CHANGING FOCUS OF VENTURE CAPITALISTS IN INDIA-A STUDY

Dr. M.P.Shiva Kumar Food and Agribusiness School (FABS), Hyderabad

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Venture capital has become an increasingly important

source of financing for new companies, particularly

when such companies are operating on the frontier of

emerging technologies and markets.

The venture capital industry as an institution is a good example that prides itself on nursing companies, rather than just financing them.

The roles played by venture capitalists are many

they offer knowledge and contribute to the growth of companies

help the firm obtain alternative sources of equity finance help their portfolio firms

The underlying assumption is that the entrepreneur and the venture capitalist would act together in the interest of the enterprise as 'partners.

Venture capital is the capital available for financing a new business venture. It is also often thought of as the early stage financing of new and young enterprises seeking to grow rapidly.

VENTURE CAPITAL DEFINITION

The National Venture Capital Association defined

venture capital as: money provided by professionals

who invest alongside management in young, rapidly

growing companies that have the potential to develop

into significant economic contributors(NVCA 2001).

Return on Investment in Venture Capital

Venture capitalists are particularly interested in

securing large returns on investments. Table below

provides some commonly sought targets, which are

flexible.
(Table Source: W.KeithSchilit, How to obtain venture capital ", Business Horizons, May/June 1987.PP-78, Foundation for the school of business at Indiana university.)

Stage of business
Start-up business (Idea stage) First-Stage financing (New business) Second-Stage

Expected
60% +

annual Expected increase on initial

investment 10-15 *investment

return on investment

40%-60%

6-12*investment

financing 30%-50%

4-8*investment

(Development stage) ThirdStage financing

(Expansion stage)

25%-40%

3-6*investment

Turnaround situation

50% +

8-15*investment

INVESTMENT DETERMINANTS OF THE VENTURE CAPITAL FIRM

Venture capital funds popularly known as High Risk Capital then come forward to provide finance and go beyond finance in order to make the assisted firms have an easy takeoff in the commercial horizon of the economy.

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venture

capital

fund

studies

and

critically

examines the under mentioned variables to make 'SWOT' analysis of the ventures before it takes financing decision.

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Management
George Doriot, the most successful venture capital funds expert in the USA says,' we can back a first rate management team with a second rate product and

have success, but if we back a first rate product with

a second rate management team, we can seldom achieve our objectives'.

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Market
It is carefully judged whether the product/service of the projected venture could cater to a large and rapidly growing market and whether it accrues competitive advantage in the

prevailing

economic

environment.

Besides,

the

industrial growth prospects of the venture in the immediate future are also surveyed.
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Technology
Selection of technology is one of the most critical factors. investor, Venture judges capital the fund as the of potential the new effectiveness

technology that can secure capital growth in the

assisted firms.

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Profitability Venture capital funds favor those firms for investment that can project a high degree of profitability. Cash-

generation capacity of the ventures is also examined

before arriving at a decision for investment.

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THE INDIAN VENTURE CAPITAL INDUSTRY

Economic liberalization of India has brought new financial direction assure of India. products and services to nurture and

support the growth of the industrial sector. In such

venture capital significantly financing the has come to of development

entrepreneurship and exploit technological potential

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The U.S. has the most developed venture capital market in the world with a high level of deal processing

expertise (By grave and Timmons, 1999). In contrast,

the Indian venture capital market emerged in the late 1980s following a series of measures to establish government sponsored risk capital corporations and capital gains tax concessions for venture capital

investments (Mishra, 1996; Verma, 1997).

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The Indian Venture Capital industry (IVCI) is just

about a decade old as compared to that in Europe

and U.S. In this short span it has nurtured close to 1000 ventures, mostly in SME segment and has

supported
through.

budding

technocrat/professionals

all

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In India, however, the potential of venture capital investments is yet to be fully realized. Today India

has over 50 VC funds and equity funds operating in

the country.

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180 160

NO.OF VC FIRMS IN INDIA

160 146

140 120 105 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 81 77 78 81 86 89

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VENTURE CAPITAL FOCUS IN INDIA

VC funds no more only tech driven
As the tides of investments change over time,

venture capital (VC) funds are shifting their focus to businesses related to consumer demand, such as

education, media and entertainment, food & beverages etc..

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Though the IT sector attracted the biggest share of

VC money all these years in India, several factors, including the limited size of the market for IT solutions in the country, are turning out to be deterrents for investments in IT start-ups. VCs are

also likely to emphasize more on capital efficiency,

and those companies would probably get funded.

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Venture capitalists are getting more selective about

funding start-ups and looking beyond information technology and training their money and efforts on a variety of other sectors for instance, in its second coming, the Indian health care industry which is

growing at an exponential rate, now presents an

attractive investment opportunity for Indian venture capital firms. *The list of Sectors of most active VCs going beyond IT See Table
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Sectors

Year 2006 Deals Amt 380 13 31

Year 2007 Deals 84 15 14 Amt 470 96 63

Year 2008 Deals 81 14 12 Amt 475 57 54

Year 2009 Deals 45 20 11 Amt 243 73 43

Year 2010 YTD Deals 13 4 4 Amt 86 20 9

IT &ITES BFSI

68 6

Health care &Life 13 Sciences Energy Manufacturing 2 2

13 25

2 4

11 27

11 2

90 17

6 4

51 4

4 0

17 0

Media
Entertainment Telecom Agribusiness Education Engg Construction Food & Beverages

& 5

42

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11

46

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2 0 0 & 1

6 0 0 3

2 3 5 0

17 23 35 0

3 1 7 3

7 5 36 21

2 3 4 2

11 10 8 10

1 0 3 0

5 0 26 0

17

44

Retail Other Services

6 7

17 24

6 3

22 17

2 7

14 25

1 6

1 34

1 2

10 13

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Favorite avenues for Venture Capital Investments

VCs have expanded from largely a product focus to

investing in service businesses. India, as a whole, has

moved from the labor arbitrage to value adds model

in the outsourcing space. India now provides solutions for the global market place and VCs are following in the same footsteps.
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Today most importantly VC space is expanding to

sectors beyond technology. With fundamental economic growth spanning across sectors in India, segments that escaped the scrutiny of VCs during the tech boom have begun attracting attention. The major focused

areas include media, healthcare, education,

infra,

retail and food services. The modern VC ecosystem is a mix of IT and non-technology, catering to domestic,

global solutions demand.

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not VCs Fund Focus available Shipping and logistics not disclosed 3% 2% Education 1% 1% Food and All Energy related agriculture 4% 2% 3% Green and clean tech 4% Engineering construction and infrastructure 5% Telecom 6%

IT & ITES 18%

Health care and life sciences 11%

Real estate 10% Banking and financial services 6% Consumer products 7% Manufacturing 8% Media entertainment and liesure 9%

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VC HIGH ON INDIA
Venture Capitalists and private equities are expected to invest over $ 8 billion in India in the next five

years, in areas such as biotechnology and life

sciences, logistics, clean technology, film production and education.

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Expected ($ In Billion) 1.5 (By 2012) 2 3.5

investment Sectors Biotechnology and Life Sciences Maritime Infrastructure and Logistics Cleantech Indian Film Industry

0.25 (By 2011)

200

Indian Education

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CONCLUSION

Venture capital (VC) firms, as it happens, are still investing. While the pace of investments has slowed down on an industry-wide basis, the venture capital firms are becoming more restrictive about the industries in which they are willing to invest, but we can conclude that VCs not only want to continue to invest in Indian start-ups in areas they are most familiar with, i.e., in IT, telecom and Internet related products and services but also to initiate potential investments in the rapidly emerging sectors.
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