

A highway exit for Sand Hill Road in Menlo Park, California, where many Bay Area venture capital firms are based One of the first steps toward a professionally-managed venture capital industry was the passage of the Small Business Investment Act of 1958. The 1958 Act officially allowed the U.S. Small Business Administration (SBA) to license private "Small Business Investment Companies" (SBICs) to help the financing and management of the small entrepreneurial businesses in the United States. During the 1960s and 1970s, venture capital firms focused their investment activity primarily on starting and expanding companies. More often than not, these companies were exploiting breakthroughs in electronic, medical, or data-processing technology. As a result, venture capital came to be almost synonymous with technology finance. An early West Coast venture capital company was Draper and Johnson Investment Company, formed in 1962 by William Henry

Draper III and Franklin P. Johnson, Jr. In 1962 Bill Draper and Paul Wythes founded Sutter Hill Ventures, and Pitch Johnson formed Asset Management Company. It is commonly noted that the first venture-backed startup is Fairchild Semiconductor (which produced the first commercially practical integrated circuit), funded in 1959 by what would later become Venrock Associates.[11] Venrock was founded in 1969 by Laurance S. Rockefeller, the fourth of John D. Rockefeller's six children as a way to allow other Rockefeller children to develop exposure to venture capital investments. It was also in the 1960s that the common form of private equity fund, still in use today, emerged. Private equity firms organized limited partnerships to hold investments in which the investment professionals served as general partner and the investors, who were passive limited partners, put up the capital. The compensation structure, still in use today, also emerged with limited partners paying an annual management fee of 1-2.5% and a carried interest typically representing up to 20% of the profits of the partnership. The growth of the venture capital industry was fueled by the emergence of the independent investment firms on Sand Hill Road, beginning with Kleiner, Perkins, Caufield & Byers and Sequoia Capitalin 1972. Located, in Menlo Park, CA, Kleiner Perkins, Sequoia and later venture capital firms would have access to the many semiconductor companies based in the Santa Clara Valley as well as early computer firms using their devices and programming and service companies. Throughout the 1970s, a group of private equity firms, focused primarily on venture capital investments, would be founded that would become the model for later leveraged buyout and venture capital investment firms. In 1973, with the number of new venture capital firms increasing, leading venture capitalists formed the National Venture Capital Association (NVCA). The NVCA was to serve as the industry trade group for the venture capital industry. Venture capital firms suffered a temporary downturn in 1974, when the stock market crashed and investors were naturally wary of this new kind of investment fund. It was not until 1978 that venture capital experienced its first major fundraising year, as the industry raised approximately $750 million. With the passage of the Employee Retirement Income Security Act (ERISA) in 1974, corporate pension funds were prohibited from holding

certain risky investments including many investments in privately held companies. In 1978, the US Labor Department relaxed certain of the ERISA restrictions, under the "prudent man rule," thus allowing corporate pension funds to invest in the asset class and providing a major source of capital available to venture capitalists. 1980s The public successes of the venture capital industry in the 1970s and early 1980s (e.g., Digital Equipment Corporation, Apple Inc., Genentech) gave rise to a major proliferation of venture capital investment firms. From just a few dozen firms at the start of the decade, there were over 650 firms by the end of the 1980s, each searching for the next major "home run". While the number of firms multiplied, the capital managed by these firms increased by only 11% from $28 billion to $31 billion over the course of the decade. The growth of the industry was hampered by sharply declining returns and certain venture firms began posting losses for the first time. In addition to the increased competition among firms, several other factors impacted returns. The market for initial public offerings cooled in the mid1980s before collapsing after the stock market crash in 1987 and foreign corporations, particularly from Japan and Korea, flooded early stage companies with capital. In response to the changing conditions, corporations that had sponsored in-house venture investment arms, including General Electric and Paine Webber either sold off or closed these venture capital units. Additionally, venture capital units within Chemical Bank and Continental Illinois National Bank, among others, began shifting their focus from funding early stage companies toward investments in more mature companies. Even industry founders J.H. Whitney & Company and Warburg Pincus began to transition toward leveraged buyouts and growth capital investments.[15][16][17]

The venture capital boom and the Internet Bubble (1995 to 2000)
By the end of the 1980s, venture capital returns were relatively low, particularly in comparison with their emerging leveraged buyout cousins, due in part to the competition for hot startups, excess supply of IPOs and the inexperience of many venture capital fund managers. Growth in

the venture capital industry remained limited throughout the 1980s and the first half of the 1990s increasing from $3 billion in 1983 to just over $4 billion more than a decade later in 1994. After a shakeout of venture capital managers, the more successful firms retrenched, focusing increasingly on improving operations at their portfolio companies rather than continuously making new investments. Results would begin to turn very attractive, successful and would ultimately generate the venture capital boom of the 1990s. Former Wharton Professor Andrew Metrick refers to these first 15 years of the modern venture capital industry beginning in 1980 as the "pre-boom period" in anticipation of the boom that would begin in 1995 and last through the bursting of the Internet bubble in 2000. The late 1990s were a boom time for venture capital, as firms on Sand Hill Road in Menlo Park and Silicon Valley benefited from a huge surge of interest in the nascent Internet and other computer technologies. Initial public offerings of stock for technology and other growth companies were in abundance and venture firms were reaping large returns.

The private equity crash (2000 to 2003)

The technology-heavy NASDAQ Composite index peaked at 5,048 in March 2000, reflecting the high point of the dot-com bubble. The NASDAQ crash and technology slump that started in March 2000 shook virtually the entire venture capital industry as valuations for startup technology companies collapsed. Over the next two years, many venture firms had been forced to write-off large proportions of their investments and many funds were significantly "under water" (the values of the fund's investments were below the amount of capital invested). Venture capital investors sought to reduce size of commitments they had made to venture capital funds and in numerous instances, investors sought to unload existing commitments for cents on the dollar in the secondary market. By mid-2003, the venture capital industry had shriveled to about half its 2001 capacity. Nevertheless, PricewaterhouseCoopers' Money Tree Survey shows that total venture capital investments held steady at 2003 levels through the second quarter of 2005.

Although the post-boom years represent just a small fraction of the peak levels of venture investment reached in 2000, they still represent an increase over the levels of investment from 1980 through 1995. As a percentage of GDP, venture investment was 0.058% in 1994, peaked at 1.087% (nearly 19 times the 1994 level) in 2000 and ranged from 0.164% to 0.182 % in 2003 and 2004. The revival of an Internet-driven environment in 2004 through 2007 helped to revive the venture capital environment. However, as a percentage of the overall private equity market, venture capital has still not reached its mid-1990s level, let alone its peak in 2000. Venture capital funds, which were responsible for much of the fundraising volume in 2000 (the height of the dot-com bubble), raised only $25.1 billion in 2006, a 2% decline from 2005 and a significant decline from its peak.

II.2. 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.

III.2.1. 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 tax-efficient 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.

III.2.2. 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.

III.2.3. 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 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.

III.2.4. 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. Thereafter, 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.

III.2.5. 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.

III.2.6. 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.

III.2.7. 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.

III.2.8. 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 up to 40 per cent of equity of Investee Company. VCFs may place the investment restriction for VCFs by way of maximum equity stake in the company, which could be up to 49 per cent of equity of the Investee Company.

III.2.9. 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.

III.2.10. Limitation on application of sweat 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.

III.2.11. 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.

VENTURE CAPITAL IN INDIA

III.1. 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, 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. 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. A comprehensive survey of the venture capital industry in India was done. This survey was conducted under the aegis of Indian Venture Capital Association (IVCA) by Thomson Financial (Venture Economics) and PRIME Database. The field survey was launched in October 2001 and completed in May 2002.

Some Highlights of the Survey are as follows:

In 2001, India ranked as third most active VC market in Asia Pacific (excluding Japan).

Venture funds invested $907.58 million in Indian companies in 2001, down 21.8% on 2000.

Number of companies receiving investment declined 62.6% to 101, from 270 in 2000.

VC funds disbursing investments declined to 57 in 2001 from 88 in 2000 but the average investment value of each deal rose from $3.85 million to $7.89 million.

Communications and media experienced the largest rise in investment in 2001, rising from $93.75 million in 2000 to $585.02 million.

Overall, India saw a shift to later stage investing with expansion stage funds accounting for 60.0% of disbursements in 2001, compared to 44.3% in 2000.

19 exits were achieved in 2001.

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 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, 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.

III.2. 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

III.3. Difference between Venture Finance & Debt Finance

Venture Finance
Objective Maximize Return

Debt Finance
Interest payment

Holding Period Instruments

2-5 years Common shares, Convertible bonds, Options, Warrants

Short/Long term Loan, Factoring, leasing

Pricing Collateral Ownership Control

Price earnings ratio, net tangible assets Very Rare Yes Minority shareholders, rights protection, board members

Interest spread Yes No Covenants

Impact on B/S

Reduced Leverage

Increased Leverage Loan repayment

Exit Mechanism Public offering, Sale to third party, Sale to entrepreneur

Table III.3: Difference between Venture Capital and Debt Finance

III.4. CATEGORIZATION OF VC INVESTORS

The "venture funds" available could be from

Incubators Angel Investors Venture Capitalists (VCs) Private Equity Players

III.4.1. 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. E-Ventures, Infinity is examples of incubators in India.

III.4.2. 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

The Indus Entrepreneurs (Tie) is a classic group of angels like: Vinod Dham, Sailesh Mehta, Kanwal Rekhi, Prabhu Goel, Suhas Patil, Prakash Agarwal, and K.B. Chandrashekhar. In India there is a lack of home grown angels except a few like Saurabh Srivastava & Atul Choksey (ex-Asian Paints)

III.4.3. Venture Capitalists (VCs)

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

III.4.4. Private Equity Players

They are established investment bankers. Typically: invest into proven/established businesses have financial partners approach invest between USD 5 100 million

III.5. CLASSIFICATION OF VENTURE FUNDS

Venture funds in India can be classified on the basis of

III.5.1. 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.

III.5.2. 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.

III.5.3. 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, SIDBI etc.

III.5.4. 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.

III.5.5. 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, Micro lands 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, ITL Infosys US subsidiary, solutions for supply chain management.

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.

III.6. 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.

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.

III.6.1. 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 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

III.6.2. 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 in-depth 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.

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 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

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.

III.6.3. 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

Issues
New or vendor shares Par value Partially-paid shares

Preference shares

Redeemable (conditions under Company Act) Participating Par value Nominal shares

Loan

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

Warrants Options

Exercise price, Exercise period Exercise price, Exercise period, call, put

Table III.6.3.(i): Capital Deal Instruments And Related Issues

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 its 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

Categories
Company specific Promoter specific Product/Project specific Macro environment

Factors influencing the choice of Instrument

Risk, current stage of operation, expected profitability, future cash flows, and investment liquidity options. Current financial position of promoters, performance track record, willingness of promoters to dilute stake. Future market potential, product life cycle, gestation period. Tax options on different instruments, legal framework, policies adopted by competition. Table: III.6.3. (ii): Factors influencing the selection of Instruments

III.6.4. 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 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 judgment 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. 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 premoney. 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.

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.

III.6.5. 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.

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

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.

III.6.6. 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.

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.

III.6.7. 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 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.

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.

III.7. SPECIAL PURPOSE VEHICLE:

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

Fig.III.7. Working of Special Purpose Vehicle

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

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.

III.8. 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.

III.8.1.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.

III.9. BUSINESS PLAN COVERAGE

III.9.1. 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 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

III.9.2. 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

III.9.3. 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

III.9.4. 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

III.9.5. 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 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

III.9.6. 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

III.9.7. 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

III.9.8. Risk Factors

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

III.9.9. 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

III.9.10. 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.

III.9.11. Use of Proceeds

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

III.9.12. Financial Summaries

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.

III.10. 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.

III.10.1. Stages of Financing

Venture capital can be provided to companies at different stages. These include:

III.10.2. Early-stage Financing

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.

III.10.3. 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.

III.10.4. 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.

III.11. 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.

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 recognized 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 recognized 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.

Venture capital investments are required to be restricted to domestic companies engaged in business of (i) (ii) (iii) (iv) (v) software Information Technology Production of basic drugs in pharmaceuticals sector, Bio-technology and Agriculture and allied other sectors etc.

Also in Union Budget 2010-2011

Indian companies are being permitted to invest up to US$ 100 million overseas. Indian companies are being permitted to make overseas investments in joint ventures abroad by market purchases without prior approval up to 50 per cent of their net worth

ANALYSIS AND INTERPRETATION

IV.1. SWOT ANALYSIS OF INDIAN VENTURE CAPITAL Strengths

An effort initiated from within Home grown Increased awareness of venture capital More capital under management by VCFs Industry crossed learning curve More experienced Venture Capitalists, Faddish Limited exit option Uncertainties Political Policy repatriation, Taxation

Weakness

Intermediaries, and Entrepreneurs. Growing number of foreign trained

Bureaucratic meddling and rigid official attitude Industry fragmented and polarized Mixed V.C culture. Smaller investments Domestic fund raising difficult Lack of transparency & corporate governance Accounting standards Poor legal administration Difficult due diligence Inadequate management depth funds with illiquid

professionals. Global competition growing. Moving towards international standards. Offshore funds bring strong foreign ties Matured capital market system Electronic trading - through NSE & BSE Valuation addition Irreversible reform Regulatory framework evolving

 Valuation expectations unrealistic Technical and Market evaluation difficult Negligible minority protection rights Inadequate corporate laws Poor infrastructure TABLE: IV.1. (i). Strengths and Weaknesses of Venture Capital in India

Opportunities

Threats

Growth capital for strong companies and Buyouts of weak companies due to growing global competition.

Change in government politics with respect to

Structuring Taxation

Financial restructuring of over leveraged companies taking place.

Acquisition of quoted small / medium cap companies. Threats from within expansion and Over

Pre money valuations low Vast potential exists in turn around, MBO, MBI.

Explositive

Exuberance of Investors. Greed for very high returns

Table: IV.1.(ii): Opportunities and Threats of Venture Capital in India

IV.2. VALUE CHAIN ANALYSIS

PRIMARY ACTIVITIES AND COSTS

Deal Origination

Deal Screening

Deal Structuring

Evaluation or Due diligence

Post investment Activities

Fig.IV.2. Primary Activities and Costs of VCA

There are four activities which supporting the venture capitals service. The primary activities that are foremost in creating value for customers and requisite support activities that enhance the performance of primary activities.

Primary Activities:
1. Deal origination 2. Screening 3. Deal structuring 4. Evaluation or Due Diligence 5. Post Investment Activities

There are four supporting activities: 1. Human Resource Development 2. Asset Manager 3. MIS System 4. International affiliation & Network

IV.2.1. PRIMARY ACTIVITIES IV.2.1.1. DEAL ORIGINATION:

In generating a deal flow, the Venture capital investor creates a pipeline of deals or investment opportunities that he would consider for investing in. Deal may originate in various ways. Referral system active search system and intermediaries. Referral system is an important source of deals. Deals may be referred to VCFs by their parent organizations, trade partners, industry associations, friends etc. Another deal flow is active search through networks, trade fairs, conferences, seminars, foreign visits etc. Intermediaries is used by venture capitalists in developed countries like USA, is certain intermediaries who match VCFs and the potential entrepreneurs. . A continuous flow of deals is necessary for the venture capital business. Yet another important source of deals flows is the active search through networks, trade fairs, conferences, seminars, etc. For e.g. APIDC-VCL deal generation strategy will produce a relatively higher level of quality deals than a general promotional approach and will generate sufficient deals to invest the monies raised by it. Their focused approach to canvassing entrepreneurs will be more efficient in finding qualified entrepreneurs and project ideas that meet their criteria of Key Differentials. APIDCVCL has set up a flow of investment opportunities with its existing network in India and with its associates in the USA. APIDC-VCL also plans to promote through focused seminars, a public

relations, campaign to institutions and industry associations, to heighten the awareness of its activities.

IV.2.1.2. SCREENING
VCFs, before going for an in-depth analysis, carry out initial screening of all projects on the basis of some broad criteria. For example, the screening process may limit projects to areas in which the venture capitalist is familiar in terms of technology, or product, or market scope. The size of investment, geographical location and stage of financing could also be used as the broad screening criteria. Here the company must identifying the market and company must have knowledge about how large the market, where is the market headed, what is the competition, how is the market segmented, how will the product or service be positioned in the market. And company must have knowledge about the product.

Monitoring and Value Addition:

APIDC-VCL in line with its proactive strategy of value addition follows an active mode of monitoring and value addition. APIDC-VCL in collaboration with the investee company sets up milestones that lead up to the eventual disinvestments from the investee company. These milestones are then monitored actively and the investee company is urged to adopt a reporting system that facilitates the monitoring of the progress versus the milestones.

IV.2.1.3. DEAL STRUCTURING:

In this process, the venture capitalist and the venture company negotiate the terms of the deals, that is, the amount, form and price of the investment. This process is termed as deal structuring.

The agreement also include the venture capitalists right to control the venture company and to change its management if needed, buyback arrangements, acquisition, making initial public offerings (IPOs), etc. Earned out arrangements specify the entrepreneurs equity share and the objectives to be achieved. The process involves the details of the financing instruments and the percentage ownership of the venture capitalist. The structure should also consider various commercial issues. The common instruments are equity, preferred shares, convertible debt, conditional loans, conventional secured or unsecured loans and income notes, etc. the instruments used by the venture capitalist to optimize venture capitals return /protection on one hand and to satisfy the entrepreneurs requirement on the other.

IV.2.1.4. Pricing of Deal

Pricing is the most sensitive part of the negotiation process. Pricing involves valuation Ofa Company before and after financing based on an analysis of risk and return. In seed capital and other early stage investment. VCC/VCFs expect a compounded annual return of 50% or more, whereas in second stage investment VCC/VCF may be satisfied with an annual return of 30-40% and in later stage financing, 25-30%. Venture capitalist must take care while pricing the deal as far as control over the ownership of the firm is concerned. The following are various methods used for valuation deals:

Conventional Valuation Method

This is based on the expected increase in the initial investment that could be sold out to a third party or through public offering via the exit route. Price earnings ratio (P/E) is calculated on the maturing date, also known as liquidity date. Multiplying the earning level post-tax effect by P/E ratio on the future maturity date arrives at valuation of investment at a future date. This method does not take into account the stream of cash flows beginning from the date of investment till the date of liquidity of investment.

 Present-Value-Base Method
This method takes into account the stream of earnings (or losses) generated during the entire period of the investment from the date of initial investment till date of maturity at a presumed discounted rate. The method was developed by Stanley Golder of the first Chicago Corporation and is popularly known as first Chicago method. Three alternative scenarios styled as success; survival and failure are assumed for the entire maturing period of the project that are discounted by a uniform discount rate to arrive at the present value of investment. Each scenario is assigned a probability figure. Probability figures are based on many factors, which affect the earning stream: prices of raw material; prices of finished goods; marketing factors. The product is multiplied by respective probability figures to arrive at expected value in each scenario. The total of these scenarios gives the expected present value of the company. Based on such value the venture capitalist makes his investment. The problem with this method is that it is based more on a value judgment by the venture capitalist than empirical consideration.

Revenue Multiplier Method

Revenue multiplier is an assumed factor used to estimate the value of an enterprise. By multiplying the annual estimated sales by such factor, the valuation figure is derived. This method is based on sales income and not on earnings. Assuming the absence of profit in the early stages of project, the method is useful for valuation at the early stages. The multiplier (M) is obtained by using the following equation: M= (1+g) n (e) (PE)
(1) + d n

Where, M g n e = stands for multiplier. = stands for growth rate. = stands for number of years between initial investment and exit date. = stands for expected profit margin (post tax) percentage at the exit date.

PE = stands for expected price earnings ratio at the exit date. D = stands for appropriate discount rate for venture capital investment and undertaking

Valuation, (v) is obtained by using the following equation M= R (1+g) n (e) (PE)
(1) + d n

Utilization of earlier investment is an important part of investigation that would reveal the ability of management to economically and efficiently utilize funds

IV.2.1.5. DUE DILIGENCE

Due diligence is the industry jargon for all the activities that are associated with evaluating an investment proposal. The venture capitalists evaluate the quality of entrepreneur before appraising the characteristics of the product, market or technology. Most venture capitalists ask for a business plan to make an assessment of the possible risk and return on the venture. Business plan contains detailed information about the proposed venture. The evaluation of ventures by Venture Capital Funds in India includes; For the venture capital investment process, due diligence means a rigorous investigation and evaluation of an investment opportunity before committing funds. This investigation is conducted by the parties involved in preparing a registration statement to form a basis for believing the statements contained therein are true and

that no material facts are omitted. This process includes review of its management team, business conditions, projections, philosophy, and investment terms and conditions. Absolutely vital to making a sound investment, due diligence verifies any business opportunities that survive the initial screening stage. For venture capital investments, as few as 10-15% of proposals make it past the initial screening stage to the full due-diligence process, and only 10% of those receive funding. This verification process consists of checking the accuracy of business plans, audited accounts, and management accounts; getting replies to warranty and other standard questionnaires; patent searches; and technical studies. Unpublished accounting information and subjective information are equally important; these data are collected by calling customers, suppliers, lawyers, and bankers, and by checking trade journals.

Preliminary Evaluation: The applicant required to provide a brief profile of the proposed
venture to establish prima facie eligibility.

Detailed Evaluation: Once the preliminary evaluation is over, the proposal is evaluated in
greater detail. Venture Capital funds in India expect the entrepreneur to have:-Integrity, long-term vision, urge to grow, managerial skills, commercial orientation. Venture Capital Funds in India also make the risk analysis of the proposed projects which includes: Product risk, Market risk, Technological risk and Entrepreneurial risk. The final decision is taken in terms of the expected risk-return trade-off. For e.g. APIDC-VCL will evaluate each deal against the started investment strategy and whether the returns meet the target rates, and whether the risk can be contained and are appropriate, prior to proceeding further. Specifically, APIDC-VCL will evaluate.

1. The quality of the management team. 2. The match with its strategy of Key Differential resulting in a strong, competitive edge for the company.

3. The size and growth rate of market. 4. Types of risk and their management. 5. Potential for high profitability while protecting the downside

IV.2.1.6. POST INVESTMENT ACTIVITIES:

Once the deal has been structured and agreement finalized, the venture capitalist generally assumes the role of a partner and collaborator. He also gets involved in shaping of the direction of the venture. The degree of the venture capitalists involvement depends on his policy. It may not, however, be desirable for a venture capitalist to get involved in the day-to-day operation of the venture. If a financial or managerial crisis occurs, the venture capitalist may intervene, and even install a new management team.

The company also provides following value added service: 1. Strategic planning 2. Recruitment 3. Operational planning 4. Help in obtaining additional financing 5. Introduction to potential customers and suppliers 6. International access 7. Legal and other professional services 8. Negotiation and execution of M&A

IV.2.2. SECONDARY ACTIVITIES: IV.2.2.1. Human Resource Development:

The company must have good expertise person like engineers, professional etc. for the evaluation and screening of the deal. Because this is the most important stage in the venture capital investment process. On the basis of screening and evaluating of the deal we can get idea about the success or failure in the deal.

IV.2.2.2. Asset Manager:

It is one of less than handful of asset manger, which is owner manager driven. The asset management team must have impressive credentials and strong overseas capabilities are essential in todays liberalized market. This allows to better relate and assess provide value addition to investee companies.

IV.2.2.3. MIS system

The company must have fully developed management information system for screening the deal and for evaluating the deal. The MIS system is also useful in pricing of the deal.

IV.3. PEST ANALYSIS: IV.3.1. POLITICAL FACTORS:

Venture Capital being a very sensitive institutional form due to the high-risk nature of its investments it was prerequisite for the government to be careful to ensure that its policies do not adversely affect its venture capitalists. There are number of rules and regulations for VC and these would broadly come under either of the following heads: The Indian Trust Act, 1882 or the company Act, 1956 depending on whether the fund is set up as a trust or a company. The foreign investment Promotion Board (FIPB) and the RBI in case of an offshore fund. These funds have to secure the permission of the FIPB while setting up in India and need a clearance from the RBI for any repatriation of income. The Central Board of Direct Taxation (CBDT) governs the issues pertaining to income tax on the proceeds from VC funding activity. The long term capital gain tax is at around 10% in India and the relevant clauses to VC may be found in Section 10(23)

VC & FVCI

SEBI

RBI

FIPB

TAX

SEBI (VCF) Reg. 1996 SEBI (FCVI) Reg. 2000 SCR Act. 1956 SEBI (SAST) Reg.1997 SEBI (DIP)

FEMA, 1999 Transfer or issue of security by a person resident outside India regulation 2000

FDI Policy Press Notes

IT Act, 1961

Investment Approvals DTAA Singapore Mauritius Others

Guidelines, 2000 SEBI Act, 1992

Figure: IV.3.1. Major Regulatory framework for venture capital industry

Minimum contribution and fund size: The minimum investment in a Venture Capital

Fund from any investor will not be less than Rs.5 lacs and the minimum corpus of the fund before the fund can start activities shall be at least Rs.5 crores.

Short term capital gain: Rate of tax on short term capital gains under Section 111A &

Section 115AD increased to 15 per cent from earlier 10%.

Investment Criteria:

The earlier investment criteria has been substituted by a new

investment criteria which has the following requirements:

Disclosure of investment strategy; Maximum investment in single venture capital undertaking not to exceed 25% of the corpus of the fund;

Investment in the associated companies not permitted; At least 75% of the investible funds to be invested in unlisted equity shares or equity linked instruments.

Not more than 25% of the investible funds may be invested by way of: a. Subscription to initial public offer of a venture capital undertaking whose shares are proposed to be listed subject to lock-in period of one year;

b. Debt or debt instrument of a venture capital undertaking in which the venture capital fund has already made an investment by way of equity. It has also been provided that Venture Capital Fund seeking to avail benefit under the relevant provisions of the Income Tax Act will be required to divest from the investment within a period of one year from the listing of the Venture Capital Undertaking.
Disclosure and Information to Investors: In order to simplify and expedite the process

of fund raising, the requirement of filing the Placement memorandum with SEBI is dispensed with and instead the fund will be required to submit a copy of Placement Memorandum/ copy of contribution agreement entered with the investors along with the details of the fund raised for information to SEBI. Further, the contents of the Placement Memorandum are strengthened to provide adequate disclosure and information to investors. SEBI will also prescribe suitable reporting requirement from the fund on their investment activity.

QIB status for Venture Capital Funds: The venture capital fund will be eligible to

participate in the IPO through book building route as Qualified Institutional Buyer subject to compliance with the SEBI (Venture Capital Fund) Regulations.

Relaxation in Takeover Code: The acquisition of shares by the company or any of the

promoters from the Venture Capital Fund under the terms of agreement shall be treated on the same footing as that of acquisition of shares by promoters/ companies from the state level financial institutions and shall be exempt from making an open offer to other shareholders/

Investments by Mutual Funds in Venture Capital Funds: In order to increase the

resources for domestic venture capital funds, mutual funds are permitted to invest up to 5% of its corpus in the case of open ended schemes and up to 10% of its corpus in the

case of close ended schemes. Apart from raising the resources for Venture Capital Funds this would provide an opportunity to small investors to participate in Venture Capital activities through mutual funds.

Government of India Guidelines: The Government of India (MOF) Guidelines for

Overseas Venture Capital Investment in India dated September 20, 1995 will be repealed by the MOF on notification of SEBI Venture Capital Fund Regulations.

GUIDELINES FOR OVERSEAS VENTURE CAPITAL INVESTMENT IN INDIA

In recognition of growing importance of Venture Capital as one of the sources of finance for Indian industry, particularly for the smaller unlisted companies, the Government has announced a policy governing the establishment of domestic Venture Capital Funds/ Companies. An amendment has also been carried out in the SEBI Act empowering the Securities and Exchange Board of India (SEBI) to register and regulate Venture Capital Funds (VCFs) and Venture Capital Companies (VCCs) through specific regulations.

With a view to augment the availability of Venture Capital, the Government has decided to allow overseas venture capital investments in India subject to suitable guidelines as outlined below:

a. Offshore investment may invest in approved domestic Venture Capital Funds/ Companies set up under the new policy after obtaining FIPB approval for the investment. There is no limit to the extent of foreign contribution to a domestic venture capital company/ fund. An offshore venture capital company may contribute 100% of the capital of

domestic venture capital fund, and may also set up a domestic asset management company to manage the Fund.

b. Establishment of an asset management company with foreign investment to manage such funds would require FIPB approval and would be subject to the existing norms for foreign investment in non-bank financial services companies.

c. Once the initial FIPB approval has been obtained, the subsequent investment by the domestic venture capital company/ fund in Indian companies will not require FIPB approval. Such investment will be limited only by the general restriction applicable to venture capital companies viz., i. ii. A minimum lock-in period of three years will apply to all such investments. VCFs and VCCs shall invest only in unlisted companies and their investment shall be limited to 40% of the paid up capital of the company. The ceiling will be subject to relevant equity investment limits that may be in force from time to time in relation to areas reserved for the Small Scale Sector. iii. Investment in any single company by a VCF/ VCC shall not exceed 20% of the paid-up corpus of the domestic VCF / VCC.

iv.

The tax exemption available to domestic VCFs and VCCs under Section 10(23F) of the Income Tax Act, 1961, will also be extended to domestic VCFs and VCCs which attract overseas venture capital investments provided these VCFs/ VCCs conform to the guidelines applicable for domestic VCFs/ VCCs. However, if the VCF/ VCC is willing to forego the tax exemptions available under Section 10(23F) of the Income Tax Act, it would be within its rights to invest in any sector.

v.

Income paid to offshore investors from Indian VCFs/ VCCs will be subject to tax as per the normal rates applicable to foreign investors.

vi.

Offshore investors may also invest directly in the equity of unlisted Indian companies without going through the route of a domestic VCF/ VCC. However, in such cases each investment will be treated as a separate act of foreign investment and will require separate approval as required under the general policy for foreign investment proposals.

vii.

Hassle free entry/exit for foreign venture capital firm

SEBI registered Foreign Venture Capital Investors shall be permitted to make investment on an automatic route within the overall sectorial ceiling of foreign investment under Annexure III of Statement of Industrial Policy without any approval from FIPB. Further, SEBI registered FVCIs shall be granted a general permission from the exchange control angle for inflow and outflow of funds and no prior approval of RBI would be required for pricing, however, there would be expost reporting requirement for the amount transacted. DTAT (Double Tax Avoidance Treaties) Foreign funds investing in India directly into Indian portfolio companies will not be affected by the proposed amendment. As most of these funds have been set up in tax neutral jurisdictions like Mauritius, they will continue to enjoy tax exemption on capital gains tax under the DTAA, effectively getting the equivalent of a pass through notwithstanding which sector they invest in. Controller of Capital Issue The exist route available to the venture capitalist were restricted to the IPO route. Pricing of the issue was dependent on Controller of Capital Issues (CCI) regulations before deregulations.

Many of the issues were under priced. Failure of OTCEOI so small companies could not hope for BSE / NSE listing.

Relaxation In IPO Norms: The SEBI norms for an IPO by a Venture Capital Company / fund be relaxed. The requirement of three years track record should be waived off for a Venture Capital company/ fund registered with SEBI. This will help the Venture Capital Company/ fund to generate resources.

SEBI registered VCFs have been permitted to invest in equity and equity linked instruments of offshore venture capital undertakings, subject to overall limit of USD 500 million and with prior SEBI approval. Investment can be made only in those companies which have an Indian connection and the investment cannot exceed 10% of the VCFs investible funds.

Taxed on emerging sector:

As per Union Budget 2007 and its broad guidelines, Government proposed to limit pass-through status to venture capital funds (VCFs) making investment in nine areas. These nine areas are biotechnology, information technology, nanotechnology, seed research and development, R&D for pharma sectors, dairy industry, poultry industry and production of bio-fuels. Pass-through status means that the incomes earned by funds are taxable now.

Liberalization: With the advent of liberalization, India has been showing remarkable growth in the economy in the past 10 12 years. The government is promoting growth in capacity utilization of available and acquired resources and hence entrepreneurship development, by liberalizing norms regarding

venture capital. In the year 2000, the finance ministry announced the liberalization of tax treatment for venture capital funds to promote them & to increase job creation. This is expected to give a strong boost to the non resident Indians located in the Silicon Valley and elsewhere to invest some of their capital, knowledge and enterprise in these ventures.

IV.3.2. ECONOMIC FACTORS:

MERGER & ACQUISTION: Venture backed liquidity events by year 2004-2010 through M&A Quarte r/Year Total M&A Deals M&A Deals with Disclosed Values 2004 2005 2006 2007-1 2007-2 2007-3 2007-4 2007 2008-1 2008-2 2008-3 2008-4 2008 2009-1 318 290 339 81 81 101 87 350 107 105 94 62 368 82 152 122 186 45 34 48 39 166 52 40 42 26 160 29 Total Disclosed M&A Value (SM) 7,916.4 7,721.1 15,440.6 4351.9 4,725.0 18,056.0 2,594.0 29,727.0 5,607.5 4,018.5 3,894.8 5,616.8 19,137.6 4,540.3 Average M&A Deal Size (SM) 52.1 63.3 83.0 96.7 139.0 376.2 66.5 179.1 107.8 100.5 92.7 216.0 119.6 156.6

2009-2 2009-3 2009-4 2009 2010-1 2010-2 2010

87 100 86 355 70 50 120

36 52 43 160 28 14 40

1,972.3 10,810.0 9,084.1 28,406.7 3,602.4 2,397.3 5,999.7

110.3 207.9 211.3 177.5 128.7 171.2 142.9

Table IV.3.2. (i): Venture backed liquidity events by year 2004-2010 through M&A www.thomsonreuters.com

Figure: IV.3.2. (i): Venture backed M&A deals

 MERGERS AND ACQUISITIONS VOLUME DECLINES In the second quarter of 2008, 50 venture-backed M&A deals were completed, 14 of which had an aggregate deal value of $2.4 billion. M&A volume of 120 transactions in the first half of 2008 was down 28 percent from the first half of 2007 when 169 transactions were completed. The average disclosed deal value for the quarter was $171.2 million. Due to this V/C is directly affected negatively because M&A is the exit route for Venture capital industry. The reason behind decreasing No. of M&A deals is crash down of SENSEX by 51%. Quarter/ Year No. of IPOs Total Offer Amount (SM) 2004 2005 2006 2007-1 2007-2 2007-3 22 29 93 10 10 19 2,109.10 2,022.70 11014.90 720.7 714.1 1458.10 Average IPO Offer Amount (SM) 95.9 69.8 118.4 72.1 71.4 76.7

2007-4 2007 2008-1 2008-2 2008-3 2008-4 2008 2009-1 2009-2 2009-3 2009-4 2009 2010-1 2010-2 2010

18 57 10 19 8 20 57 18 25 12 31 86 5 0 5

1592.10 4485.00 540.8 2011.00 934.2 1631.10 5117.10 2190.6 4146.80 945.2 3043.80 10326.30 282.7 0 282.7

92.2 78.7 54.1 105.8 116.8 81.6 89.8 121.7 165.9 78.8 98.2 120.1 56.5 n/a 56.5 www.thomsonreuters.com

Table: IV.3.2. (ii): Number of IPOs during 2004 2010 Here the No. of IPO is decreased in first two quarters of 2010 as compared to first two quarters of previous two years. The no. IPO in 1st two quarter of 2009 are 43 and in first two quarter of 2010 are only 5 IPO. Because due to crash down of IPO nobody like to bring IPO. IPO is the exist route for venture capital company. It becomes a barrier for venture capital to exist from a venture capital.

 INFLATION RATE

Source: www.rbi.org.in, Macroeconomic and Monetary Development, annual statement on monetary policy, First Quarter Review 2010-11 Figure: IV.3.2. (ii) Inflation V/S Venture Capital growth rate

IMPACT
In the above chart the inflation rate is decreased to 4.5 in 2007 from 7.4 in 2006. At same time, the growth in VC is also declining to 33.33% in 2007 from 251.06% in 2006. From the above chart we can conclude that inflation and VC has positive relationship. Now in June 2010 the inflation rate was 11.9 and the NO. of deal in first two quarter in 2010 was 170 and value of deal was 6390 US $ mn and in third quarter of 2010 was only four deals. And in October the inflation touch the 13.01%. Due to increase in inflation rate the people will be going to spend more. Thus, their savings will decrease. So more money will come into the market and demand of the

products will increase continuously now due to growth of any sector will attract new entrepreneur to enter in the industry. For that they must need funds. So there is a great opportunity for venture capital industry to attract this new entrepreneur.

GDP GROWTH RATE

Source: CII (Confederation of Indian Industry) July 2010 Presentation Figure: IV.3.2. (iii) GDP V/S Venture Capital growth rate

IMPACT
In above chart there was a positive relationship there was between GDP growth rate. But in 2009 the growth of VC was decline to 89.79% from 240.91% in 2008 but here the value of deal was increasing. In 2010 the growth rate is 9% and project the next year GDP 8% to 9%. So there is a hope, the growth of VC industry can be increased. India is the 4th largest economy in terms of PPP. GDP of India is US$ 3787.3 billion in PPP terms.

Taking Indian Purchasing Power Parity (PPP) into consideration, this would be equivalent to $22 billion worth of investment in the US. Since about $1.75 billion (or approximately 40% of $4.4 billion) has been already raised, even if only $2.2 billion is raised by December 2008.

Evalueserve cautions that there will be a glut of VC money for earlystage investments in India. This will be especially true if the VCs continue to invest only in currently favourite sectors such as IT, BPO, software and hardware products, telecom, and consumer Internet.

CONTRIBUTION OF SECTOR IN GDP:

Sourc e: CII (Confederation of Indian Industry) July 2010, Presentation

Figure: IV.3.2. (iv) Contribution of various sectors in GDP In Indian GDP growth rate the contribution of service and manufacturing sectors are increasing. In 1991 the contribution of service and industry sectors are 41% and 27% and now in 2008 it is 54% and 27% respectively.

IMPRESSIVE GROWTH IN INDUSTRY SECTOR:

Items Industry Mining and Quarrying Manufacturing Electricity, Gas and water supply Construction 2006-07 9.8 7.5 8.7 7.5 14.1 2007-08 10.15 4.87 8.98 4.68 16.46 2008-09 11 5.7 12 6 12 2009-10 (AE) 8.1 4.7 8.8 6.3 9.8

Table: IV.3.2. (iii): Growth in Industrial Sector

IMPRESSIVE GROWTH IN SERVICES SECTOR:

Items Services Trade, hotels, transport & Communication Financial, real estate & business services Community, social and personal services 11.41 13.9 11.8 11.51 11.8 12.0 10.34 2007-08 11.9 2008-9 2009-10 (AE) 10.7

7.21

6.9

7.3

Source: Confederation of Indian Industry, July 2010 Table: IV.3.2. (iv): Growth in Service Sector Most of the venture capital industry invests their money in IT companies, hotels, transport, communication, bio-technology, BIFS etc. This shows an impressive growth year by year. These are emerging sectors for venture capital industry.

 SENSEX CRASHDOWN

www.bseindia.com Figure: IV.3.2. (v). SENSEX in 2010

IMPACT
The SENSEX is down by 51% from January 2010 to Nov 2010. So one company is tried to come up with IPO. IPO in first two quarter of 2009 is 43 and value of IPO is 6337.4 in first two quarter of 2010. There is only 5 IPO and value is only 282.7 through VC Company go for exit. Because IPO is one of the exit route for Venture Capitalist from the company. It is also favorable for Venture Capital Company because no one tries to come up with IPO so they must go to the venture capital for money.

 SMALL SCALE INDUSTRIES

Source:ww w.msme.org.in, Economic survey 2009-10, chapter 8 Figure: IV.3.2. (vi) No. Of deals V/S No. Of SMEs.

IMPACT
VC, to be able to contribute to developing entrepreneurship in India, needs to concentrate its investment in small and medium enterprises. A Package for Promotion of Micro and Small Enterprises was announced in February 2009. This includes measures addressing concerns of credit, fiscal support, cluster-based development, infrastructure, technology, and marketing. Capacity building of MSME Associations and support to women entrepreneurs are the other important features of this package. SMEs have been allowed to manage their direct/ indirect exposure to foreign exchange risk by booking/ cancelling/ roll over of forward contracts without prior permission of RBI.

To boost the micro and small enterprise sector, the bank has decided to refinance an amount of 7,000 crore to the Small Industries Development Bank of India, which was available up to March 31, 2010. The Central Bank said that it is also working on a similar refinance facility for the
National Housing Bank (NHB) of an amount of Rs 4,000 crore.

INTEREST RATE:

Sour ces:- The Macro economic and monetary development annual statement on monetary policy, first Quarter Review 2010-11 Figure: IV.3.2. (vii): Interest Rate

IMPACT:
The interest rate increase year by year. It is 6.11% in March-2008 and now in July 2010 it is 9.11%. venture capital firms generally borrow from banks now if interest rates are increasing interest cost of venture capital firms will also increase which led reduce the profitability of Venture Capital firms. Because if anyone is investing in any option he will look for good return, so here if they will maintain their own profits they will have to give less return to investors then investors will go for other options. Here increase in bank rates affects Venture Capital firms in both ways from the suppliers as well as buyers side.

CURRENCY RISK:

Figure: IV.3.2. (viii): Exchange Rate (INR/US$)

IMPACT
From the above chart we can see that exchange rate is highly fluctuated. Nowadays the exchange rate touches to Rs.50/-. Per dollar. Now due to globalization venture capital firms are entering at global level. For a particular country currency risk can be defined in two ways.
Indian venture capital is concentrated on global level due to increasing

opportunity in

global level. They make a deal with global company. So there is directly affect the movement of exchange rate.
In second way, Foreign institutional investor incest their money Indian

stock market

and nowadays due to crash down of market the investment of FII is decreasing. Due to this nobody likes to bring IPO. It is directly affected to venture capital company because IPO is one way for exist.

EXPORT AND IMPORT

Figure: IV.3.2. (ix): Value of export and import

IMPACT:

The value of Import and export are increasing year by year. In 2004-05 the value of import and export are 52.7 and 61.4 US$bn respectively and in 2009-10 the value of import and export are 155.7 and 185.7 US$bn. It means industry needs more money for import and export. So it is an opportunity for venture capital. On the other side when company going to export the company must have good contact with other countrys company. So for that venture capital industry is useful because they have good contact and affiliation network with other countrys company.

REPO RATE
The Repo Rate is now reduced to 6.5 from 8.5 in July 2010. It is directly affect the home loan rate. The rate of home loan is reduced so it is very helpful for real estate sector. And most of the Venture Capital companies invest their money in real estate sector. There is an improvement of the flow of credit to productive sectors of the economy.

LACK OF FINANCIAL TRANSPERANCY AND OTHER PROCESSES:

Again, partly because the Indian economy was a socialistic and closed economy and partly because Indian entrepreneurs are not as proficient at business development as their counterparts in the US, Indian start-ups lack financial transparency and often have limited experience in implementing effective financial processes. This usually makes the task of Venture Capital much more difficult not only during the due-diligence phase, but also in helping the start-up grow rapidly.

FACTOR

FAVOURABLE

UNFAVOURABLE

BOTH

MERGERS & AQUISITIONS, IPO INFLATION RATE GDP GROWTH RATE SENSEX CRASHDOWN SMALL SCALE INDUSTRIES INTEREST RATE CURRENCY RISK EXPORT & IMPORT REPO RATE

Table: IV.3.2. (v): Result of Economic Factors

IV.3.3. SOCIAL FACTORS: Demographic factor: AGE:

Population Demographic Shift Age % of population Under 15 years Between 15-59 years Above 60 years 1999 37.20% 56.10% 06.60% 2004 33.50% 59.30% 06.90% 2009 30.00% 62.30% 07.50%

Table: IV.3.3. (i): Population Demographic Shift

(Source: Planning Commission Projection data) Figure: IV.3.3. (i): Population Demographic Shift between 15-59 Years

In above chart we can see young working people in India are increasing rapidly. Earlier the young working people are 56.1% out of total population and nowadays it is 62.3% Young people out of total population. The average young age in India is 25 up to year 2025.

UNEMPLOYMENT RATE:

www. indexmundi.com Figure: IV.3.3. (ii): Unemployment rate In India the unemployment rate is very high. No doubt it is decreasing year by year. It is 9.5% in 2006 and now it is 7.2% in 2010. Here there is a great opportunity for Venture capital firm because there is a huge untapped market and they require amount for starting the business.

According to one survey by National Entrepreneurship Development Board (NEBD), Ministry of SSI & ARI, Govt. of India, on Entry barriers to entrepreneurship as perceived by youth. In this survey out of 1625 respondents 19.2% people have future plan to become entrepreneur for starting the business and 80.8% persons are not ready for business. But out of this 80.8% persons 58.3% person are ready for becoming entrepreneurship if they get help in

finance, project idea, and training for business and management. So here there is a great opportunity for venture capital firms.

INDIAN ENTREPRENEUR LACKS IN MARKETING, SALES AND BUSINESS DEVELOPMENT EXPERTISE:

An Indian entrepreneur is found to be quite adept technically and definitely at par with similar entrepreneurs in developed countries. However, entrepreneurs in India generally lacked expertise in marketing, sales and business development areas, especially when compared to their counterparts in the US. Furthermore, since India had socialistic economic policies during 19471992, there is a lack of good talent in marketing and sales professionals who can thrive in an extremely competitive environment. Hence, finding the appropriate marketing, sales and business development people is one area where Indian start-ups need help. This problem is further exacerbated because the Indian economy has been growing at 8% and most start- ups have to compete for talent not only with other companies who are exporting similar or dissimilar products and services but also with many Indian domestic companies. In fact, finding and retaining the right talent has become an issue not only in marketing, sales and business development but also in research, technical and advanced development areas. Finally, if the eventual market were a developed country, then such expertise can be potentially found in that country. However, if the market for the corresponding product or service is India, China or some other developing nation, then finding such people can be a Herculean task!

INDIAN ENTREPRENEURS ARE HESISTANT TO GIVE UP CONTROL :

Indian entrepreneurs are usually hesitant about giving up control. In fact, most of the entrepreneurs in India currently receive their initial funding from family and friends, and even if they do not do so, the Indian social system is such that relatives and friends still end up being a

major influence. Also, company can borrow money from bank and other financial institution at lower than Venture capital rather give substantial share to the VC. Consequently, the Venture Capital will have to provide a very clear value proposition to the startups and cannot simply state that they bring value to the table just because they are well connected, etc. In fact, we believe that in some cases the Venture Capital may even have to go to the extreme of closing contracts and bringing in the revenue on behalf of a start-up rather than simply opening doors by providing the contacts in their Rolodex.

ORIGIN OF IMMIGRANT ENTREPRENEUR

Source: Presentation of ITeC (institute for technology entrepreneurship & commercialization) Fig.IV.3.3. (iii): Origin of Immigrant Entrepreneur Salaries of skilled people are raising 15-20% annually in India and China. Skilled immigrants have contributed greatly to US industrial growth but there is a huge immigration backlog: Legal, Educated, skilled workers currently waiting for green cards 500,040 in main employment-based visa categories plus 555,044 family members

 Over 1 million skilled immigrants waiting for yearly quota of 120,000 visas with 8,400 max/country.

DEMOGRAPHIC FACTOR FACTOR AGE & UNEMPLOYMENT RATE INDIAN ENTREPRENEUR LACK IN MARKETING, SALES AND BUSINESS DEVELOPMENT EXPERTISE INDIAN ENTREPRENEURS ARE HESISTANT TO GIVE UP CONTROL ORIGIN OF IMMIGRANT ENTREPRENEUR FAVOURABLE UNFAVOURABLE BOTH

Table: IV.3.3. (ii): Result Of Demographic Factors

IV.3.4. GEOGRAPHIC FACTOR:

1. EMERGING CITIES

TOP CITIES ATTRACTING VENTURE CAPITAL INVESTMENT (2009) City Mumbai Delhi (Include Noida & Gurgoan) Bangalore Hyderabad Chennai Ahmadabad Kolkata No. Of Deals 109 63 49 41 32 14 12 Value (US $M) 5995 2688 685 1380 824 492 339

Table: IV.3.4. (i): Top Cities Attracting Venture Capital Investment

Cities Mumbai

Sectors Software services, BPO, Media, Computer Graphics, Animations, Finance and Banking

All IP-led companies; IT and IT- enables services, Bangalore Biotechnology

Delhi

Software services, IT enabled services, Telecom.

Chennai

IT and Telecom

Hyderabad

IT and IT enabled services, Pharma

Pune

Biotech, IT, BPO Source: IVCA

Table: IV.3.4. (ii): City Wise Sectorial Investment by Venture Capital In Venture Capital industry most of the deals are made in emerging city like Mumbai, Delhi, Bangalore, Chennai, and Kolkata. In this industry Venture Capital firms invest their money in most highly risk and emerging sector like bio- technology, IT-ITES, real estate, healthcare and these sectors are highly developed in this emerging city. So there is a great opportunity for Venture Capital to invest their money in this city.

IV.4. FUTURE OF VENTURE CAPITAL INDUSTRY IN INDIA

Venture capital has been a remarkable catalyst of entrepreneurial activity, after the Second World War, in many developed countries. It has led to significant growth in industry and innovation. 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. In all emerging markets, the market practice will be ahead of regulation and there could be problems galore in the process of market maturing. 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 a recent estimate by the National Association of Software and Service Companies (Nasscom), the venture capital investment in India is slated to rise to massive Rs 50,000 crore by 2011, up from Rs 2,200 crore in 2005-06.

Trends for 2011

Most VCs believe that the next year will undoubtedly be better; driven by a relatively stable economy, with growth rates again picking up. The digital signature regime implemented by April 2011 will also offer a big boost to the e-commerce sectors especially e-banking and online trading.

It is estimated that total disbursements will be in the region of $ 2 billion, and fund raising for India-centric funds could increase significantly, driven by increased European interest.

Total VC disbursements in India were to the tune of about $1.1 billion in 2010 (as compared to $1.3 billion in the previous year), according to the IVCA. VCs feel that 2011 will see VC disbursements in the $2 billion range, with India centric capital to the tune of $1 billion to be raised in 2011.

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 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, and 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.

SUMMARY AND CONCLUSION

V.1. FINDINGS
The following are the few Major findings after analyzing various factors:

V.1.1 ORIGIN OF IMMIGRANT ENTREPRENEUR

Salaries of skilled people are raising 15-20% annually in India and China. Skilled immigrants have contributed greatly to US industrial growth but there is a huge immigration backlog: Legal, Educated, skilled workers currently waiting for green cards 500,040 in main employment-based visa categories plus 555,044 family members Over 1 million skilled immigrants waiting for yearly quota of 120,000 visas with 8,400 max/country.

V.1.2 UNEMPLOYMENT RATE:

In India the unemployment rate is very high. No doubt it is decreasing year by year. It is 9.5% in 2006 and now it is 7.2% in 2010. Here there is a great opportunity for Venture capital firm because there is a huge untapped market and they require amount for starting the business.

According to one survey by National Entrepreneurship Development Board (NEBD), Ministry of SSI & ARI, Govt. of India, on Entry barriers to entrepreneurship as perceived by youth. In this survey out of 1625 respondents 19.2% people have future plan to become entrepreneur for starting the business and 80.8% persons are not ready for business. But out of this 80.8% persons 58.3% person are ready for becoming entrepreneurship if they get help in finance, project idea, and training for business and management. So here there is a great opportunity for venture capital firms.

V.1.3 REPO RATE

The Repo Rate is now reduced to 6.5 from 8.5 in July 2010. It is directly affect the home loan rate. The rate of home loan is reduced so it is very helpful for real estate sector. And most of the Venture Capital companies invest their money in real estate sector. There is an improvement of the flow of credit to productive sectors of the economy.

V.1.4 EXPORT AND IMPORT

The value of Import and export are increasing year by year. In 2004-05 the value of import and export are 52.7 and 61.4 US$bn respectively and in 2009-10 the value of import and export are 155.7 and 185.7 US$bn. It means industry needs more money for import and export. So it is an opportunity for venture capital. On the other side when company going to export the company must have good contact with other countrys company. So for that venture capital industry is useful because they have good contact and affiliation network with other countrys company.

V.1.5 CURRENCY RISK:

We can see that exchange rate is highly fluctuated. Nowadays the exchange rate touches to Rs.50/-. Per dollar. Now due to globalization venture capital firms are entering at global level. For a particular country currency risk can be defined in two ways.

Indian venture capital is concentrated on global level due to increasing

opportunity in global level. They make a deal with global company. So there is directly affect the movement of exchange rate.
In second way, Foreign institutional investor incest their money Indian

stock market

and nowadays due to crash down of market the investment of FII is decreasing. Due to this nobody likes to bring IPO. It is directly affected to venture capital company because IPO is one way for exist.

V.1.6 SENSEX CRASHDOWN

The SENSEX is down by 51% from January 2010 to Nov 2010. So one company is tried to come up with IPO. IPO in first two quarter of 2009 is 43 and value of IPO is 6337.4 in first two quarter of 2010. There is only 5 IPO and value is only 282.7 through VC Company go for exit. Because IPO is one of the exit route for Venture Capitalist from the company. It is also favorable for Venture Capital Company because no one tries to come up with IPO so they must go to the venture capital for money.

V.1.7 CONTRIBUTION OF SECTOR IN GDP

In Indian GDP growth rate the contribution of service and manufacturing sectors are increasing. In 1991 the contribution of service and industry sectors are 41% and 27% and now in 2008 it is 54% and 27% respectively.

V.1.8. DEVELOPMENT OF SMALL SCALE INDUSTRIES

VC, to be able to contribute to developing entrepreneurship in India, needs to concentrate its investment in small and medium enterprises. A Package for Promotion of Micro and Small Enterprises was announced in February 2009. This includes measures addressing concerns of credit, fiscal support, cluster-based development, infrastructure, technology, and marketing. Capacity building of MSME Associations and support to women entrepreneurs are the other important features of this package. SMEs have been allowed to manage their direct/ indirect exposure to foreign exchange risk by booking/ cancelling/ roll over of forward contracts without prior permission of RBI.

V.2. MEASURES TO BE PROVIDED/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.

V.2.1. 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.

V.2.2. 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.

V.2.3. 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.

V.2.4. Entrepreneurship and Innovation:

A broad-based (and less family based) entrepreneurial traditions and societal and governmental encouragement for innovation creativity and enterprise.

V.2.5. 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.

V.2.6. 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.

V.2.7. Technological Competitiveness:

Encouragement and funding of R&D by private and public sector companies and the government for ensuring technological competitiveness.

V.2.8. 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.

V.2.9. 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.

V.2.10. 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 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.

V.3. 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. There are around 30 Venture capital funds, which have garnered over Rs.5000 crores.

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.

Thus, venture capital in India resembles more a development capital than a true venture capital (for risk, high-tech ventures).

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.

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 favorable environment needed to take-off the venture capital finance in India.

ANNEXURE 1

Table-1: Indian Scenario A Statistical Snapshot

Contributors of funds 2010 Foreign Institutional Investors All India Financial Institutions Multilateral Development Other Banks Agencies Foreign Investors Private Sector Public Sector Nationalized Banks Non Resident Indians State Financial Institutions Other Public Insurance Companies Mutual Funds Total

Contributors (Rs mn) 13,426.47 6,252.90 2,133.64 1,541.00 570.00 412.53 324.44 278.67 235.50 215.00 115.52 85.00 4.5 25,595.17

Per cent 52.46 24.43 8.34 6.02 2.23 1.61 1.27 1.09 0.92 0.84 0.45 0.33 0.0 100.00%

Table-2: Financing by investment stage

Investment Stages Seed Stage Start up Other Early Stage Later Stage Turnaround 2009 5% 41% 18% 35% 1% 2010 9% 40% 20% 30% 1%

ANNEXURE 2

Brief Profile of major players

IDBI Venture Capital Fund:

This was established in1986 with the objective to finance projects whose requirements range between Rs. 5 lakhs to 2.5 crores. The promoters stake should be at least 10percent for the ventures below Rs. 50 lakhs and 15percent for those above 50 lakhs. Financial assistance is extended in the form of unsecured loans involving minimum legal formalities. Interest at concessional rate of 9percent is charged during technology development and trial run of production stage and it will be 17percent once the product is commercially traded in the market by the financially assisted firm. IDBI venture capital funds extends its financial assistance to the ventures likely to be engaged in the fields of chemicals, computer software, electronics, bio-technology, non-conventional energy, food products, refractories and medical equipments.

Technology Development and Information Company of India Limited (TDICI):

This venture Capital fund was jointly floated by Industrial Credit & Investment Corporation of India (ICICI) and Unit Trust of India (UTI) to finance the projects of professional technocrats who take initiative in designing and developing indigenous technology in the country. Technology Development and Information Company of India Limited (TDICI) was launched with an authorized capital base of Rs. 20 crores and the same was targeted to be increased to Rs. 40 to 50 crores. TDICI favours the firms seeking financial assistance for developing information

technology,

management

consultancy,

pharmaceutical,

veterinary

biological, environmental, engineering, non-conventional sources of energy and other innovative services in the country.

 Unit Trust of India (UTI)

In 1988-99 UTI set-up a venture capital fund of Rs. 20 crores in collaboration with ICICI for fostering industrial development. TDICI established by UTI jointly with ICICI acts as an advisor and manager of the fund. UTI launched venture capital unit scheme (VECAUS-I) to raise resources for this fund. It has set up a second venture capital fund in March 1990 with a capital of Rs. 100 crores with the objective of financing green field ventures and steering industrial development.

Risk Capital and Technology Finance Corporation Ltd. (RCTFC)

IFCI had sponsored in 1985, Risk Capital Foundation (RCF) to give positive encouragement to the new entrepreneurs. RCF was converted into RCTFC on 12th January, 1988. It provides both risk capital and technology finance and roof to innovative entrepreneurs and technocrats for their technology oriented ventures.

Small Industrial Development Bank of India (SIDBI)

Small Industrial Development Bank of India (SIDBI) has decided to setup a venture capital fund in July 1993, exclusively for support to entrepreneurs in the small sector. Initially a corpus has been created by setting apart Rs. 10 crores. The fund would be augmented in future, depending upon requirements.

Andhra Pradesh Industrial Development Corporation (APIDC)

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APIDC Venture Capital Ltd. (APIDC-VCL) was promoted by APIDC with an authorized capital of Rs.2 million on 29th August 1989. Its main objective is to encourage technology-based ventures particularly those started by first generation technocrat entrepreneurs and ventures involving high risk in the state of Andhra Pradesh.

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 Gujarat Venture Finance Limited (GVFL)

GVFL has been promoted by the Gujarat Industrial Investment Corporation Limited (GIIC) in 1990, to provide financial support to the ventures whose requirements range between 25 lakhs and 2 crores. Total corpus of Rs. 24 crores of the referred venture capital fund was cofinanced by GIIC, state financial corporation, some private corporates and World Bank. The firms engaged in biotechnology, surgical instruments, conservation of energy and food processing industries are financed by GVFL.

Commercial Banks Sponsored Venture Capital Funds

State Bank of India, Canara Bank, Grindlays Bank and many other banks have participated in the venture capital fund building Industry in order to provide financial assistance to the projects associated with high risks. SBI venture capital is monitored through SBI capital markets. Canbanks venture capital functions through Canbank. Financial services and India Investment Fund represents the venture capital launched by Grindlays Bank.

Some of the Private Sector Venture Capital Funds ICICI ventures Fund Management
ICICI is the leading VC with $400 million. Starting with the objective of playing the role of a value added investors with a high technology focus ICICI in 1997-98, ICICI made 10 investments worth Rs 50 crore and it further increased to 37 with an investment of Rs 277 crore during 19992000.The momentum continued in next period also i.e., from April 2000 to September 2000, 35 investments were made with RS 290 crores.

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ICICI has set a record not only in making investments but also in exiting from the companies, which made them so successful.

20th Century Venture Capital Fund:

20th century venture capital fund has been established with a corpus of Rs. 20 crores promoted by 20th century finance company limited. The fund envisages focus on sick industries and first generation entrepreneurs.

Credit Capital Venture Fund (CCVF):

CCVF (India) Limited has been formed as a subsidiary of credit capital finance corporation limited in April1989. This fund has been promoted by nearly 15 major industrial houses in the country with the objectives of reviving sick units. It is the first private managed venture fund with a subscribed capital of Rs.10 crore contributed to the extent of Rs.6.5 crore by international financial agencies and the remaining raised through public subscription.

The other venture capitalists are as follows:

Alliance Venture Capital Advisors Ltd. Baring Private Equity Partners Chrysalis Capital CDC Advisors Private Ltd. Draper International eVentures India Feedback Ventures HBSC Private Equity Management Mauritius Ltd.
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ICF Ventures IL & FS Venture Corporation Ltd. Indus Venture Management Ltd. JF Electra Advisors (I) Ltd. Marigold Capital Services Ltd. Pathfinder Investment Company Private Ltd. Risk Capital & Technology Finance Corp. Ltd. Walden Nikko

Infinity Ventures

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BIBLIOGRAPHY

WWW.WIKIPEDIA.ORG www.nasscom.org www.rbi.org.in www.vcline.com www.thomsonreuters.com 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

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www.indiainfoline.com

www.icfaipress.org

www.thehindubusinessline.com

www.gvfl.com

www.bseindia.com

www.msme.org.in

Planning Commission Projection data

www.indexmundi.com

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