REPORT on Venture Capital
February 21, 2017 | Author: SANDEEP ARORA | Category: N/A
Short Description
Download REPORT on Venture Capital...
Description
FINAL REPORT ON
“Study of Venture Capital in India and its Aspects” Submitted in partial fulfilment of the requirement of MBA Degree of Maharshi Dayanand University, Rohtak
Under the supervision of:
Mr Vivek Bhatia Faculty International Business, ITM Gurgaon Submitted by:
sandeep arora 07-MBA-127 Session 2007-2009
Institute of Technology and Management Gurgaon Project Report – Institute of Technology and Management, Gurgaon
Acknowledgement “No Learning is proper and effective without Proper Guidance” Every study is incomplete without having a well plan and concrete exposure to the student. Management studies are not exception. Scope of the project at this level is very wide ranging. On the other hand it provide sound basis to adopt the theoretical knowledge and on the other hand it gives an opportunities for exposure to real time situation.
This study is an internal part of our MBA program and to do this project in a short period was a heavy task.
Inten Intenti tion, on, dedica dedicati tion, on, conce concentr ntrat ation ion and hard hard work work are are very very much much essen essenti tial al to comple complete te any any task. task. But But still still it needs needs a lot of suppor support, t, guida guidance nce,, assist assistanc ance, e, cooperation of people to make it successful. I bear to imprint of my people who have given me, their precious ideas and times to enable me to complete the research and the project report. I want to thanks them for their continuous support in my research and writing efforts.
I wish wish to record record my thanks thanks and indeb indebte tedne dness ss to Mr Vivek Vivek Bhatia Bhatia - Facul Faculty ty International Business, ITM Gurgaon, whose inspiration, dedication and helping
nature provided me the kind of guidance necessary to complete this project.
I am extr extrem emel ely y grat gratef eful ul to management of Inst Instit itut utee of Te Tech chno nolo logy gy & Management, Gurgaon for granting me permission to be part of this college.
I would also like to acknowledge my parents and my batch mates for their guidance and blessings
Project Report – Institute of Technology and Management, Gurgaon
Table of Content 1.
Introduction
2.
Significance of Study of Study
3.
Objective of Study
4.
Research Methodology •
Literature Review
•
Conceptual Framework
•
Operational Definition
5.
Analysis & Interpretation
6.
Findings
7.
Suggestions
8.
Conclusion
9.
Limitation
10. 11.
Bibliographies Annexure
ANNEXURE I I – – NAME OF VENTURE CAPITAL FIRMS OUT
SIDE OF INDIA ANNEXURE II II – – NAME NAME OF VENTURE CAPITAL FIRMS IN
INDIA.
Project Report – Institute of Technology and Management, Gurgaon
Introduction
A number of technocrats are seeking to set up shop on their own and capitalize on opportunities. In the highly dynamic economic climate that surrounds us today, few ‘traditional’ business models may survive. Countries across the globe are realizing that it is not the conglomerates and the gigantic corporations that fuel economic growth any more. The essence of any economy today is the small and medium enterprises. For example, in the US, 50% of the exports are created by companies with less than 20 employees and only 7% are created by created by companies with 500 or more or more employees. This growing trend can be attributed to rapid advances in technology in the
last
decade.
Knowledge
driven
industries
like
InfoTech,
health-care,
entertainment and services have become have become the cynosure of bourses bourses worldwide. In these sectors, it is innovation and technical capability that are big are big business-drivers. business-drivers. This is a paradigm shift from the earlier physical production physical production and ‘economies of scale’ of scale’ model. However, starting an enterprise is never easy. never easy. There are a number of number of parameters parameters that contribute to its success or downfall. Experience, integrity, prudence and a clear understanding of the market are among the sought after qualities of a promoter. However, there are other factors, which lie beyond the control of the entrepreneur. Prominent among these is the timely infusion of funds. This is where the venture capitalist comes in, with money, business money, business sense and a lot more.
What is Venture Capital??? The venture capital investment helps for the for the growth of innovative entrepreneurships in India. Venture capital has developed as a result of the need to provide nonconventional, risky finance to new ventures based on innovative entrepreneurship. Project Report – Institute of Technology and Management, Gurgaon
Venture capital is an investment in the form of equity, quasi-equity and sometimes debt - straight or conditional, made in new or untried concepts, promoted by a technically or professionally qualified entrepreneur. Venture capital means risk capital. It refers to capital investment, both investment, both equity and debt, which carries substantial risk and uncertainties. The risk envisaged may be very high may be so high as to result in total loss or very or very less so as to result in high gains
The concept of Venture of Venture Capital Venture capital means many things to many people. many people. It is in fact nearly impossible to come across one single definition of the of the concept. Jane Koloski Morris , editor of the well known industry publication, Venture
Economics, defines venture capital as 'providing seed, start-up and first stage financing' and also 'funding the expansion of companies that have already demonstrated their business potential but do not yet have access to the public securities market or to credit oriented institutional funding sources .
The European Venture Capital Association describes it as risk finance for entrepreneurial growth oriented companies. It is investment for the medium or long term return seeking to maximize medium or long term for both for both parties. It is a partnership with the entrepreneur in entrepreneur in which the investor can investor can add value to the company because of his of his knowledge, experience and contact base. contact base. Meaning of venture of venture capital: capital:
Venture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential the potential to develop into significant economic contributors. Venture capital is an important source of equity for start-up for start-up companies. Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves. Venture capitalists generally: •
Finance new and rapidly growing companies Project Report – Institute of Technology and Management, Gurgaon
•
Purchase equity securities
•
Assist in the development of new of new products products or services or services
•
Add value to the company through active participation active participation
•
Take higher risks higher risks with the expectation of higher of higher rewards rewards
•
Have a long-term orientation
When considering an investment, venture capitalists carefully screen the technical and business merits of the proposed company. Venture capitalists only invest in a small percentage of the businesses they review and have a long-term perspective. They also actively work with the company's management, especially with contacts and strategy formulation. Venture capitalists mitigate the risk of risk of investing by investing by developing a portfolio of young of young companies in a single venture fund. Many times they co-invest with other professional venture capital firms. In addition, many venture partnerships manage multiple funds simultaneously. For decades, venture capitalists have nurtured the growth of America's high technology and entrepreneurial communities resulting in significant job creation, economic growth and international competitiveness. Companies such as Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and Genetech are famous examples of companies of companies that received venture capital early in their development. their development. (Source: National (Source: National Venture Venture Capital Association Association 1999 Year book) Year book)
Project Report – Institute of Technology and Management, Gurgaon
Private Equity Investing Venture capital investing has grown from a small investment pool investment pool in the 1960s and early 1970s to a mainstream asset class that is a viable and significant part of the institutional and corporate investment portfolio. investment portfolio. Recently, some investors have been have been referring to venture investing and buyout and buyout investing as "private equity investing." This term can be can be confusing because confusing because some in the investment industry use the term "private equity" to refer only to buyout fund investing. In any case, an institutional investor will allocate 2% to 3% of their institutional portfolio for investment in alternative assets such as private as private equity or venture or venture capital as part as part of their of their overall overall asset allocation. Currently, over 50% of investments in venture capital/private equity comes from institutional public and private pension funds, with the balance coming from endowments, foundations, insurance companies, banks, companies, banks, individuals and other entities other entities who seek to seek to diversify their portfolio portfolio with this investment class.
What is a Venture Capitalist? The typical person-on-the-street typical person-on-the-street depiction of a of a venture capitalist is that of a wealthy financier who financier who wants to fund start-up companies. The perception The perception is that a person who develops a brand new change-the-world invention needs capital; thus, if they if they can’t get capital from a bank or from their own pockets, they enlist the help of a venture capitalist. In truth, venture capital and private equity firms are pools of capital, typically organized as a limited partnership partnership that invests in companies that represent the opportunity for a for a high rate of return of return within five to seven years. The venture capitalist may look at look at several hundred investment opportunities before opportunities before investing in only a few selected companies with favorable investment opportunities. Far from being simply passive financiers, venture capitalists foster growth in companies through their involvement in the management, strategic marketing and planning of their investee companies. They are entrepreneurs first and financiers second. Even individuals may be venture capitalists. In the early days of venture capital investment, in the 1950s and 1960s, individual investors were the archetypal venture Project Report – Institute of Technology and Management, Gurgaon
investor. While this type of individual investment did not totally disappear, the modern venture firm emerged as the dominant venture investment vehicle. However, in the last few years, individuals have again become again become a potent and increasingly larger part of the of the early stage start-up venture life cycle. These "angel investors" will mentor a company and provide needed capital and expertise to help develop companies. Angel investors may either be be wealthy people wealthy people with management expertise or retired business men and women who seek the opportunity for first-hand business development.
Factor to be considered by venture capitalist in sel selec ecti tion on of inve invest stme ment nt proposal There are basically four key elements in financing of ventures which are studied in depth
by
the
venture
capitalists.
These
are:
of the key people key people on the board the board bring bring 1. Management : The strength, expertise & unity of the significant credibility to the company. The members are to be mature, experienced possessing working knowledge of business of business and capable of taking potentially high risks. of return of about of about 30 - 40% is 2. Pote Po tent ntia iall for fo r Capi Ca pita tall Gain Ga in:: An above average rate of return required by required by venture capitalists. The rate of return of return also depends upon the stage of the of the business cycle where funds are being deployed. Earlier the stage, higher is the risk and hence the return. 3. Realistic Financial Requirement and Projections: Projections : The venture capitalist requires
a realistic view about the present health of the organization as well as future projections regarding scope, nature and performance and performance of the of the company in terms of scale of scale of operations, operating profit and further costs related to product development through Research & Development. 4. Owner's Financial Stake: Stake: The financial resources owned & committed by the
entrepreneur/ owner in the business including the funds invested by family, friends and relatives play relatives play a very important role in increasing the viability of the of the business. business. It is an important avenue where the venture capitalist keeps an open eye.
Project Report – Institute of Technology and Management, Gurgaon
A Brie Brieff Hist Histor oryy The concept of venture of venture capital is not new. Venture capitalists often relate the story of Christopher Columbus. Christopher Columbus. In the fifteenth century, he sought to travel westwards instead of eastwards of eastwards from Europe and so planned so planned to reach India. His far-fetched idea did not find favor with the King of Portugal, who refused to finance him. Finally, Queen Isabella of Spain of Spain decided to fund him and the voyages of Christopher of Christopher Columbus Columbus are now empanelled in history. The modern venture capital industry began industry began taking shape in the post the post – – World World War II years. It is often said that people decide to become entrepreneurs because they see role models in
other people
who have become successful entrepreneurs. Much the
same thing can be said about venture capitalists. The earliest members of the organized venture capital industry had several role models, including these three: American Research and Development Corporation, formed in 1946, whose
biggest success was Digital Equipment. The founder of founder of ARD was General Georges Doroit, a French-born military man who is considered "the father of venture capital." In the 1950s, he taught at the Harvard Business School. His lectures on the
importance of risk capital were considered quirky by the rest of the faculty, who concentrated on conventional corporate management. of whose early hits was Minute Maid J.H. Whitney & Co also formed in 1946, one of whose juice. Jock Whitney Jock Whitney is considered one of the of the industry’s founders. The Rockefeller Family, and in particular, L S Rockefeller, one of whose earliest
investments was in Eastern Airlines, which is now defunct but defunct but was one of the of the earliest commercial airlines. The Second World War produced an abundance of technological innovation, primarily with military applications. They include, for example, for example, some of the of the earliest work on micro circuitry. Indeed, J.H. Whitney’s investment in Minute Maid was
Project Report – Institute of Technology and Management, Gurgaon
intended to commercialize an orange juice concentrate that had been developed to provide nourishment for troops for troops in the field. In the mid-1950s, the U.S. federal government wanted to speed the development of advanced technologies. In 1957, the Federal Reserve System conducted a study that concluded that a shortage of entrepreneurial financing was a chief obstacle to the development of what it called "entrepreneurial businesses." As a response this a number of Small Business Investment Companies (SBIC) were established to "leverage" their private private capital by capital by borrowing borrowing from the federal government at belowat belowmarket interest rates. Soon commercial banks commercial banks were allowed to form SBICs and within four years, four years, nearly 600 SBICs were in operation. At the same time a number of number of venture venture capital firms were forming private forming private partnerships partnerships outside the SBIC format. These partnerships These partnerships added to the venture capitalist’s toolkit, by offering a degree of flexibility of flexibility that SBICs lack. Within a decade, private decade, private venture capital partnerships capital partnerships passed passed SBICs in total capital under management. under management. The 1960s saw a tremendous bull IPO market that allowed venture capital firms to demonstrate their ability to create companies and produce huge investment returns. For example, when Digital Equipment went public in 1968 it provided ARD with 101% annualized Return on Investment (ROI). The US$70,000 Digital invested to start the company in 1959 had a market value of US$37mn. As a result, venture capital became a hot market, particularly for wealthy individuals and families. However, it was still considered too risky for institutional for institutional investors. In the 1970s, though, venture capital suffered a double-whammy. First, a red-hot IPO market brought over 1,000 venture-backed companies to market in 1968, the public markets went into a seven-year slump. seven-year slump. There were a lot of disappointed of disappointed stock market stock market investors and a lot of disappointed of disappointed venture capital investors too. Then in 1974, after Congress legislation against the abuse of pension fund money, all high-risk investment of these funds was halted. As a result of poor of poor public public market and the pension fund legislation, venture capital fund raising hit rock bottom bottom in 1975. Well, things could only get better from there. Beginning in 1978, a series of legislative and regulatory changes gradually improved the climate for venture Project Report – Institute of Technology and Management, Gurgaon
investing. First Congress slashed the capital gains tax rate to 28% from 49.5%. Then the Labor Department Labor Department issued a clarification that eliminated the pension the pension funds act as an obstacle to venture investing. At around the same time, there was a number of high-profile IPOs by venture-backed companies. These included Federal Express in 1978, and Apple Computer and Genetech Inc in 1981. This rekindled interest in venture capital on the part the part of wealthy families and institutional investors. Indeed, in the 1980s, the venture capital industry began industry began its greatest period greatest period of growth. In 1980, venture firms raised and invested less than US$600 million. That number soared to nearly US$4bn by 1987. The decade also marked the explosion in the buy-out business. The late 1980s marked the transition of the primary the primary source of venture capital funds from wealthy individuals and families to endowment, pension endowment, pension and other institutional other institutional funds. The surge in capital in the 1980s had predictable results. Returns on venture capital investments plunged. investments plunged. Many investors went into the funds anticipating returns of 30% or higher. That was probably an unrealistic expectation to begin with. The consensus today is that private that private equity investments generally should give the investor an internal rate of return of return something to the order of order of 15% 15% to 25%, depending upon the degree of risk of risk the the firm is taking. However, by However, by 1990, the average long-term return on venture capital funds fell below fell below 8%, leading to yet another downturn in venture funding. Disappointed families and institutions withdrew from venture investing in droves in the 1989-91 periods. 1989-91 periods. The economic recovery and the IPO boom of 1991-94 have gone a long way towards reversing the trend in both private equity investment performance and partnership commitments. In 1998, the venture capital industry in the United States continued its seventh straight year of growth. It raised US$25bn in committed capital for investments by venture firms, who invested over US$16bn over US$16bn into domestic growth companies US firms have traditionally been traditionally been the biggest the biggest participants participants in venture deals, but deals, but non-US venture investment is growing.
In India, venture funding more than doubled from $420
million in 2002 to almost $1 billion $1 billion in 2003. For the For the first half of half of 2004, 2004, venture capital investment rose 32% from 2003.
Project Report – Institute of Technology and Management, Gurgaon
Venture Capital in INDIA Venture capital was introduced in India in mid eighties by All India Financial Institutions with the inauguration of Risk Capital Foundation (RCF) sponsored by IFCI with a view to encourage the technologists and the professional the professional to promote to promote new industries. Consequently the government of India of India promoted promoted the venture capital during 1986-87 by 1986-87 by creating a venture capital fund in the context of structural development and growth of small-scale business enterprises. Since then several venture capital firms/funds (VCFs) are incorporated by Financial Institutions (FIs), Public Sector Banks (PSBs), and Private Banks and Private Financial companies. The Indian Venture Capital Industry (IVCI) is just is just about a decade old industry as compared to that in Europe and US. In this short span it has nurtured close to one thousand ventures, mostly in SME segment and has supported building technocrat/professionals all through. The VC industry, through its investment in high growth companies as well as companies adopting newer technologies newer technologies backed backed by by first generation entrepreneurs, has made a substantial contribution to economy. In India, however, the potential the potential of venture of venture capital investments is yet to be to be fully realized. There are around thirty venture capital funds, which have garnered over Rs. 5000 Crores. The venture capital investments in India at Rs. 1000.05 crore as in 1997, representing 0.1 percent 0.1 percent of GDP, of GDP, as compared to 5.5 per 5.5 per cent cent in countries such as Hong Kong.
Inve Investm stmen entt Philo Philosop sophy hy Project Report – Institute of Technology and Management, Gurgaon
Venture capitalists can be can be generalists, investing in various industry sectors, or various or various geographic locations, or various stages of a company’s life. Alternatively, they may be specialists in one or two or two industry sectors, or may or may seek to seek to invest in only a localized geographic area. Not all venture capitalists invest in "start-ups." While venture firms will invest in companies that are in their initial their initial start-up modes, venture capitalists will also invest in companies at various stages of the of the business business life cycle. A venture capitalist may invest before there is a real product or company organized (so called "seed investing"), or may provide may provide capital to start up a company in its first or second or second stages of development of development known as "early stage investing." Also, the venture capitalist may provide needed financing to help a company grow beyond grow beyond a critical mass to become to become more successful ("expansion stage financing"). The venture capitalist may invest in a company throughout the company’s life cycle and therefore some funds focus on later stage later stage investing by investing by providing providing financing to help the company grow to a critical mass to attract public financing through a stock offering. Alternatively, the venture capitalist may help the company attract a merger or acquisition with another company by providing liquidity and exit for the company’s founders. At the other end of the spectrum, some venture funds specialize in the acquisition, turnaround or recapitalization of public and private companies that represent favorable investment opportunities. There are venture funds that will be will be broadly broadly diversified and will invest in companies in various industry sectors as diverse as semiconductors, software, retailing and restaurants and others that may be may be specialists in only one technology. While high technology investment makes up most of the venture investing in the U.S., and the venture industry gets a lot of attention for its high technology investments, venture capitalists also invest in companies such as construction, industrial products, business services, etc. There are several firms that have specialized in retail company investment and others that have a focus in investing only in "socially responsible" start-up endeavors. Project Report – Institute of Technology and Management, Gurgaon
The basic The basic principal principal underlying venture capital – capital – invest invest in high-risk projects projects with the anticipation of high returns. These funds are then invested in several fledging enterprises, which require funding, but are unable to access it through the conventional sources such as banks and financial institutions. Typically first generation entrepreneurs start such enterprises. Such enterprises generally do not have any major collateral major collateral to offer as security, hence banks hence banks and financial institutions are averse to funding them. Venture capital funding may be may be by by way of investment of investment in the equity of the of the new enterprise or a or a combination of debt of debt and equity, though equity is the most preferred most preferred route. Since most of the ventures financed through this route are in new areas (worldwide venture capital follows "hot industries" like InfoTech, electronics and biotechnology), and biotechnology), the probability the probability of success of success is very low. All projects All projects financed do not give a high return. Some projects fail and some give moderate returns. The investment, however, is a long-term risk capital as such projects normally take 3 to 7 years to generate substantial returns. Venture capitalists offer "more than money" to the venture and seek to seek to add value to the investee unit by unit by active participation active participation in its management. They monitor and monitor and evaluate the project the project on a continuous basis. continuous basis. The venture capitalist is however not worried about failure of an investee company, because the deal which succeeds, nets a very high return on his investments – high enough to make up for the losses sustained in unsuccessful projects. The returns generally come in the form of selling the stocks when they get listed on the stock exchange or by by a timely sale of his of his stake in the company to a strategic buyer. strategic buyer. The idea is to cash in on an increased appreciation of the share value of the company at the time of disinvestment of disinvestment in the investee company. If the venture fails (more often than not), the entire amount gets written off. Probably, that is one reason why venture capitalists assess several projects several projects and invest only in a handful after careful after careful scrutiny of the management and marketability of the of the project. project. To conclude, a venture financier is financier is one who funds a start up company, in most cases promoted by promoted by a first generation technocrat promoter technocrat promoter with with equity. A venture capitalist is not a lender, but lender, but an equity partner. equity partner. He cannot survive on minimalism. He is driven by driven by maximization: wealth maximization. Venture capitalists are sources of expertise for
Project Report – Institute of Technology and Management, Gurgaon
the companies they finance. Exit is preferably through listing on stock exchanges. This method has been extremely successful in USA, and venture funds have been credited with the success of technology companies in Silicon Valley. The entire technology industry thrives on it
Leng Le ngth th of inve invest stme ment nt : Venture capitalists will help companies grow, but they eventually seek to exit the investment in three to seven years. An early stage investment make take seven to ten years to mature, while a later stage investment many only take a few years, so the appetite for the for the investment life cycle must be must be congruent with the limited partnerships’ limited partnerships’ appetite for liquidity. The venture investment is neither a short term nor a liquid investment, but investment, but an investment that must be must be made with careful diligence and expertise.
Project Report – Institute of Technology and Management, Gurgaon
Stages of Venture Capital Funding The Venture Capital funding varies across the different stages of growth of a firm. The various stages are:
: 1. Pre seed Stage: Here, a relatively small amount of capital is provided to an entrepreneur to conceive and market a potential idea having good future prospects. The funded work also work also involves product involves product development to some extent.
2. Seed Stage: Financing is provided to complete product development and commence initial marketing formalities.
Ea rly y Stag St agee / First Fir st Stag St agee: Finance is provided to companies to initiate 3. Earl commercial manufacturing and sales.
of Financing working capital is provided is provided for 4. Second Stage: In the Second Stage of Financing the expansion of the of the company in terms of growing of growing accounts receivable and inventory.
5. Third Stage: Funds provided for major expansion of a company having increasing sales volume. This stage is met when the firm crosses the break the break even even point. point.
6. Bridge / Mezzanine Financing or Later Stage Financing: Bridge / Mezzanine Financing or Later or Later Stage Stage Financing is financing a company just company just before before its IPO (Initial Public Offer). Often, bridge Often, bridge finance is structured so that it can be can be repaid, from the proceeds the proceeds of a of a public offering.
Project Report – Institute of Technology and Management, Gurgaon
Methods ethods of Ventu Venture re Financin Financing g Venture capital is typically available in three forms in India, they are:
Equity: All VCFs in India provide India provide equity but equity but generally their contribution their contribution does not exceed 49 percent 49 percent of the of the total equity capital. capital. Thus, the effective control and majority ownership of the of the firm remains with the entrepreneur. They buy They buy shares of an of an enterprise with an intention to ultimately sell them off to off to make capital gains.
Conditi Con ditiona onall Loan : It is repayable in the form of a of a royalty after the after the venture is able to generate sales. No interest is paid on such loans. In India, VCFs charge royalty ranging between ranging between 2 to 15 percent; 15 percent; actual rate depends on other factors other factors of the of the venture such as gestation period, cost-flow patterns, riskiness and other factors of the enterprise.
Income Note: It is a hybrid security which combines the features of both conventional loan and conditional loan. The entrepreneur has entrepreneur has to pay to pay both both interest and royalty on sales, but sales, but at substantially low rates.
Othe Ot herr Fina Financ ncin ing g Meth Method odss:
A few venture capitalists, particularly in the
private sector, have started introducing innovative financial securities like participating debentures, introduced by introduced by TCFC is an example.
Project Report – Institute of Technology and Management, Gurgaon
Venture Capital Fund Operation Venture capitalists are very selective in deciding what to invest in. A common figure is that they invest only in about one in four hundred four hundred ventures presented ventures presented to them. They are only interested in ventures with high growth potential. growth potential. Only ventures with high growth potential are capable of providing of providing the return that venture capitalists expect, and structure their businesses their businesses to expect. Because many businesses cannot create the growth required having an exit event within the required timeframe, venture capital is not suitable for everyone. for everyone. Venture capitalists usually expect to be to be able to assign personnel assign personnel to key management positions and also to obtain one or more seats on the company's board of directors. This is to pu phrase that that has has somet sometime imess quite quite unfort unfortuna unate te putt people people in place place, a phrase implications as it was used in many accounting scandals to refer to a strategy of placing incompetent or easily bypassed individuals in positions of due of due diligence diligence and formal legal responsibility, enabling others to rob stockholders blind. Only a tiny portion of venture capitalists, however, have been found liable in the large scale frauds that rocked American (mostly) finance in 2000 and 2001. Vent Ventur uree capi capita tali list stss expe expect ct to be able able to sell sell thei theirr stoc stock, k, warr warran ants ts,, opti option ons, s, convertibles, or other forms of equity in three to ten years: this is referred to as harvesting. Venture capitalists know that not all their investments will pay-off. The
failure rate of investments can be high; anywhere from 20% to 90% of the enterprises funded fail to return the invested capital. Many venture capitalists try to mitigate this problem through diversification. They inves investt in compan companie iess in diffe differe rent nt indus industr trie iess and diffe differen rentt countr countrie iess so that that the systematic risk of their total portfolio is reduced. Others concentrate their investments in the industry that they are familiar with. In either case, they work on the assumption that for every ten investments investments they make, two will be failures, failures, two will be successful, and six will be marginally successful. They expect that the two successes will pay for the time given to, and risk exposure of the other eight. In good times, the funds that do succeed may offer returns of 300 to 1000% to investors. Project Report – Institute of Technology and Management, Gurgaon
Venture capital partners (also known as "venture capitalists" or "VCs") may be former chief executives executives at firm firmss simi simila larr to those those which which the partn partners ershi hip p funds funds.. Investors in venture capital funds are typically large institutions with large amounts of available capital, such as state and private pension funds, funds, university endowments, endowments, insurance companies and pooled and pooled investment vehicles. Most venture capital funds have a fixed life of ten years—this model was pioneered by some of the most successful funds in Silicon Valley through the 1980s to invest in technol technologic ogical al trends trends broadly broadly but only during their period period of ascendan ascendance, ce, to cut exposure to management and marketing risks of any individual firm or its product. In such a fund, the investors have a fixed commitment to the fund that is "called down" by the VCs over time as the fund makes its investments. In a typical venture capit capital al fund, fund, the the VCs VCs recei receive ve an annual annual "mana "managem gement ent fee" fee" equal equal to 2% of the committed capital to the fund and 20% of the net profits of the fund. Because a fund may run out of capital prior to the end of its life, larger VCs usually have several overlapping funds at the same time—this lets the larger firm keep specialists in all stage of the development of firms almost constantly engaged. Smaller firms tend to thrive or fail with their initial industry contacts—by the time the fund cashes out, an entirely new generation of technologies and people is ascending, whom they do not know well, and so it is prudent to re-assess and shift industries or personnel rather than attempt to simply invest more in the industry or people it already knows
Project Report – Institute of Technology and Management, Gurgaon
Significance of Study Venture capitalists not only support high technology projects they also fiancé any risky idea, they provide funds (a) if one needs additional capital to expand his existing business existing business or one has a new & promising project to exploit (b) if one cannot obtain a conventional loan the requirement terms would create a burden during the period the firm is struggling to grown.
It is the ambition of many of many talented people talented people in India to set up their own their own venture if they if they could get adequate & reliable support. Financial investment provides investment provides loans & equity. But they do not provide not provide management support, which is often needed by needed by entrepreneurs. But the venture capital industries provide industries provide such support along with capital also. Venture capitalist acts a partner not partner not a financier.
Project Report – Institute of Technology and Management, Gurgaon
Objective of the Study When we are going to study something there is specific purpose specific purpose for our for our study. study. It may be for our for our course, course, as hobby, for passing passing our time, our time, to find out genuine solution for any for any problem or to or to draw out certain inferences out of the of the available data. The objectives of my study are:
To find out the venture capital investment volume in India.
To study the problem the problem faced by faced by venture capitalist in India.
To study the future prospects future prospects of venture of venture capital financing
Objective No. 1
To Find out the venture capital investment volume in India Methods of Financing of Financing Instruments
Rs million
Per cent
Project Report – Institute of Technology and Management, Gurgaon
Equity Shares Redeemable Preference Shares Non Convertible Debt Convertible Instruments Other I Other Instruments Total
6,318.12 2,154.46 873.01 580.02 75.85 10,000.46
63.18 21.54 8.73 5.8 0.75 100
Rs million 7,000.00
6,318.12
6,000.00 5,000.00 4,000.00 3,000.00
2,154.46
2,000.00
873.01
1,000.00
580.02
75.85
0.00 y s t e i r u a q h E S
e l b e c s a n e e r m r a e f e h e d e r S e P R
e l b t i n t r b o e e v D N n o C
s e t l b n i t r e m e v u r n t o s C I n
s t r n e e h m t u r O t s n I
Interpretation: Interpretation: This diagram shows the venture capital financing in equity share and secondly they invest in redeemable preference redeemable preference shares to get higher returns. higher returns.
Contributors of Funds of Funds Contributors
Foreign Institutional Investors All India Financial Institutions Multilateral Development Agencies Other B Other Banks Foreign Investors Private Sector
Rs. mn
13,426.47 6,252.90 2,133.64 1,541.00 570 412.53
Per cent
52.46% 24.43% 8.34% 6.02% 2.23% 1.61%
Project Report – Institute of Technology and Management, Gurgaon
Public Sector Nationalized Banks Non Resident Indians State Financial Institutions Other P Other Public Insurance Companies Mutual Funds Total
324.44 278.67 235.5 215 115.52 85 4.5 25,595.17
1.27% 1.09% 0.92% 0.84% 0.45% 0.33% 0.02% 100.00%
Interpretation: This table shows the highest contribution of fund of fund FII and secondly AIFI to develop the Industry.
Project Report – Institute of Technology and Management, Gurgaon
Financing By Investment Stage Investment Stages
Rs million
Start-up Later s Later stage Other early Other early stage Seed stage Turnaround financing Total
3,813.00 3,338.99 1,825.77 963.2 59.5 10,000.46
Number
297 154 124 107 9 691
Rs million 4,500.00 4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0.00
3,813.00 3,338.99
1,825.77 963.2 59.5 Star Start-u t-up
Later ter stag stage
Oth Other early arly stage
Seed Seed stage
Turnar urnarou ound nd financing
Interpretation: Interpretation: This diagram shows the highest finance is received by received by the venture in startup stage of any of any venture.
Project Report – Institute of Technology and Management, Gurgaon
Financing By Industry
Industry
Rs million
Industrial products, Industrial products, machinery Computer S Computer Software Consumer R Consumer Related Medical Food, food processing Other e Other electronics Tel & Data Communications Biotechnology Energy related Computer H Computer Hardware Miscellaneous Total
2,599.32 1,832 1,412.74 623.8 500.06 436.54 385.09 376.46 249.56 203.36 1,380.85 10,000.46
Rs million
3,000.00 2,599.32 2,500.00 2,000.00
1,832 1,412.74
1,380.85
1,500.00 1,000.00
623.8
500.00 0.00
l , r e r a t s e r e d i r c t t u a m e s u p w u t a l u d m t f s e d o n r o o o R n p I C S C
l a c i d e M
500.06 436.54 385.09 376.46
s s d g n c n o i i r n a i o o s f s e o t t , e t h t r a a d c c D i o o O c e & n o r l u F p e l e m T m o C
y g o l o n h c e t o i B
249.56 203.36 d e t a l e r y g r e n E
Project Report – Institute of Technology and Management, Gurgaon
r e e r t u a p w m d r o a C H
s u o e n a l l e c s i M
Interpretation: Interpretation: In this diagram highest finance received by received by industrial products industrial products and machinery and secondly finance received by received by computer software. computer software.
Project Report – Institute of Technology and Management, Gurgaon
Financing By States Investment
Maharashtra Tamil Nadu Andhra Pradesh Gujarat Karnataka West Bengal Haryana Delhi Uttar P Uttar Pradesh Madhya Pradesh Kerala Goa Rajasthan Punjab Orissa Dadra & Nagar H Nagar Haveli Himachal Pradesh Pondicherry Bihar Overseas Total
Rs million
2,566 1531 1372 1102 1046 312 300 294 283 231 135 105 87 84 35 32 28 22 16 413 9994 Source IVCA Source IVCA (2005-06)
Project Report – Institute of Technology and Management, Gurgaon
Rs million 3,000
2,566
2,500 2,000 1,500
1531
1372 1102
1046
1,000 3 12
500 0
a d u s h t r a a e h d N s l a a a a i r r P a m h a a a T r a M d h n A
a t a r a j G u
3 00
a l k a n a g a a t n y r y n a B e a r n t H a s K W e
294
l h i e D
Interpretation: Interpretation: In this diagram highest finance given by the Maharashtra to the ventures to promote to promote the state economy growth.
Project Report – Institute of Technology and Management, Gurgaon
Assessing ssessing Venture Venture Capital Capital Venture funds, both funds, both domestic and offshore, have been have been around in India for some for some years now. However it is only in the past 12 to 18 months, they have come into the limelight. The rejection ratio is very high, about 10 in 100 get beyond get beyond pre pre evaluation stage, and 1 gets funded. Venture capital funds are broadly are broadly of two of two kinds - generalists or specialists. or specialists. It is critical for the for the company to access the right type of fund, of fund, ie who can add value. This backing This backing is invaluable as focused/specialized funds open doors, assist in future rounds and help in strategy. Hence, it is important to choose the right venture capitalist. The standard parameters used by venture capitalists are very similar to any investment decision. The only difference being difference being exit. If one If one buys buys a listed security, one can exit at a price but with an unlisted security, exit becomes difficult. The key factors which they look for look for in in
The Management Most businesses are people driven, with success or failure depending on the performance of the team. It is important to distinguish the entrepreneur from the professional management team. The value of the idea, the vision, putting the team together, getting the funding in place in place is amongst others, some key aspects of the of the role of the of the entrepreneur. Venture capitalists will insist on a professional team coming in, including a CEO to execute the idea. One-man armies are passe. Integrity and commitment are attributes sought for. The venture capitalist can provide can provide the strategic vision, but vision, but the team executes it. As a famous Silicon Valley saying goes "Success is execution, strategy is a dream".
The Idea The idea and its potential its potential for commercialization for commercialization are critical. Venture funds look for look for aa scalable model, at a country or a or a regional level. Otherwise the entire game would be would be reduced to a manpower or machine multiplication exercise. For example, it is very easy for Hindustan for Hindustan Lever to Lever to double sales of Liril of Liril - a soap without incremental capex, Project Report – Institute of Technology and Management, Gurgaon
while Gujarat Ambuja needs to spend at least Rs4bn before it can increase sales by sales by 1mn ton. Distinctive competitive advantages must exist in the form of scale, technology, brands, distribution, etc which will make it difficult for competition to enter.
Valuation All investment decisions are sensitive to this. An old stock market saying "Every stock is a buy at a price and vice versa". Most deals fail because of valuation expectation mismatch. In India, while calculating returns, venture capital funds will take into account issues like rupee depreciation, political depreciation, political instability, which adds to the risk premia, premia, thus suppressing valuations. Linked to valuation is the stake, which the fund takes. In India, entrepreneurs are still uncomfortable with the venture capital "taking control" in a seed stage project. stage project.
Exit Without exit, gains cannot be booked. Exit may be in the form of a strategic sale or/and IPO. Taxation issues come up at the time. Any fund would discuss all exit options before closing a deal. Sometimes, the fund insists on a buy back clause to ensure an exit.
Portfolio Balancing Most venture funds try and achieve portfolio balancing as they invest in different stages of the company life cycle. For example, a venture capital has invested in a portfolio of companies predominantly at seed stage; they will focus on expansion stage projects stage projects for future for future investments to balance to balance the investment portfolio. investment portfolio. This would enable them to have a phased exit. In summary, venture capital funds go through a certain due diligence to finalize the deal. This includes evaluation of the of the management team, strategy, execution and commercialization plans. commercialization plans. This is supplemented by supplemented by legal and accounting due diligence, typically carried out by an external agency. In India, the entire process takes about 6 months. Entrepreneurs are advised to keep that in mind before mind before looking to raise funds. The actual cash inflow might get delayed because delayed because of regulatory of regulatory issues. It is interesting to note that in USA, at times angels write checks across the table. Project Report – Institute of Technology and Management, Gurgaon
Financing Options in General The possibility The possibility of raising of raising a substantial part substantial part of project project finances in India through both through both equity and debt instruments are among the key advantages of investing of investing in India.
The Indian banking Indian banking system has shown remarkable growth over the over the last two decades. The rapid growth and increasing complexity of the financial markets, especially the capital market have brought about measures for further development and improvement in the working of these markets. Banks and development financial institutions led by ICICI, IDBI and IFCI were providers of term loans for funding projects. The options were limited to conventional businesses, i.e. manufacturing centric. Services sector was sector was ignored because ignored because of the of the "collateral" issue.
Equity was raised from the capital markets using the IPO route. The bull The bull markets of the 90s, fuelled by fuelled by Harshad Mehta and the FIIs, ensured that (ad) venture capital was easily available. Manufacturing companies exploited this to the full.
The services sector was sector was ignored, like software, media, etc. Lack of Lack of understanding understanding of these sectors was also responsible for the for the same. If we If we look back to back to 1991 or even or even 1992, the situation as regards financial outlay available to Indian software companies was poor. Most software companies found it extremely difficult to source seed capital, working capital or even or even venture capital. Most software companies started off undercapitalized, and had to rely on loans or overdraft or overdraft facilities to provide to provide working capital. This approach forced them to generate revenue in the short term, rather than rather than investing in product in product development. The situation fortunately has changed.
Project Report – Institute of Technology and Management, Gurgaon
Research Methodology defines,”Research as a systematized effort to gain now REDMEN & MORY defines, knowledge.” It is a careful investigation for search for search of new of new facts in any branch any branch of knowledge. of knowledge. The purpose of research of research methodology section is to describe the procedure the procedure for conduction for conduction the study. It includes research design, sample size, data collection and procedure of analysis of research of research instrument. Research Research always starts with a question or a problem. Its purpose is to find answers to questions through the application of the scientific method. It is a systematic and intensive study directed towards a more complete knowledge of the subject studied.
RESEARCH RESE ARCH DESIGN DESI GN:
“Resear earch ch desig design n is the plan plan struct structure ure & strat strategy egy of Acc. Acc. to Kerlinger Kerlinger,, “Res investigation conceived so as to obtain answers to research questions and to control variance. Acc. to Green and Tull, “A research design is the specification of methods
and procedures for acquiring the information needed. It is the overall operational pattern pattern or framework framework of the project that stipulates what information information is to be collected from which sources by what procedures. Its found that research design is purely and simply the framework for a study that guides the collection and analysis of required of required data. Research design is broadly is broadly classified into • • •
Exploratory research design Descriptive research design Casual research design
This research is a Explorato major purpose of this research is Expl oratory ry research resea rch . The major purpose description of state of state of affairs of affairs as it exists at present. at present.
Project Report – Institute of Technology and Management, Gurgaon
DATA COLLECT COL LECTION ION Secondary data
Secondary data is the data which is already collected by someone and complied for different purposes different purposes which are used in research for this for this study. It includes:•
Internet
•
Magazine
•
Journal
•
Newspaper
Project Report – Institute of Technology and Management, Gurgaon
Lite Literat rature ure Re Revie view w According to Subash and Nair, (May 2005) According to theses persons though the modern concept of venture capital stated during 1946 and now practiced by almost all economies around the world, there seems to be to be a slowdown of venture of venture capital activities after 2000.There after 2000.There may be may be a long list of reasons of reasons for this for this situation, where people where people feel more risky to put to put their money in new and emerging ventures. Hardly 5% of the total venture capital investment globally is given to really stage ventures. In all the years people years people around the world has seen the potentiality the potentiality of venture of venture capital in promoting in promoting different economies of the of the world by improving the standard of living of the people by expanding business activities, increasing employment and also generating more revenue to the government
According To Kumar, (June 2003) This study focus on the industry should concentrate more on early stage business opportunities instead of later stage. later stage. It is the experience world over and over and especially in the United States of America that the early stage opportunities have generated exceptional returns for the for the industry. He also suggests that individual capitalists should follow a focused investment strategy. The specialization should be in a board technology segment.
According to Kumar and Kaura, (March 2006) The present study reports four factors which are used by the venture capitalist to screen new venture proposals. Using Kendall’s tau-c analysis, the study brings out strong association between association between several variable pair. variable pair. Broadly, the analysis finds that: •
Successful venture teams put teams put in sustained efforts o identified target markets.
•
They are highly meticulous while attending to the details.
•
These teams are adept at dealing with risk because because of their impeccable past experience.
•
Indian venture capitalists do not seem to be much enamored of technology venturing; at least some of the successful funded by them do not seem to show signs of being being hi- tech. Project Report – Institute of Technology and Management, Gurgaon
The study brings out four important variables which are highly unique to successful venture in India. They are: • • • •
Ability to evaluate and react to risk Attention to details Market share Profits.
Evaluating risk seems to be an area where unsuccessful venture fail. Since successful teams focus on established markets and meticulously pursue meticulously pursue these markets to gain market share, they achieve desired profits. desired profits.
According to Kumar, (May 2004) The Indian Venture Capital Industry has followed the classical model of venture capital finance. The early stage financing which includes seeds, startup & early stage investment was always the major part major part of the total investment. Whenever venture capitalists invest in venture certain basic certain basic preference preference play play a crucial role in investment decision. Two such considerations are location preferences and ownership preferences. Seed stage finance is provided is provided to new companies for the for the use in product in product development & initial marketing company may be in the process of setting up the business or may be in the business for short period but have not reach the stage of commercialization.
According to Kumar, (March, 2004) The industry should concentrate more an early stage business stage business opportunities instead of later stage. It is the experience world over and especially in the United states of America that the early stage opportunities have generated exceptional for the industry. It is recommended that the venture capitalists should retain their basic their basic feature that taking retain their basic their basic feature that is taking high risk. The present situation may compel venture capitalists to opt for less risky opportunities but it is against the sprit of venture of venture capitalism. The established fact is big is big gains are possible are possible in high risk projects. projects.
Project Report – Institute of Technology and Management, Gurgaon
According to Chary, (September 2005)
There has been has been a plethora of literature of literature on venture capital finance, which is helping the practitioners’ viz., venture capital finance companies and fund manage for better for better understanding the role of venture of venture capital in economic development. There are number of studies on the venture capital and activities of venture capitalists in developed countries.
According to Vijayalakshman & Dalvi, ((Jan., 2006) Whenever Indian Whenever Indian policy policy makers have to encourage any industry. The usual practice usual practice is to grant that the industry tax breaks for a limited period. This definitely acts as a positive incentive for that industry. However, what is required is a through understanding of the of the industry requirement framing and implementation of aggregative of aggregative strategy for its for its development. VC funds are not even registered with SEBI in spite of all the benefit available. VC industry is one, which will today prepare a base for a strong tomorrow. What is need for the development of VC industry is not only tax breaks but simpler procedures simpler procedures legislation for simplified exit form investment, more transparency and legal backing legal backing to participate to participate in business in business amongst other things. other things.
According to Kumar, (July, 2005) One of the of the integral aspects of venture of venture funding is venture capitalist's involvement with the entrepreneurial team. The relationship through broad through broad interaction was explored by explored by Rosenstein (1988). A comparison was drawn between small and large firms with regard to board to board interaction. While it is important in large firms the relative power relative power of of small conventional firms, board firms, board interaction generally is undermined. Rosenstein et. a. (1993) studied the finer aspects of boards of boards in the venture funded companies in the USA. From 98 candidates in the sample, the study attempted to bring to bring out the changes in the board the board size, board size, board composition and control and their relation their relation to value added to the funded unit. The empirical analysis yielded results wherein the size of the of the board board increased after venture after venture funding, indicating more transparency in board in board operations. Through a case based approach Lloyd et. al. (1995) explored the aspect of deal structuring and post investment staging of venture capitalists through venture Project Report – Institute of Technology and Management, Gurgaon
capitalists' co-investing strategy. The study finds that even through venture capitalists fix tight milestones and time lines they themselves contribute to many of the delays that are experienced by experienced by a typical start up firm. This is because is because of the of the hierarchical coinvesting partners and the lack of understanding within the venture capitalist coinvestors as to what role they individually play individually play in the development of their of their portfolio portfolio company.
According to Robbie, (1997) Robbies, et. al. (1997) highlights the monitoring policies monitoring policies of funded of funded units by units by venture capitalists and studies the performance targets, monitoring information, and monitoring actions through a questionnaire-based survey. The survey was administered to 108 British Venture Capital Association members and total of 77 responses were gathered in the study. The findings related to performance to performance targets and other monitoring other monitoring issues were considerable addition to the literature in the subject. The issues concerning board of directors' role in venture backed companies are widely debated topics in academic research. The findings of the of the study by study by Fried et. al. (1998) emphasize that the board the board of directors of directors are a more involved in the venture backed firms than boards than boards where members do not have large ownership at stake. The study provides an empirical evidence of variation in the boards' involvement and shows its relevance in performance in performance management of funded of funded units.
According to Mishra, (July 2004) There is abundant empirical research conducted in developed countries which address the relative investment evaluation criteria taken into account in the screening process screening process for new for new venture investment proposals. investment proposals. Zopunidis (1994) provides a useful summary of the of the previous previous research in this field. The identification of selection of selection criteria has been has been researched using different methodologies such as simple rating of criteria of criteria (perpetual and deal specific responses) Knight, 1986; Dixon, 1991; Hall and Hofer, 1993; Rah, Jung and Lee, 1994), construct analysis (Fried and Hisrich, 1994), verbal protocols (Zhacharakis and Meyer, 1998), and quantitative compensatory models (Muzyka, Birley and Leleux, 1996; Shepherd, 1999). Multi methods (case analysis, study of administrative records, published interviews, questionnaire and personal interviews) Project Report – Institute of Technology and Management, Gurgaon
approach has also been used (Riquelme, 1994) to enhance understanding of investment criteria and also extend it to other aspects other aspects of investment of investment process process like deal structuring and divestment.
Project Report – Institute of Technology and Management, Gurgaon
Conceptual Frame Work – The Ve Vent ntur uree Cap Ca pital Proc ro cess The Venture Capital Investment Process: The venture capital activity is a sequential process sequential process involving the following six steps. 1. Deal origination 2. Screening 3. Due diligence Evaluation 4. Deal structuring 5. Post-investment activity 6. Exit
Project Report – Institute of Technology and Management, Gurgaon
Venture Capital Investment Process
Project Report – Institute of Technology and Management, Gurgaon
Deal originat orig ination: ion:
In generating a deal flow, the VC investor creates a pipeline of deals of deals or investment opportunities that he would consider for investing in. Deal may originate in various ways. referral system, active search system, and intermediaries. Referral system is an important source of deals. Deals may be referred to VCFs by their parent organizations, trade partners, 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 the potential entrepreneurs. Screening:
VCFs, before VCFs, before going for an for an in-depth analysis, carry out initial screening of all of all projects 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 familiar in terms of technology, of technology, or product, or market or market scope. The size of investment, of investment, geographical location and stage of financing could also be also be used as the broad the broad screening criteria. Due Diligen Dil igence: ce:
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 ask for aa business plan business plan to make an assessment of the possible risk and return on the venture. Business plan contains detailed information about the proposed the proposed venture. The evaluation of ventures of ventures by by VCFs in India includes; Preliminary evaluation: The applicant required to provide a brief profile brief profile of the proposed venture to establish prima establish prima facie eligibility. Detailed evaluation: Once the preliminary evaluation is over, the proposal is evaluated in greater detail. greater detail. VCFs in India expect the entrepreneur to 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 of the expected risk-return trade-off as trade-off as shown in Figure.
Project Report – Institute of Technology and Management, Gurgaon
Deal Structuring: Structuring refers to putting together the financial aspects of the deal and negotiating with the entrepreneurs to accept a venture capital’s proposal capital’s proposal and finally closing the deal. To do a good job in structuring, one needs to be knowledgeable in areas of accounting, of accounting, cash flow, finance, legal and taxation. Also the structure should take into consideration the various commercial issues (ie what the entrepreneur wants and what the venture capital would require protecting the investment). Documentation refers to the legal aspects of the of the paperwork paperwork in in putting putting the deal together. The instruments to be used in structuring deals are many and varied. The objective in selecting the instrument would be would be to maximize (or optimize) (or optimize) venture capital’s returns/protection and yet satisfies the entrepreneur’s requirements. The instruments could be could be as follows: Instrument Loan
Preference shares
Warrants Common shares
Issues Clean vs secured
Interest bearing Interest bearing vs non interest bearing interest bearing convertible vs one with features (warrants) 1st Charge, 2nd Charge, loan vs loan stock Maturity redeemable (conditions under Company under Company Act) participating par value par value nominal shares exercise price, expiry period expiry period new or vendor or vendor shares shares par value par value partially-paid shares
In India, straight equity and convertibles are popular are popular and and commonly used. Nowadays, used. Nowadays, warrants are issued as a tool to bring to bring down pricing. down pricing. A variation that was first used by PACT and TDICI was "royalty on sales". Under this, the company was given a conditional loan. If the project was successful, the company had to pay to pay a % age of sales of sales as royalty and if it if it failed then the amount was written off. In structuring a deal, it is important to listen to what the entrepreneur wants, but wants, but the venture capital comes up with his own solution. Even for the for the proposed proposed investment amount, the venture capital decides whether or whether or not not the amount requested, is appropriate and consistent with the risk level risk level of the of the investment. The risks should be should be Project Report – Institute of Technology and Management, Gurgaon
analyzed, taking into consideration the stage at which the company is in and other factors relating to the project. the project. (eg exit problems, exit problems, etc). Post Pos t Invest Inv estmen mentt Activi Act iviti ties es :
Once the deal has been structured and agreement finalized, the venture capitalist generally assumes the role of a partner and collaborator. He also gets involved in shaping of the direction of the venture. The degree of the venture 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 of the venture. If a 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 their gains in five to ten years after the after the initial investment. They play They play a positive role in directing the company towards particular exit particular exit routes. A venture may exit in one of the of the following ways: 1. Initial Public Offerings (IPO’s) 2. Acquisition by Acquisition by another company another company 3. Purchase of the of the venture capitalist's shares by shares by the promoter, the promoter, 4. Purchase of the of the venture capitalist's share by share by an outsider
Project Report – Institute of Technology and Management, Gurgaon
Obje Object ctiv ivee No.2 No.2
To study the problems fac fa ced by ve ven nture cap ca pital it alis istt in Ind India. ia . Problems of Venture of Venture Capital in Indian Context One can ask why venture funding is so successful in USA and faced a number of problems in India. The biggest problem was a mindset change from "collateral funding" to high risk high risk high return funding. Most of the of the pioneers pioneers in the industry were people with credit background credit background and exposure to manufacturing industries. Exposure to Project Report – Institute of Technology and Management, Gurgaon
fast growing intellectual property business and services sector was almost zero. Moreover VCF is in its nascent stages in India. The emerging scenario of global competitiveness has put has put an immense pressure immense pressure on the industrial sector to 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 of return on the investment. The financing firms expect a sound, experienced, mature and capable management team of the company being financed. Since the innovative project innovative project involves a higher risk, higher risk, there is an expectation of higher returns higher returns from the project. The payback period payback period is also generally high (5 - 7 years). The other issues other issues that led to such a situation include:
License Raj and The IPO Boom Till early 90s, under the license raj regime, only commodity centric businesses thrived in a deficit situation. To fund a cement plant, venture capital is not needed. What was needed was ability to get a license and then get the project the project funded by funded by the banks and DFIs. In most cases, the promoters the promoters were well-established industrial houses, with no apparent need for funds. for funds. Most of these of these entities were capable of raising of raising funds from conventional sources, including term loans from institutions and equity markets.
Scalability The Indian software segment has recorded an impressive growth over the last few years and earns large revenues from its export earnings, yet our share in the global market is less than 1 per cent. Within the software industry, the value chain ranges from body shopping at the bottom to strategic consulting at the top. Higher value addition and profitability as well as significant market presence take place at the higher end higher end of the of the value chain. If the If the industry has to grow further and further and survive the flux it would only be only be through innovation. For any For any venture idea to succeed there should be should be a product that has a growing market with a scalable business scalable business model. The IT industry (which is most suited for venture funding because funding because of its "ideas" nature) in India till Project Report – Institute of Technology and Management, Gurgaon
recently had a service centric business centric business model. Products developed for Indian for Indian markets lack scale. lack scale.
Mindsets Venture capital as an activity was virtually non-existent in India. Most venture capital companies want to provide to provide capital on a secured debt basis, debt basis, to established businesses established businesses with profitable with profitable operating histories. Most of the of the venture capital units were offshoots of financial institutions and banks and the lending mindset continued. True venture capital is capital that is used to help launch products launch products and ideas of tomorrow. of tomorrow. Abroad, this problem this problem is solved by solved by the presence the presence of `angel of `angel investors’. They are typically wealthy individuals who not only provide only provide venture finance but finance but also help entrepreneurs to shape their business business and make their venture their venture successful.
Returns, Taxes and Regulations There is a multiplicity of regulators of regulators like SEBI and RBI. Domestic venture funds are set up under the under the Indian Trusts Act of 1882 as per SEBI guidelines, while offshore funds routed through Mauritius follow RBI guidelines. Abroad, such funds are made under the under the Limited Partnership Act, which brings which brings advantages in terms of taxation. of taxation. The government must allow pension allow pension funds and insurance companies to invest in venture capitals as in USA where corporate contributions to venture funds are large.
Project Report – Institute of Technology and Management, Gurgaon
Exit The exit routes available to the venture capitalists were restricted to the IPO route. Before deregulation, pricing was dependent on the erstwhile CCI regulations. In general, all issues were under priced. priced. Even now SEBI guidelines make it difficult for pricing issues for an easy exit. Given the failure of the OTCEI and the revised guidelines, small companies could not hope for a BSE/ NSE listing. Given the dull
market for mergers for mergers and acquisitions, strategic sale was also not available. Valuation The recent phenomenon recent phenomenon is valuation mismatches. Thanks to the software boom, software boom, most promoters have sky high valuation expectations. Given this, it is difficult for deals for deals to reach financial closure as promoters as promoters do not agree to a valuation. This coupled with the fancy for software for software stocks in the bourses the bourses means that most companies are preponing are preponing their IPO’s. their IPO’s. Consequently, the number and number and quality of deals of deals available to the venture funds gets reduced Some other major other major problems problems facing by facing by venture capitalist in India are: a.
Requirement of an of an experienced management team.
b.
Requirement
of an
above average
rate
of return
on
investment.
Longer payback payback period. period. c.
Uncertainty regarding the success of the of the product product in the market.
d.
Questions regarding the infrastructure details of production production like plant like plant location, accessibility, relationship with the suppliers and creditors, transportation facilities, labour availability labour availability etc.
e.
The category of potential of potential customers and hence the packaging and pricing details of the of the product. product.
f.
The size of the of the market.
g.
Major competitors Major competitors and their market their market share.
h.
Skills and Training required and the cost of training. of training.
i.
Financial considerations like return on capital employed (ROCE), cost of the of the project, the Internal Rate of Return of Return (IRR) of the of the project, project, total amount of funds of funds Project Report – Institute of Technology and Management, Gurgaon
required, ratio of owners investment (personnel funds of the entrepreneur), borrowed capital, mortgage loans etc. in the capital employed.
[Source Pandey, [Source Pandey, I. I. M., M., Venture Capital – The – The Indian Indian Express Express VIth Edition VIth Edition (2006)] ]
Project Report – Institute of Technology and Management, Gurgaon
Objective No. 3
To study the future future pr prospe os pect ct of Ve Vent ntur uree Capi Capita tall Fina Financ ncing ing . Prospects of Venture of Venture Capital Financing With the advent of liberalization, India has been showing remarkable growth in the economy in the past the past 10 - 12 years. The government is promoting is promoting growth in capacity utilization of available and acquired resources and hence entrepreneurship development, by liberalizing norms regarding venture capital. While only eight domestic venture capital funds were registered with SEBI during 1996-1998, 14 funds have already been registered in 1999-2000. Institutional interest is growing and foreign venture investments are also on the rise. Many state governments have also set up venture capital funds for the IT sector in partnership with the local state financial institutions and SIDBI. These include Andhra Paradesh, Karnataka, Delhi, Kerala
and
Tamil
Nadu.
The
other
states
are
to
follow
soon.
In the year 2000, the finance ministry announced the liberalization of tax treatment for venture for venture capital funds to promote to promote them & to increase job 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 of their capital, capital, knowledge and enterprise in these ventures. A Bangalore based media company, Gray Gray cell cell Ltd., has recently obtained VC investment totaling about $ 1.7 mn. The company would be creating and marketing branded web based web based consumer products products in the near future. near future. The following points following points can be can be considered as the harbingers of VC of VC financing in India: India:Existence of a of a globally competitive high technology. Globally competitive human resource capital. Second Largest English speaking, scientific & technical manpower in the world. Vast pool of existing of existing and ongoing scientific and technical research carried by carried by d. Vast pool a. b. c.
large number of number of research research laboratories. e.
Initiatives taken by the Government in formulating policies to encourage investors and entrepreneurs.
Project Report – Institute of Technology and Management, Gurgaon
f.
Initiatives of the SEBI to develop a strong and vibrant capital market giving the adequate liquidity and flexibility for investors for investors for entry for entry and exit.
In a recent survey it has been has been shown that the VC investments in India's I.T. - Software and services sector (including sector (including dot com companies)- have grown from US $ 150 million in 1998 to over US$ 1200 million in 2008. The credit can be given to setting up of a National Venture Capital Fund for the for the Software and I.T. Industry (NFSIT) in association with various financial institutions of Small Industries and Development Bank of India (SIDBI). The facts reveal that VC disbursements as on September 30, 2002 made by NFSIT totaled Rs 254.36 mn. Source www.evaluesevrve.com
Project Report – Institute of Technology and Management, Gurgaon
Findings During the preparation of my report I have analyzed many things which are following:•
A number of people in India feel that financial institution are not only conservatives but conservatives but they also have a bias for foreign for foreign technology & they do not trust on the abilities of entrepreneurs. of entrepreneurs.
Project Report – Institute of Technology and Management, Gurgaon
•
Some venture fails due to few exit options. Teams Teams are ignorant of international standards. standards. The team usually a two or three man team. It does not possess the required depth In top management. The team is often found to have technical skills but does not possess the overall organization building skills team is often short sited.
•
Venture capitalists in India consider the consider the entrepreneur’s integrity &urge to grow as the most critical aspect or venture or venture evaluation.
Project Report – Institute of Technology and Management, Gurgaon
Limitations of Study The biggest limitation was time because time because the time was not sufficient as there 1. The biggest was lot of information of information to be to be got & to have it interpretation 2. The data required was secondary & that was not easily available.
Study by its nature is suggestive & not conclusive 3. Study by 4. Expenses were high in collecting & searching the data.
Project Report – Institute of Technology and Management, Gurgaon
Suggestions 1.
The investment should be in turnaround stage. Since there are many sick industries in India and the number is growing each year, the venture capitalists that have specialized knowledge in management can help sick industries. It would also be highly profitable if the venture capitalist replace management either good either good ones in the sick industries. sick industries.
2.
It is recommended that the venture capitalists should retain their basic basic feature that is tasking high risk. The present situation may compel venture capitalists to opt for less for less risky opportunities but opportunities but is against the spirit of venture capitalism. The established fact is big gains are possible in high risk projects. projects.
3.
There should be a greater role for the venture capitalists in the promotion of entrepreneurship. of entrepreneurship. The Venture capitalists should promote should promote entrepreneur forums, entrepreneur forums, clubs and institutions of learning of learning to enhance the quality of entrepreneurship of entrepreneurship..
Project Report – Institute of Technology and Management, Gurgaon
Bibliography 1.
JOURNALS •
APPLIED
FINANCE
VENTURE
STAGE
INVESTMENT
PREFERENCE IN INDIA, VINAY KUMAR, MAY, 2004. •
ICFAI JOURNAL OF APPLIED FINANCE MAY- JUNE
•
VIKALPA VOLULMLE 28, APRI L- JUNE 2003
•
ICFAI JOURNAL OF APPLIED FINANCE, JULY- AUG.
2. BOOKS
3.
•
I.M. Panday- venture capital development process development process in India
•
I. M. Panday- venture capital the Indian experience,
VARIOUS NEWS PAPERS
4. INTERNET •
www.indiainfoline.com
•
www.vcapital.com
•
www.investopedia.com
•
www.vcinstitute.com
Project Report – Institute of Technology and Management, Gurgaon
ANNEXURE I Venture capital firms Examples of venture of venture capital firms include: •
Accede Partners
•
Austin Ventures
•
Atlas Venture
•
Battery Ventures
•
Benchmark Capital Benchmark Capital
•
Charles River Ventures River Ventures
•
Doughty Hanson Technology Ventures
•
Fidelity Ventures
•
Health Cap
•
Hummer Wimbled Hummer Wimbled
•
Insight Venture Partners
•
Mobius Venture Capital
•
Mohr Davidow Mohr Davidow Ventures
•
Sevin Rosen Funds
•
Sequoia Capital
•
Trelys
Project Report – Institute of Technology and Management, Gurgaon
ANNEXURE II Some important Venture Capital Funds in India 1. APIDC Venture Capital Limited, Limited, , Babukhan Estate, Hyderabad 500 001 2. Canbank Venture Canbank Venture Capital Fund Limited, IInd Floor, Kareem Towers, Bangalore. 3. Gujarat Venture Capital Fund 1997, Ashram Road, Ahmedabad 380 009 4. Industrial Venture Capital Limited, Thyagaraya Road, Chennai 600 017 5. Gujarat Venture Capital Fund 1995 Ashram Road Ahmedabad 380 009 6. Karnataka Information Technology Venture Capital Fund Cunningham Rd Bangalore 7. India Auto Ancillary Fund Nariman Fund Nariman Point, Mumbai 400 021 8. Information Technology Fund, Nariman Fund, Nariman Point, Mumbai 400021 9. Tamilnadu InfoTech Fund Nariman Point, Mumbai 400021 10. Orissa Venture Capital Fund Nariman Fund Nariman Point Mumbai 400021 11. Uttar Pradesh Uttar Pradesh Venture Capital Fund Nariman Fund Nariman Point, Mumbai 400021 12. SICOM Venture Capital Fund Nariman Fund Nariman Point Mumbai 400 021
Project Report – Institute of Technology and Management, Gurgaon
Project Report – Institute of Technology and Management, Gurgaon
Conclusion Venture capital can play a more innovation and development role in a developing country like India. It could help the rehabilitation of sick unit through people with ideas and turnaround management skill. A large number of number of small small enterprises in India because sick unit even before the commencement of production of production of production. of production. Venture capitalist could also be in line with the developments taking place in their parent companies. Yet another area where can play a significant role in developing countries is the service sector including tourism, publishing, healthcare etc. they could also provide financial assistance to people to people coming out of the universities, technical institutes etc. who wish to start their own their own venture with or without or without high-tech content, but involving high risk. This would encourage the entrepreneurial spirit. It is not only initial funding which is need from the venture capitalists, but capitalists, but the should also simultaneously provide management and marketing expertise-a real critical aspect of venture capitalists, but they also simultaneously provide management and marketing expertise-a real critical aspect of venture of venture capital in developing countries. countries. Which can improve their effectiveness by setting up venture capital cell in R&D and other scientific generation, providing syndicated or consortium financing and acing as business incubators.
Project Report – Institute of Technology and Management, Gurgaon
View more...
Comments
