A

PROJECT REPORT

ON

Venture Capital in India

In partial fulfillment of requirement for MBA Degree

Submitted To Submitted By
Mrs Safia Khan Mudit Upadhyay
Faculty (Mgt. Deptt.) M.B.A. IIIrd Sem.

Amrapali Institute of Management &Technology,

Haldwani Distt. Nainital , Uttarakhand
(Affiliated to Uttarakhand Technical University, Uttarakhand)
 TABLE OF CONTENT

Acknowledgement

List of Tables

Chapter-1

Introduction
Origin of venture Capital
What is Venture Capital

Chapter-2

Objective of Venture Capital

Feature of Venture Capital

Chapter-3

Forms of Venture Capital

Function of Venture Capital

Chapter-4

Venture Capital Companies

Venture Capital Industry
Conclusion
 ACKNOWLEDGEMENT

It is essential to acknowledge the help received from the people from various
areas. I find myself at loss how to thank them.

These words are not a formality but a sincere voice of my heart and I owe
gratitude to them all. I express my deep feelings of gratitude, profound
respect to Miss Safia Khan for cooperating with me to complete my project in
proper manner, with adequate knowledge provided by them.
I feel great pleasure in rendering my deep sense of gratitude entire friend
group for their helping attitude and cooperation during course of this project.
CHAPTER-1
 INTRODUCTION

Venture capital is a new financial service, the emergence of which went

towards developing strategies to help a new entrepreneurs to translate their
business ideas into realities. As the name suggests it implies capital provided
to start a new venture. The capital provided to start a venture in known as
venture capital . In particular, for a small entrepreneur with zeal and
dynamism but inadequate or lack of finance, venture capital or seed capital is
a boon, making it a launching pad for financial growth.

The venture capitalist essentially provides finance to businesses

promoted by individuals group of individuals who have sound project ideas
but lack financial resources to implement them. Such projects would usually
have a high risk element inherent in them but would also promise highly
attractive returns to the investors in the event of success.

Venture capital is thought of as a creative capital and is expected to

perform economic functions different from other investment vehicles which
primarily serve as expansion capital. This is some thing that is ignored by
several entrepreneurs in India.
 Origin of Venture Capital

The concept of venture capital originated in the USA during the nineteenth an
early twentieth centuries when the European investors along with American
natives were involved in the backing of construction of new industries such a
rail roads , steel, oil and glass. The concept was formalized after world war II
with the involvement of a few wealthy American family groups who made
fortunes in earlier new ventures. In 1946, the American Research and
development (AR & D) was formed as the first venture organization which
financed nearly for 11 years about 100 companies and made 35 times its
investment

Perhaps the most famous legend of them all is Apple computer, which
started out in the US in 1977 with capital provided by an obscure venture
capital firm, Arthur Rock & Co. The rest is history. Apple Computer , with a
turnover of $ 9.80 billion, made it to the fortune 500 andArthur Rock & Co.
Attained a near mythical stature in the venture capital industry.

Of course, There is more to venture capital financing that just nursing

start-ups. It encompasses a whole gamut of activities from providing seep
capital, and supplying funds for product development and marketing
expenditure, to extending bridge finance prior to an initial public offering
(IPO), But, almost always, the term venture capital conjures up images of
funding risky and unproven, but sophisticated, technologies.

The beginning of 1950 marked the growth of venture capital

companies in different areas. The investors in these companies where
provided returns of more than 100 to 1. For Example, in Digital equipment,
Raychem , Memorex, etc., AR & D’s $ 70,000 investment in Digital
equipment became worth more than 500 million.
 The origin of venture capital in the UK is also traceable during the
nineteenth Venture when European merchant bankers and investors helped
the growth of industry in the USA and in their dominions like South Africa,
India and else where. Building of railways in parts of America and India,
construction of high risk projects like the suez canal ,etc, are examples where
pooled financial institutions have set up subsidiary units as venture capital
companies with the main objective of financing high technology industrial
units. Rapid development of industry in Japan is credited to the easy
availability of venture capital
WHAT IS VENTURE CAPITAL

Venture capital broadly implies as investment or long term, equity

finance in high risk projects with high reward possibilities, it is equity finance
based on the principle that a partnership can be formed between the
entrepreneur and the investors and thus represents an attempt to
institutionalize entrepreneur ship particularly associated with innovations.

The venture capitalist essentially provides finance to businesses

promoted by individuals group of individuals who have sound project ideas
but lack financial resources to implement them. Such projects would usually
have a high risk element inherent in them but would also promise highly
attractive returns to the investors in the event of success.

Venture capital is thought of as a creative capital and is expected to

perform economic functions different from other investment vehicles which
primarily serve as expansion capital. This is some thing that is ignored by
several entrepreneurs in India.

The fact remains that if venture capital has been the harbinger of
entrepreneurship as never before in the west, it is because it enjoys a great
deal of flexibility. In the US, for example, this form of financing enjoys
considerable tax incentives. But, by and large, the industry rose to the
occasion when some industrialists such a lock whitney and laurence
Rockefeller set aside funds to see whether a financing industry could be
developed out of giving entrepreneurs an opportunity to start business. And
what a way it developed.
CHAPTER-2
 OBJECTIVE OF VENTURE CAPITAL

1- Fuel ambitions and dreams

2- Breathes life into promising business ventures

3- Charts the course of incisive business ideas.

4- Provides foresight with a free sense of direction

5- Helps in building enterprise visions

6- Smoothly glides over rough passages

7- Partners enterprises on to script thrilling success

8- Complements acumen and enterprise with a steady flow of resources

9- Inspires enterprises to script thrilling success

10-Venture capital finances are plotted on a firm life cycle curve

Features of Venture capital

1- It is high risk venture . The success rate in developed economics like

the USA is around 60% . Where as in a developing country like ours,

the success rate is expected to be around 20%-30%
2- It finances high tech projects
3- The gestation period is long. The benefit or profit from the venture
capital investment will start accruing only after an average period of 4
to 5 years
4- Venture capitalist also makes available to be assisted units the

managerial and marketing assistance.

5- When the assisted company has reached a certain stage of profitability,
the venture capitalist sells his shares in the stock market at a hefty
premium. He thus makes good profit as well as gets his locked up
funds released for redeployment in some other ventures
6- Provision to have conditional loans which unlike the conventional
loans, don’t carry interest charge. Instead, it carries a royalty linked to
sales generated by the company after commercialization. The rate of
royalty is fixed depending on the profitability of the business and the
fund’s requirement of a reasonable return. The conditional loan is
essentially a quasi-equity instrument which does not place a servicing
burden on the company in the initial periods and seeks a return
commensurate with the success of the ventures .
7- It is an equity or quasi-equity form of investment
8- It is a long term investment and the returns are in the forms of capital
gains
9- It is an active form of investment with a higher degree of involvement
in the management of a venture.
 CHAPTER-3

Forms of Venture Capital

Based on the four stages of development of a business, the venture capital

financing maybe classified as seed finance, startup finance, beginner’s

finance and establishment finance. During the first stage of starting a

business i.e., at the formulation of an idea stage, the risk associated is very

high. Here an idea needs to be translated into a business proposition. So the

finance required at this stage is the seed finance from the venture capital

fund. The second stage being the implementation phase, startup finance from

venture capital is required for the purpose of implementing the appropriate

production processes. In the third stage commercial production is to be

started and beginner’s finance is required to develop the marketing and other

infrastructures. In the fourth and the last stage, when the business is fully

established , it requires finance for its growth and expansion so as to reap the

economics of the scale . Here, establishment finance is sought from the

venture capital fund. The degree of risk associated with a business gradually

diminishes in every subsequent stage of business development. A

comprehensive venture capital financing may take all of the above forms.

VENTURE CAPITAL STAGES OF FINANCING

1- Seed Money stage : Small amount of financing needed to prove a

concept or develop a product. Marketing is not included in this

stage.

2- Start up : Financing for a firm that started up in the past one year.

Funds are likely to pay for marketing and product development

 3- First Round Financing : Additional money to begin sales and

manufacturing after a firm has spent its start up capital

4- Second Round Financing : Funds earmarked for working capital for

a firm that is selling its product, but is still losing money

5- Third Round Financing : Financing for a firm that is breaking even

and is contemplating on expansion project

6- Fourth Round financing : Money provided for firms that are likely

to go public soon. Also known as bridge financing.

FUNCTION OF VENTURE CAPITAL

1- Venture capital provides finance as well as skills to new enterprises

and new venture of existing ones based on high technology

innovations. It provides seed capital funds to finance innovations even

in the pre-start stage.

2- Venture Capitalist fills the gap in the owner’s funds in relation to the

quantum of equity required to support the successful launching of a

new business or the optimum scale of operations of an existing

business. It acts as a trigger in launching new business and as a catalyst

in stimulating exist in firms to achieve optimum performance

3- Venture capitalist’s duty extends even as for as to see that the firm has

proper and adequate commercial banking and receivable financing

4- Venture capitalist assists the entrepreneurs in locating, interviewing

and employing out standing corporate achievers to professionalise the

firm.
 CHAPTER 4

VENTURE CAPITAL COMPANIES

 Venture capital is a temporary start up financing in the form of equity

capital or loans, with returns linked to profits and with some measure of

managerial control. Venture capitalists expect losses on some ventures to be

greater than with traditional financing, but they invest because they think that

greater than normal returns on other will more than make up for those losses

Venture capital is ideally suited to projects involving uncertainly, poor

market information and lack of collateral. It is, therefore , an alternative to

finance from DFIs. It is clearly not suitable for every country, however. It

requires an entrepreneurial class and an environment conducive to private

sector initiatives. A source of long term investible resources is also necessary.

And an active secondary market- either a secondary stock exchange with less

demanding listing requirements of an adequate network of business contacts-

is essential so that investments can be sold

MAJOR PLAYERS

The forerunner to venture capital funding in India was USAID’s

programme for advancement of commercial technology (PACT), started in

1985 to assist Indian firms in commercializing innovative technologies

through Indo-US joint ventures. Subsequently, using the expertise, ICICI

setup the country’s first venture capital company- The Technology

Development and Investment Corporation of India (TDICI) in 1986.

In India, the venture capital industry has largely been sponsored by

financial institutions and banks like IDBI, ICICI, UTI, IFCI, SBI, Canara

Bank etc.

VENTURE CAPITAL INDUSTRY

The venture capital industry in india , started in mid eighties in still in

a nascent stage , VCFs, particularly the domestic funds which have relatively

small corpus, are engaged in financing small and medium enterprises which

form the hub of the industrial sector of the nation.

1- Lack of Regulatory Frame work : There is no regulartory frame work

for structuring the funds. Most of the domestic VCFs have been set up

under the Indian trust Act which was enacted in 1982 and since then

has never been changed. Offshore Funds are set up through the

Mauritius route. While the domestic VCFs have to follow SEBI

Guidelines, offshore funds are required to follow the RBI Guidelines.

2- Anomaly in Taxation : There Is a great anomaly in tax treatment

among VCFs and offshore funds. While offshore funds which cater
 mainly to the existing large companies do not pay and tax, domestic

VCFs which provide equity assistance to small and medium enterprises

pay maximum marginal tax. Even among the domestic funds, funds

settled by UTI are totally exempted from tax.

3- Difficulty in Fund Raising : In absence of any inventive, it is extremely

difficult for domestic VCFs to raise money. Initially the funds were

raised either from multilateral agencies like the world Bank or all India

Financial Institutions. In the US. And other developed countries,

pension funds and insurance companies invest in the VCFs . Duging

1997-98 , the corpus mobilized by the VCFs with proven track records

ultimately help small and medium scale companies.

4- Exit : All the early investments were made by the VCFs in small

companies. As OTC exchange could not take off, these investments are

largely illiquid. This is one of the major reasons for domestic VCFs not

take in off . At present , CBDT Guide lines permit investment of 80%

of the funds only in the equity of unlisted companies. This makes it all

the more difficult for the VCFs to exit. If CBDT Guide lines are

changed to include instruments such as preference shares.

Convertibles, Conditional Loans etc.

 CONCLUSION

India has all the main ingredients for venture capital business, viz,

large investible funds with the public, a sound technological base, a large

number of risk takers, professional manager, entrepreneurs and scientist and a

growing capital market. If the concept of venture capital is successfully

implanted, it will not only provide the stimulus for an industrial leap but also

pave the way for the private sector sharing the responsibility of industrial

finance with the public sector . And, to that extent, there is a gradual

loosening of the government’s budgetary support for the private sector’s

development through concessional long term credit from the public sector. It

will also bring a new deal for the fast growing technocrats, managers, and

professionals in our country with an instinct for entrepreneurial risk taking

Thus, venture capital promotes entrepreneurships, accelerates the process of

industrialization, promotes new products and services and generates

employment opportunities to skilled as well as unskilled workers. The

economy receive a new boost.