Chapter 1. Introduction of Venture Capital

PRAHLADRAI DALMIA LIONS COLLEGE COMMERCE & ECONOMICS
CHAPTER 1. INTRODUCTION OF VENTURE CAPITAL
Venture Capital:
Venture capital is a type of financing provided to privately-held businesses by investors

in exchange for partial ownership of the company.
Venture capitalists (VCs) are more often firms, such as Kleiner Perkins or Sequoia. But
individuals who are VCs are more generally known as “angel investors,” because they often
get involved earlier and take a smaller stake.
VCs identify promising new technology, products, or concepts, and then provide the
funding needed to move the project forward. As payment for their investment, they typically
take an equity, or ownership, stake. While the impression may be that VC funding is pretty
typical, in fact, historically, fewer than 1% of companies have landed VC money. It’s the
exception, not the rule
Definition:
Start up companies with a potential to grow need a certain amount of investment.

Wealthy investors like to invest their capital in such businesses with a long-term growth
perspective. This capital is known as venture capital and the investors are called venture
capitalists.
Description:
Such investments are risky as they are illiquid, but are capable of giving lcapitalists
depend upon the growth of the company. Venture capitalists have the power to influence major
decisions of the companies they are investing in as it is their money at stake.
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CHAPTER 2. OBJECTIVE OF STUDY
1) Understand the concept of venture capital.

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

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

Venture capital has played a very important role in U.K., Australia and Hong Kong
also in development of technology growth of exports and employment.
4) Find out opportunities that encourage & threats those hinder venture
capital industry in India.
5) To know the impact of political & economical factors on venture

capital investment.
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CHAPTER 3. RESEARCH METHODOLOGY
In India neither venture capital theory has been developed nor are there many
comprehensive books on the subject. Even the number of research papers available is very
limited. The research design used is descriptive in nature. (The attempt has been made to collect
maximum facts and figures available on the availability of venture capital in India, nature of
assistance granted, future projected demand for this financing, analysis of the problems faced
by the entrepreneurs in getting venture capital, analysis of the venture capitalists and social and
environmental impact on the existing framework.)
The research is based on secondary data collected from the published material. The data
was also collected from the publications and press releases of venture capital associations in
India.
Scanning the business papers filled the gaps in information. The Economic times,
Financial Express and Business Standards were scanned for any article or news item related to
venture capital. Sufficient amount of data about the venture capital has been derived from this
project.
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CHAPTER 4 . LIMITATION AND SCOPE OF PROJECT
Limitations:
A study of this type cannot be without limitations. It has been observed that venture
capitals are very secretive about their performance as well as about their investments. This
attitude has been a major hurdle in data collection. However venture capital funds/companies
that are members of Indian venture capital association are included in the study. Financial
analysis has been restricted by and large to members of IVCA.
Scope:
The scope of the research includes all type of venture capital firms whether setup as a
company or a trust fund. Venture capital companies and funds irrespective of the fact that they
are registered with SEBI of India or not are part of this study. Angel investors have been kept
out of the study as it was not feasible to collect authenticated information about them.
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CHAPTER 5. HOW IT WORKS ?
The venture capital industry has four main players: entrepreneurs who need funding;
investors who want high returns; investment bankers who need companies to sell; and the
venture capitalists who make money for themselves by making a market for the other three.
VC firms also protect themselves from risk by converting with other firms. Typically,
there will be a “lead” investor and several “followers.” It is the exception, not the rule, for one
VC to finance an individual company entirely. Rather, venture firms prefer to have two or three
groups involved in most stages of financing. Such relationships provide further portfolio
diversification that is, the ability to invest in more deals per dollar of invested capital. They
also decrease the workload of the VC partners by getting others involved in assessing the risks
during the due diligence period and in managing the deal. And the presence of several VC firms
adds credibility. In fact, some observers have suggested that the truly smart fund will always
be a follower of the top-tier firms.
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CHAPTER 6. CONCEPT OF VENTURE CAPITAL
The term venture capital comprises of two words that is, “Venture” and “Capital”.
Venture is a course of processing, the outcome of which is uncertain but to which is attended
the risk or danger of “loss”. “Capital” means recourses to start an enterprise. To connote the
risk and adventure of such a fund, the generic name Venture Capital was coined.
Venture capital is considered as financing of high and new technology based

enterprises. It is said that Venture capital involves investment in new or relatively untried
technology, initiated by relatively new and professionally or technically qualified
entrepreneurs with inadequate funds. The conventional financiers, unlike Venture capitals,
mainly finance proven technologies and established markets. However, high technology need
not be pre-requisite for venture capital.
Venture capital has also been described as ‘unsecured risk financing’. The relatively high risk
of venture capital is compensated by the possibility of high returns usually through substantial
capital gains in the medium term. Venture capital in broader sense is not solely an injection of
funds into a new firm, it is also an input of skills needed to set up the firm, design its marketing
strategy, organize and manage it. Thus it is a long term association with successive stages of
company’s development under highly risk investment conditions, with distinctive type of
financing appropriate to each stage of development. Investors join the entrepreneurs as co-
partners and support the project with finance and business skills to exploit the market
opportunities.
Venture capital is not a passive finance. It may be at any stage of business/production cycle,
that is, start up, expansion or to improve a product or process, which are associated with both
risk and reward. The Venture capital makes higher capital gains through appreciation in the
value of such investments when the new technology succeeds. Thus the primary return sought
by the investor is essentially capital gain rather than steady interest income or dividend yield.
The most flexible definition of Venture capital is-
“The support by investors of entrepreneurial talent with finance and business skills to
exploit market opportunities and thus obtain capital gains.”
Venture capital commonly describes not only the provision of start up finance or ‘seed corn’
capital but also development capital for later stages of business. A long term commitment of
funds is involved in the form of equity investments, with the aim of eventual capital gains
rather than income and active involvement in the management of customer’s business.
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CHAPTER 7. FEATURES OF VENTURE CAPITAL
1. High Risk
By definition the Venture capital financing is highly risky and chances of failure are high as it
provides long term start up capital to high risk-high reward ventures. Venture capital assumes
four types of risks, these are:
 Management risk - Inability of management teams to work together.
 Market risk - Product may fail in the market.
 Product risk - Product may not be commercially viable.
 Operation risk - Operations may not be cost effective resulting in
increased cost decreased gross margins.
2. High Tech
As opportunities in the low technology area tend to be few of lower order, and hi-tech projects
generally offer higher returns than projects in more traditional areas, venture capital
investments are made in high tech. areas using new technologies or producing innovative goods
by using new technology. Not just high technology, any high risk ventures where the
entrepreneur has conviction but little capital gets venture finance. Venture capital is available
for expansion of existing business or diversification to a high risk area. Thus technology
financing had never been the primary objective but incidental to venture capital.
3. Equity Participation & Capital Gains

Investments are generally in equity and quasi equity participation through direct purchase of
shares, options, convertible debentures where the debt holder has the option to convert the loan
instruments into stock of the borrower or a debt with warrants to equity investment. The funds
in the form of equity help to raise term loans that are cheaper source of funds. In the early stage
of business, because dividends can be delayed, equity investment implies that investors bear
the risk of venture and would earn a return commensurate with success in the form of capital
gains.
4. Participation In Management
Venture capital provides value addition by managerial support, monitoring and follow up
assistance. It monitors physical and financial progress as well as market development initiative.
It helps by identifying key resource person. They want one seat on the company’s board of
directors and involvement, for better or worse, in the major decision affecting the direction of
company. This is a unique philosophy of “hands on management” where Venture capitalist acts
as complementary to the entrepreneurs. Based upon the experience other companies, a venture
capitalist advise the promoters on project planning, monitoring, financial management,
including working capital and public issue. Venture capital investor cannot interfere in day
VENTURE CAPITAL 7
today management of the enterprise but keeps a close contact with the promoters or
entrepreneurs to protect his investment.
5. Length of Investment
Venture capitalist help companies grow, but they eventually seek to exit the investment in three
to seven years. An early stage investment may take seven to ten years to mature, while most of
the later stage investment takes only a few years. The process of having significant returns
takes several years and calls on the capacity and talent of venture capitalist and entrepreneurs
to reach fruition.
6. Illiquid Investment
Venture capital investments are illiquid, that is, not subject to repayment on demand or
following a repayment schedule. Investors seek return ultimately by means of capital gains
when the investment is sold at market place. The investment is realized only on enlistment of
security or it is lost if enterprise is liquidated for unsuccessful working. It may take several
years before the first investment starts to locked for seven to ten years. Venture capitalist
understands this illiquidity and factors this in his investment decisions.
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CHAPTER 8. DIFFERENCE BETWEEN VENTURE CAPITAL

& OTHER FUNDS
1. Venture Capital Vs Development Funds
Venture capital differs from Development funds as latter means putting up of industries without
much consideration of use of new technology or new entrepreneurial venture but having a focus
on underdeveloped areas (locations). In majority of cases it is in the form of loan capital and
proportion of equity is very thin. Development finance is security oriented and liquidity prone.
The criteria for investment are proven track record of company and its promoters, and sufficient
cash generation to provide for returns (principal and interest). The development bank
safeguards its interest through collateral.
They have no say in working of the enterprise except safeguarding their interest by having
a nominee director. They do not play any active role in the enterprise except ensuring flow of
information and proper management information system, regular board meetings, adherence to
statutory requirements for effective management control where as Venture capitalist remain
interested if the overall management of the project o account of high risk involved I the project
till its completion, entering into production and making available proper exit route for
liquidation of the investment. As against this fixed payments in the form of installment of
principal and interest are to be made to development banks.
2. Venture Capital Vs Seed Capital & Risk Capital

It is difficult to make a distinction between venture capital, seed capital, and risk capital as
the latter two form part of broader meaning of Venture capital. Difference between them arises
on account of application of funds and terms and conditions applicable. The seed capital and
risk funds in India are being provided basically to arrange promoter’s contribution to the
project. The objective is to provide finance and encourage professionals to become promoters
of industrial projects. The seed capital is provided to conventional projects on the consideration
of low risk and security and use conventional techniques for appraisal. Seed capital is normally
in the form of low interest deferred loan as against equity investment by Venture capital. Unlike
Venture capital, Seed capital providers neither provide any value addition nor participate in the
management of the project. Unlike Venture capital Seed capital provider is satisfied with low
risk-normal returns and lacks any flexibility in its approach.
Risk capital is also provided to established companies for adapting new technologies. Herein
the approach is not business oriented but developmental. As a result on one hand the success
rate of units assisted by Seed capital/Risk
Finance has been lower than those provided with venture capital. On the other hand the return
to the seed/risk capital financier had been very low as compared to venture capitalist.
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Seed Capital Scheme Venture capital Scheme

Basis Income or aid Commercial viability
Beneficiaries Very small entrepreneurs Medium and large
entrepreneurs are also
covered
Size of assistance Rs. 15 Lac (Max) Up to 40 percent of
promoters’ equity
Appraisal process Normal Skilled and specialized
Estimates returns 20 percent 30 percent plus
Flexibility Nil Highly flexible
Value addition Nil Multiple ways
Exit option Sell back to promoters Several ,including Public
offer
Funding sources Owner funds Outside contribution
allowed
Syndication Not done Possible
Tax concession Nil Exempted
Success rate Not good Very satisfactory
Difference between Seed Capital Scheme and Venture capital Scheme
3. Venture Capital Vs Bought Out Deals

The important difference between the Venture capital and bought out deals is that
bought-outs are not based upon high risk- high reward principal. Further unlike Venture capital
they do not provide equity finance at different stages of the enterprise. However both have a
common expectation of capital gains yet their objectives and intents are totally different.
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CHAPTER 9. VENTURE CAPITAL SPECTRUM
The growth of an enterprise follows a life cycle as shown in the diagram below. The
requirements of funds vary with the life cycle stage of the enterprise. Even before a business
plan is prepared the entrepreneur invests his time and resources in surveying the market, finding
and understanding the target customers and their needs. At the seed stage the entrepreneur
continue to fund the venture with his own or family funds. At this stage the funds are needed
to solicit the consultant’s services in formulation of business plans, meeting potential customers
and technology partners. Next the funds would be required for development of the
product/process and producing prototypes, hiring key people and building up the managerial
team. This is followed by funds for assembling the manufacturing and marketing facilities in
that order. Finally the funds are needed to expand the business and attaint the critical mass for
profit generation. Venture capitalists cater to the needs of the entrepreneurs at different stages
of their enterprises. Depending upon the stage they finance, venture capitalists are called angel
investors, venture capitalist or private equity supplier/investor.
 Venture Capital Spectrum

Venture capital was started as early stage financing of relatively small but rapidly
growing companies. However various reasons forced venture capitalists to be more and more
involved in expansion financing to support the development of existing portfolio companies.
With increasing demand of capital from newer business, Venture capitalists began to operate
across a broader spectrum of investment interest. This diversity of opportunities enabled
Venture capitalists to balance their activities in term of time involvement, risk acceptance and
reward potential, while providing on going assistance to developing business.
Different venture capital firms have different attributes and aptitudes for different types
of Venture capital investments. Hence there are different stages of entry for different Venture
capitalists and they can identify and differentiate between types of Venture capital investments,
each appropriate for the given stage of the investee company, These are:-
1. Early Stage Finance

 Seed Capital
 Start up Capital
 Early/First Stage Capital
 Later/Third Stage Capital
2. Later Stage Finance

 Expansion/Development Stage Capital
 Replacement Finance
 Management Buy Out and Buy ins
 Turnarounds
 Mezzanine/Bridge Finance
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Not all business firms pass through each of these stages in a sequential manner. For instance
seed capital is normally not required by service based ventures. It applies largely to
manufacturing or research based activities. Similarly second round finance does not always
follow early stage finance. If the business grows successfully it is likely to develop sufficient
cash to fund its own growth, so does not require venture capital for growth.
The table below shows risk perception and time orientation for different stages of venture
capital financing.
Financing Stage Period (funds Risk perception Activity to be financed

locked in years)
Early stage finance 7-10 Extreme For supporting a concept or
Seed idea or R & D for product
development
Start up 5-9 Very high Initializing operations or
developing prototypes
First stage 3-7 High Start commercial production
and marketing
Second stage 3-5 Sufficiently Expand market & growing
high working capital need
Later stage finance 1-3 Medium Market expansion,
acquisition & product
development for profit
making company
Buy out-in 1-3 Medium Acquisition financing
Turnaround 3-5 Medium to high Turning around a sick

company
Mezzanine 1-3 Low Facilitating public issue
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Venture Capital- Financing Stages

1. Seed Capital
It is an idea or concept as opposed to a business. European Venture capital association
defines seed capital as “The financing of the initial product development or capital provided to
an entrepreneur to prove the feasibility of a project and to qualify for start up capital”.
The characteristics of the seed capital may be enumerated as follows:
 Absence of ready product market
 Absence of complete management team
 Product/ process still in R & D stage
 Initial period / licensing stage of technology transfer
Broadly speaking seed capital investment may take 7 to 10 years to achieve realization.
It is the earliest and therefore riskiest stage of Venture capital investment. The new technology
and innovations being attempted have equal chance of success and failure. Such projects,
particularly hi-tech, projects sink a lot of cash and need a strong financial support for their
adaptation, commencement and eventual success. However, while the earliest stage of
financing is fraught with risk, it also provides greater potential for realizing significant gains
in long term. Typically seed enterprises lack asset base or track record to obtain finance from
conventional sources and are largely dependent upon entrepreneur’s personal resources. Seed
capital is provided after being satisfied that the entrepreneur has used up his own resources and
carried out his idea to a stage of acceptance and has initiated research. The asset underlying the
seed capital is often technology or an idea as opposed to human assets (a good management
team) so often sought by venture capitalists.
Volume of Investment Activity
It has been observed that Venture capitalist seldom make seed capital investment and these are
relatively small by comparison to other forms of venture finance. The absence of interest in
providing a significant amount of seed capital can be attributed to the following three factors:
a) Seed capital projects by their very nature require a relatively small amount of capital. The
success or failure of an individual seed capital investment will have little impact on the
performance of all but the smallest venture capitalist’s portfolio. Larger venture capitalists
avoid seed capital investments. This is because the small investments are seen to be cost
inefficient in terms of time required to analyze, structure and manage them.
b) The time horizon to realization for most seed capital investments is typically 7-10 years
which is longer than all but most long-term oriented investors will desire.
c) The risk of product and technology obsolescence increases as the time to realization is
extended. These types of obsolescence are particularly likely to occur with high technology
investments particularly in the fields related to Information Technology.
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2. Start up Capital
It is stage 2 in the venture capital cycle and is distinguishable from seed capital
investments. An entrepreneur often needs finance when the business is just starting. The start
up stage involves starting a new business. Here in the entrepreneur has moved closer towards
establishment of a going concern. Here in the business concept has been fully investigated and
the business risk now becomes that of turning the concept into product.
Start up capital is defined as: “Capital needed to finance the product development,
initial marketing and establishment of product facility. “
The characteristics of start-up capital are:-

i. Establishment of company or business. The company is either being organized or is
established recently. New business activity could be based on experts, experience or a spin-off
from R & D.
ii. Establishment of most but not all the members of the team. The skills and fitness to the
job and situation of the entrepreneur’s team is an important factor for start up finance.
iii. Development of business plan or idea. The business plan should be fully developed yet
the acceptability of the product by the market is uncertain. The company has not yet started
trading.
In the start up preposition venture capitalists’ investment criteria shifts from idea to
people involved in the venture and the market opportunity. Before committing any finance at
this stage, Venture capitalist however, assesses the managerial ability and the capacity of the
entrepreneur, besides the skills, suitability and competence of the managerial team are also
evaluated. If required they supply managerial skills and supervision for implementation. The
time horizon for start up capital will be typically 6 or 8 years. Failure rate for start up is 2 out
of 3. Start up needs funds by way of both first round investment and subsequent follow-up
investments. The risk tends t be lower relative to seed capital situation. The risk is controlled
by initially investing a smaller amount of capital in start-ups. The decision on additional
financing is based upon the successful performance of the company. However, the term to
realization of a start up investment remains longer than the term of finance normally provided
by the majority of financial institutions. Longer time scale for using exit route demands
continued watch on start up projects.
Volume of Investment Activity
Despite potential for specular returns most venture firms avoid investing in start-ups. One
reason for the paucity of start up financing may be high discount rate that venture capitalist
applies to venture proposals at this level of risk and maturity. They often prefer to spread their
risk by sharing the financing. Thus syndicates of investor’s often participate in start up finance.
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3. Early Stage Finance

It is also called first stage capital is provided to entrepreneur who has a proven product, to start
commercial production and marketing, not covering market expansion, de-risking and
acquisition costs.
At this stage the company passed into early success stage of its life cycle. A proven
management team is put into this stage, a product is established and an identifiable market is
being targeted.
British Venture Capital Association has vividly defined early stage finance as: “Finance
provided to companies that have completed the product development stage and require further
funds to initiate commercial manufacturing and sales but may not be generating profits.”
The characteristics of early stage finance may be: -
 Little or no sales revenue.
 Cash flow and profit still negative.
 A small but enthusiastic management team which consists of people with technical and
specialist background and with little experience in the management of growing
business.
 Short term prospective for dramatic growth in revenue and profits.
The early stage finance usually takes 4 to 6 years time horizon to realization. Early stage
finance is the earliest in which two of the fundamentals of business are in place i.e. fully
assembled management team and a marketable product. A company needs this round of finance
because of any of the following reasons: -
 Project overruns on product development.
 Initial loss after start up phase.
The firm needs additional equity funds, which are not available from other sources thus
prompting venture capitalist that, have financed the start up stage to provide further financing.
The management risk is shifted from factors internal to the firm (lack of management, lack of
product etc.) to factors external to the firm (competitive pressures, in sufficient will of financial
institutions to provide adequate capital, risk of product obsolescence etc.)
At this stage, capital needs, both fixed and working capital needs are greatest. Further, since
firms do not have foundation of a trading record, finance will be difficult to obtain and so
Venture capital particularly equity investment without associated debt burden is key to survival
of the business.
The following risks are normally associated to firms at this stage: -
a) The early stage firms may have drawn the attention of and incurred the challenge of a larger
competition.
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b) There is a risk of product obsolescence. This is more so when the firm is involved in high-
tech business like computer, information technology etc.
4. Second Stage Finance.

It is the capital provided for marketing and meeting the growing working capital needs
of an enterprise that has commenced the production but does not have positive cash flows
sufficient to take care of its growing needs. Second stage finance, the second trench of Early
State Finance is also referred to as follow on finance and can be defined as the provision of
capital to the firm which has previously been in receipt of external capital but whose financial
needs have subsequently exploded. This may be second or even third injection of capital.
The characteristics of a second stage finance are:
 A developed product on the market
 A full management team in place
 Sales revenue being generated from one or more products
 There are losses in the firm or at best there may be a break even but the surplus generated
is insufficient to meet the firm’s needs.
Second round financing typically comes in after start up and early stage funding and so
have shorter time to maturity, generally ranging from 3 to 7 years. This stage of financing has
both positive and negative reasons.
Negative reasons include:
 Cost overruns in market development.
 Failure of new product to live up to sales forecast.
 Need to re-position products through a new marketing campaign.
 Need to re-define the product in the market place once the product deficiency is
revealed.
Positive reasons include:

 Sales appear to be exceeding forecasts and the enterprise needs to acquire assets to gear
up for production volumes greater than forecasts.
 High growth enterprises expand faster than their working capital permit, thus needing
additional finance. Aim is to provide working capital for initial expansion of an
enterprise to meet needs of increasing stocks and receivables.
It is additional injection of funds and is an acceptable part of venture capital. Often

provision for such additional finance can be included in the original financing package as an
option, subject to certain management performance targets.
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5. Later Stage Finance

It is called third stage capital is provided to an enterprise that has established commercial
production and basic marketing set-up, typically for market expansion, acquisition, product
development etc. It is provided for market expansion of the enterprise. The enterprises eligible
for this round of finance have following characteristics.
 Established business, having already passed the risky early stage.
 Expanding high yield, capital growth and good profitability.
 Reputed market position and an established formal organization structure.
“Funds are utilized for further plant expansion, marketing, working capital or development
of improved products.” Third stage financing is a mix of equity with debt or subordinate debt.
As it is half way between equity and debt in US it is called “mezzanine” finance. It is also
called last round of finance in run up to the trade sale or public offer.
Venture capitalist s prefer later stage investment vis a vis early stage investments, as
the rate of failure in later stage financing is low. It is because firms at this stage have a past
performance data, track record of management, established procedures of financial control.
The time horizon for realization is shorter, ranging from 3 to 5 years. This helps the venture
capitalists to balance their own portfolio of investment as it provides a running yield to venture
capitalists. Further the loan component in third stage finance provides tax advantage and
superior return to the investors.
There are four sub divisions of later stage finance.
 Expansion / Development Finance
 Replacement Finance
 Buyout Financing
 Turnaround Finance
Expansion / Development Finance
An enterprise established in a given market increases its profits exponentially by

achieving the economies of scale. This expansion can be achieved either through an organic
growth, that is by expanding production capacity and setting up proper distribution system or
by way of acquisitions. Anyhow, expansion needs finance and venture capitalists support both
organic growth as well as acquisitions for expansion.
At this stage the real market feedback is used to analyze competition. It may be found
that the entrepreneur needs to develop his managerial team for handling growth and managing
a larger business.
Realization horizon for expansion / development investment is one to three years. It is
favored by venture capitalist as it offers higher rewards in shorter period with lower risk. Funds
are needed for new or larger factories and warehouses, production capacities, developing
VENTURE CAPITAL 17
improved or new products, developing new markets or entering exports by enterprise with
established business that has already achieved break even and has started making profits.
Replacement Finance
It means substituting one shareholder for another, rather than raising new capital
resulting in the change of ownership pattern. Venture capitalist purchase shares from the
entrepreneurs and their associates enabling them to reduce their shareholding in unlisted
companies. They also buy ordinary shares from non-promoters and convert them to preference
shares with fixed dividend coupon. Later, on sale of the company or its listing on stock
exchange, these are re-converted to ordinary shares. Thus Venture capitalist makes a capital
gain in a period of 1 to 5 years.
Buy - out / Buy - in Financing
It is a recent development and a new form of investment by venture capitalist. The funds
provided to the current operating management to acquire or purchase a significant share
holding in the business they manage are called management buyout.
Management Buy-in refers to the funds provided to enable a manager or a group of
managers from outside the company to buy into it.
It is the most popular form of venture capital amongst later stage financing. It is less
risky as venture capitalist in invests in solid, ongoing and more mature business. The funds are
provided for acquiring and revitalizing an existing product line or division of a major business.
MBO (Management buyout) has low risk as enterprise to be bought have existed for some time
besides having positive cash flow to provide regular returns to the venture capitalist, who
structure their investment by judicious combination of debt and equity. Of late there has been
a gradual shift away from start up and early finance to wards MBO opportunities. This shift is
because of lower risk than start up investments.
Turnaround Finance
It is rare form later stage finance which most of the venture capitalist avoid because of
higher degree of risk. When an established enterprise becomes sick, it needs finance as well as
management assistance foe a major restructuring to revitalize growth of profits. Unquoted
company at an early stage of development often has higher debt than equity; its cash flows are
slowing down due to lack of managerial skill and inability to exploit the market potential. The
sick companies at the later stages of development do not normally have high debt burden but
lack competent staff at various levels. Such enterprises are compelled to relinquish control to
new management. The venture capitalist has to carry out the recovery process using hands on
management in 2 to 5 years. The risk profile and anticipated rewards are akin to early stage
investment
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Bridge Finance
It is the pre-public offering or pre-merger/acquisition finance to a company. It is the
last round of financing before the planned exit. Venture capitalist help in building a stable and
experienced management team that will help the company in its initial public offer. Most of
the time bridge finance helps improves the valuation of the company. Bridge finance often has
a realization period of 6 months to one year and hence the risk involved is low. The bridge
finance is paid back from the proceeds of the public issue.
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CHAPTER 10. VENTURE CAPITAL INVESTMENT PROCESS
Venture capital investment process is different from normal project financing. In order
to understand the investment process a review of the available literature on venture capital
finance is carried out. Tyebjee and Bruno in 1984 gave a model of venture capital investment
activity which with some variations is commonly used presently.
As per this model this activity is a five step process as follows:
1. Deal Organization
2. Screening
3. Evaluation or due Diligence
4. Deal Structuring
5. Post Investment Activity and Exit
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Deal origination:
In generating a deal flow, the VC 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 organisaions, 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.
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.
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 VCFs in India includes;
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. VCFs in India expect the entrepreneur to have:- Integrity, long-term vision, urge
to grow, managerial skills, commercial orientation.
VCFs 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 as shown in Figure.
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 capitalist's 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 entrepreneur's equity share and the
objectives to be achieved.
VENTURE CAPITAL 21
Post Investment Activities:

Once the deal has been structured and agreement finalised, 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 capitalist's 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.
Exit:
Venture capitalists generally want to cash-out their gains in five to ten years after the initial
investment. They play a positive role in directing the company towards particular exit routes.
A venture may exit in one of the following ways:
There are four ways for a venture capitalist to exit its investment:
 Initial Public Offer (IPO)
 Acquisition by another company
 Re-purchase of venture capitalist’s share by the investee company
 Purchase of venture capitalist’s share by a third party.
Promoter’s Buy-back
The most popular disinvestments route in India is promoter’s buy-back. This route is
suited to Indian conditions because it keeps the ownership and control of the promoter intact.
The obvious limitation, however, is that in a majority of cases the market value of the shares
of the venture firm would have appreciated so much after some years that the promoter would
not be in a financial position to buy them back.
In India, the promoters are invariably given the first option to buy back equity of their
enterprises. For example, RCTC participates in the assisted firm’s equity with suitable
agreement for the promoter to repurchase it. Similarly, Canfina-VCF offers an opportunity to
the promoters to buy back the shares of the assisted firm within an agreed period at a
predetermined price. If the promoter fails to buy back the shares within the stipulated period,
Canfina-VCF would have the discretion to divest them in any manner it deemed appropriate.
SBI capital Markets ensures through examining the personal assets of the promoters and their
associates, which buy back, would be a feasible option. GVFL would make disinvestments, in
consultation with the promoter, usually after the project has settled down, to a profitable level
and the entrepreneur is in a position to avail of finance under conventional schemes of
assistance from banks or other financial institutions.
VENTURE CAPITAL 22
Initial Public Offers (IPOs)

The benefits of disinvestments via the public issue route are, improved marketability
and liquidity, better prospects for capital gains and widely known status of the venture as well
as market control through public share participation. This option has certain limitations in the
Indian context. The promotion of the public issue would be difficult and expensive since the
first generation entrepreneurs are not known in the capital markets. Further, difficulties will be
caused if the entrepreneur’s business is perceived to be an unattractive investment proposition
by investors. Also, the emphasis by the Indian investors on short-term profits and dividends
may tend to make the market price unattractive. Yet another difficulty in India until recently
was that the Controller of Capital Issues (CCI) guidelines for determining the premium on
shares took into account the book value and the cumulative average EPS till the date of the new
issue. This formula failed to give due weight age to the expected stream of earning of the
venture firm. Thus, the formula would underestimate the premium. The Government has now
abolished the Capital Issues Control Act, 1947 and consequently, the office of the controller of
Capital Issues. The existing companies are now free to fix the premium on their shares. The
initial public issue for disinvestments of VCFs’ holding can involve high transaction costs
because of the inefficiency of the secondary market in a country like India. Also, this option
has become far less feasible for small ventures on account of the higher listing requirement of
the stock exchanges. In February 1989, the Government of India raised the minimum capital
for listing on the stock exchanges from Rs 10 million to Rs 30 million and the minimum public
offer from Rs 6 million to Rs 18 million.
Sale on the OTC Market
An active secondary capital market provides the necessary impetus to the success of
the venture capital. VCFs should be able to sell their holdings, and investors should be able to
trade shares conveniently and freely. In the USA, there exist well-developed OTC markets
where dealers trade in shares on telephone/terminal and not on an exchange floor. This
mechanism enables new, small companies which are not otherwise eligible to be listed on the
stock exchange, to enlist on the OTC markets and provides liquidity to investors. The National
Association of Securities Dealers Automated Quotation System (NASDAQ) in the USA daily
quotes over 8000 stock prices of companies backed by venture capital.
The OTC Exchange in India was established in June 1992. The Government of India
had approved the creation for the Exchange under the Securities Contracts (Regulations) Act
in 1989. It has been promoted jointly by UTI, ICICI, SBI Capital Markets, Can bank Financial
Services, GIC, LIC and IDBI. Since this list of market-makers (who will decide daily prices
and appoint dealers for trading) includes most of the public sector venture financiers, it should
pick up fast, and it should be possible for investors to trade in the securities of new small and
medium size enterprises.
The other disinvestments mechanisms such as the management buyouts or sale to other
venture funds are not considered to be appropriate by VCFs in India.
VENTURE CAPITAL 23
The growth of an enterprise follows a life cycle as shown in the diagram below. The
requirements of funds vary with the life cycle stage of the enterprise. Even before a business
plan is prepared the entrepreneur invests his time and resources in surveying the market, finding
and understanding the target customers and their needs. At the seed stage the entrepreneur
continue to fund the venture with his own or family funds. At this stage the funds are needed
to solicit the consultant’s services in formulation of business plans, meeting potential customers
and technology partners. Next the funds would be required for development of the
product/process and producing prototypes, hiring key people and building up the managerial
team. This is followed by funds for assembling the manufacturing and marketing facilities in
that order. Finally the funds are needed to expand the business and attaint the critical mass for
profit generation. Venture capitalists cater to the needs of the entrepreneurs at different stages
of their enterprises. Depending upon the stage they finance, venture capitalists are called angel
investors, venture capitalist or private equity supplier/investor.
The players
There are following groups of players:
1. Angels and angel clubs
2. Venture Capital funds
 Small
 Medium
 Large
3. Corporate venture funds
4. Financial service venture groups
 Angels and angel clubs

Angels are wealthy individuals who invest directly into companies. They can form angel
clubs to coordinate and bundle their activities. Besides the money, angels often provide their
personal knowledge, experience and contacts to support their investees. With average deals
sizes from USD 100,000 to USD 500,000 they finance companies in their early stages.
Examples for angel clubs are · Media Club, Dinner Club ,· Angel's Forum.
 Small and Upstart Venture Capital Funds

These are smaller Venture Capital Companies that mostly provide seed and start-up capital.
The so called "Boutique firms" are often specialised in certain industries or market
segments. Their capitalization is about USD 20 to USD 50 million (is this deals size or total
money under management or money under management per fund?). As for the small and
medium Venture Capital funds strong competition will clear the marketplace. There will
be mergers and acquisitions leading to a concentration of capital. Funds specialised in
different business areas will form strategic partnerships. Only the more successful funds
will be able to attract new money. Examples are: Artemis Comaford, Abbell Venture Fund,
Acacia Venture Partners.
VENTURE CAPITAL 24
 Medium Venture Funds

The medium venture funds finance all stages after seed stage and operate in all business
segments. They provide money for deals up to USD 250 million. Single funds have up to USD
5 billion under management. An example is Accel Partners
 Large Venture Funds

As the medium funds, large funds operate in all business sectors and provide all types of
capital for companies after seed stage. They often operate internationally and finance deals up
to USD 500 million The large funds will try to improve their position by mergers and
acquisitions with other funds to improve size, reputation and their financial muscle. In addition
they will to diversify. Possible areas to enter are other financial services by means of M&As
with financial services corporations and the consulting business. For the latter one the funds
have a rich resource of expertise and contacts in house. In a declining market for their core
activity and with lots of tumbling companies out there is no reason why Venture Capital funds
should offer advice and consulting only to their investees.
Examples are:
 AIG American International Group
 Cap Vest Man
 3i
 Corporate Venture Funds

These Venture Capital funds are set up and owned by technology companies. Their aim is to
widen the parent company's technology base in an win-win-situation for both, the investor and
the investee. In general, corporate funds invest in growing or maturing companies, often when
the investee wishes to make additional investments in echnology or product development. The
average deals size is between USD 2 million and USD 5 million. The large funds will try to
improve their position by mergers and acquisitions with other funds to improve size, reputation
and their financial muscle. In addition they will to diversify. Possible areas to enter are other
financial services by means of M&As with financial services corporations and the consulting
business. For the latter one the funds have a rich resource of expertise and contacts in house.
In a declining market for their core activity and with lots of tumbling companies out there is
no reason why Venture Capital funds should offer advice and consulting only to their investees.
Examples are:
 Oracle
 Adobe
 Dell
 Kyocera
VENTURE CAPITAL 25
As an example, Adobe systems launched a $40m venture fund in 1994 to invest in

companies strategic to its core business, such as Cascade Systems Inc and Lantana Research
Corporation.- has been successfully boosting demand for its core products, so that Adobe
recently launched a second $40m fund.
 Financial funds
A solution for financial funds could be a shift to a higher securisation of Venture

Capital activities. That means that the parent companies shift the risk to their customers by
creating new products such as stakes in an Venture Capital fund. However, the success of such
products will depend on the overall climate and expectations in the economy. As long as the
sownturn continues without any sign of recovery customers might prefer less risky alternatives.
VENTURE CAPITAL 26
CHAPTER 11. KEY SUCCESS FACTOR FOR VENTURE

CAPITAL INDUSTRY IN INDIA
Knowledge become the key factor for a competitive advantage for company. Venture
Capital firms need more expert knowledge in various fields. The various key success factor for
venture capital industry are as follow:
 Knowledge about Government changing policies:
Investment, management and exit should provide flexibility to suit the business requirements
and should also be driven by global trends. Venture capital investments have typically come
from high net worth individuals who have risk taking capacity. Since high risk is involved in
venture financing, venture investors globally seek investment and exit on very flexible terms
which provides them with certain levels of protection. Such exit should be possible through
IPOs and mergers/acquisitions on a global basis and not just within India. In this context the
judgement of the judiciary raising doubts on treatment of tax on capital gains made by
firms registered in Mauritius gains significance - changing policies with a retrospective
effect is undoubtedly acting as a dampener to fresh fund raising by Venture capital firms.
 Quick Response time :
The company have flat organization structure results in quicker decision making. The
entrepreneur is relieved of the trauma that one normally goes through in an interface with a
funding institution or a development agency. They follow a clearly defined decision making
process that works with clock like precision, which means that if they agree on a funding
schedule entrepreneur can count on them to stick it.
 Knowledge about Global Environment:
With increasing global integration and mobility of capital it is important that Indian venture
capital firms as well as venture financed enterprises be able to have opportunities for
investment abroad. This would not only enhance their ability to generate better returns
but also add to their experience and expertise to function successfully in a global
environment.
 Good Human Resource :
Venture capital should become an institutionalized industry financed and managed by

successful entrepreneurs, professional and sophisticated investors. Globally, venture
capitalist are not merely finance providers but are also closely involved with the investee
enterprises and provide expertise by way of management and marketing support. This industry
has developed its own ethos and culture. Venture capital has only one common aspect that cuts
across geography i.e. it is risk capital invested by experts in the field. It is important that venture
capital in India be allowed to develop via professional and institutional management.
VENTURE CAPITAL 27
 Balance between three factors:

Venture Capital backed companies can provide high returns. However, despite of
success stories like Apple, FedEx of Microsoft, a lot of these deals fail. It is said that only one
out of ten companies succeed. That's why every deal has an element of potential profit and an
element of risk, depending on the deals size. To be successful, a Venture Capital Company
must manage the balance between these three factors.
Financial markets and

the industries to invest in
Knowledge
Risk management skills Possible investees and

and contacts to investors external expertise
frame work for key success factor
Knowledge is key, to get the balance in this "Magic Triangle". With knowledge we
mean knowledge about the financial markets and the industries to invest in, risk
management skills and contacts to investors, possible investees and external expertise.
High profits, achievable by larger deals, are not only important for the financial performance
of the Venture Capital company. As a good track record they are also a vital argument to attract
funds which are the basis for larger deals. However, larger deals imply higher risks of losses.
Many Venture Capital companies try to share and limit their risks. Solutions could be alliances
and careful portfolio management. There are Venture Capital firms that refuse to invest in e-
start-up's because they perceive it as too risky to follow today's type.
VENTURE CAPITAL 28
CHAPTER 12. GE NINE – CELL INDUSTRY

ATTRACTIVENESS – COMPETITIVE STRENGTH MATRIX
Industry attractiveness:
Industrial Attractiveness Importance weight Rating Score

Growth Rate 0.20 7 1.4
Intensity of competition 0.20 6 1.2
Regulatory policies 0.10 4 0.40
Domestic economic factor 0.20 8 1.6
Industrial profitability 0.20 7 1.4
Product innovation 0.10 4 0.4
Total 1.00 6.4
industry attractiveness
Business strength :
Business Importance APIDC IVCF UTI ICICI AVISHKAR

Strength weight (Rank/score) (Rank/score) (Rank/score) (Rank/score) (Rank/score)
Quick response 0.20 7/1.4 4/0.8 5/1.00 8/1.6 7/1.4
time
International 0.15 6/0.90 5/0.75 5/0.75 7/1.05 6/0.90
Affiliation &
network
Entrepreneurial 0.20 7/1.4 5/1.00 4/0.8 6/1.20 7/1.40
Edge
Intellectual 0.25 6/1.5 6/1.5 6/1.5 7/1.75 6/1.50
Assets
Management 0.20 6/1.2 7/1.4 4/0.8 7/1.4 6/1.20
support
Total 1.00 6.40 5.45 4.85 7.00 6.40
Business strength
VENTURE CAPITAL 29
Implication :
The First Zone consists of the three cells in the upper left corner. The ICICI venture
capital firms falls in this zone that it is in a favorable position with relatively attractive growth
opportunities. This indicates to invest in this service.
The Second Zone consists of the three diagonal cells from the lower left to the upper
right. The APIDC, Aviskar, VCF, UTI fall in this phase. A position in this zone is viewed as
having medium attractiveness. Management must therefore exercise caution when making
additional investments in this service. The suggested strategy is to seek to maintain share rather
than growing or reducing share.
The ICICI venture capital fund will try to go in upward line and try to increase their
strength and must allocate their source on his strength like affiliation & network Management
support and Intellectual assets. For this company make Strategic Business Unit(SBU) for each
deal. Company can make network with other global companies . So it is useful when company
make deal in Merger& Acquisition deals and company must have knowledge about global
culture. Due to large network it may become useful in generation a flow of deals The company
must hire experienced professional person. Because it can become competitive advantage for
company in Venture Capital Industry. The company can increase its strength by providing
better post investment services like strategic planning, better portfolio management services
and helpful in financing from other companies.
VENTURE CAPITAL 30
CHAPTER 13. OPPORTUNITIES AND THREATS:
OPPORTUNITIES :
Initiatives taken by the Government in formulating policies to encourage investors and
entrepreneurs
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 implication is to obtain adequate financing along with
the necessary hi-tech equipments to produce an innovative product which can succeed and
grow in the present market condition. Unfortunately, our country lacks on both fronts. The
necessary capital can be obtained from the venture capital firms who expect an above average
rate of return on the investment. Government of India understands this.
Also, The Government of India in an attempt to bring the nation at par and above the
developed nations has been promoting venture capital financing to new, innovative concepts
& ideas, liberalizing taxation norms providing tax incentives to venture firms, giving an
opportunity for the creation of local pools of capital and holding training sessions for the
emerging VC investors.
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.
 SME GROWTH
No. deals V/S No. of SMEs
450 128.44 130

400 387
123.42 125
350
299
300 120
118.59
250
115
200 113.95
146
150 109.49 110
100 71
56 105
50
0 100
2003 2004 2005 2006 2007
No. of deals No. of SMEs
VENTURE CAPITAL 31
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 2007. 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/canceling/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 7000 crore to the Small Industries Development Bank of India, which will be
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.
The Indian economy is growing at 8-9% so the there is a development of all sector like
manufacturing, services sector. So there is a great opportunities for Venture Capital firms.
Because mostly invest their money in this sectors.
India amongst leading entrepreneurial Hotbeds globally
City competencies emerging

1. Bangalore
 All IP-led companies; IT and IT-enabled services
2. Delhi (NCR)
 Software services, IT enabled services, Telecom
3. Mumbai
 Software services, IT enabled services, Media,
Computer Graphics, Animation, Banking
4. Other emerging Centers

 Chennai, Hyderabad, and Pune
Emerging sectors for investments
As the venture industry continues to accelerate, a number of trends that cross

geographies can be seen. The industry is becoming even more globalized .As a result,
innovation in clean tech, IT, and healthcare, pharmaceutical are having a global impact. This
changing landscape is driving new approaches in how large corporations are interacting with
the venture community.
VENTURE CAPITAL 32
Clean technology.
Global climate changes, high oil prices, accelerated growth in emerging markets,
energy security concerns and the finite nature of resources are some of the key drivers of the
growing global demand for clean technologies in energy and water. In addition ,the increased
willingness of consumers and governments to pay for and use green technologies ,combined
with the positive exit environment of the last years ,has provided venture capitalists with the
confidence to invest in emerging companies around the globe.
According to the research from Dow Jones Venture One and Ernst &Young .US $1.28
billion was invested in 140financing rounds in 2006 in China , Europe Israel and United States
that compares to US $ 664.1 million invested in 103 financing rounds in 2005,showing the
capital investment in the field has nearly doubled over the past year. It is expected that
investment in clean technologies will continue to increase not only in developed markets but
also in the developing markets, mainly in India and China.
Biotechnology
Over last few years, the story of the US biotech industry has been one of the remarkable
success. There are signs that this success story is now repeated in other parts of world, with
maturing pipelines, record breaking financing totals, strong deal activity and impressive
financial results. Industry is grew 31% for second year in raw in 2007. Exemption of import
duty on key R&D, Contract manufacturing/clinical trial equipment and duty credit for R&D
and consumer goods.
BIOTECH IDUSTRY REVENUES
2500
2078
Revenue(US$ million)
2000
1587
1500
1000
500
0
2005-2006 2006-2007
Year
Source : ://http://indiabudget.nic.in , Economic survey 2007-08 ,chapter
VENTURE CAPITAL 33
Pharmaceutical
Source : ://http://indiabudget.nic.in , Economic survey 2007-08 ,chapter 8

export and import of pharmaceuticals
EXPORT OF PHARMACEUTICAL/DRUGS
16000
14000 14380
12000
Export(Rs.)
10000 10821
8000 9263
6000 7445
6779
4000
2000
0
2002-03 2003-04 2004-05 2005-06 2006-07
Years
Export of pharmaceuticals
 The industry's growth rate is likely to touch 19 per cent from the current 13 per cent,
according to a projection released by the Confederation of Indian Industries (CII), on
September 1, 2008.
 According to a McKinsey study, the Indian pharmaceutical industry is projected to
grow to US$ 25 billion by 2010 whereas the domestic market is likely to more than
triple to US$ 20 billion by 2015 from the current US$ 6 billion to become one of the
leading pharmaceutical markets in the next decade.
 The Indian pharmaceutical industry has shown robust growth in terms of infrastructure
development, technology base creation and a wide range of products with a
determination to flourish in the rapidly changing environment, thereby establishing its
VENTURE CAPITAL 34
global presence. The Indian pharmaceutical industry has increased its competitive
intensity owing to pricing pressures and striving consistently to innovate. ICICI, Abbell
Venture Fund.
 Venture-controlled Ranbaxy Fine Chemicals (RFCL) has acquired the US-based

speciality chemicals major Mallinckrodt Baker in a deal estimated at US$ 340 million.
 SO there is great opportunity for venture capital industry to invest their money in this
sector. Nowadays, India will become a global pharma hub exporting by exporting
domestically produced generic products
IT/ITes Industry
IT/ITeS Sector revenue
2006-2007 15.9
31.9
2005-2006 13.2
24.2
Year
2004-2005 10.2
18.3
2003-2004 8.3
13.3
2002-2003 6.3
9.8
0 5 10 15 20 25 30 35
US$ billion
Export Domestic market
IT/ITes Industry revenue
Source: http://www.ibef.org/sector/informationtechnolgy.aspx
The Department of Information Technology is setting up Nano Electronic Centres at
the Indian Institute of Technology, Mumbai and the Indian Institute of Science, Bangalore.
with an outlay of about Rs. 100 crore to carry out R&D activities in nano-electronics devices
and materials.
In 2006-07, the performance of the Information Technology Enabled Services–
Business Process Outsourcing (ITES-BPO) industry was marked by double-digit revenue
growth, steady expansion into newer service lines and increased geographic penetration and an
unprecedented rise in investments by multinational corporations (MNCs).
VENTURE CAPITAL 35
The Special Incentive Package Scheme (SIPS) to encourage investments for setting up
semiconductor fabrication and other micro- and nano-technology manufacturing industries was
announced in March2007. The incentives admissible would be 20 per cent of the capital
expenditure during the first 10 years for units located in Special Economic Zones (SEZs) and
25 per cent for units located outside SEZs.
ELECTRONIC INDUSTRY
PRODUCTION OF ELECTRONIC INDUSTRY
300000
250000 245600
200000 190300
AMOUNT
150000 152420
118290
100000 97000
50000
0
2002-03 2003-04 2004-05 2005-06 2006-07
Source : ://http://indiabudget.nic.in , Economic survey 2007-08 ,chapter 8

Electronic industry production
 There is a high growth of software and solutions related to the consumer Internet,
software as a service (SAAS), open source, software-cum-services and
telecommunications (both wireless and wire-line) products and related services. There
is a great opportunity for venture capital industry to invest in this electronic production
industry.
 In 11th five year plan investment estimate in telecommunication sector are 65.1 US$bn.
 The industry has seen the following trends in growth rate in April-June 2008
(estimated) over same period in 2007 :-
 Transformers – 4.1%
 Motors & Starters – -14.58%
 Boilers – 35%
VENTURE CAPITAL 36
Threats :
 Venture Capital Market in India Getting Overheated.
The Venture Capital market in India seems to be getting as hot as the country’s famous
summers. However, this potential over-exuberance may lead to some stormy days ahead, based
on sobering research compiled by global research and analytics services firm, Evalueserve.
Evalueserve research shows an interesting phenomenon is beginning to emerge.
Over 44 US-based Venture capital firms are now seeking to invest heavily in start-ups
and early-stage companies in India. These firms have raised, or are in the process of raising, an
average of US $100 million each. Indeed, if these 40-plus firms are successful in raising money,
they would garner approximately $4.4 billion to be invested during the next 4 to 5 years. 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 2006,
Evalueserve cautions that there will be a glut of Venture Capital money for early stage
investments in India. This will be especially true if the VCs continue to invest only in currently
favorite sectors such as IT, BPO, software and hardware products, telecom, and consumer
Internet. Given that a typical start-up in India would require $9 million during the first three
years (i.e., $3 million per year) and even assuming that the start-up survives for three years,
investing $2.2 billion during 2007-2010 would imply investing in 150 to 180 start-ups every
year during this period, which simply does not seem practical if the VCs continue to focus only
on their current favorite sectors.
 Unproductive workforce:
A global survey by McKinsey & Company revealed that Indian business leaders are
much more optimistic about the future than their international peers. So Indian employees are
tardy in their job so it will effect reversly on the economic condition of the country. Because
they are unproductive to the economy of the country.
 Exit route barriers :
Due to crashdown of market by 51% fromjanuary to novembor 2008. It create a

problem for venture capital firms. Because Nobody is trying to come up with IPO and IPO is the
exist route dor Venture Capital.
 Taxes 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.
VENTURE CAPITAL 37
CHAPTER 14. NEED AND RELEVANCE OF VENTURE

CAPITAL IN INDIA
In USA given its highly progressive industrial environment and entrepreneurial culture
it is normal for an entrepreneur or inventor of a new product /process to set up company to
produce and market the product by obtaining finance through the sale of company shares to
Venture Capital Funds which are readily willing to share the risk in return for future gains .
In India risk financing of this type has yet to pick up in any significant way. There are
large number of financial institutions which provide conventional finance to business firms.
This sort of traditional financing primarily caters to projects based on proven established
processes and technology with minimum investment risk .it is security oriented and asset based.
It involves fixed and uniform payment of interest and principal and it follows fixed form of
financing e.g. debt equity ratio, promoters contribution security margin etc. The existing
financial institutions are conservative in their approach
A number of people in India feel that financial institutions are not only conservative
but they also have bias for foreign technology and they do not trust the abilities of
entrepreneurs.
VENTURE CAPITAL 38
CHAPTER 15. STAGES OF INVESTMENT

There are 5 Investments stages widely used by the industry to invest. These stages are defined
as under:
1) Seed Stage:
Financing provided to new companies for use in product development and initial
marketing constitutes Seed Stage. Eligible companies may be in the process of being
setup or may have been in business for a short time or may not have sold their product
commercially. This is the fmancing provided to companies when the Initial Concept of
the business is being formed.
2) Startup :
Financing Provided to new companies, for manufacturing and commercializing the
developed products, represent Startup. The companies may be in their initial stages of
development and finance may be extended for creation of new infrastructure and
meeting the Working Capital Margin.
3) Other Early Stage:

Financing provided to companies that have completed the commercial scale
implementation and may require further funds to meet initial cash and further working
capital is treated as Other Early Stage. The companies may have expended their capital
and would require additional funds and may not yet be generating profit.
4) Later Stage:
Financing Capital provided for the growth and expansion of established companies.
Funds may be used to finance increase in production capacity, market or product
development and/ or provide additional working capital. This would include product
diversification, forward/backward integration, besides creation of additional capacity.
Capital could be provided for companies that are breaking even or profitable or in
turnaround situations.
5) Turnaround:
Financing Capital provided for companies that are in operational or financial difficulties
where the additional funds would help in Turnaround Situations.
Earlier VC funds use to invest in Seed and Startup stages and very rarely in Turnaround
Stages, but off late the trend is changing and Venture Capitalist funds are a part of every
stage and are also actively participating in Turnaround Stages through buyouts and
takeovers.
VENTURE CAPITAL 39
CHAPTER 16. PROCESS OF VENTURE CAPITAL.

The Following are the process of venture Capital:
 Deal Origination
 Screening
 Evaluation
 Deal Negotiation
 Post Investment Activity
 Exit Plan.
The above-mentioned steps are explained in details below;
1) Deal origination:
Origination of a deal is the primary step in venture capital financing. It is not possible to make
an investment without a deal therefore a stream of deal is necessary however the source of
origination of such deals may be various. One of the most common sources of such origination
is referral system. In referral system deals are referred to the venture capitalist by their business
partners, parent organisations, friends etc.
2) Screening:
Screening is the process by which the venture capitalist scrutinises all the projects in which he
could invest. The projects are categorised under certain criterion such as market scope,
technology or product, size of investment, geographical location, stage of financing etc. For
the process of screening the entrepreneurs are asked to either provide a brief profile of their
venture or invited for face-to-face discussion for seeking certain clarifications.
3) Evaluation:
The proposal is evaluated after the screening and a detailed study is done. Some of the
documents which are studied in details are projected profile, track record of the entrepreneur,
future turnover, etc. The process of evaluation is a thorough process which not only evaluates
the project capacity but also the capacity of the entrepreneurs to meet such claims. Certain
qualities in the entrepreneur such as entrepreneurial skills, technical competence,
manufacturing and marketing abilities and experience are put into consideration during
evaluation. After putting into consideration all the factors, thorough risk management is done
which is then followed by deal negotiation.
VENTURE CAPITAL 40
4) Deal negotiation:
After the venture capitalist finds the project beneficial he gets into deal negotiation. Deal
negotiation is a process by which the terms and conditions of the deal are so formulated so as
to make it mutually beneficial. The both the parties put forward their demands and a way in
between is sought to settle the demands. Some of the factors which are negotiated are amount
of investment, percentage of profit held by both the parties, rights of the venture capitalist
and entrepreneur etc.
5) Post investment activity:
Once the deal is finalised, the venture capitalist becomes a part of the venture and takes
up certain rights and duties. The capitalist however does not take part in the day to day
procedures of the firm; it only becomes involved during the situation of financial risk. The
venture capitalists participate in the enterprise by a representation in the Board of Directors
and ensure that the enterprise is acting as per the plan.
6) Exit plan:
The last stage of venture capital investment is to make the exit plan based on the nature
of investment, extent and type of financial stake etc. The exit plan is made to make minimal
losses and maximum profits. The venture capitalist may exit through IPOs, acquisition by
another company, purchase of the venture capitalists share by the promoter or an outsider.
VENTURE CAPITAL 41
CHAPTER 17. ADVANTAGES AND DISADVANTAGES OF

VENTURE CAPITAL FINANCING
The advantages and disadvantages of venture capital financing are various. Some of the
advantages and disadvantages are given below.
 The autonomy and control of the founder is lost as the investor becomes a part owner.
 The process is lengthy and complex as it involves a lot of risk.
 The object and profit return capacity of the investment is uncertain.
 The investments made based on long term goals thus the profits are returned late.
 Although the investment is time taking and uncertain, the wealth and expertise it brings
to the investor is huge.
 The sum of equity finance that can be provided is huge.
 The entrepreneur is at a safer position as the business does not run on the obligation to
repay money as the investor is well aware of the uncertainty of the project.
VENTURE CAPITAL 42
CHAPTER 18. SUGGESTIONS AND RECOMMENDATIONS

1. Venture investing is by definition risky. Increased risks due to the environment
correspondingly decrease the likelihood of success. In nations with unpredictable regulations,
corrupt governments and unstable currencies, the probability of success is decreased and such
situations are beyond the control of both the entrepreneur and the venture capitalist. These
environmental risks discourage the practice of venture capital.
2. The task of offering suggestions for improving the infrastructure of the venture capital
industry, and its role in industrial development of the country, is rendered difficult on account
of the infancy of the industry and the vast problems it faces.
3. From the experience of venture capital activities in the developed countries and discussion
with the officials of venture capital funds and venture capital entrepreneurs and detailed survey
of venture capital undertakings
4. An entrepreneurial tradition must be broad-based and less family based. This calls for
imparting education and training in entrepreneurship.
5. Up-to-date information source for startup entrepreneurs in the form of source books web
portals and one stop shops and widen dissemination of all relevant information should be
created.
VENTURE CAPITAL 43
CHAPTER 19. CONCLUSION

The study provides that the maturity if the still nascent Indian Venture Capital market
is imminent.
Venture Capitalists in Indian have notice of newer avenues and regions to expand. VCs
have moved beyond IT service but are cautious in exploring the right business model, for
finding opportunities that generate better returns for their investors.
In terms of impediments to expansion, few concerning factors to VCs include;

unfavorable political and regulatory environment compared to other countries, difficulty in
achieving successful exists and administrative delays in documentation and approval.
In spite of few non attracting factors, Indian opportunities are no doubt promising which
is evident by the large number of new entrants in past years as well in coming days. Nonetheless
the market is challenging for successful investment.
Therefore Venture capitalists responses are upbeat about the attractiveness of the India as a
place to do the business.
VENTURE CAPITAL 44
BIBLIOGRAPHY & WEBLIOGRAPHY
BOOKS :
 Taneja Satish, “Venture Capital In India”, Galgotia Publishing Company, 2002, pg 1 – Commented [R1]:
44.
 Chary T Satyanarayana, “Venture Capital – Concepts & Applications”, Macmillian
India Ltd, 2005, pg 19 – 22.
 Pandey I M, “Venture Capital – The Indian Experience”, Prentice Hall of India Pvt Ltd,
1999, pg 95 – 97.
 Thompson Arthur, Strickland A J, Gamble John E, Jain Arun K, “Crafting & Executing
Strategy – The Quest for Competitive Advantage”, Tata McGraw Hill, 14th edition,
2006, pg 44 – 80.
MAGAZINE :
 Sharma Kapil, An Analysis of Venture Capital Industry in India, ICFAI Reader, April
2007, pg 37 – 43.
REPORT :
 Trends of Venture Capital in India, survey Report by Deloitte, 2007.
 Global Trends of Venture Capital, survey report by Deloitte, 2007.
 Acceleration – Global Venture Capital Insights Report by Ernst & Young, 2007
 Economic survey 2007-08, Chepter-8
WEBSITE:
 www.ivca.org
 www.indiavca.org.
 www.vcindia.com
 www.ventureintelligence.in
 www.nvca.org
 www.economictimes.indiatimes.com
 www.100ventures.com
 www.google.com.
VENTURE CAPITAL 45
VENTURE CAPITAL 46

Chapter 1. Introduction of Venture Capital

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PRAHLADRAI DALMIA LIONS COLLEGE COMMERCE & ECONOMICS

CHAPTER 1. INTRODUCTION OF VENTURE CAPITAL

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

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

CHAPTER 2. OBJECTIVE OF STUDY

1) Understand the concept of venture capital.

2) Study venture capital industry in India.

3) Study venture capital industry in global scenario.

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

CHAPTER 3. RESEARCH METHODOLOGY

CHAPTER 4 . LIMITATION AND SCOPE OF PROJECT

CHAPTER 5. HOW IT WORKS ?

CHAPTER 6. CONCEPT OF VENTURE CAPITAL

Venture capital is considered as financing of high and new technology based

CHAPTER 7. FEATURES OF VENTURE CAPITAL

3. Equity Participation & Capital Gains

CHAPTER 8. DIFFERENCE BETWEEN VENTURE CAPITAL

1. Venture Capital Vs Development Funds

2. Venture Capital Vs Seed Capital & Risk Capital

Seed Capital Scheme Venture capital Scheme

Difference between Seed Capital Scheme and Venture capital Scheme

3. Venture Capital Vs Bought Out Deals

CHAPTER 9. VENTURE CAPITAL SPECTRUM

 Venture Capital Spectrum

1. Early Stage Finance

2. Later Stage Finance

Financing Stage Period (funds Risk perception Activity to be financed

Turnaround 3-5 Medium to high Turning around a sick

Venture Capital- Financing Stages

The characteristics of start-up capital are:-

3. Early Stage Finance

4. Second Stage Finance.

Positive reasons include:

It is additional injection of funds and is an acceptable part of venture capital. Often

5. Later Stage Finance

Expansion / Development Finance

An enterprise established in a given market increases its profits exponentially by

Buy - out / Buy - in Financing

CHAPTER 10. VENTURE CAPITAL INVESTMENT PROCESS

Post Investment Activities:

Initial Public Offers (IPOs)

Sale on the OTC Market

 Angels and angel clubs

 Small and Upstart Venture Capital Funds

 Medium Venture Funds

 Large Venture Funds

 Corporate Venture Funds

As an example, Adobe systems launched a $40m venture fund in 1994 to invest in

A solution for financial funds could be a shift to a higher securisation of Venture

CHAPTER 11. KEY SUCCESS FACTOR FOR VENTURE

 Knowledge about Government changing policies:

 Quick Response time :

 Knowledge about Global Environment:

 Good Human Resource :

Venture capital should become an institutionalized industry financed and managed by

 Balance between three factors:

Financial markets and

Risk management skills Possible investees and

frame work for key success factor

CHAPTER 12. GE NINE – CELL INDUSTRY

Industrial Attractiveness Importance weight Rating Score

Business Importance APIDC IVCF UTI ICICI AVISHKAR

CHAPTER 13. OPPORTUNITIES AND THREATS: