VENTURE CAPITAL

INDEX
SR. NO.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

PARTICULARS
INTRODUCTIONS EXECUTIVE SUMMARY CONCEPT & DEFINITIONS OF VENTURE CAPITAL FEATURE OF VENTURE CAPITAL & VENTURE CAPITAL FIRM DIFFIRENT TYPES OF VENTURE CAPITAL STEPS IN SEEKING VENTURE CAPITAL INVESTMENT CONDITION & RESTRICTIONS FACTORS INFLUENCING VENTURE CAPITALISTS CHOICE OF INVESTMENT PROBLEM OF VENTURE CAPITAL FINANCE EXIT ROUTES VENTURE CAPITAL REGULATIONS IN INDIA WHAT ARE THE VENTURE CAPITAL FUNDS IN INDIA ADVANTAGES OF VENTURE CAPITAL CASE STUDY CONCLUSION BIBLOGRAPHI

Page no.

INTRODUCTION:

VENTURE CAPITAL

Scientists, technocrats and management gurus have crazy ideas and that s the !irth "#ace $or great inventions% &any a times these ideas are Uto"ian ideas% 'and$u#s o$ them ho(ever turn into rea#ity% )hen these things !ecome rea#, they !ring "aradigm shi$t in our #i$esty#e% Someone has to $und these crazy e$$orts% )e see mat many Pharma and techno#ogy $irms setu" a research de"artment and em"#oy scientists% This de"artment cannot !e a "ro$it centre% It may give ne( and innovative "roduct !ut the time $rame and success rate o$ the "roduct cannot !e "redicted% Sti## one grand success (i"es out a## the costs incurred on research% Even governments "romote such research% Each o$ these (ho $und such research have vested interest in it% Pha*ma com"anies get ne( medicines (hich no other $irm has so $ar% So they can cash+in on their $irst introducer "osition% ,overnments can get ne( (ea"ons, astronomy missions or innovative (ays to address socia# "ro!#ems% These are a## $unded researches% No sooner as ne( "roduct is deve#o"ed, its commercia# e*"#oitation is systematic and is done on#y !y the $irm (hich underta-es research activity%

There cou#d !e inde"endent technocrat or a grou" or .ust a sim"#e !usiness idea% No one (ou#d have $unded the invention or idea% The "erson (ho invents this may not !e having $inancia# musc#e to commercia#ize it% 'e may not !e having management a!i#ity to ma-e a success$u# commercia# venture% Such initiatives are $unded !y VCs i%e% Venture ca"ita#ists%

VENTURE CAPITAL
VCs "rovide ca"ita# and management e*"ertise% They ta-e ris- as success is un"redicta!#e at nascent stage o$ "roduct deve#o"ment% /ut returns a#so cou#d !e high%

Sometimes

the

"roduct

is

deve#o"ed %

and

tested

in

sma##

mar-et% VCs $und !ig #ea" or e*"ansion o$ die "roduct% Such $unding is a#so termed as 'private equity'%

Venture ca"ita# cou#d !e at idea #eve# 0seed ca"ita#1 or at commercia#ization stage 0gro(th ca"ita#1 or at e*"ansion stage 0mezzanine #eve#1 or esta!#ishment stage 0"rivate e2uity1% Some ana#ysts $inancing% ca## on#y ear#y stage $inancing as venture ca"ita#

VENTURE CAPITAL

EXECUTIVE SUMMARY
This re"ort, (hich contains in de"th study o$ Venture ca"ita# Industry in India, is made (ith an intension to get through a## the as"ects re#ate to the to"ic and to !ecome a!#e to ma-e some suggestion at the industry% 3uture o$ any economy de"ends on the success o$ the ne( techno#ogies and industries and services su""orting these techno#ogies% In India, (here human, "articu#ar#y technica# and entre"reneuria# are a!undant and there is short$a## o$ ca"ita#, venture ca"ita# has a greater signi$icance% It is o!served the ne( com"anies, "articu#ar#y the sma##er ones, create more .o!s% Venture ca"ita# he#"s em"#oyment generation "articu#ar#y $or educated and s-i##ed (or-ers% The $inancing o$ domestica##y deve#o"ed techno#ogies in genera# and those deve#o"ed !y the ne( generation o$ entre"reneur has a#(ays !een a "ro!#em in !oth deve#o"ed and deve#o"ing countries% This is !ecause domestica##y deve#o"ed techno#ogies, either !y organized sector or the unorganized sector, are usua##y "erceived to !e uncertain !y the conventiona# $inancia# system% In India, since inde"endence, a num!er o$ $inancia# institutions have emerged to cater to the needs o$ the industria# entre"reneurs and these have main#y remained as de!t "roviding organizations% In India, ris$inance has a#(ays !een in short su""#y%

VENTURE CAPITAL
The initia# e2uity $or any venture has to !e raised !y the "romoters $rom their o(n sources and "u!#ic $inancia# institutions are not o$ much he#"% To overcome this "ro!#em venture ca"ita# $inancing made a sma## !eginning in India since 4566% The to"ic concentrates on the "rovision o$ "ermanent or e2uity ty"e ca"ita#s i%e% venture ca"ita#% In the !road terms, venture ca"ita# means #ong term ris- e2uity $inance (here the "rimary re(ard $or its "rovider is eventua# ca"ita# gain and not the interest7 dividend yie#d% India is on the thresho#d o$ a high techno#ogy revo#ution and ne( entre"reneuria# gro(th% S#o( gro(th o$ signi$icant institutiona# set u" to "rovide much needed venture ca"ita# has ham"ered the gro(th o$ the economy% A radia# change in the e*isting $rame(or- o$ venture ca"ita# $inancing in India is a must to achieve high economic gro(th%

VENTURE CAPITAL

CONCEPT OF VENTURE CAPITAL

Venture ca"ita# is the ca"ita# invested in a !usiness (here the chances o$ success are uncertain% It is a term to descri!e the $inancing o$ startu" and ear#y stage !usinesses as (e## as !usinesses in 8 tur investments !ut o$$er the "otentia# $or a!ove+average returns% ar!u " 8 situations% Venture ca"ita# investments genera##y are higher ris-

A venture ca"ita#ist 0VC1 is a "erson (ho ma-es such investments. The initia#, start+u" money is re$erred to as #$ee" %! ey8 and entai#s the greatest ris-%

I$ the "ro.ect gets o$$ the ground it may re2uire additiona# $inancing at additiona# 8rounds8 or the 8mezzanine #eve#8 !e$ore the com"any is $ina##y !rought to the mar-et and the venture ca"ita#ist can en.oy handsome re(ards%

Venture Ca"ita# Is su!.ect to more than a norma# degree o$ risand thus ca##ed as Ris- Ca"ita#% It is usua##y associated (ith a ne( !usiness or venture% Though not as a ru#e !ut usua##y it is in re#ation to new techno#ogy "ro.ects%

A venture ca"ita# $unding arrangement ty"ica##y entai#s di#uting o(nershi" and contro# of the !usiness. 9$$setting the high ris- the investors ta-e is the "otentia# o$ high return on the investment%

VENTURE CAPITAL

DEFINITIONS:
Ve ture &apita' is ca"ita# "rovided !y outside investors $or $inancing o$ startu" ventures, gro(th ventures or strugg#ing 0to !e turned around $rom #osses1 !usinesses% Venture ca"ita# investments genera##y are high ris- investments% At the same time o$$er the "ossi!i#ity o$ e*traordinary high returns%

Ve ture

&apita'i$t

0VC1

is

"erson

(ho

ma-es

such investments%

Ve ture &apita' (u " is a "artnershi" or a trust or a com"any that "rimari#y invests the $inancia# ca"ita# o$ "romoters and other investors 0venture ca"ita#ists1 in enter"rises that are too ris-y $or the standard ca"ita# mar-ets or !an- #oans%

An a )e' i ve$t!r is an a$$#uent individua# (ho "rovides ca"ita# $or a !usiness start+u", usua##y in e*change $or o(nershi" e2uity% Un#i-e venture ca"ita#ists, ange#s ty"ica##y do not manage the "oo#ed money o$ others in a "ro$essiona##y+managed $und+ 'o(ever, ange# investors o$ten organize themse#ves into ange# net(or-s or ange# grou"s to share research and "oo# their o(n investment ca"ita#%

VENTURE CAPITAL

FEATURES OF VENTURE CAPITAL;

&ore !usinessmen are getting into venture ca"ita#% )hether as entre"reneurs or ca"ita#ists themse#ves, more "eo"#e are getting into it !ecause o$ the "romise o$ $ast, easy money in a re#ative#y short time% )hi#e many may attest to the $inancia# security that the scheme !rought, there are a#so .ust as many un$ortunate stories that have circu#ated as (e##% 'ere are some characteristics o$ venture ca"ita# that any !usinessman must -no(.

* Venture ca"ita# is usua##y in the $orm o$ e2uity or a mi* o$ e2uity and de!t % In some rare cases it cou#d !e .ust #ong term #oan or converti!#e #oan%

* Commercia# success o$ $unded venture is not tested and hence VC is a ris- investment * I$ success$u#, VCs can get e*traordinary returns%

* Venture ca"ita#ist is not .ust a $und "rovider !ut a#so is invo#ved in managing the envisaged gro(th o$ the $irm%

* Investment is usua##y in tiny, sma## or non+e*istant ventures% /ig esta!#ished ventures are not $unded !y VCs%

VENTURE CAPITAL
* Venture ca"ita#ists are interested ca"ita# gains and cash gains%

* VCs genera##y e*it !usiness a$ter achieving desired gro(th and there!y !oo-ing ca"ita# a""reciation Venture ca"ita# investments are di$$erent $rom venture ca"ita# #oans% 3or the #atter, the ris- is !orne !y the investor and not !y the investment $irm% The entre"reneur must re"ay the amount "#us interest, regard#ess o$ the com"any s success or $ai#ure% 3or venture ca"ita# investment, it is the $irm that !ears the ris-% This e*"#ains (hy more "eo"#e o"t $or venture ca"ita# investments than #oans% Since the $irm !ears the ris-, it is there$ore the one entit#ed to a ma.or "art o$ the "ro$its% These investors see- ma*imum gain at the shortest "eriod "ossi!#e.

VENTURE CAPITAL

FEATURES OF A VC FIRM:
Venture ca"ita# $irms are made u" o$ individua# investors or cor"orations% Sometimes the "artici"ants are institutiona# investors #i-e insurance com"anies, $oundations and "ension $unds% Aside $rom these $irms, there is a#so (hat is ca##ed as ange# investors% These are individua#s or a sma##er grou" o$ investors that o"erate the same (ay as venture ca"ita# $irms% They a## $unction the same (ay, and that is to $und sma## and starting !usinesses, ending in a !uyout, merger or IP9% 3o##o(ing are some o$ the $eature o$ venture ca"ita# $irm:%%

+,- I ve$t%e t i .i).*ri$/0 .i).*retur $ ve ture$ :

As VCs invest in untested, innovative ideas the investments entai# high ris-s% In return, they e*"ect a much higher return than usua#% 0Interna# 'ate o$ return e*"ected is genera##y in the range o$ ;< "er cent to => "er cent1%

+1- Parti&ipati! i %a a)e%e t :

/esides "roviding $inance, venture ca"ita#ists may a#so "rovide technica#, mar-eting and strategic su""ort% To sa$eguard their

VENTURE CAPITAL
investment, they may a#so at times e*"ect "artici"ation in management% +2- E3perti$e i %a a)i ) (u "$ : VCs genera##y invest have a in "articu#ar ty"e o$ industries or

some o$ them invest in "articu#ar ty"e o$ !usinesses and hence "rior e*"erience and contacts in the s"eci$ic industry (hich an e*"ertise in !etter management o$ the $unds gives them de"#oyed%

+2- Rai$e$ (u "$ (r!% $evera' $!ur&e$:

Though many venture ca"ita#ists are rich individua#s (ho come together in a. "artnershi", a## VCs are not necessari#y rich and a#most a#(ays dea# (ith $unds raised main#y $rom others% The v a r i o u s sources o$ $unds are rich individua#s, other investment $unds, "ension $unds, endo(ment $unds, et cetera, in addition to their o(n $unds, i$ any%

(5) Diver$i(i&ati!

!( t.e p!rt(!'i! :

VCs reduce the ris- o$ venture investing !y deve#o"ing a "ort$o#io o$ com"anies and the norm $o##o(ed !y them is same as the "ort$o#io managers, that is, not to "ut a## the eggs in the same !as-et%

(6) E3it a(ter $pe&i(ie" ti%e:

VENTURE CAPITAL
VCs are genera##y interested in e*iting $rom a !usiness a$ter a "re+s"eci$ied "eriod% This "eriod may usua##y range $rom ? to 7 years%

VENTURE CAPITAL

Di((ere t type$ !( ve ture &apita' i ve$t%e t$

Ear'y Sta)e Fi a &e
+ Seed Ca"ita# + Startu" ca"ita# + Ear#y stage ca"ita# + Later stage ca"ita#

Later Sta)e (i a &e

+ E*"ansion stage ca"ita# + Re"#acement 3inance + Turnarounds + /ridge 3inance

Not a## !usiness $irms "ass through each o$ these stages in a se2uentia# manner% 3or instance seed ca"ita# is norma##y not re2uired !y service !ased ventures%

It a""#ies #arge#y to manu$acturing or research !ased activities% Simi#ar#y second stage $inance does not a#(ays $o##o( ear#y stage $inance%

VENTURE CAPITAL
The ta!#e !e#o( sho(s ris- "erce"tion and time orientation $or di$$erent stages o$ venture ca"ita# $inancing
3inancing Stage Ear#y stage 3inance seed Start u" 3irst stage Period 0$unds Loc-ed in years1 @+4> Ris- "erce"tion E*treme Activity to !e $inance 3or su""orting a conce"t or idea $or "roduct <+5 ?+@ Very high 'igh deve#o"ment Initia#izing o"eration Start commercia# "roduction Second stage ?+< Su$$icient#y high and mar-eting E*"and mar-et A gro(ing Later stage 4+? &edium (or-ing ca"ita# need &ar-et e*"ansion, ac2uisition "roduct deve#o"ment /uy out+in Turnaround &ezzanine 4+? ?+< 4+? medium &edium high #o( "ro$it ma-ing co% Ac2uisition $inancing Turning around a sic- co% 3aci#itating issue "u!#ic $or A

Ear'y Sta)e Fi a &e

VENTURE CAPITAL
+ Seed Ca"ita# It is an idea or conce"t as o""osed to a !usiness% Euro"ean Venture ca"ita# association de$ines seed ca"ita# as BThe $inancing o$ the initia# "roduct deve#o"ment or ca"ita# "rovided to an entre"reneur to "rove the $easi!i#ity o$ a "ro.ect and to 2ua#i$y $or start u" ca"ita#C%

T.e &.ara&teri$ti&$ !( t.e $ee" &apita' %ay 4e e u%erate" a$ (!''!5$6 I% A!sence o$ ready "roduct mar-et% ii% A!sence o$ com"#ete management team% iii% Product 7 "rocess sti## in R A D stage% Iv% Initia# "eriod 7 #icensing stage o$ techno#ogy trans$er% /road#y s"ea-ing seed ca"ita# investment may ta-e @ to 4> years to achieve rea#ization% /road#y s"ea-ing seed ca"ita# investment may ta-e @ to 4> years to achieve rea#ization% It is the ear#iest and there$ore ris-iest stage o$ Venture ca"ita# investment% The ne( techno#ogy and innovations !eing attem"ted have e2ua# chance o$ success and $ai#ure. Seed ca"ita# is "rovided a$ter !eing satis$ied that the

VENTURE CAPITAL
entre"reneur has used u" his o(n resources and carried out his idea to a stage o$ acce"tance and has initiated research% The asset under#ying the seed ca"ita# is o$ten techno#ogy or an idea as o""osed to human assets 0a good management team1 so o$ten sought !y venture ca"ita#ists

+ Startu" ca"ita#
It is the stage ; in the venture ca"ita# cyc#e and is distinguisha!#e $rom seed ca"ita# investments% An entre"reneur o$ten needs $inance (hen the !usiness is .ust starting% The start u" stage invo#ves starting a ne( !usiness% 'ere in the entre"reneur has moved c#oser to(ards esta!#ishment o$ a going concern% 'ere in the !usiness conce"t has !een $u##y investigated and the !usiness ris- no( !ecomes that o$ turning the conce"t into "roduct% Start u" ca"ita# is de$ined as :%% BCa"ita# needed to $inance the "roduct deve#o"ment, initia# mar-eting and esta!#ishment o$ "roduct $aci#ity% C T.e &.ara&teri$ti&$ !( $tart*up &apita' are:*

VENTURE CAPITAL
I% Esta!#ishment o$ com"any or !usiness% The com"any is either !eing organized or is esta!#ished recent#y% Ne( !usiness activity cou#d !e !ased on e*"erts, e*"erience or a s"in+o$$ $rom R A D% ii% Esta!#ishment o$ most !ut not a## the mem!ers o$ the team% The s-i##s and $itness to the .o! and situation o$ the entre"reneurEs team is an im"ortant $actor $or start u" $inance% iii% Deve#o"ment o$ !usiness "#an or idea% The !usiness "#an shou#d !e $u##y deve#o"ed yet the acce"ta!i#ity o$ the "roduct !y the mar-et is uncertain% The com"any has not yet started trading% In the start u" "re"osition venture ca"ita#istsE investment criteria shi$ts $rom idea to "eo"#e invo#ved in the venture and the mar-et o""ortunity% The time horizon $or start u" ca"ita# (i## !e ty"ica##y F or 6 years% 3ai#ure rate $or start u" is ; out o$ ?% Start u" needs $unds !y (ay o$ !oth $irst round investment and su!se2uent $o##o(+u" investments%

The ris- tends to !e #o(er re#ative to seed ca"ita# situation% The risis contro##ed !y initia##y investing a sma##er amount o$ ca"ita# in start+

VENTURE CAPITAL
u"s% 'o(ever, the term to rea#ization o$ a start u" investment remains #onger than the term o$ $inance norma##y "rovided !y the ma.ority o$ $inancia# institutions%

+Ear#y Stage 3inance

It is a#so ca##ed $irst stage ca"ita# is "rovided to entre"reneur (ho has a "roven "roduct, to start commercia# "roduction and mar-eting, not covering mar-et e*"ansion, de+ris-ing and ac2uisition costs%

At this stage the com"any "assed into ear#y success stage o$ its #i$e cyc#e% A "roven management team is "ut into this stage, a "roduct is esta!#ished and an identi$ia!#e mar-et is !eing targeted% /ritish Venture Ca"ita# Association has de$ined ear#y stage $inance asG B3inance "rovided to com"anies that have com"#eted the "roduct deve#o"ment stage and re2uire $urther $unds to initiate commercia# manu$acturing and sa#es !ut may not !e generating "ro$its%C

T.e &.ara&teri$ti&$ !( ear'y $ta)e (i a &e %ay 4e: *

VENTURE CAPITAL

4% Litt#e or no sa#es revenue% ;% Cash $#o( and "ro$it sti## negative% ?% A sma## management team (hich consists o$ "eo"#e (ith technica# and s"ecia#ist !ac-ground and (ith #itt#e e*"erience in the management o$ gro(ing !usiness% =% Short term "ros"ective $or dramatic gro(th in revenue and "ro$its% The ear#y stage $inance usua##y ta-es = to F years time horizon to rea#ization% Ear#y stage $inance is the ear#iest in (hich t(o o$ the $undamenta#s o$ !usiness are in "#ace i%e% $u##y assem!#ed management team and a mar-eta!#e "roduct% A com"any needs this round o$ $inance !ecause o$ any o$ the $o##o(ing reasonsG + <% Pro.ect overruns on "roduct deve#o"ment% F% Initia# #oss a$ter start u" "hase% The $irm needs additiona# e2uity $unds, (hich are not avai#a!#e $rom other sources thus "rom"ting venture ca"ita#ist that, have $inanced the start u" stage to "rovide $urther $inancing%

VENTURE CAPITAL +Later Stage 3inance

It is ca##ed third stage ca"ita# is "rovided to an enter"rise that has esta!#ished commercia# "roduction and !asic mar-eting set+u", ty"ica##y $or mar-et e*"ansion, ac2uisition, "roduct deve#o"ment etc% It is "rovided $or mar-et e*"ansion o$ the enter"rise% The enter"rises e#igi!#e $or this round o$ $inance have $o##o(ing characteristics% I% II% III% Esta!#ished !usiness, having a#ready "assed the ris-y ear#y stage% E*"anding high yie#d, ca"ita# gro(th and good "ro$ita!i#ity% Re"uted mar-et "osition and an esta!#ished $orma# organization structure% Later stage $inance is de$ined as under: B3unds are uti#ized $or $urther "#ant e*"ansion, mar-eting, (or-ing ca"ita# or deve#o"ment o$ im"roved "roducts%C %

+E*"ansion stageG
3inancing $or gro(th and e*"ansion o$ a com"any (hich is !rea-ing even or trading "ro$ita!#y% Ca"ita# may !e used to $inance increased "roduction ca"acity, mar-et or "roduct deve#o"ment, and7or to "rovide additiona# (or-ing ca"ita#%

VENTURE CAPITAL
This stage inc#udes !ridge $inancing and rescue or turnaround investments%

+Re"#acement 3inance
It means su!stituting one shareho#der $or another, rather than raising ne( ca"ita# resu#ting in the change o$ o(nershi" "attern% Venture ca"ita#ist "urchase shares $rom the entre"reneurs and their associates ena!#ing them to reduce their shareho#ding in un#isted com"anies%

They a#so !uy ordinary shares $rom non+"romoters and convert them to "re$erence shares (ith $i*ed dividend cou"on% Later, on sa#e o$ the com"any or its #isting on stoc- e*change, these are re+converted to ordinary shares% Thus Venture ca"ita#ist ma-es a ca"ita# gain in a "eriod o$ 4 to < years%

VENTURE CAPITAL STEPS IN SEE7IN8 VENTURE CAPITAL:

VC investor ma-es detai#ed eva#uation o$ the 2ua#ity o$ "eo"#e, 2ua#ity o$ !usiness and the 2ua#ity o$ investment invo#ved% A decision to invest is reached a$ter severa# rounds o$ "resentations and negotiations% The most di$$icu#t to assess is ho(ever the 2ua#ity o$ "eo"#e%

3o##o(ing stage are invo#ved in see-ing VC $undingG

(1)

Stu"y !( VC'$ Detai'$: &ost o$ the organized VCs have a

(e!site% They s"e## out their investment o!.ectives and "hi#oso"hy on the "orta#% Ste"s to a""roach them and criteria $or se#ection are a#so dis"#ayed%

(2)

Su4%i$$i!

!( 9u$i e$$ P'a : Porta#s a#so indicate (hat

VC (ou#d re2uire in !usiness "#an to !e su!mitted% /usiness "#an shou#d !e "re"ared according#y and shou#d !e su!mitted through the "orta#% NoteG &any Indian VCs 0es"ecia##y $rom government domain1 do not have these on #ine $eatures . In such case $orms shou#d !e co##ected $rom their o$$ice and !usiness "#an shou#d !e su!mitted to them%

VENTURE CAPITAL
(3)

S&ruti y !( 9u$i e$$ P'a : VC studies the !usiness "#an

and $orms his "rimary vie(% I$ he doesn t c#ic- (e## (ith the "#an at a##, he re.ects it in too% There is no $urther consideration% I$ VC $inds some (orth to consider it $urther, he may send some 2ueries and demand some detai#s $rom the a""#icant% A""#icant (ou#d try to $u#$i## the demands%

(4)

Pre'i%i ary Meeti ): The initia# meeting "rovides an

o""ortunity $or the venture ca"ita#ist to meet the entre"reneur and -ey mem!ers o$ the management team to revie( the !usiness "#an and conduct initia# due di#igence on the "ro.ect%

It

is

an

im"ortant

time

$or

the

management

team

to demonstrate their understanding o$ their !usiness and a!i#ity to achieve the strategies out#ined in the "#an%

The venture ca"ita#ist (i## #oo- care$u##y at the team s s-i##s and !ac-grounds% I$ he esta!#ishes con$idence in the team, he (ou#d consider it $urther%

VENTURE CAPITAL :- Ne)!tiati ) I ve$t%e t: This invo#ves negotiations on

terms o$ "ossi!#e agreement !et(een the venture ca"ita#ist and management%

The

venture

ca"ita#ist

(i##

then

study

the

via!i#ity o$ the mar-et to estimate its "otentia#% 9$ten they use mar-et $orecasts that have !een inde"endent#y "re"ared !y industry e*"erts (ho s"ecia#ize in estimating the size and gro(th rates o$ mar-ets and mar-et segments%

The venture ca"ita#ist a#so studies the industry care$u##y to o!tain in$ormation a!out com"etitors, entry !arriers, and the "otentia# to e*"#oit su!stantia# niches, "roduct #i$e cyc#es, distri!ution channe#s and "ossi!#e e*"ort "otentia#% The due di#igence continues (ith re"orts $rom accountants and other consu#tants%

(6)

Appr!va'$: The "rocess invo#ves e*haustive due di#igence

and disc#osure o$ a## re#evant !usiness in$ormation% 3ina# terms can then !e negotiated and an investment "ro"osa# su!mitted to the !oard o$ directors%

(7)

Le)a' a " !t.er Pr!&e"ure$: A shareho#ders agreement

is "re"ared containing the rights and o!#igations o$ each "arty% This cou#d inc#ude, $or e*am"#e, veto rights !y the investor on

VENTURE CAPITAL
remuneration and #oans to e*ecutives, ac2uisition or sa#e o$ assets, audit, #isting o$ the com"any, rights o$ co+sa#e and (arranties re#ating to the accuracy o$ in$ormation enc#osed%

The investment "rocess can ta-e u" to three months, and sometimes #onger% It is im"ortant, there$ore, not to e*"ect a s"eedy res"onse%

It

is

advisa!#e

to

"#an

the

!usiness

$inancia#

needs ear#y on to a##o( a""ro"riate time to secure the re2uired 3unding

VENTURE CAPITAL

INVESTMENT CONDITIONS AND RESTRICTIONS:

&inimum investment o$ not #ess than Rs%< #a-hs $rom each investor

Scheme A India 7$oreign7 Non+resident Investors

VC3

Scheme /

Scheme C Units issued

A VCF sha## acce"t not #ess than Rs% < #a-hs as minimum investment $rom each investor !y (ay o$ issue o$ units and the VC3 in turn (i## invest the "oo#ed $unds in various schemes (ith a minimum contri!ution in each scheme o$ Rs% < crores%

VENTURE CAPITAL

There are $urther restrictions on the a##ocation o$ $unds !y a VC3 in various VCUs as i##ustrated in the diagram !e#o(%

Su!scri"tion to IP9 o$ CVU "ro"osed to !e #isted%

- De!t instruments in (hich CV3 a#ready has e2uity investment - "re$erentia# a##otment in e2uity su!.ect to 4 year #oc- i

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FACTORS INFLUENCING VENTURE CAPITALISTS CHOICE OF INVESTMENT

+ Trac- record o$ "romoters and the management team + Nature o$ the !usiness and the "romoters e*"erience in the "ro"osed or re#ated !usiness + /usiness shou#d meet the investment o!.ectives in terms o$ ris- and return + &ar-eting strategy + Techno#ogy and techno#ogy co##a!oration A detai#ed and (e## organized !usiness "#an is the on#y (ay to gain a venture ca"ita#ist attention and o!tain $unding% The detai#ed "ro"osa# must cover the $o##o(ing issuesG H /usiness and its $uture H &anagement H 3inancing H Ris- $actors H Ana#ysis o$ o"erations and "ro.ections H Product s"eci$ications

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PRO9LEMS OF VENTURE CAPITAL FINANCIN8G

VC3 is in its various stages in India% The emerging scenario o$ g#o!a# com"etitiveness has "ut their "ressure on the industria# sector to im"rove the 2ua#ity #eve# (ith minimization o$ cost o$ "roducts !y ma-ing use o$ #atest techno#ogica# s-i##s%

The im"#ication is to o!tain ade2uate $inancing a#ong (ith the necessary hi+tech e2ui"ments to "roduce an innovative "roduct (hich can succeed and gro( in the "resent mar-et condition% Un$ortunate#y, our country #ac-s on !oth $ronts% The necessary ca"ita# can !e o!tained $rom the venture ca"ita# $irms (ho e*"ect an a!ove average rate o$ return on the investment%

The $inancing $irms e*"ect a sound, e*"erienced, mature and ca"a!#e management team o$ the com"any !eing $inanced%

Since the innovative "ro.ect invo#ves a higher ris-, there is an e*"ectation o$ higher returns $rom the "ro.ect% The "ay!ac- "eriod is a#so genera##y high 0< + @ years1%

VENTURE CAPITAL

The various pr!4'e%$; querie$ can !e out#ined as $o##o(s 0I1 Re2uirement o$ an e*"erienced management team% 0ii1 Re2uirement o$ an a!ove average rate o$ return on investment% 0iii1 Longer "ay!ac- "eriod% 0iv1 Uncertainty regarding the success o$ the "roduct in the mar-et% 0v1 Iuestions regarding the in$rastructure detai#s o$ "roduction #i-e "#ant #ocation, accessi!i#ity, re#ationshi" (ith the su""#iers and creditors, trans"ortation $aci#ities, avai#a!i#ity etc 0vi1 The category o$ "otentia# customers and hence the "ac-aging and "ricing detai#s o$ the "roduct% 0vii1 The size o$ the mar-et% 0viii1 &a.or com"etitors and their mar-et share% 0i*1 S-i##s and Training re2uired and the cost o$ training%

0*1 3inancia# considerations #i-e return on ca"ita# em"#oyed 0R9CE1, cost o$ the "ro.ect, the Interna# Rate o$ Return 0IRR1 o$ the "ro.ect,

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tota# amount o$ $unds re2uired, ratio o$ o(ners investment 0"ersonne# $unds o$ the entre"reneur1, !orro(ed ca"ita#, mortgage #oans etc% in the ca"ita# em"#oyed%

EXIT ROUTES
Venture Ca"ita#ists invest (ith a so#e motive o$ ma-ing !ig money !y ca"ita# gains% They are not interested in remaining (ith the !usiness $orever% VCs are not -een to !e #ong term e2uity shareho#ders in #ater stage o$ gro(n+u" !usiness% This is+!ecause a$ter such stage, ca"ita# a""reciation (ou#d !e at organic rate (hereas in start+u" and gro(th stage it is e*"onentia#% VCs ris- a""etite is high and they aim at high returns% To rea#ize the desired returns, they need an e*it mechanism at o""ortune time%

E*it routes are

+,- Pr!%!ter$< 9uy4a&/: Promoters themse#ves shou#d

!ecome (ea#thy !ecause o$ success o$ the venture and shou#d !e a!#e to !uy a## the shares o$ VC a$ter some years% This is most "re$erred o"tion i$ (or-s out $easi!#e% 9rigina# "romoters get there 4>>J contro# again !y this route% VCs here !ehave #i-e ang#es rea##y% They come, nurture the !usiness idea, ma-e it !ig and give it !ac- to the "romoters% VCs a#so "re$er this route as e*it I sim"#e as com"ared to other e*it routes%

VENTURE CAPITAL

+1- Pu4'i& I$$ue: I$ the venture is success$u# and gets "u!#ic

a""reciation and !rand image, then VCs can e*it through "u!#ic issue% VCs "remium% e2uity shares (i## !e so#d to "u!ic at

+2-Sa'e t! !t.er private Equity Fu "$: Every e2uity investor

has his "re$erred investment stage% )hi#e VCs "re$er to invest at re#ative#y ear#y stages, there are some "rivate e2uity $unds (ho #i-e to invest in gro(n+ u" !ut non+#isted !usinesses%VCscan ha""i#y se## there investment to these $unds and e*it%

+=- Ma a)e%e t 9uy*!ut : /ig !usiness houses may #i-e to !uy such esta!#ished and nurtured ventures% VCs can se## their sta-e to !ig cong#omerates and tycoons% This is done (ith e*"#icit consent o$ the origina# "romoters%

+:-Se'' i

OTC %ar/et:

over the counter mar-ets (or#d(ide

acce"t such sma## issues (ithout much g#amour around them% VCs can se## their e2uity in 9TC mar-et% This route is underdeve#o"ed in India%

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Ve ture Capita' Re)u'ati! $ i I "ia

Venture ca"ita# regu#ations are government !y BSecurities and E*change /oard o$ IndiaC 0Venture Ca"ita# 3unds%1 Regu#ations, 455F areG

(1) Any com"any or trust or a !ody cor"orate or a% $oreign VC 3und 0su!.ect to R/I c#earance1 to carry on any activity as a venture ca"ita# $und shou#d a""#y to SE/I %

(2) The venture ca"ita# $und sha## not carry on any other activity other than that o$ a venture ca"ita# $und%

(3) A venture ca"ita# $und may raise monies $rom any investor (hether Indian, $oreign or non+resident Indians !y (ay o$ issue o$ units% (4) &inimum sum acce"ta!#e !y VC 3und horn any investor is R$6 Five La/.6

(5) Each scheme #aunched or $und set u" !y a venture ca"ita# $und sha## have $irm commitment $rom the investors $or contri!ution o$ an amount o$ at #east Ru"ees $ive Crores

VENTURE CAPITAL
!e$ore the start o$ o"erations !y the venture ca"ita# $und%

(6)

O I ve$t%e t$:

( ) Venture ca"ita# $und shou#d disc#ose the investment strategy at the time o$ a""#ication $or registration%

(!) Venture ca"ita# $und shou#d not invest more than ;<J cor"us o$ the $und in one venture%

(") VC shou#d not invest in the associated com"anies%

(#) At #east @<J o$ the investi!#e $unds shou#d !e invested in un#isted e2uity shares or e2uity #in-ed instruments%

+e- Not more than ;<J of the investi!#e $unds may !e invested !y (ay o$ su!scri"tion to initial public offer of a venture ca"ita# underta-ing (hose shares are "ro"osed to !e #isted su!.ect to #oc-+in "eriod o$ one year or !y (ay o$ de!t or de!t instrument o$ a venture ca"ita1 underta-ing in (hich the venture ca"ita# $und has a#ready made an investment !y (ay o$ e2uity%

VENTURE CAPITAL

(7) Venture ca"ita# $und is not "ermitted to get its units #isted on any recognized stoc- e*change $or $irst three years $rom the date o$ the issuance o$ units !y the venture ca"ita# $und%

(8) Venture ca"ita# $und are not "ermitted to issue any document or advertisement inviting o$$ers $rom the "u!#ic $or the su!scri"tion or "urchase o$ any o$ its units% A venture ca"ita# $und may receive monies $or investment in the venture ca"ita# $ind on#y through "rivate o$ its units%

(9) Venture ca"ita# $und shou#d maintain "ro"er !oo-s o$ account as "er the #a(%

VENTURE CAPITAL

$% & '( &%( #) *& +(, -. )(*&/'( " 01& 23

41 The investing "u!#ic (i## !e a!#e to reduce their ris- signi$icant#y against unscru"u#ous management% I$ the "u!#ic invest in venture $unds (ho in turn (i## invest in e2uity o$ ne( !usiness% ;1 Investors have no means to chec- the reasona!#eness o$ the "ro$it c#aimed !y the "romoters% The venture ca"ita# $unds e2ui""ed (ith necessary s-i## (i## !e a!#e to ana#yses the "ros"ect o$ the !usiness% ?1 Venture ca"ita# $unds having re"resentative on the !oard o$ directors o$ the com"any (ou#d ensure that the !usinesses are conducted "rudent#y%

=1 A deve#o"ment venture ca"ita# institutiona# set u" reduces the time #ag !et(een a techno#ogy innovation and its commercia# e*"#oitation% <1 9nce the venture ca"ita# $unds start earning "ro$its% it (i## easy $or them to raise resources $orm "rimary ca"ita# mar-et in the $orm o$ e2uity and de!ts% There$ore investors (ou#d !e a!#e to invest in ne( !usiness%

VENTURE CAPITAL

F1 Venture ca"ita# $unds "rovides investment o""ortunity in high risand high re(ard ne( venture (hich are not avai#a!#e though any other mechanism%

@1 At initia# stage o$ !usiness no other (ay o$ $unding is avai#a!#e e*ce"t venture ca"ita#6 /an-ers are not (i##ing to e*tend #oans at this stage

61 Socia# ta#ent is uti#ized "ro"er#y $or its idea and e$$orts%

51 &ore individua#s are motivated to e*"eriment as they motivation $rom venture ca"ita# $unded success story%

VENTURE CAPITAL

)hat are the venture ca"ita# $unds in IndiaK

41 ICICI VENTURE CAPITAL &ANA,E&ENT C9&PANL LI&ITED G It is $ormer#y -no(n as TDICI LLD, (as $ound in 4566 in .oint venture (ith the unit trust o$ India% Su!se2uent#y ICICI !ought out UTIMs sta-e in 4556 and it !ecome su!sidiary o$ ICICI% It "rovides "#at$orm $or net(or-ing Indian com"anies (ith g#o!a# mar-ets and techno#ogy% The !road s"ectrum o$ $inancia# and ana#ytica# resources ena!#ing a -een understanding o$ the India $inancia# mar-et%

;1 I3CI VENTURE CAPITAL 3UNDS It (as origina##y set u" !y I3CI as Ris-y ca"ita# $oundation 0RC31 in45@< to "rovide institutiona# su""ort to $irst generation "ro$essiona#s and technocrats% In 4566 RC3 (as converted in to Ris-y ca"ita# and techno#ogy $inance cor"oration 0RCT3C1% It introduced the techno#ogy $inance and deve#o"ment scheme% In 3e!ruary ;>>>, the name o$ RCT3C (as changed to I3CI venture ca"ita# $und%

VENTURE CAPITAL

?1 SID/I VENTURE CAPITAL 3UNDS

It is a (ho##y su!sidiary com"any o$ SID/I, incor"orated in Nu#y 4555% Its mission is to cata#yse entre"reneurshi" !y "roviding ca"ita# and other strategic in"uts $or !ui#ding !usiness around gro(th o""ortunities and ma*imize returns on investment% It manages various ca"ita# $und #aunched !y SID/I%

=1 ILA3S ,R9UP /USINESSES

It (as incor"orated in 456@ as su!sidiary o$ centra# !an- o$ India% the initia# shareho#ders (ere UTI and 'D3C Thus $rom its ince"tion, ILA3S inherited the e*"erience and e*"ertise o$ these $unctions%

<1 ,UNARAT VENTURE 3INANCE LI&ITED It is incor"orated in the year 455> it is regarded as "ioneer o$ venture ca"ita# in India% It has created a niche $or itse#$ in sma## and medium sca#e

VENTURE CAPITAL
com"anies% Investment "ro.ects% F1 ;I CAPITAL It is an asset managements com"any and has insight into investment o""ortunities in industria# and service sector and #arge gro(ing domestic mar-et% It #everages in techno#ogy, engineering and techno#ogy services% and monitoring such com"anies re2uires

considera!#e e$$orts and invo#vement as com"ared to #arge

@1 SILIC9N VALLEL /ANOS

It is the "rivate e2uity arm and is an integra# o$ the grou"Es strategy to create va#ue (ithin the venture ca"ita#% It invests a#ong (ith "artners in "ort$o#io com"anies on !eha#$ o$ SV/ $inancia# grou" and its others investors

61 AND'RA

PRADES'

INDUSTRIAL

DEVEL9P&EN

C9RP9RATI9N VENTURE CAPITAL

It (as #aunched in 455> and it has "ro"osa# $or venture ca"ita# $inancing in the s"here o$ !iotechnogy and com"uter so$t(are a""#ications% Assistance is norma##y in the $orm o$ e2uity !ut de"ending on

VENTURE CAPITAL
the circumstances #oans may a#so !e "rovided

51

CANARA /ANO It has set u" a venture ca"ita# $unds ca##ed Canara !an- venture ca"ita# $unds It norma##y sanctions the $und in the $ie#d o$ chemica#s, machine, $ood stu$$s etc%

4>1

S/I CAPITAL &AROET LI&ITED% It "rovides assistance to entre"reneur (ho has good techni2ue a!i#ity !ut #ac- o$ $inancia# strength% The "ro.ects in high "riority thrust areas such im"ort su!stitute, high e*"ort "otentia#, high tech o"tions are "re$erred%

VENTURE CAPITAL

* CASE STUDY

SID9I ve ture &apita' 'i%ite"

SID/I Launches S&E ,R9)T' 3UND + a Rs% <>> crore Venture Ca"ita# $und In Partici"ation (ith &a.or Commercia# /an-s

S%a'' I "u$trie$ Deve'!p%e t 9a / !( I "ia has today #aunched SME 8RO>T? FUND, a ne( venture ca"ita# $und (ith a #arge cor"us o$ Rs% <>> crore, dedicated to the S&E sector% The 6+year #i$e 3und is !eing esta!#ished (ith an o!.ective to meet the #ong+term ris- ca"ita# re2uirement o$ innovative and techno#ogy oriented units in this sector% Venture 3unds are recognized g#o!a##y as the most suita!#e $orm o$ "roviding ris- ca"ita# $or the gro(th o$ innovative and high techno#ogy !usinesses% Innovative S&E units are e*"ected to "#ay a cata#ytic ro#e in the "ost #i!era#ized economic environment in the country% Oee"ing in

VENTURE CAPITAL
vie( the #eve# o$ dis"ensation o$ venture $inance to the S&E thus $ar, the ne( 3und (ith its size o$ Rs% <>> crore is a signi$icant mi#estone%

It is a uni2ue initiative s"onsored !y SID/I .oint#y (ith ma.or "u!#ic sector !an-s% /esides $orma# commitment o$ Rs%;;< crore so $ar $rom SID/I, Pun.a! Nationa# /an- and Union /an- o$ India, severa# other ma.or nationa#ized !an-s are a#so e*"ected to "artici"ate in the 3und% The entire cor"us is e*"ected to !e tied u" (ithin si* months % Du#y registered (ith SE/I as a venture ca"ita# $und, the 3und sha## invest in domestic S&E units having su"erior gro(th "otentia#, ra"id sca#a!i#ity, and a strong committed team and en.oying uni2ue and sustaina!#e #ong term com"etitive advantage% The $und (i## identi$y un#isted S&E entities in various gro(ing sectors such as #i$e sciences, retai#ing, #ight engineering, $ood "rocessing, in$ormation techno#ogy, in$rastructure re#ated to services such as hea#th care, #ogistics and distri!utions, etc

Sma## Industries Deve#o"ment /an- o$ India 0SID/I1, as the a"e* 3inancia# Institution $or the Sma## Sca#e Sector, has !een "#aying a very active ro#e in the evo#ution o$ Venture Ca"ita# $inancing in the country to su""ort the ris- ca"ita# re2uirements o$ the sector%

VENTURE CAPITAL

SID/I has !een $o##o(ing a three tier a""roach in this regard% To this end, the /an- has !een investing in severa# Venture Ca"ita# 3unds $or on(ard investments in the S&E sector%

These inc#ude severa# "rominent $unds such as India Leverage 3und, India Advantage 3und, and India Deve#o"ment 3und% Recent#y SID/I has "artnered (ith Sma## Enter"rise Assistance 3und, US and Ooda&ahindra /an- Ltd%

In setting u" India ,ro(th 3und% /an- has a#so invested in a num!er o$ state #eve#s VC $unds in co##a!oration (ith #oca# institutions% S&E ,R9)T' 3UND distinguishes itse#$ as the #argest VC $und dedicated to the S&E%

INVEST&ENT 39CUS

SME 8RO>T? Fu "Es $ocus is to invest in un#isted entities in the sma## and medium enter"rises in manu$acturing as (e## as services sector as a#so !usinesses "roviding in$rastructure or other su""ort to

VENTURE CAPITAL
S&Es% The 3und may a#so invest very se#ective#y in #isted entities, to ta-e advantage o$ attractive o""ortunities in gro(ing com"anies%

The 3und (i## ty"ica##y invest in com"anies at ear#y stage as (e## as in second round $inancing $or those (ith a trac- record o$ "roven techno#ogy or !usiness mode# and o""ortunities $or gro(th and earnings%

SME 8RO>T? FUND (i## $ocus at (ide range o$ gro(th sectors, such as #i$e sciences, retai#ing, #ight engineering, $ood "rocessing, in$ormation techno#ogy, in$rastructure re#ated services, hea#thcare, #ogistics and distri!ution, etc%

MODE OF INVESTMENT

SME 8RO>T? FUND "rovides $inancia# assistance "rimari#y !y (ay o$ e2uity or e2uity+#in-ed ca"ita# investment% It sha## a#so endeavor to "rovide mentoring su""ort and other va#ue addition to ena!#e the $unded com"anies to achieve ra"id gro(th and achieve 7 maintain their com"etitive edge in domestic and internationa# mar-ets%

VENTURE CAPITAL
The 3und (i## see- a strategic sta-e in the $unded com"anies (ith !oard re"resentation and other rights as venture ca"ita# investor%

INVESTMENT CRITERIA

SME 8RO>T? FUND is #oo-ing $or investment in "ro.ects o$$ering "otentia# $or attractive gro(th and earnings% Oey criteria $or "ro.ect se#ection are P Q Str! ) a " &!%%itte" &!re tea%: The 3und (i## #oo- $or !usinesses managed !y a team (ith a demonstrated "er$ormance trac- record, commitment and energy% Q 8r!5t. p!te tia': The 3und (i## #i-e to invest in "romising !usinesses having "otentia# $or sustaina!#e high gro(th% Q L! )*ter% &!%petitive a"va ta)e: The 3und (i## "re$er to invest in innovative !usiness o"erations (ith a sustaina!#e com"etitive advantage% Q Via4'e 4u$i e$$ p'a : The venture shou#d have a via!#e !usiness "#an (hich o$$ers a!ove average "ro$ita!i#ity #eading to attractive return on investment%

VENTURE CAPITAL
Q A C'ear e3it p'a : The 3und, !eing o$ #imited #i$e, (i## see- to invest in ventures o$$ering a strategy $or c#ear e*it (ithin a reasona!#e time "eriod% The e*it cou#d !e !y (ay o$ IP9, o$$er $or sa#e, merger and ac2uisition or sa#e to a strategic or a $inancia# investor%

CONCLUSION

'aving your o(n !usiness is one o$ the dreams and goa# o$ the average "erson% &ost o$ us (ou#d rather !e their o(n !oss than !ecome someone e#se s em"#oyee% Un$ortunate#y having your o(n !usiness is not easy% &oney is di$$icu#t to earn and more di$$icu#t to $ind, (e## un#ess you are a#ready (e## o$$% Starting your o(n !usiness may ta-e a #ot o$ thin-ing, guts and money% A ve ture &apita' (u "$ are ! 'y 5ay t! a&.ieve y!ur )!a'$ a " (u'(i''e" y!ur "rea%$6 The (or#d is !ecoming increasing#y com"etitive% Com"anies are re2uired to !e su"er e$$icient (ith res"ect to cost, "roductivity, and #a!our e$$iciency, technica# !ac- u", $#e*i!i#ity to consumer demand, ada"ta!i#ity and $oresightedness% There is an im"ending demand $or high#y cost e$$ective, 2ua#ity "roducts and hence the need $or right access to va'ua4'e .u%a e3perti$e t! )ui"e a " %! it!r a'! ) 5it. t.e e&e$$ary (u "$

VENTURE CAPITAL
(!r (i a &i ) t.e e5 pr!@e&t$6

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